Guide to Hong Kong Monetary, Banking and Financial Terms

An agreement reached in July 1988 between the Financial Secretary, as the Controller of the Exchange Fund, and the Hongkong and Shanghai Banking Corporation Limited (HSBC), as the Management Bank of the Clearing House of the Hong Kong Association of Banks. The agreement required HSBC to open an account with the Exchange Fund. The balance in that account could only be altered by the HKMA, (or its predecessor, the Office of the Exchange Fund). The Accounting Arrangements required HSBC to manage the Net Clearing Balance (NCB) of the rest of the banking system, having regard to the level of the balance of HSBC's account with the HKMA. If the NCB exceeded the balance, the HKMA would charge HSBC punitive interest on the excess amount, which represented the sum that HSBC had over-lent to the rest of the banking system. If the NCB was negative, a punitive interest rate would also be charged on the debit balance. The Accounting Arrangements came to an end with the introduction of the Real Time Gross Settlement system in December 1996, which requires all banks to maintain a clearing account with the HKMA.

The total net profit earned by an entity as an on-going business. The Accumulated Surplus of the Exchange Fund is the total net profit earned by the Exchange Fund since 6 December 1935.

A component (other than Common Equity Tier 1 capital) of an authorized institution’s Tier 1 capital, which is intended to absorb losses of an authorized institution on a going concern basis. It includes capital instruments issued by an authorized institution that meet the qualifying criteria set out in Schedule 4B to the Banking (Capital) Rules, share premium resulting from the issue of Additional Tier 1 capital instruments and the amount of minority interests arising from Additional Tier 1 capital instruments issued by consolidated bank subsidiaries of the authorized institution and held by third parties.

The sum of balances in the clearing accounts and reserve accounts kept with the central bank. In Hong Kong, this refers to the sum of the balances in the clearing accounts kept with the HKMA. The Aggregate Balance is a part of the Monetary Base. Since June 1998, the HKMA has been disclosing forecast changes in the Aggregate Balance attributable to the HKMA's foreign exchange transactions as well as issuance of and interest payments on Exchange Fund paper on a real time basis through Reuters and Bloomberg.

See also Currency Board System and Linked Exchange Rate System.

An Ordinance that:
(a) provides for the imposition of requirements relating to customer due diligence and record-keeping on specified financial institutions and designated non-financial businesses and professions;
(b) provides for the powers of the relevant authorities and regulatory bodies to supervise compliance with those requirements and other requirements under the AMLO;
(c) provides for the regulation of the operation of a money service and the licensing of money service operators;
(d) provides for the regulation of the operation of a trust or company service and the licensing of trust or company service providers;
(e) establishes a review tribunal to review certain decisions made by the relevant authorities under the AMLO; and
(f) provides for incidental and related matters.

Interest rate arbitrage: Activities that seek to profit from the deviation between the interest rate differential and interest equivalent of the spread between the forward exchange rate and spot exchange rate. In a broader context, interest rate arbitrage activities may seek to take advantage of the interest rate differential between two currencies. Funds may be switched from one currency to another until the interest rate gap reflects the expected appreciation or depreciation of one currency against the other.

Currency note arbitrage: Activities that seek to profit from the deviation between the official exchange rate applicable to the issue and redemption of banknotes and the market exchange rate. For example, when the market exchange rate is stronger than the official exchange rate, banks can buy foreign currency in the foreign exchange market, surrender it to the Currency Board in exchange for domestic currency at the fixed exchange rate, and thereby make a profit from the differential between the two rates.

A regional macroeconomic surveillance organization, established under the Chiang Mai Initiative Multilateralisation (CMIM) Agreement, to support the implementation of CMIM, and monitor the macroeconomic and financial soundness of all CMIM parties.

Established in 1989, the goal of APEC is to advance Asia-Pacific economic dynamism and sense of community. Hong Kong is a member of APEC and HKMA representatives attend the APEC meetings for finance and central bank officials.

An inter-governmental organisation, consisting of over 40 member jurisdictions in the Asia Pacific region, focused on ensuring that its members effectively implement the international standards against money laundering, terrorist financing and proliferation financing related to weapons of mass destruction. The APG is one of the nine FATF-style regional bodies which are the associate members of the FATF. Hong Kong was one of the founding member of the APG in 1997.

A fund initiated by the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP) in 2002, with the aim of broadening and deepening regional and domestic bond markets in Asia. The ABF consists of two phases. In June 2003, EMEAP launched the first phase (ABF1), which invests in a basket of US dollar-denominated bonds issued by Asian sovereign and quasi-sovereign issuers in eight EMEAP economies (China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand). Building on the success of ABF1, EMEAP has worked to extend the ABF concept to bonds denominated in local currencies. It announced the launch of the second phase of ABF (ABF2) in December 2004.

ABF2 comprises the ABF Pan Asia Bond Index Fund (PAIF) and eight Single-Market Funds. The PAIF is a single bond fund investing in sovereign and quasi-sovereign local currency-denominated bonds issued in eight EMEAP markets. The eight Single-Market Funds will each invest in sovereign and quasi-sovereign local currency-denominated bonds issued in the respective EMEAP markets. The Single-Market Fund of Hong Kong, the ABF Hong Kong Bond Index Fund, is the first ever bond exchange-traded fund in Asia. Both the ABF Hong Kong Bond Index Fund and the PAIF are listed on the Stock Exchange of Hong Kong.

A multilateral development finance institution founded in 1966 by 31 member governments to promote the social and economic progress of the Asia-Pacific region. It now has 65 members - 47 from within the region and 18 from outside. Hong Kong has been a member of the ADB since 1969. The HKMA is responsible for matters relating to Hong Kong's participation in the ADB. HKMA officials attend the ADB's Annual Meetings and contribute to discussions on policy issues of common interest. Under the name "Hong Kong, China", the HKMA has continued to participate actively in the ADB's activities after 1 July 1997.

A description of the degree of financial strength and risk in a bank's assets, typically loans, investments, placements, and off-balance sheet items. Asset quality is normally measured by the level of a bank's classified assets, as well as overdue and rescheduled assets. The higher the level of classified assets and overdue and rescheduled assets, the lower the asset quality of a bank.

See also Loan Classification System.

