ENG-1995 — Page 114

FINANCIAL AND MONETARY AFFAIRS

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these instruments; the average daily turnover in 1995 was HK$17 billion, represented by about 1 000 transactions.

The CMU extended its service to private-sector Hong Kong dollar debt securities in January 1994. The CMU performs the role of central custodian and clearing agent for these instruments issued by the private sector, such as certificates of deposit, commercial paper and bonds. Transfer of title is also in book-entry form so that physical delivery is not required. By the end of 1995, 203 financial institutions had joined the CMU Service as members and 260 issues amounting to a total value of HK$73 billion had been lodged for clearing. Membership is open to all authorised institutions in Hong Kong, members of the Hong Kong Capital Markets Association and exempt dealers in securities under the Securities Ordinance.

The CMU also takes up collateral management functions in the context of the Liquidity Adjustment Facility (LAF), which is the Hong Kong version of a discount window. A licensed bank wishing to obtain late overnight funding from the HKMA must enter into a 'Repo agreement'. Eligible securities are Exchange Fund Bills, Exchange Fund Notes and MTRC Notes. Some CMU instruments are also eligible, if they are of acceptable credit rating and can demonstrate a high degree of marketability in the secondary market. To help broaden the investor base of Hong Kong dollar debt paper, the CMU was linked with the international depositories Euroclear and Cedel in 1994.

In December 1995, the CMU introduced Delivery versus Payment (DvP) settlement for CMU instruments both for end-of-day secondary market trading and new issue allotment. The DVP functionality is an optional service in addition to the free of payment (FOP) settlement. Under this new scheme, the HKMA has appointed an agent bank to handle cash settlement on behalf of CMU members. The CMU will effect transfer of title upon confirmation of settled funds from the agent bank. Hence DvP is achieved when both transfers of payment and securities title are effected simultaneously, eliminating a large part of the settlement risk associated with FoP settlement.

The Evolving Hong Kong Dollar Debt Market

The Hong Kong dollar debt market has experienced tremendous growth in the past few years. Total outstanding public and private sector debt issues increased five-fold from around $27 billion at end-1989 to $153 billion at end-1994. The market size was further expanded to $197 billion by the end of 1995.

The launch of the Exchange Fund Bills and Notes Programme in 1990 marked the first public sector initiative in developing the Hong Kong debt market. The 91-day Exchange Fund Bills were introduced in March 1990 to provide an additional tool for monetary management and to promote debt market development.

Government debt paper provides a benchmark yield against which private debt issues can be priced. From a weekly issue of 91-day bills, the programme was gradually expanded to include the fortnightly issue of 182-day bills in October 1990 and the issue of 364-day bills every four weeks in February 1991. The benchmark yield curve of Exchange Fund paper has been extended with the subsequent introduction of the two-, three- and five-year Exchange Fund Notes in May 1993, October 1993 and September 1994, respectively. The yield curve was further extended to the seven-year area with the debut of seven-year Exchange Fund Notes in