ENG-2000 — Page 122

FINANCIAL AND MONETARY AFFAIRS

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The Steering Committee was reconvened in late 2000 to take forward the longer- term recommendations.

The HKMA has worked closely with the banking community to enhance the robustness of Hong Kong's interbank payment system. With the efforts of the HKMA and the banking industry, Hong Kong's interbank payment system successfully changed to the Real Time Gross Settlement (RTGS) system in December 1996. Over the past four years, the system has provided smooth and efficient settlement for interbank payments. The RTGS system is a single-tier settlement structure with all banks maintaining settlement accounts with the HKMA. All RTGS payments are settled in a real time, transaction to transaction basis across the books of the HKMA. The banks' settlement accounts are not allowed to go into overdraft. Intraday liquidity can be obtained by the banks through the use of their Exchange Fund Bills and Notes for intraday repurchase (repo) agreements with the HKMA. In order to speed up the processing of Hong Kong dollar cheques presented in Shenzhen, the HKMA and the Shenzhen Branch of the People's Bank of China entered into a Memorandum of Understanding to operate a joint clearing facility for Hong Kong dollar cheques drawing upon banks in Hong Kong. This joint clearing arrangement, which was implemented in January 1998, has reduced the processing time from 14 days to two days. A similar arrangement for Hong Kong dollar cheques presented in Guangzhou and other cities in Guangdong started operation on October 1.

The US dollar is the single most widely used currency for the denomination of world trade in merchandise and financial products. The development of a local US dollar clearing and settlement infrastructure will enable enterprises, both local and from the Mainland and elsewhere around the region, to issue securities denominated in the US dollar or trade such securities in Hong Kong during Hong Kong hours. Using the experience of the Hong Kong Dollar RTGS system, the HKMA introduced the US Dollar RTGS system in August. The new system allows local financial institutions to settle US dollar transactions real time in the Asian time zone. Foreign exchange settlement risk caused by the time gap between the settlement of the Hong Kong dollars and the US dollars can be reduced. The risk may be even eliminated if the banks choose to make use of the Payment versus Payment facility, a facility made possible by linking up the Hong Kong Dollar Payment System with the US Dollar Payment System, which was introduced in September.

The US Dollar Payment System is expected to help develop the local markets in US dollar denominated securities, both debt securities and equities, and to attract US dollar denominated trades in the region to settle in Hong Kong. The system covers US dollar paper cheque clearing, and the Real Time Gross Settlement (RTGS) interface with the Central Moneymarkets Unit (CMU) for settling US dollar denominated debt securities. The RTGS/CMU interface allows settlement of US dollar denominated debt securities in the CMU, and also enables automatic intraday repos for the RTGS system.

The CMU Service, established in 1990, is operated by the HKMA to provide a clearing and custodian system for Exchange Fund Bills and Notes. In 1994, the HKMA extended the service to cover Hong Kong dollar private sector debt issues. It has recorded remarkable growth since then and 203 CMU members, which are mostly financial institutions in Hong Kong, now participate in the system. At the end of 2000, there were 1 171 issues with a total value of $206.2 billion equivalent lodged