XN000022-1992-07-15 — Page 5

WEDNESDAY, JULY 15, 1992

NOTES ON THE ACCOUNTS

1 (a) Investments

2.

3.

4.

5.

The fund is invested in interest bearing deposits with banks in Hong Kong and overseas and in a variety of financial instruments, including bonds, notes and treasury bills. Only instruments which have good marketability and which are issued by or guaranteed by governments with high credit standing are acquired.

(b) Foreign currency assets distribution

A large proportion of the Fund's foreign currency assets are held in US dollars because this is the intervention currency and there is no exchange risk involved, given that the Hong Kong dollar is linked to the US dollar. Apart from the US dollar, the Fund also holds assets denominated in other major foreign currencies. They are the Canadian dollar, deutschemark, Japanese yen, pound sterling, Swiss franc, Dutch guilder, French franc and the ECU.

(c) Location of assets

The assets

are

held in deposit, trustee and safe-keeping

organisations situated in Hong Kong and other major financial centres.

(d) Valuation of assets

accounts

banks with banks, central

and custodial

Treasury bills and other short-term money market instruments are valued at cost. Bonds and notes аге valued at mid-market prices as at the close of business on the last business day of each accounting period.

(e) Translation of foreign currency assets

US dollar (USD) assets are translated into Hong Kong dollars (HKD) at an exchange rate of USD 1 = HKD 7.80. Assets in other foreign currencies are translated into Hong Kong dollars based on US dollar middle market cross rates in New York at the close of business on the last business day of the accounting period.

As backing for their bank note issues, the two note-issuing banks are required to hold non-interest bearing certificates of indebtedness issued by the Exchange Fund. Since 17 October 1983 these certificates have been issued to or redeemed from the two banks against payment in US dollars at a fixed rate of HKD7.80 USD1.00.

This is that proportion of the fiscal reserves which has been transferred from the General Revenue Account, Capital Investment Fund, Loan Fund and Capital Works Reserve Fund to the Exchange Fund on an interest earning basis.

Other liabilities comprise expenses accrued at the year end, in the main interest due on fiscal reserve transfers, contingency reserves for bank rescue operations and any other borrowings.

In accordance with the Accounting Arrangements introduced in July 1988, The Hongkong and Shanghai Banking Corporation Ltd., as the Management Bank of the Clearing House of the Hong Kong Association of Banks, is required to maintain a Clearing Account with the Exchange Fund. The balance in the Account, which represents the level of

liquidity in the interbank market, can only be altered by the Fund. The Accounting Arrangements enable the Fund to maintain exchange rate stability more effectively by influencing the level of interbank liquidity through money market operations.

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