It is a pleasure to welcome you all to this afternoon's signing
ceremony. The purpose of the ceremony is for the HKMA formally to
appoint HSBC as the Settlement Institution for the new US dollar
clearing system that will be developed in Hong Kong over the coming
months. When it is fully running - prospectively by the end of the
year - this system will enable a wide range of financial
transactions in US dollars to be settled here in Hong Kong, many of
them on a real time basis. The project marks an important milestone
in the development of Hong Kong's financial infrastructure and it
should help to consolidate Hong Kong's position as an international
financial centre.
2. Developing Hong Kong's financial infrastructure is, along
with maintaining currency and banking stability, one of the three
main policy objectives of the HKMA. Financial infrastructure, when
it works efficiently, is something that is so much taken for
granted that it is barely noticed. It is a far less prominent
public issue than currency or banking stability. Yet, without a
properly working financial infrastructure, there is little chance
of currency and banking stability. Effective financial
infrastructure is as important to Hong Kong as is the extensive and
far more visible physical infrastructure that we see around us. And
Hong Kong is fortunate to be equipped with a financial
infrastructure that is as advanced, reliable and efficient as the
road, rail and airport facilities that keep our city moving.
3. Since 1994 the HKMA has implemented a number of major reforms
to Hong Kong's payment and settlement systems. The largest of these
reforms was the launch, in December 1996, of Hong Kong's Real Time
Gross Settlement (RTGS) system for interbank payments in Hong Kong
dollars. This state-of-the-art system is widely acknowledged to be
one of the most advanced and robust of its kind. It has served Hong
Kong remarkably well, and made an important contribution to
maintaining financial stability during the Asian financial crisis,
which erupted not long after its introduction. Our experience with
the RTGS system, and in particular the technology produced for it,
plays an essential role in the development of the next great
milestone, the US dollar clearing system.
4. The US dollar is the currency in which most world trade in
merchandise and financial products is denominated. Because of Hong
Kong's role as an international financial centre, and the fact that
our own currency is linked to the US dollar, there is extensive
holding of US dollars and a considerable trade in US
dollar-denominated assets. The existing market demand
within Hong Kong for a US dollar clearing system is a persuasive
enough argument for its introduction: the potential demand for
such a system, and the strategic impetus that it would give to our
development as a leading financial centre, is considerable. In the
near term, Hong Kong's US Dollar Clearing System will provide the
necessary infrastructure to support the Stock Exchange's launch of
the Growth Enterprise Market (GEM), which will allow listed shares
to be denominated and settled in US dollars. In the longer term,
the system will provide a range of opportunities for further
developing our stock and debt markets into major world markets.
5. A local US dollar clearing system will bring with it the
advantages of speed, convenience and efficiency: it will, for
example, allow US dollar cheques to be settled within two days,
instead of the current two weeks. In addition to these obvious
advantages, it will also carry the benefit of safety, in the form
of reduced settlement risk. By enabling, within Hong Kong, delivery
versus payment (DvP) for US dollar-denominated securities, and
payment versus payment (PvP) for foreign exchange transactions
between US dollars and Hong Kong dollars, the system will eliminate
the settlement risk that arises when a transaction is spread across
different time zones.
6. Greater safety at the level of individual transactions will
be complemented by the contribution the system will make to
monetary stability. By reducing the need for using the Hong Kong
dollar as a vehicle currency for conducting non-domestic financial
business, the US Dollar Clearing System will reduce the impact on
local monetary conditions of movements in portfolio capital
unrelated to economic developments intrinsic to Hong Kong. This is
an excellent illustration of how a piece of robust and efficient
financial infrastructure can be conducive to other important policy
objectives, in this case monetary stability.
7. Let me turn now to the mechanics of the system. The
arrangement adopted here is a private sector solution, in which the
Settlement Institution is a commercial bank. This is not only
consistent with the tradition in Hong Kong, but is also in line
with international practice and with the recommendations of the
Bank for International Settlements. At the end of a rigorous
selection process, a Selection Panel made up of disinterested
members of the Exchange Fund Advisory Committee (EFAC) and senior
executives from the HKMA recommended to EFAC that HSBC be appointed
the Settlement Institution for a franchise period of five years.
Under the arrangements agreed between the HKMA and HSBC, the
Settlement Institution will in turn appoint Hong Kong Interbank
Clearing Ltd, the current operator of the Hong Kong dollar payment
system, to develop and operate the US dollar clearing system. The
role of the HKMA will be to oversee the design and implementation
of the system and to ensure that it meets the highest international
standards.
8. The conceptual design of the system is firmly in place. The
intention is that it should encompass not only the best,
internationally agreed, principles of payment system design but
also state-of-the-art technology. Leveraging on the technology used
for the existing Hong Kong dollar RTGS system, this US Dollar
Clearing System will offer a range of advanced and sophisticated
clearing functions. These will include linkage with the Hong Kong
dollar payment system to provide real time PvP settlement for US
dollar-Hong Kong dollar transactions, as well as linkages with the
stock and debt securities clearing houses to provide DvP
settlement. For the general public, the System will enable banks to
offer US dollar cheque deposit accounts, which means that US dollar
payments can be discharged through the writing of a cheque in US
dollars drawn upon a bank in Hong Kong. The various features of the
system will be introduced in phases. All being well, we hope to see
real-time interbank payments and PvP for US dollar-Hong Kong dollar
foreign exchange transactions introduced by the third quarter of
this year and US dollar paper cheque clearing and a linkage with
the HKMA's Central Moneymarkets Unit completed by the end of the
year.
9. People have asked whether we propose to introduce clearing in
other foreign currencies once the US dollar system is established.
In principle this would be possible. In practice there needs to be
a business case. The HKMA is certainly ready to respond if there
appears to be market demand for similar clearing systems for other
major currencies.
10. Hong Kong will shortly have a state-of-the-art facility for
conducting US dollar transactions in Asian time. The benefits of
this for both local business and international customers, in both
trade and finance, should be considerable. I take this opportunity
to thank and congratulate those who have worked hard to bring the
project to its present advanced stage in so short a time, and I
wish every success to all who will be involved in translating the
design into reality.