A Sub-Committee established under the Exchange Fund Advisory Committee to review and report on the HKMA's financial reporting process and the adequacy and effectiveness of the internal control systems of the HKMA. The Sub-Committee reviews the HKMA's financial statements, and the composition and accounting principles adopted in such statements. It also examines and reviews with both the external and internal auditors the scope and results of their audits.

An institution authorized under the Banking Ordinance to carry on the business of taking deposits. Hong Kong maintains a Three-tier Banking System, which comprises banks, restricted licence banks and deposit-taking companies. Authorized institutions are supervised by the HKMA.

The main device under a Currency Board System for maintaining currency stability. Under Hong Kong's Currency Board System, when banks sell US dollars to the HKMA, the inflow of funds causes the Aggregate Balance, and hence the Monetary Base, to expand. This expansion takes place because, in settling the deals, the HKMA credits the clearing accounts of these banks with the Hong Kong dollars required for settlement. Conversely, when banks sell Hong Kong dollars to the HKMA, the HKMA debits the clearing accounts of these banks, causing the Aggregate Balance, and hence the Monetary Base, to shrink. The expansion or contraction of the Monetary Base causes domestic interest rates to fall or rise respectively, thus creating the market conditions necessary to counteract the initial capital flows and restore exchange rate stability.

See also Linked Exchange Rate system.

Specific US dollar assets of the Exchange Fund that have been designated to back the Monetary Base. A statement of the Currency Board Account, which shows the value of the Backing Assets and the Monetary Base, has been published monthly since March 1999.

See also Backing Ratio, Investment Portfolio, Long-Term Growth Portfolio, Strategic Portfolio and foreign currency reserves .

The ratio between the Backing Assets and the Monetary Base. When the Currency Board Account was first set up, sufficient US dollar assets were transferred to the Currency Board Account to provide a 105% backing of the Monetary Base (Backing Portfolio). Movements in the Backing Ratio are subject to the effects of changes in the Monetary Base, revaluation gains or losses due to interest rate change, and the size of the net interest income. Net interest income refers to the excess of interest earnings from US dollar assets over interest payments on Exchange Fund paper. Under the Linked Exchange Rate System, although specific Exchange Fund assets have been designated for the Backing Portfolio, all Exchange Fund assets are available to support the Hong Kong dollar exchange rate.

Under a new arrangement approved by the Financial Secretary in January 2000, when the Backing Ratio reaches 112.5% (the upper trigger point), assets will be transferred out of the Backing Portfolio to the Investment Portfolio of the Exchange Fund assets to reduce the ratio to 110%. Conversely, should the ratio drop to 105% (the lower trigger point), assets will be injected from the Investment Portfolio to restore it to 107.5%. This arrangement enables a higher investment return on excess assets while ensuring sufficient liquid assets in the Backing Portfolio.

See also Backing Assets/Backing Portfolio .

A statutory write-off, cancellation, conversion into equity or modification of certain liabilities of a failing financial institution, in order to absorb losses of the institution and restore its capital position so as to enable it to carry on business for a reasonable period and maintain market confidence in it. It is one of the stabilization options available under the Financial Institutions (Resolution) Ordinance.

A statistical statement that summarises, for a specific period, the economic transactions of an economy with the rest of world. A complete BoP account comprises the current account and the capital and financial account. In Hong Kong, while the quarterly BoP account is compiled from the reference period of the first quarter of 1999, the annual BoP account dates back to the reference period of 1998.

One of the three types of authorized institution in Hong Kong under the Banking Ordinance. Banks are the only institutions permitted to carry on banking business.

See also deposit-taking company, licensed bank, restricted licence bank and Three-tier Banking System.

An international organisation founded in 1930 to foster international monetary and financial co-operation and serves as a bank for central banks. The BIS provides secretariat support for G-10 and other central banking committees, which include the Basel Committee on Banking Supervision, the Committee on the Global Financial System, the Committee on Payment and Settlement Systems, the Markets Committee, and the Central Bank Governance Steering Group looking into issues relating to the promotion of global financial stability. The HKMA joined the BIS in 1996. In July 1998, the BIS opened its first representative office for Asia and the Pacific in Hong Kong. Between September 1999 and March 2006, the HKMA chaired the Central Bank Governance Steering Group. The HKMA now participates in BIS Annual Meetings, and in some of its committee and working group meetings.

A forum established in 2001 to provide a vehicle for communication between the Asian and Pacific members of the Bank for International Settlements (BIS) and its Board and management on matters of interest and concern to the Asian central bank community. The forum comprises the Governors of the BIS member central banks in the Asia-Pacific region. The HKMA is a member; it chaired the forum from June 2003 to June 2005.

A committee established under the Banking Ordinance to advise the Chief Executive of the Hong Kong Special Administrative Region (CE/SAR) on matters relating to the Banking Ordinance, in particular in relation to banks and the carrying on of banking business. The BAC is chaired by the Financial Secretary. Its members include the Monetary Authority and persons appointed by the Financial Secretary under the delegated authority conferred by the CE/SAR.

See also Deposit-Taking Companies Advisory Committee.

This refers to the on-balance sheet assets and off-balance sheet exposures held by the authorized institutions other than assets and exposures categorised under the trading book.

Under the Banking Ordinance, banking business means the business of either or both of the following:

(a) receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than three months;

(b) paying or collecting cheques drawn by or paid in by customers.

A piece of subsidiary legislation made by the Monetary Authority under section 97C of the Banking Ordinance to prescribe capital requirements for authorized institutions incorporated in Hong Kong, taking into account the risks associated with the institutions.

A piece of subsidiary legislation made by the Monetary Authority under section 60A of the Banking Ordinance to set out the minimum standards for public disclosure which authorized institutions must make in respect of their state of affairs, profit and loss and financial resources (including capital resources and liquidity resources).

The Banking (Disclosure) Rules apply to both locally incorporated and overseas incorporated authorized institutions, except for those falling within certain exemption criteria as specified in the Banking (Disclosure) Rules.

A licence granted by the Monetary Authority under the Banking Ordinance to a body corporate incorporated in or outside of Hong Kong wishing to carry on banking business in Hong Kong. Under the minimum criteria for authorization, certain conditions must be satisfied before a banking licence can be granted.

