ENG-1996 — Page 122

FINANCIAL AND MONETARY AFFAIRS

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The HKMA, HKAB and HKICL had an extremely busy year in getting the system and the banks ready for full implementation of RTGS in December 1996. This RTGS system is a single-tier settlement structure with all banks maintaining settlement accounts with the HKMA. All RTGS payments are settled in real time and are final, irrevocable and unconditional. The banks' settlement accounts are not allowed to go into overdraft and intraday liquidity, which is often the most difficult issue facing any RTGS system, can be obtained by the banks through the use of their Exchange Fund Bills and Notes for intraday 'repo' agreements with the HKMA.

The Central Moneymarkets Unit (CMU) Service, which was established in 1990 and operated by the HKMA to provide a clearing and custodian system for Exchange Fund Bills and Notes, was extended to cover private sector debt issues in 1994. It has recorded remarkable growth since then and 259 CMU members, which are mostly financial institutions in Hong Kong, participate in the system. There are 444 issues with a total value of $133.6 billion lodged with the CMU. Since 1994, a number of enhancements have been added to the CMU Service, such as the acceptance of foreign currency debt instruments and the introduction of end of day delivery against payment functionality for both Hong Kong dollar and foreign currency debt

instrument.

The CMU system was fully integrated with the new interbank payment system when the latter went live on RTGS in December 1996. Delivery-versus-payment, both real time and end of day, became available. This matches international best practice in providing efficient, robust and risk-free clearing and settlement facilities for debt securities. It also enables the banks to obtain intraday liquidity through intraday 'repos' in a safe and efficient manner.

The CMU is linked to Euroclear and Cedel, the two largest international clearing systems in the world, in December 1994. These links, the first of their kind in East Asia, allow overseas investors and traders easy access to the Hong Kong dollar debt market.

The Hong Kong Dollar Debt Market

There have been impressive developments in the domestic debt market in recent years. The outstanding amount of Hong Kong dollar debt instruments stood at $281.4 billion as at end-1996, which was equivalent to about 23 per cent of the GDP. Exchange Fund Bills and Notes accounted for 33 per cent of the market while the rest consisted of private sector issues such as negotiable certificates of deposit, bonds, floating rate notes and asset-backed securities. Reflecting the increasing importance of the local debt market as a fund-raising avenue, $70.7 billion was raised through debt issues by the private sector during 1996.

The growth of the domestic debt market can be attributed partly to a combination of government initiatives and continued improvement in supply and demand conditions. The launch of the Exchange Fund Bills and Notes Programme in 1990 marked an important milestone in the development of the Hong Kong debt market. 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