ENG-2004 — Page 110

80 Financial and Monetary Affairs

efficient manner. The CLS System is a global clearing and settlement system for cross- border foreign exchange transactions. Inclusion of the Hong Kong dollar into the CLS System enables foreign exchange transactions involving the Hong Kong dollar to be settled through the CLS System on a PvP basis, thus removing the settlement risk in these transactions.

Hong Kong Monetary Authority

The HKMA was established in April 1993. The Exchange Fund (Amendment) Ordinance 1992 provides for its establishment.

The HKMA's policy objectives are to maintain currency stability, within the framework of the Linked Exchange Rate system, through sound management of the Exchange Fund, monetary policy operations and other means deemed necessary; to promote safety and stability of the banking system through the regulation of banking business and the business of taking deposits, and the supervision of Als; and to promote efficiency, integrity and development of the financial system, particularly payment and settlement arrangements.

The HKMA is an integral part of the Government, but can employ staff on terms different from those of the Civil Service to attract personnel of the appropriate experience and expertise. Its staff and operating costs are charged directly to the Exchange Fund instead of the general revenue. The HKMA is accountable to the Financial Secretary, who is advised by the Exchange Fund Advisory Committee on matters relating to the control of the Exchange Fund.

The HKMA seeks advice on policy matters routinely from the Banking Advisory Committee and the Deposit-taking Companies Advisory Committee. Both committees are established under the Banking Ordinance. They are chaired by the Financial Secretary and comprise members from the banking industry and other relevant professions. Members of the committees are appointed by the Financial Secretary under the authority delegated by the Chief Executive.

The Banking Ordinance provides the legal framework for banking supervision in Hong Kong. Under the ordinance, the HKMA is the licensing authority responsible for granting and revoking the authorisation of all Als, as well as the approval and revocation of money broker licences. The HKMA seeks to maintain a regulatory framework that is fully in line with international standards. The objective is to devise a prudential supervisory system to help preserve the general stability and effective working of the banking system while at the same time providing sufficient flexibility for Als to make commercial decisions. Hong Kong's framework of banking supervision is in line with the Core Principles for Effective Banking Supervision promulgated by the Basel Committee on Banking Supervision (BCBS).

The HKMA's supervisory approach is based on a policy of 'continuous supervision' through a combination of on-site examinations, off-site reviews, prudential meetings, cooperation with external auditors and meetings with boards of directors. Since 2000, the HKMA has been using a risk-based supervisory framework for all Als. This approach puts emphasis on evaluation of the quality of risk