The statute providing the legal framework for banking supervision in Hong Kong. The Banking Ordinance provides for the authorization and supervision of authorized institutions so as to provide a measure of protection to depositors and to promote the general stability and effective working of the banking system. The Banking Ordinance also provides for the approval and supervision of money brokers. The Banking Ordinance is regularly reviewed in the light of practical experience and to take account of developments in the banking industry.

A tribunal established under section 101A(1) of the Banking Ordinance to hear appeals brought up by authorized institutions against certain decisions made by the Monetary Authority under the Banking Ordinance or its subsidiary legislation in relation to capital, liquidity and disclosure requirements, recovery planning and limitations on exposures and interests.

The HKMA announced in July 1999 a three-year reform programme to further develop the banking sector in Hong Kong. The objectives of the reform programme are twofold: first, to encourage market liberalisation and enhance competitiveness in the banking sector; and, secondly, to strengthen banking infrastructure with the objective of enhancing the safety and soundness of the sector. The package of policy initiatives includes, among others, the removal of the "one-building" condition, deregulation of the Interest Rates Rules, a consultancy study on enhancing deposit protection and a study on the establishment of a commercial credit reference agency. All the policy initiatives contained in the reform programme have been completed.

A committee established in 1996 within the HKMA to consider, advise and make recommendations to the Monetary Authority on major authorization matters under the Banking Ordinance. The principal objectives of the Committee are to ensure that decisions on authorization matters are taken in a fair and reasonable manner and to strengthen internal checks and balances.

A note issued by a bank promising to pay the bearer the par value of the note on demand.

The interest rate forming the foundation upon which the Discount Rates for repurchase-agreement transactions through the Discount Window are computed. The Base Rate is currently set at 50 basis points above the lower end of the prevailing target range for the US federal funds rate or the average of the five-day moving averages of the overnight and one-month HIBORs, whichever is the higher. The HKMA announces the Base Rate every day before the interbank market opens in Hong Kong.

A framework published by the Basel Committee on Banking Supervision in June 2004 for regulating the capital adequacy of banks. Replacing the Capital Accord (also known as Basel I) issued in 1988, Basel II offers implementing jurisdictions a more comprehensive and risk-sensitive framework that aligns regulatory capital requirements of banks more closely with the inherent risks they face. It consists of three pillars:

• minimum capital requirements
• supervisory review process
• market discipline.

See also internal ratings-based approach and standardized (credit risk) approach.

A package of regulatory reforms introduced by the Basel Committee on Banking Supervision (Basel Committee), including (i) various enhancements to the international regulatory capital standards and (ii) new international liquidity standards, with a view to promoting the resilience of banks and banking systems to financial stress.

The primary global standard setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Its mandate is to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. It comprises representatives of central banks and supervisory authorities from 28 jurisdictions. The Hong Kong Monetary Authority became a member in 2009.

One of the approaches set out in the Banking (Capital) Rules that authorized institutions incorporated in Hong Kong may choose for the calculation of minimum capital requirements for their credit risk. This approach is essentially a modification of the Capital Accord issued in 1988 (Basel I) and is mainly intended for use, with the prior approval of the HKMA, by authorized institutions with small, simple and straightforward operations.

See also standardized (credit risk) approach.

A legally enforceable arrangement between two parties under which, in the event of a party's default, the amount the non-defaulting party is to receive from (or pay to) the defaulting party is a net sum determined by netting the amounts receivable from and the amounts payable to the defaulting party under all transactions covered by the arrangement.

A company created for the purpose of receiving a transfer, under the Financial Institutions (Resolution) Ordinance, of all or part of a failing financial institution’s issued securities, assets, rights or liabilities and effecting a timely disposal of the same to a purchaser.

An internationally recognised framework for assessing the Capital adequacy, Asset quality, Management, Earnings and Liquidity of banks. The primary purpose of CAMEL is to help identify institutions whose weaknesses require special supervisory attention. The overall rating is expressed on a scale of one to five in ascending order of supervisory concern: "1" indicates the highest rating and least degree of concern; "5" represents the lowest rating and highest degree of concern. The HKMA has adopted the CAMEL rating system to assess the financial condition and overall soundness of authorized institutions in Hong Kong.

An accord reached by the Basel Committee on Banking Supervision in 1988 (now commonly known as Basel I), which has been applied to Hong Kong since 1989. The Capital Accord sets out the framework for measuring the capital adequacy of banks, by requiring them to hold a minimum level of capital for their exposures to credit risk, expressed as a minimum ratio between a bank's capital base and its risk weighted assets. The Capital Accord promotes soundness and stability in the international banking system and aims at reducing sources of competitive inequality among international banks. It has been revised to address the issues of bilateral netting, multilateral netting and market risks arising from banks' open positions in various financial instruments.

CAR is a collective term referring to the three risk-weighted capital ratios, namely the (a) Common Equity Tier 1 capital ratio; (b) Tier 1 capital ratio; and (c) Total capital ratio, prescribed under Basel III. The ratio is intended to be a measurement of a bank’s capital position in respect of its exposures to credit risk, market risk, operational risk and sovereign concentration risk. The Banking (Capital) Rules made under section 97C of the Banking Ordinance stipulates that locally incorporated authorized institutions must maintain a Common Equity Tier 1 capital ratio of not less than 4.5%, a Tier 1 capital ratio of not less than 6% and a Total capital ratio of not less than 8%, but the Monetary Authority may under section 97F of the Ordinance increase the minimum above ratios applicable to an authorized institution, taking into account the risks associated with the institution. Each locally incorporated authorized institution is assigned a set of minimum ratios on an unconsolidated (solo) basis or on both a consolidated and unconsolidated basis.

The method based on which a locally incorporated authorized institution should calculate its CAR is set out in detail in the Banking (Capital) Rules. The standards set out in the Rules are in line with the international capital standards released by the Basel Committee on Banking Supervision.

Consolidated basis: In the calculation of the consolidated CAR, the consolidated position of the institution covers its local and overseas branches and the subsidiaries specified by the HKMA.

Solo basis: In the calculation of the solo CAR, the combined position of the institution's local and overseas branches is covered.

Capital buffers consist of three components: 1) the capital conservation buffer, 2) the countercyclical capital buffer and, 3) for authorized institutions considered as systemically important by the Monetary Authority, a higher loss absorbency buffer.

