HONG KONG MONETARY AUTHORITY Annual Report 1996
PERFORMANCE IN 1996
The Exchange Fund employs external managers in seven major international financial centres, monitored by the External Managers Division. With their deeper experience in specific markets and presence in other time zones, the external managers complement the work of the internal Direct Investment Division
Both the Direct Investment Division and the External Managers Division engage in active dialogue with major investment managers and players in the international capital markets on analytical, technical, tactical and strategic levels. This ensures that the investment and risk control processes of the Exchange Fund are in line with international best practices.
TECHNOLOGICAL SUPPORT
The HKMA continues to modernise its operational and management information systems for the management of the Exchange Fund. In 1996, the first phase of the computerisation programme was completed. When fully implemented in 1997, this programme will electronically cover the full transaction cycle from deal entry through settlement and settlement accounting to daily valuations. This system will enhance the provision of comprehensive and timely management of the Fund with improved internal controls.
This system will also incorporate comprehensive market risk management modules to enhance the measurement, dimensioning and control of risks inherent in the investment process.
To further secure the custody of the assets of the Exchange Fund and to improve the efficiency of portfolio administration, the Exchange Fund consolidated the custodianship of the assets of the multi-currency portfolios to a global master custodian in 1996.
INCREASED TRANSPARENCY - MONTHLY DISCLOSURE
Consistent with the commitment of moving towards greater transparency in disclosure, the Financial Secretary has decided to publish the amount of foreign currency assets held by the Fund on a monthly basis, with the first set of monthly figures released in January 1997. These data are reported in two formats, i.e. settled assets (excluding forward transactions) and the underlying asset position (including forward transactions).
CHALLENGES
1997 began with a sharp appreciation of the US dollar, accompanied by a rising US equity market and expectations for some increase in US interest rates. In Europe and Japan, concerns over domestic economic recovery have led to greater volatilities in international currency, interest rate and equity markets. Since the fourth quarter of 1996, the investment strategy of the Exchange Fund has incorporated defensive measures against the strength of the US dollar and market volatilities. With improved risk management tools, the HKMA will continue to manage the Exchange Fund prudently to achieve the objectives of liquidity, capital preservation and an adequate return on assets.