TNAG-0448-FCO40-513-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 91

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"Until the month end valuations have been made we will not know whether the total value of our sterling holdings is more or less than the amount held at 26th September 1973 (78.85 per cent). It usually takes about a month to collect all the information necessary to complete the monthly return to the Bank of England and we shall not know for certain, until this return has been completed, whether or not our sterling holdings are above or below the minimum. All participants whose actual sterling holdings at the 24th September are close to the agreed minimum, and who have a substantial part of their reserves in gilt edged securities, will have this, problem. We assume, therefore, that you accept that, from time to time, the month end return may show our sterling holdings to be below the agreed level.

We were advised, in a telegram from London, that:

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(Her Majesty's Treasury) accepts that there may be occasions when Hong Kong may fail to maintain the minimum sterling holding on a particular reporting date because of a fall in the market price of gilts. Accordingly, we are prepared to agree that the terms of the present guarantee will not be abrogated in the case of a purely accidental failure to satisfy the provisions of paragraph 3 of the Declaration as a result of changes in the value of holdings of securities arising from changes in market prices, provided that those conditions are satisfied on the date on which advices are next due after the advice date on which the failure occurred.

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4.

In Hong Kong we interpreted this as meaning that an accidental breach at any monthly reporting date could be corrected, in respect of that date, by "topping-up" purchases in the following month. In London, however, the interpretation put upon this by officials was that an accidental breach at one reporting date was permissible only provided that no breach occurred on any following reporting date. This interpretation was subsequently rationalised in the following terms:

"(Whereas) you appear to regard any breach resulting from a fall in the price of gilts as accidental by definition even if it could have been foreseen and avoided either by the maintenance of a margin above MSP/MSH or purchases in advance.. we regard an accidental breach as one resulting from circumstances which could not have been reasonably foreseen or prudently provided against, such as a substantial fall in gilt prices in the last days of the month.

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