The capital buffers, which must be met by Common Equity Tier 1 capital, are intended to bolster resilience of the banking sector against adverse economic developments and, in the case of the higher loss absorbency buffer, to limit potential negative externalities posed by systemically important authorized institutions were they to become non-viable. If any of the capital buffers maintained by an authorized institution is lower than the level prescribed in the Banking (Capital) Rules, the institution will be subject to restrictions on its ability to make distributions so that it can restore the capital buffer to the desired level.

A function carried out by a central counterparty through which financial performance of financial contracts is guaranteed, thereby mitigating the counterparty credit risk faced by the sellers and the buyers of the contracts.

An entity that interposes itself between the buyers and the sellers of financial contracts such that it becomes the buyer to every seller and the seller to every buyer of the contracts for the purposes of clearing and settling the contracts.

A clearing system operated by the HKMA. The CMU comprises computerised clearing, settlement and custodian facilities for Exchange Fund Bills and Notes, bonds issued by the Government of the Hong Kong Special Administrative Region, and debt securities issued by both public and private sector entities.

A certificate issued to designated systems meeting certain criteria specified under the Clearing and Settlement Systems Ordinance. The certificate provides statutory backing to the finality of settlement for transactions made through designated systems by protecting the settlement finality from insolvency laws or any other laws.

Certificates issued by the Financial Secretary under the Exchange Fund Ordinance, to be held by note-issuing banks as cover for the banknotes they issue. The note-issuing banks are required to submit US dollars to the HKMA in return for the Certificates at the rate of HK$7.80 to US$1.

The ratio of the total amount of loans written off during a period to total outstanding amount of loans at the end of that period. This ratio measures the gross credit loss of a loan portfolio over a specified period of time. Charge-off policies vary from institution to institution. For credit card lending, normally, an account will be written off when the receivable has been overdue for more than 180 days or when the ultimate repayment of the receivable is unlikely (e.g. the cardholder is bankrupt or cannot be located). To better assess the asset quality of the credit card lending portfolio, the credit card charge-off ratio should be read in conjunction with the delinquency ratio. The charge-off ratio is annualised, whereas the delinquency ratio is measured by using the period-end position.

The CHATS Optimiser is a system mechanism that settles paper cheques and large-value Clearing House Automated Transfer System (CHATS) payments simultaneously and in an offsetting manner. Paper cheques are settled daily in a bulk run at a specific time by multilateral netting. When the amounts required to settle paper cheque payments are substantial, banks, having known their net cheque settlement positions, may make use of the CHATS Optimiser to make offsetting CHATS payments to their counterparties during the bulk settlement run. This helps the banks to manage their liquidity positions more efficiently and relieves them from the need to sit on substantial amounts of money for meeting their payment obligations in the bulk settlement run.

A regional multilateral arrangement under the aegis of ASEAN+3 to provide US dollar support through currency swaps to participants facing liquidity shortages and/or balance of payments difficulties.

Loans that are classified as "substandard", "doubtful" or "loss" under the HKMA's Loan Classification System.

The account maintained by banks with the central bank, or clearing house, for the purpose of paying and settling transactions between the banks themselves or between the banks and the central bank.

A system established for (i) the clearing or settlement of payment obligations, (ii) the clearing or settlement of obligations for the transfer of book entry securities, or the transfer of such securities.

A computer-based system established in Hong Kong for the electronic processing and settlement of interbank fund transfers. CHATS operates in a Real Time Gross Settlement mode between banks in Hong Kong and is designed for large-value interbank payments. Banks using CHATS are connected to the clearing house computer operated by Hong Kong Interbank Clearing Limited.

A free trade agreement entered into between the Government of the Hong Kong Special Administrative Region and the Central People's Government of the People's Republic of China on 29 June 2003 giving preferential access to the Mainland market for Hong Kong companies. CEPA aims at strengthening trade and investment co-operation between the Mainland and Hong Kong through progressively reducing tariff and non-tariff barriers on trade in goods and services, and facilitating trade and investment activities. CEPA is designed to offer new business opportunities on the Mainland for Hong Kong enterprises and professionals and increase Hong Kong's attractiveness to overseas investors.

A website https://www.cmu.org.hk developed by the Central Moneymarkets Unit (CMU) of the HKMA to increase product and pricing transparency in the bond market. It allows banks and financial institutions to quote indicative bid and offer prices for bonds and to provide related bond information, making it easier for retail investors to participate in the bond market.

A voluntary code jointly produced by the Hong Kong Association of Banks and the DTC Association with the endorsement of the HKMA. The Code took effect on 14 July 1997. It sets out the minimum standards for a wide range of personal banking services provided by authorized institutions, including the operation of accounts and loans, card services, payment services and debt collection. The HKMA requires all authorized institutions to comply with the Code and monitors authorized institutions' compliance with the Code as part of its regular supervision. The Code is subject to review and revision from time to time.

A code approved by the Monetary Authority under section 97M of the Banking Ordinance to provide guidance in respect of any of the provisions in any rules made by the Monetary Authority under section 60A(1), 81A(1), 97C(1) or 97H(1) of the Banking Ordinance in relation to disclosure requirements, limitations on exposures and interests, capital requirements and liquidity requirements applicable to authorized institutions.

A voluntary code jointly produced by eight payment card scheme operators in Hong Kong with the endorsement of the HKMA. The Code of Practice for Payment Card Scheme Operators (the Code) took effect in 2007 with a revision on 13 November 2015. The Code specifies general principles for the scheme operators to observe in order to promote the general safety and efficiency of payment cards in Hong Kong and to foster public confidence in them.

A statute enacted in 1994 to make provision for the issue of legal tender coins in Hong Kong.

See also Legal Tender Notes Issue Ordinance.

See credit reference agency.

A committee hosted by the Bank for International Settlements that sets international standards to promote, monitor and make recommendations about the safety and efficiency of payment, clearing, settlement and related arrangements, thereby supporting financial stability and the wider economy.

Formerly known as the Euro-Currency Standing Committee, the CGFS is one of the four standing committees under the Bank for International Settlements. The Committee has three major tasks: systematic short-term monitoring of global financial system conditions; long-term analysis of the functioning of financial markets; and the articulation of policy recommendations aimed at improving market functioning and promoting stability. The Committee meets quarterly in Basel. The HKMA is not a member but has been regularly invited to participate in CGFS meetings.

