FINANCIAL AND MONETARY AFFAIRS
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Authority, Hong Kong Mortgage Corporation Limited, Kowloon-Canton Railway Corporation, and MTR Corporation Limited, effective from September 1, 20013. This change may result in additional business opportunities for private sector arrangers in the wake of the HKMA's exit from debt arrangement business. Other major market developments included the review of regulations by the SFC relating to the offering of debt securities. This led to the exemption of Hong Kong incorporated companies' prospectuses issued to professional investors relating to debt securities - from the dual language and content requirements, and other prospectus- related requirements under the Companies Ordinance, which have become effective since May 2001.
Development of a Secondary Mortgage Market
A well-developed secondary mortgage market plays 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 to develop this market.
The HKMC's 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.
Since its commencement of business in October 1997, the HKMC has proceeded smoothly with its Mortgage Purchase Programme. Through effective marketing and the introduction of innovative products, the outstanding principal balance of the HKMC's mortgage portfolio reached $19.8 billion as at the end of 2001.
The HKMC introduced the Mortgage Insurance Programme (MIP) in March 1999 to promote home-ownership in Hong Kong. It enables the banks to lend home mortgage loans above the 70 per cent loan-to-value ceiling set by the HKMA without incurring additional risk. In 2000, the MIP was expanded to cover mortgage loans with a loan-to-value ratio from 85 per cent to 90 per cent.
The HKMC launched a back-to-back MBS Programme in October 1999. The back- to-back structure allows banks to effectively 'repackage' their mortgage portfolios into more liquid portfolios and to maintain the majority of the cash flow if they hold the MBS in their own investment portfolio. The HKMC's guarantee on the timely payment of principal and interest serves to make the MBS a safe and attractive investment for investors. The HKMC has securitised $2.26 billion of MBS with two of its key business partners. The corporation also launched a multi-currency conventional bond-style MBS Programme in 2001 and planned to launch the debut issue in early 2002.
3 Under the NIPs, debt securities issued by the four statutory bodies or government-owned corporations — specified instruments (SIs) have been fungible with Exchange Fund paper. In other words, a short position of a market maker in Exchange Fund paper can be covered by a long position in SIs, or vice versa. In this regard, there is a possibility for holders of SIs to create additional Exchange Fund paper, without specific foreign reserve backing as required under the currency board arrangements.