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Speech at the Signing Ceremony of the Airport Authority Note Issuance Programme

by Joseph Yam, Chief Executive, Hong Kong Monetary Authority

16 October 1997

  1. Authority Note Issuance Programme is the second of such Programmes in which the Hong Kong Monetary Authority acts as the arranger, the custodian and the agent for the issuer, following on from similar arrangements for the Mass Transit Railway Corporation. The debt paper to be issued by the Airport Authority under this Programme will be covered by the market making arrangements that we have designed for our own Exchange Fund paper. It will also be eligible as security for our licensed banks in borrowing funds through the Liquidity Adjustment Facility that we run.
  2. We have two objectives in mind when arranging these Note Issuance Programmes. First is to encourage the continuing development of our debt market through the introduction of high quality borrowers. Second is to assist public sector entities in borrowing Hong Kong dollar funds cost-effectively, correctly reflecting their credit-worthiness. This is achieved through the market making arrangements and the eligibility for LAF which together ensure a high degree of liquidity and therefore enhance the attractiveness of the paper in the secondary market, enabling the paper to be more finely priced. Under the market making arrangements, the 31 market makers appointed by the HKMA are obliged to make two-way prices during money market hours. They are also allowed to go short in the paper, provided that they have an overall net long position in the paper covered by the market making arrangements, subject to prudent risk management measures laid down.
  3. The Airport Authority, notwithstanding its relatively short history, has already built up its reputation as a quality borrower. It is also a public sector entity and so an ideal candidate for the Note Issuance Programme that we have developed. I am confident that this Programme will help to achieve the objectives that I have mentioned. The Airport Authority, through this Programme, will be able to borrow Hong Kong dollar funds at a lower cost. The MTRC achieved funding cost below the interbank rates through their Note Issuance Programme launched in 1995. We expect the Airport Authority will similarly benefit from this Programme.
  4. The development of the debt market is a matter of strategic importance for Hong Kong as an international financial centre and so has been for some time a matter of priority for the HKMA. Allow me to take this opportunity to mention yet another two new initiatives which will be launched by us in early December this year.
  5. The first initiative is the introduction of a Securities Lending Programme for private sector paper lodged with our debt clearing and settlement system - the CMU. While we have been successful in developing the Exchange Fund Bills and Notes Programme into one which supports the most actively traded government debt market in the world, in terms of daily turnover as a percentage of paper outstanding, liquidity of private sector issues is still relatively low. Investors who buy and hold still account for a large part of the investor base of private sector paper.
  6. The Securities Lending Programme will enhance the liquidity of private sector paper lodged with the CMU by providing a mechanism to utilize securities held by long term investors for short term use by the more active market participants. Under the Programme, market participants who are prepared to act as market makers of private sector paper will be allowed to borrow paper from other CMU members to cover their short positions. The market makers will be required to quote two way prices at a reasonable spread during money market hours. The Programme will also help to achieve two other important objectives. First, it will improve the settlement efficiency of CMU instruments as paper made available by borrowing through the Programme will help to reduce the chance of settlement failure. Secondly, it will increase the attractiveness of private sector paper to investors by enhancing the yields for the lenders. Institutional investors have indicated that they would find the 1.5% annual yield enhancement attractive. The operational framework for the Programme has now been finalized, after consultation with the Hong Kong Capital Markets Association, and the Programme will commence operation on 1 December 1997.
  7. The second initiative focuses on the extension of the geographical boundaries of our debt market through developing cross border linkages between our CMU and the central securities depositories of other markets in the Region. This would facilitate cross border holding and trading of debt securities. Although the total size of outstanding debt securities lodged with the CMU has increased by more than twenty times since 1991, which is very substantial by any standards, the size of the debt market, at 23% of GDP, still lags far behind the banking sector with total bank assets representing 660% of GDP, and the stock market with capitalization equivalent to 290% of GDP. The difficulty in achieving a critical mass is not unique to Hong Kong, but a common feature of debt markets in this geographically fragmented Region. There is now merely a cluster of predominantly domestic debt markets barely serving domestic needs in the Region. Even with the most sophisticated market infrastructure and market making system, liquidity may still be a problem simply because the markets themselves are small. I believe that there is a need for debt markets to break through geographical or national boundaries.
  8. I am often reminded that the Eurodollar and Eurobond market took off after Euroclear was established in the late 1960s. In order to help the Asian debt market to take off, it is essential to build a network linking the domestic securities depositories in the Region to facilitate the clearing of cross border trades in debt securities in Asia. It will enlarge the investor base and broaden domestic debt markets. It will also help to reduce settlement risk by facilitating cross border delivery versus payment (DvP) which will mark another important achievement to enhance international investors' confidence in the Asian debt market.
  9. In the past twelve months, we have made good progress in our discussions with other central banks in the Region in setting up bilateral linkages of the domestic securities depositories. The first bilateral link between CMU and the securities depositories in Australia will start operation on 1 December 1997. Besides Australia, the HKMA is discussing with the People's Bank of China and the Reserve Bank of New Zealand on establishing similar linkages with the securities depositories in the Mainland of China and New Zealand. Our objective is to set up more of such linkages with other systems in the Region, and encourage others similarly to link up, eventually forming a tight network, which is our vision of an Asiaclear.
  10. Let me turn back to the Airport Authority Issuance Note Programme. I would like to thank all those concerned for their untiring efforts in bringing this Programme into fruition. Also I would like to thank the market makers and recognized dealers for their support and contribution over the years in helping to broaden and deepen our debt market. Thank you.
Last revision date: 1 August 2011
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