Common Equity Tier 1 capital is generally regarded as having the highest loss absorption capacity among different types of an authorized institution’s capital. It includes capital instruments that meet the qualifying criteria set out in Schedule 4A to the Banking (Capital) Rules, share premium resulting from the issue of Common Equity Tier 1 capital instruments, retained earnings, other disclosed reserves, and minority interests arising from Common Equity Tier 1 capital instruments issued by consolidated bank subsidiaries of the authorized institution and held by third parties.

See also capital buffers and Tier 1 capital.

A ratio, expressed as a percentage, of the amount of the authorized institution’s Common Equity Tier 1 capital to the sum of the institution’s total risk-weighted amount for credit risk, market risk, operational risk and sovereign concentration risk, as determined in accordance with the Banking (Capital) Rules.

See also capital adequacy ratio.

The global supervision by the HKMA of locally incorporated authorized institutions. The supervision embraces, among other matters, capital adequacy, concentration of exposures, and liquidity. It covers an institution's subsidiaries as well as local and overseas branches. The main objective is to enable the HKMA to assess any weaknesses within a banking or financial group that may affect the authorized institution itself, and, if possible, to initiate preventive or remedial action.

A global clearing and settlement system for cross-border foreign exchange transactions. The System is operated by CLS bank International which is owned by over 70 global banking and financial institutions. It enables foreign exchange transactions involving the CLS eligible currencies to be settled through the CLS System on a payment-versus-payment basis, thus eliminating the settlement risk in these transactions. The Hong Kong dollar is an eligible currency of the CLS System.

An undertaking by a central bank or Currency Board to convert domestic currency into foreign currency and vice versa at a fixed exchange rate. In Hong Kong, the HKMA operates Convertibility Undertakings on both the strong side and the weak side of the Linked Rate of 7.80. Under the strong-side Convertibility Undertaking, the HKMA undertakes to buy US dollars from licensed banks at 7.75. Under the weak-side Convertibility Undertaking, the HKMA undertakes to sell US dollars at 7.85. Within the Convertibility Zone between 7.75 and 7.85, the HKMA may choose to conduct market operations consistent with Currency Board principles with the aim of promoting the smooth functioning of the money and foreign exchange markets.

The four broad principles governing these operations are

(1) All operations within the Convertibility Zone should be carried out in strict accordance with Currency Board rules: that is, both the stock and changes in the Monetary Base should be fully backed by US dollar assets.

(2) The primary objective of any operations should be to preserve exchange rate stability implied by the Linked Exchange Rate system and to maintain confidence in the system.

(3) Operations might be undertaken to support such interest rate adjustments as would maintain exchange rate stability under the Linked Exchange Rate system, and would avoid destabilising behaviour in interest rates.

(4) Operations might also be undertaken in order to remove market anomalies.

See also Currency Board System.

An institution-specific cross-border cooperation agreement between the institution’s home and relevant host resolution authorities that need to be involved in the planning and crisis resolution stages of the institution. Pursuant to Key Attribute 9, COAGs should be in place for all global systemically important financial institutions at a minimum.

A ratio, expressed as a percentage, of the amount of a category 2A institution’s “available core funding” to the amount of the institution’s “required core funding”.

A set of minimum standards for sound prudential regulation and supervision of banks and banking systems issued by the Basel Committee on Banking Supervision. They are used by jurisdictions as a benchmark for assessing the quality of their supervisory systems and for identifying future work to achieve a baseline level of sound supervisory practices. They are also used by the International Monetary Fund and the World Bank, in the context of the Financial Sector Assessment Program, to assess the effectiveness of jurisdictions’ banking supervisory systems and practices.

Corporate governance refers to the processes and the related organisational structures, by which organisations are directed, controlled and held to account. It involves a set of relationships between a company's management, its board, its shareholders, and other stakeholders. In the banking industry, corporate governance signifies the manner in which the business and affairs of individual banks are directed and managed by their board of directors and senior management. It also provides the structure through which the objectives of the institution are set, the strategy of attaining those objectives is determined and the performance of the institution is monitored.

The HKMA has issued a number of guidelines on corporate governance applicable to all authorized institutions in Hong Kong since 2000. These guidelines are reviewed by the HKMA on a regular basis to take into account international developments and to keep in pace with international best practice.

The CCyB is a part of the Basel III regulatory capital framework. In essence it is a mechanism to build up additional capital during periods of excessive credit growth when risks of system-wide stress are observed to be growing markedly. This capital can then be “released” when the credit cycle turns to absorb losses and enable the banking system to continue lending in the subsequent downturn.

See also capital buffers.

A credit risk that the counterparty to a financial contract could default before the final settlement of the cash flows of the contract. The key difference between CCR and the credit risk incurred by granting a loan is that the amount of CCR exposure will vary with the market value of the contract throughout its life and either counterparty to the contract may suffer a loss.

An entity that engages in the collection, maintenance and dissemination of information about borrowers' creditworthiness to facilitate credit assessment by credit providers. The handling of consumer credit information is governed by the Personal Data (Privacy) Ordinance and the Code of Practice on Consumer Credit Data issued thereunder. In Hong Kong, the credit reference agencies that handle consumer and/or commercial credit information are privately owned. The establishment of a commercial credit reference agency (CCRA) is one of the policy initiatives contained in the Banking Sector Reform Programme. The initiative aims to address the need for authorized institutions to have better information about their corporate customers, particularly in relation to small and medium sized enterprises. The CCRA in Hong Kong commenced operation in November 2004.

The risk of a borrower or counterparty failing to meet its obligations.

An institution-specific group maintained by the institution’s home and key host resolution authorities, with the objective of enhancing preparedness for, and facilitating the management and resolution of, a cross-border financial crisis affecting the institution. Pursuant to Key Attribute 8, CMGs should be in place for all global systemically important financial institutions.

An activity or operation carried on, or a service provided, by a financial institution on which an entity (other than a group company of that financial institution) relies; and that, if discontinued, would be likely to i) lead to the disruption of services that are essential to the economy of Hong Kong; ii) undermine the general confidence of participants in the financial market in Hong Kong; or iii) give rise to contagion within the financial system of Hong Kong.

