The first phase of Hong Kong's new US dollar payment system, launched nearly a month ago, is running smoothly with a large volume of daily business. The second phase, to be implemented later this month, will allow real time payment versus payment for foreign exchange transactions between the US dollar and Hong Kong dollar - an achievement without precedent in world financial history. Joseph Yam invites the many businesses in Hong Kong with a use for these services to try out the system - and contribute to Hong Kong's further development as an international financial centre at the same time.
In my viewpoint column of 23 March I wrote about the US dollar payment system we have been developing in Hong Kong. When completed, this system will be an exact replica of the advanced and efficient Hong Kong dollar payment system that has been in operation since 1996. We in the HKMA, working closely with the banks, and in particular with the Settlement Institution, HSBC, are quite excited about this project. It promises to deliver efficient payment services involving the US dollar. It also provides a golden opportunity for businesses in Hong Kong to help enhance Hong Kong's status as an international financial centre by making use of the new system and ensuring its success.
We have had a very good start with the successful launch of the first phase of the US dollar payment system project on 21 August. This first phase provides for what we call "Real Time Gross Settlement", or RTGS, for the payment of US dollars between banks in Hong Kong, in the same manner as that for the payment of Hong Kong dollars between banks. Thus, if your business partner has to pay US dollars to you, you are now able, with your business partner's agreement, to instruct your bankers to have this done here in Hong Kong, real time. The advantage of this is that you will receive US dollars into your bank account here in Hong Kong at the same time as your business partner pays them out to you from his or her US dollar bank account in Hong Kong. The settlement risk that you have hitherto had to incur in US dollar payments, in having to wait for funds to be cleared between your correspondent banks in New York, can now be eliminated.
The second phase of the project, which will be implemented on 25 September, is even more promising. Under this phase, we shall be able to link up the new RTGS payment system for US dollars with the existing RTGS payment system for Hong Kong dollars. Banks in Hong Kong will then be able, when buying or selling US dollars in exchange for Hong Kong dollars, to pay one currency at the same time as they receive the other currency in Hong Kong, real time. In order to take advantage of this service all you need to do is to talk to your bankers. From then on, whenever you buy any significant amount of US dollars in Hong Kong in the form of telegraphic transfers (TT), you will not have to wait until New York opens to receive your US dollars, having already parted with your Hong Kong dollars in Hong Kong time. This risk, arising from the mismatch in the timing of delivery of different currencies in different time zones - of having given one but not yet received the other (what we call Herstatt risk) - will be eliminated. We shall have achieved payment versus payment (PvP) for foreign exchange transactions between the US dollar and Hong Kong dollar. This achievement is something that Hong Kong can justifiably be proud of because we shall have scored a first in world financial history. No other financial centre is yet in a position to do this.
The third and last phase, which will be implemented in December this year extends the project to the level of retail banking by enabling US dollar cheques drawn on banks in Hong Kong to be cleared in Hong Kong. By accommodating the clearing of US dollar cheques, in addition to the provision of US dollar RTGS payments services to customers through the banks, we shall have created a US dollar payment system that is as extensive as our Hong Kong dollar payment system.
If your day-to-day business in Hong Kong involves US dollars, you can support this project - and boost Hong Kong's position as an international financial centre - simply by making use of the services provided by the US dollar payment system to manage more prudently the settlement risk of business transactions involving the US dollar.
I am sure you will be able to see the potential of this project. The many companies here engaging in external trade - Hong Kong's lifeblood - will no longer be exposed to the mismatch in the timing for the delivery of their US dollars in exchange for Hong Kong dollars. Shares and debt instruments of foreign (and domestic) companies can conveniently be listed and traded in Hong Kong in either the Hong Kong dollar or the US dollar. The US dollar payment system is a valuable piece of efficient financial infrastructure that will enable all types of activities of international financial intermediation - banking, debt and equity - to be conducted safely in Hong Kong.
Joseph Yam
14 September 2000
More information on the US Dollar Clearing System may be found here.
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