ENG-1997 — Page 126

FINANCIAL AND MONETARY AFFAIRS

78

securities in the secondary market through the market making process and improves settlement efficiency by reducing settlement failures.

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 (DvP), 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 'repo' in a safe and efficient manner. Further software changes were introduced to the CMU system in November 1997 to improve it.

The CMU was 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. In December 1997, bilateral linkages between the CMU and the central securities depositories in Australia were established. These linkages facilitate cross-border holding and trading of debt securities and reduce settlement risk of cross-border securities transactions by facilitating DvP settlement.

While the interface between the interbank payment system and CMU has enabled real time and end-of-day DvP for CMU securities to take place, the HKMA has held talks with the Hong Kong Stock Exchange and the Hong Kong Securities Clearing Company on establishing a link between the interbank payment system running on RTGS and the CCASS (clearing system for Hong Kong shares) to introduce real time and end-of-period DvP for share transactions. Implementation of the new facility is expected to take place in mid-1998.

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 $345.5 billion at end-1997, representing a 24 per cent increase over 1996 and equivalent to 26 per cent of the GDP. Exchange Fund Bills and Notes accounted for 29 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.

The total outstanding amount of Exchange Fund Bills and Notes increased to $102 billion at the end of 1997, compared with $92 billion at end-1996. Reflecting the favourable reception to the Exchange Fund paper, the average oversubscription rate for the Note issues was about 3.5 times in 1997. At end-1997, the yield of the 10-year Exchange Fund Notes stood at 6.76 per cent, only about 70 basis points above that of the 10-year US Treasury Notes. The daily turnover of the Exchange Fund paper

in 1997 was $14 billion, equivalent to 14 per cent of the amount of paper outstanding. In 1997, multilateral financial organisations including the European Investment Bank, the International Finance Corporation and the World Bank launched a total of 12 Hong Kong dollar debt issues, involving a total issue size of $8.45 billion. After a period of subdued activity in 1996, the mortgage-backed securities market picked up in 1997. There were three issues, involving a total of $4.2 billion.

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