The Currency Board Account lists the various liabilities and assets relating to the operations of the Currency Board System. On the asset side, it shows US dollar assets designated to back the Monetary Base. On the liability side, it shows the Monetary Base, which includes banknotes and coins issued, the Aggregate Balance, and the outstanding amount of debt paper issued by the Currency Board.

A Sub-Committee established under the Exchange Fund Advisory Committee in August 1998 to oversee the operation of the Currency Board System in Hong Kong and to recommend to the Financial Secretary, where appropriate, measures to enhance the robustness and effectiveness of Hong Kong's Currency Board arrangements. The Sub-Committee is chaired by the Chief Executive of the HKMA. Its members include professionals in the financial industry, academics, and senior officials of the HKMA.

A monetary system that complies with the Monetary Rule requiring that any change in the Monetary Base should be matched by a corresponding change in foreign currency reserves in a specified foreign currency at a fixed exchange rate. In operational terms, the Monetary Rule often takes the form of an undertaking by the Currency Board to convert domestic currency into foreign currency reserves at the fixed exchange rate.

See also Automatic/Autopilot Adjustment Mechanism, Aggregate Balance, Convertibility Undertaking and Linked Exchange Rate system.

Specified financial institutions, including Authorized Institutions, and designated non-financial businesses and professions are required under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance to carry out customer due diligence (CDD) measures in certain circumstances, such as before establishing a business relationship with a customer. CDD measures generally include the identification and verification of identity of a customer, any beneficial owner of the customer and any person purporting to act on behalf of the customer, as well as obtaining information on the purpose and intended nature of the business relationship established.

One of the pillars of the Cybersecurity Fortification Initiative (CFI). It provides an effective infrastructure for sharing intelligence on cyber attacks. The timeliness of receiving alerts or warnings from a commonly shared intelligence platform will help the banking sector as a whole to prepare for possible cyber attacks. The platform was launched by the HKMA in collaboration with the Hong Kong Applied Science and Technology Research Institute and the Hong Kong Association of Banks.

One of the pillars of the Cybersecurity Fortification Initiative (CFI). It is a risk-based framework for Authorized Institutions to assess their own risk profiles and benchmark the level of defence and resilience that would be required to accord appropriate protection against cyber attacks.

On the other hand, Stored Value Facilities Licensees are subject to another C-RAF which is specifically designed for them given their different business nature and risk profile. The C-RAF for SVF licensees does not form part of the CFI as the CFI is for Hong Kong’s banking sector.

The Cybersecurity Fortification Initiative (CFI) was implemented with a view to raising the cyber resilience of Hong Kong’s banking system. It is underpinned by three pillars: Cyber Resilience Assessment Framework (C-RAF), Professional Development Programme (PDP) , and Cyber Intelligence Sharing Platform (CISP).

The monthly repayment obligations of the borrower as a percentage of monthly income.

The ratio of the total amount of loans overdue for more than three months to total outstanding amount of loans. This ratio provides an indication of the asset quality of the loan portfolio.

A securities delivery arrangement in which the delivery of securities takes place as soon as payment is made for them and confirmed final and irrevocable.

See also payment versus payment (PvP) .

A scheme to provide statutory protection to bank depositors. Established and maintained by the Hong Kong Deposit Protection Board, the Scheme would help strengthen public confidence in the banking system and contribute to the maintenance of financial stability. All licensed banks in Hong Kong are members of the scheme unless otherwise exempted by the Board.

The Ordinance was enacted on 5 May 2004 to provide for the establishment of a deposit protection scheme in Hong Kong.

A committee to advise the Chief Executive of the Hong Kong Special Administrative Region (CE/SAR) on matters relating to the Banking Ordinance, in particular those relating to the business of deposit-taking companies and restricted licence banks. The DTCAC is chaired by the Financial Secretary and is composed of the Monetary Authority and other members appointed by the Financial Secretary under the delegated authority conferred by the CE/SAR.

See also Banking Advisory Committee.

One of the three types of authorized institutions in Hong Kong under the Banking Ordinance. Deposit-taking companies are restricted to taking deposits of HK$100,000 or more with an original term to maturity of at least three months. These companies are mostly owned by, or otherwise associated with, banks. They engage in a range of specialised activities, including consumer finance, trade finance and securities business.

See also licensed bank, restricted licence bank and Three-tier Banking System.

The phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk in line with a risk-based approach. De-risking can be the result of various drivers, such as concerns about profitability, prudential requirements, anxiety after the global financial crisis, and reputational risk. It is a misconception to characterise de-risking exclusively as an anti-money laundering issue.

See also Financial Inclusion.

A financial contract whose value is derived from the value of single or multiple underlying assets, indices or events. Common underlying assets include foreign currencies, equities, credit, debt securities, and commodities. Derivatives can be used for hedging, enhancing investment yield, or taking arbitrage opportunities, and cover a wide range of financial contracts including forwards, futures, options, swaps and their various combinations and variations.

A payment system (which is a clearing and settlement system or a retail payment system, as the case may be) designated under the Payment Systems and Stored Value Facilities Ordinance (PSSVFO). A payment system (i) whose proper functioning is material to the monetary or financial stability of Hong Kong or to the functioning of Hong Kong as an international financial centre, or (ii) having regard to matters of significant public interest may become a designated system under the PSSVFO . Designated systems are subject to oversight by the HKMA.

The interest rate at which banks obtain overnight Hong Kong dollar liquidity from the HKMA through repurchase agreements involving Exchange Fund paper or other eligible paper under the Discount Window. The Discount Rate consists of two tiers:

Percentage of Exchange Fund Paper held by a bank	Applicable Discount Rate
First 50 per cent	Base Rate

Next 50 per cent

Base Rate plus 5 per cent or overnight HIBOR for the day, whichever is higher

In Hong Kong, the facility through which banks can borrow Hong Kong dollar funds overnight from the HKMA through repurchase agreements using eligible securities as collateral.

See also Discount Rate.

The substitution of the domestic currency by a foreign currency (in most cases, the US dollar) as a unit of account, store of value, and medium of exchange. Dollarisation can be official or unofficial. Official dollarisation refers to the use of a foreign currency as legal tender in the local economy. Unofficial dollarisation refers to the informal, yet popular, use of a foreign currency, usually in parallel with the circulation of the local currency.

