XN000022-1988-07-15 — Page 4

FROM:

TO:

15 JULY 1988

FRIDAY, JULY 15, 1988

SECRETARY FOR MONETARY AFFAIRS

CHIEF EXECUTIVES OF ALL LICENSED BANKS

CHAIRMAN OF THE HONG KONG ASSOCIATION OF BANKS

MEMBERS OF THE EXCHANGE FUND ADVISORY COMMITTEE, THE BANKING ADVISORY COMMITTEE AND THE DEPOSIT-TAKING COMPANIES ADVISORY COMMITTEE

CHAIRMAN OF THE DEPOSIT-TÁKING COMPANIES ASSOCIATION

NEW ACCOUNTING ARRANGEMENTS BETWEEN THE EXCHANGE FUND AND THE HONGKONG AND SHANGHAI BANKING CORPORATION

INTRODUCTION

THIS PAPER DESCRIBES NEW ACCOUNTING ARRANGEMENTS TO BE ENTERED INTO ON MONDAY 18 JULY 1988, WITH THE APPROVAL OF THE GOVERNOR IN COUNCIL AND THE AGREEMENT OF THE HONGKONG AND SHANGHAI BANKING CORPORATION (HSBC), BETWEEN THE EXCHANGE FUND AND HSBC AS THE MANAGEMENT BANK OF THE CLEARING HOUSE OF THE HONG KONG ASSOCIATION OF BANKS (HKAB). MEMBERS OF THE EXCHANGE FUND ADVISORY COMMITTEE HAVE BEEN CONSULTED AND HAVE UNANIMOUSLY SUPPORTED THE INTRODUCTION OF THESE NEW ARRANGEMENTS. PAPER ALSO EXPLAINS HOW THE NEW ACCOUNTING ARRANGEMENTS ARE TO BE OPERATED.

THE

2. THE PURPOSE OF THE NEW ACCOUNTING ARRANGEMENTS 19 TO ENABLE THE GOVERNMENT, THROUGH THE USE OF THE EXCHANGE FUND, TO EXERCISE MORE EFFECTIVE INFLUENCE OVER THE AVAILABILITY AND PRICE OF MONEY IN THE INTERBANK MARKET AND THUS TO ASSIST IT BETTER TO MAINTAIN EXCHANGE RATE STABILITY WITHIN THE FRAMEWORK OF THE LINKED EXCHANGE RATE SYSTEM. UNDER THE PRESENT ARRANGEMENTS, THERE CAN BE PERVERSE SIDE-EFFECTS WHICH REDUCE THE EFFECTIVENESS OF ACTION BY GOVERNMENT AND HSBC TO INFLUENCE INTEREST RATES AND THE LEVEL OF LIQUIDITY IN THE INTERBANK MARKET FOR THE PURPOSE OF ENSURING EXCHANGE RATE STABILITY.

/THE INTERBANK