XN000022-1995-01-11 — Page 19

8 -

The Accounting Arrangements have worked very well. They have provided the Monetary Authority with a mechanism to control the level of interbank liquidity. This enables us to effectively influence interbank interest rates for the purpose of ensuring exchange rate stability. Given the significance of this monetary reform measure, it is important that it be provided a statutory backing. The Bill seeks to achieve this by conferring upon the Financial Secretary the authority to require any authorized institution to open an account with the Monetary Authority for the account of the Exchange Fund. The terms and conditions of operating the accounts will be determined with regard to the purposes of the Fund, as laid down in sections 3(1) and (1A) of the Ordinance.

This requirement will also facilitate the adoption in Hong Kong of a new and more robust interbank payment system, technically known as the Real Time Gross Settlement System. The conceptual design of this system, which has been endorsed by the Hong Kong Association of Banks and the Exchange Fund Advisory Committee, will involve all licensed banks opening clearing accounts with the Monetary Authority.

While we have enhanced the robustness of our monetary management system through the Accounting Arrangements and other reform measures, we still need the assurance that sufficient funds can be raised at short notice to defend the exchange rate of our currency in a crisis situation. This is the second area covered by the Bill. Section 3(3) of the principal Ordinance provides that the Financial Secretary may borrow for the account of the Fund on the security of any assets held by the Fund or on the general revenue. Such borrowings are, however, subject to a limit of HK$50 billion in section 3(4), which can only be amended through a resolution of this Council. This constraint is undesirable as we cannot afford any delay in raising sufficient US dollars in a pressing situation. I therefore propose to disapply the limit to borrowings which are secured on the Fund's assets. It is, however, considered appropriate that the approval of this Council should still be sought on the maximum amount of the Fund's borrowings secured on the general revenue.

I now turn to the third aspect of the Bill, which is related to the investment power of the Exchange Fund. Over the years, a number of new financial products such as interest rate swaps, currency options and bond futures have become widely used in international financial markets. As these financial products provide very useful vehicles for the Exchange Fund to hedge interest rate and market risks, I propose to broaden the investment ambit of the Exchange Fund so that the Financial Secretary may enter into a wider range of financial arrangements.