An authorized institution (AI) would be considered a D-SIB if in the opinion of the Monetary Authority the risks associated with the AI are such as to render the AI capable of having a significant impact on the effective working and stability of the banking or financial system of Hong Kong were the AI to become non-viable.

See also Systemically Important Authorized Institution (SIB).

See Loan Classification System.

Established in 1981 under the Companies Ordinance, the DTCA was originally known as the Hong Kong Association of Restricted Licence banks and Deposit-Taking Companies. Any restricted licence bank or deposit-taking company may join the DTCA. The objectives of the DTCA include furthering the general interests of restricted licence banks and deposit-taking companies, serving as an intermediary between the Government and members, and acting as a consultative body to the Government on matters concerning the business of taking deposits in Hong Kong.

See also Hong Kong Association of Banks.

The nominal effective exchange rate indices (NEERI) compiled by the Census and Statistics Department of the Government of the Hong Kong Special Administrative Region that measure movements in the weighted average of the nominal exchange rate of the Hong Kong dollar against the currencies of Hong Kong's principal trading partners. The real effective exchange rate index (REERI) measures weighted average of nominal effective exchange rates against the currencies of principal trading partners, adjusted for relative movements in price or cost indicators against those selected trading partners. In effect, the measure reflects the movement of prices of Hong Kong's goods and services relative to those of its major trading partners, and thus is often cited as our indicator of price competitiveness. There is no single measure of REERI, as the index may be constructed using different price indices based on consumer prices, export prices and unit labour costs.

Banking services delivered through a public or private network, including the Internet and wireless communication networks. Customers may gain access to e-banking services using an electronic device, such as a personal computer (PC), personal digital assistant (PDA), automated teller machine (ATM), kiosk, or touch-tone telephone.

See also Internet banking.

A computerised system for clearing and settling various types of electronic payments through Hong Kong Interbank Clearing Limited. These payments include autopay, electronic clearing items generated by the securities clearing and settlement system (the Central Clearing and Settlement System operated by Hong Kong Exchanges and Clearing Limited), and the point-of-sale clearing and settlement system. Settlement by ECG is on a next-day batch-run basis.

A programme for delivering circulars and guidelines to authorized institutions through the HKMA's Private Website.

Electronic money products are defined as stored value or prepaid products in which a record of the funds or value available to the consumer is stored on an electronic device in the consumer's possession. This includes both prepaid cards (sometimes called electronic purses) and prepaid software products that use computer networks such as the Internet (sometimes called digital cash). These products differ from so-called access products that allow consumers to use electronic means of communication to access otherwise conventional payment services (for example, use of the Internet to make a credit card payment or for general "on-line banking").

A stored value facility that allows users to use a mobile device or a computer to make purchases or payments to another person using value stored in the user’s account. Some e-wallets also allow users to link other channels (e.g. credit /debit card, bank account etc.) as a funding source.

A set of common and transparent competency standards that enables more effective training for new entrants and professional development for existing practitioners, which is conducive to enhancing the level of core competence and on-going talent development of banking practitioners. The ECF covers six professional work streams: (i) Anti-money Laundering and Counter-Financing of Terrorism, (ii) Cybersecurity, (iii) Treasury Management, (iv) Retail Wealth Management, (v) Credit Risk Management and (vi) Risk Management and Compliance.

Environmental, Social and Governance (ESG) are factors that can impact sustainability of a company and they cover non-financial considerations, including environmental protection, climate change, pollution, social impact, governance, and anti-corruption.

See also responsible investment.

A clearing system introduced in Hong Kong in April 2003 to improve settlement efficiency and reduce settlement risk of euro transactions in Asian time. Like the Hong Kong Dollar, US Dollar and Renminbi Clearing Systems, the Euro Clearing System offers Real Time Gross Settlement for euro payments and payment versus payment settlement for EUR/USD, EUR/RMB and EUR/HKD foreign exchange transactions. The system is also linked to the Central Moneymarkets Unit to provide delivery versus payment settlement of euro-denominated debt securities and repurchase agreement facilities.

See also Hong Kong Dollar Clearing System, US Dollar Clearing System and Renminbi Clearing System.

A fund established in 1935 by the Currency Ordinance (later renamed the Exchange Fund Ordinance) as a reserve to back the issue of Hong Kong's banknotes. In 1976, the bulk of the foreign exchange assets of the Government's General Revenue Account and all of the assets of the Coinage Security Fund (i.e. funds received against the issue of coin) were transferred to the Exchange Fund and debt certificates were issued in exchange. Thus, the resources available to regulate the exchange value of the Hong Kong dollar were centralised in the Fund. The Exchange Fund is under the control of the Financial Secretary and is used primarily for 'affecting, either directly or indirectly the exchange value of the currency of Hong Kong'. In addition, it may be used to maintain the stability and integrity of the monetary and financial systems of Hong Kong with a view to maintaining Hong Kong as an international financial centre. The Exchange Fund may be held in Hong Kong currency, foreign exchange, gold or silver, or in such securities or assets as the Financial Secretary considers appropriate after having consulted the Exchange Fund Advisory Committee. The Monetary Authority is appointed by the Financial Secretary to manage the Exchange Fund, among other duties.

Under section 3(1) of the Exchange Fund Ordinance, the Financial Secretary exercises control over the Exchange Fund in consultation with an Exchange Fund Advisory Committee (EFAC). The Financial Secretary is ex-officio chairman of EFAC. The other members are appointed by the Chief Executive of the Hong Kong Special Administrative Region. EFAC advises the Financial Secretary on general policy on the investment of the Exchange Fund.

EFAC is assisted in its work by five sub-committees, which monitor specific areas of the HKMA's work and report and make recommendations to the Financial Secretary through EFAC. The Governance Sub-Committee monitors the performance of the HKMA and makes recommendations on remuneration and human resources policies, and on budgetary, administrative and governance issues. The other four Sub-Committees are the Audit Sub-Committee, Currency Board Sub-Committee, Investment Sub-Committee and Financial Infrastructure and Market Development Sub-Committee.

