MR WALKER
CONFIDENTIAL
2F(RMSA) 120/91/01
STERLING GUARANTEE: HONG KONG
You asked for my considered view on how we should react to the
Before Bank's figure for balances on which compensation is due. giving this, the present note sets out some further considerations which tend to confirm that Hong Kong has interpreted 'topping-up purchases' to be those necessary to offset a previous end-month However, deficiency after taking account of interest accruals.
I
I conclude that the point of principle does not, in fact, arise, since it appears that Hong Kong has all along been applying its interpretation of the accidental breach provision to an MSP of 78.8% not 78.0%. The records which exist of this lead me to recommend that we accept as eligible at least the additions to end-February holdings which result from the higher MSP. also suggest that the Bank is in error in including in the modified settlement basis a 10% deduction based on total official reserves lower than those on 29 March by the difference between actual official sterling reserves on that date and those deemed to be held according to the modified settlement basis.
'TOFFING-UP' AND INTEREST ACCRUALS
2.
Hong Kong's reporting letters of 11 February and 4 March suggest that the Bank's defence in the last few days of topping-up purchases being allowable regardless of interest accruals is misplaced. The letter of 11 February states with regard to
MSH/MSF fulfilment at end-January that
"these purchases, combined with sterling interest earnings, should have taken total sterling holdings (including
gilts at 31 12 73 market valuation) above the agreed minimum of £313 million by the end of January...
1
80
: