FINANCIAL AND MONETARY AFFAIRS
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curve, running all the way up to 10 years, has facilitated the pricing of private debt securities in both primary and secondary markets. In May 1996, the Government introduced a scheme under which interest income and trading profits derived from eligible debt securities can enjoy a 50 per cent profits tax concession2.
To enhance secondary market liquidity, the HKMA has put in place an effective market-making system for Exchange Fund Bills and Notes. Under the market- making system, market makers are appointed to quote two-way prices (bid/offer) during normal money market trading hours for Exchange Fund paper. In light of the success of the market-making system in enhancing the secondary market liquidity of Exchange Fund paper, the arrangement was extended to the notes of the MTR Corporation Limited, Airport Authority, Kowloon-Canton Railway Corporation and Hong Kong Mortgage Corporation. There were 29 market makers at the end of 2000. In order to improve the effectiveness of the market-making system, the HKMA has set out objective performance criteria for market makers of Exchange Fund paper in 2000. From the first quarter of 2001, the HKMA will review the performance of individual market makers on a quarterly basis against the benchmark criteria. In addition, the HKMA has made some adjustments to the maturity spectrum of the Exchange Fund Bills and Notes so that longer-term paper will be issued in place of short-dated paper. The HKMA has also started to publish an advance quarterly issuance schedule of Exchange Fund paper, with a view to further enhancing the transparency of the Exchange Fund paper market.
Following the listing of Exchange Fund Notes on the Stock Exchange since August 1999, the Hong Kong Mortgage Corporation listed $3.5 billion of its debt securities. in late 1999 under its Note Issuance Programme. Over time, the listing arrangement is expected to enhance the secondary market liquidity and broaden the investor base to cover the retail level.
Development of a Secondary Mortgage Market
Hong Kong provides fertile ground for the development of a secondary mortgage market, as evidenced by the strong increase in outstanding residential mortgage loans from 8 per cent of GDP in 1980 to 43.3 per cent in 1999 (excluding Home Ownership Scheme and Private Sector Participation Scheme). A properly developed secondary mortgage market can play a useful role in channelling long-term funds, such as insurance and pension funds, to meet the rising demand for long-term home financing.
The Hong Kong Mortgage Corporation Limited (HKMC), wholly owned by the Government through the Exchange Fund, was incorporated in March 1997 with the mission of developing Hong Kong's secondary mortgage market. The HKMC is a public limited company incorporated under the Companies Ordinance. Its business is being developed in two phases. The initial phase involves the purchase of mortgage loans for its own portfolio and the funding of the purchases largely through the issuance of unsecured debt securities. In the second phase, the HKMC securitises the mortgages into Mortgage Backed Securities (MBS) and offers them for sale to investors.
2 To qualify for the concession, a debt instrument must fulfil certain criteria, including being lodged and cleared by the Central Moneymarket Unit (CMU); carry a credit rating acceptable to the HKMA; have an original maturity of at least five years; have a minimum denomination of $50,000; and being issued to the public.