CONFIDENTIAL
THE TEN PER CENT DEDUCTION
13.
The statement provided by the Bank carries into the figures
for total reserves the adjustment to the actual end-March figures provided for official sterling reserves in the modified. settlement basis. This, I think, is incorrect, since the modified settlement basis concerns only the amounts which official sterling reserves are deemed tocomprise. The Sterling Agreement definitions which govern interpretation of the Declaration treat total reserves and sterling reserves independently and do not build the former up
from the latter.
14. The interpretation I suggest is, I think, consistent with our intention in framing the modified settlement basis.
This was
to allow as official sterling reserves only the amount which Hong Kong would hold if it adhered to its understanding of the accidental breach provision. The implied corollary was that the non-sterling component of total reserves would be increased by the amount of sterling purchases which was disallowed.
15.
The necessary correction would increase the 10% deduction from £38,414,000 to £39,461,000. Eligible balances would be reduced by £1,047,000 and compensations reduced by 139,394,
16.
For the record, there is no indication in the letter of 6 May from the Accountant Yeneral that Hong Kong expects the
10% deduction to be calculated other than in the manner described
above.
CONFIDENTIAL
6.