Exchange Fund Bills and Notes (EFBNs) are Hong Kong dollar debt securities issued by the HKMA. They constitute direct, unsecured, unconditional and general obligations of the Hong Kong Special Administrative Region Government for the account of the Exchange Fund and have the same status as all other unsecured debt of the Government.

The EFBN Issuance Programme ensures the supply of a significant amount of high-quality Hong Kong dollar debt papers, which can be employed as trading, investment and liquidity management instruments. Banks that maintain Hong Kong dollar clearing accounts with the HKMA may arrange repurchase agreements using their holdings of Exchange Fund papers (and other eligible securities) as collateral to obtain overnight liquidity from the HKMA through the Discount Window.

The HKMA publishes indicative pricings for Exchange Fund Bills and Notes (EFBNs) two times a day. The indicative pricings are calculated by Reuters based on indicative bid and ask quotes provided by the Eligible Market Markers designated by the HKMA .

EFIL is a private limited company established in October 1998 under the Companies Ordinance by the Government of the Hong Kong Special Administrative Region to i) manage the Hong Kong equity portfolio of the Exchange Fund (consisting of the Hang Seng Index constituent stocks acquired in theHKMA's August 1998 market operation and the portfolio transferred from the Land Fund to the Exchange Fund in November 1998), and ii) to dispose of the Exchange Fund's Hong Kong equity portfolio (other than a long-term Investment Portfolio) with minimum disruption to the market. A total of HK$140.4 billion worth of Hong Kong stocks was disposed of through the initial public offering of the Tracker Fund of Hong Kong (TraHK) and the subsequent quarterly Tap Facility of TraHK. The disposal programme was completed on 15 October 2002. The HKMA took over responsibility for the management of the Exchange Fund's Hong Kong equity portfolio from EFIL in January 2003.

A statute originally enacted as the Currency Ordinance of 1935. The Exchange Fund Ordinance makes provision for the establishment and management of the Exchange Fund and the employment of its assets. The Ordinance requires that the Exchange Fund "shall be used primarily for such purposes as the Financial Secretary thinks fit affecting, either directly or indirectly the exchange value of the currency of Hong Kong and for other purposes incidental thereto." The Financial Secretary may, having regard to that primary purpose and with a view to maintaining Hong Kong as an international financial centre, use the Exchange Fund for maintaining the stability and integrity of the monetary and financial systems of Hong Kong. It also empowers the Financial Secretary to appoint the Monetary Authority to manage the Exchange Fund, among other duties.

A listed bond or equity fund that seeks to achieve a total return corresponding to that of its benchmark index by investing in all or a representative sample of the constituent securities of the benchmark index (benchmark securities).

One of the unique features of an ETF is the provision of an in-kind creation and redemption mechanism, which helps ensure that the trading price of fund units will be close to the net asset value per unit. Under this mechanism, units of the ETF can be created by surrendering a specified basket of benchmark securities to the fund. In the case of redemption, the fund will provide a basket of benchmark securities in exchange for the units being redeemed. In most cases, there is a minimum size for in-kind transactions.

See also Tracker Fund of Hong Kong.

In relation to an authorized institution incorporated in Hong Kong, directors who have definable management responsibilities in addition to their functions as directors.

See also independent directors and non-executive directors.

An individual appointed by a registered institution to directly supervise the conduct of one or more regulated activities of that registered institution. Such officer must have received prior written consent from the Monetary Authority. “Executive officer” has the meaning set out in §2 of the Banking Ordinance.

A forum of central banks and monetary authorities in the East Asia and Pacific region established in 1991. Executives' Meeting of East Asia-Pacific Central Banks (EMEAP)'s primary objective is to strengthen co-operation among its members. The eleven members include the Reserve Bank of Australia, People's Bank of China, the HKMA, Bank Indonesia, Bank of Japan, Bank of Korea, Bank Negara Malaysia, Reserve Bank of New Zealand, Bangko Sentral ng Pilipinas, Monetary Authority of Singapore and Bank of Thailand. Three working groups have been established, on payments and market infrastructures, financial market development, and banking supervision. The HKMA participates in all three working groups as members.

A system launched by the HKMA in September 2018 to address the increasing market needs for more efficient retail payment services. Both banks and stored value facilities (SVF) in Hong Kong may participate in the FPS. It enables their customers to make cross-bank/SVF payments easily, by entering the mobile phone number or the email address of the recipient, with funds available to the recipient almost immediately. The FPS operates on 24x7 basis and supports payments in the Hong Kong dollar and the renminbi.

Since 1 April 2007, the Financial Secretary introduced a new fee arrangement on the fiscal reserves placed with the Exchange Fund. The fee is based on a fixed rate for the year determined every January and is also applicable to most of the other placements with the Exchange Fund. The rate is the average annual investment return of the Investment Portfolio for the past six years, or the average annual yield of three-year Government Bond for the previous year subject to a minimum of 0%, whichever is higher.

See also placements with the Exchange Fund .

An inter-governmental body established in 1989. The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering,terrorist financing and financing of proliferation of weapons of mass destruction, and other related threats to the integrity of the international financial system.

The FATF has developed a series of recommendations that are recognised as the international standard for combating of money laundering and the financing of terrorism and proliferation of weapons of mass destruction. They form the basis for a co-ordinated response to these threats to the integrity of the financial system and help ensure a level playing field. In order to ensure full and effective implementation of its standards at the global level, the FATF monitors compliance by conducting evaluations on jurisdictions and undertakes stringent follow-up after the evaluations, including identifying high-risk and other monitored jurisdictions which could be subject to enhanced scrutiny by the FATF or counter-measures by the FATF members and the international community at large.

Hong Kong has been a member of the FATF since 1991 and is obliged to implement the latest FATF recommendations.

A non-profit making organisation established to administer an independent, impartial, transparent, efficient and affordable financial dispute resolution scheme providing mediation and arbitration services as an alternative to litigation, in order to facilitate the resolution of monetary disputes between financial institutions and their customers in Hong Kong.

Financial inclusion means that the general public and small- and micro- enterprises are able to open and maintain bank accounts and have access to basic banking services to meet the basic needs of their daily lives or the needs of fund transfers for their business operations.

A Sub-Committee established under the Exchange Fund Advisory Committee to make recommendations on measures to further develop Hong Kong’s status as an international financial centre and strengthen the international competitiveness of Hong Kong’s financial services, including promoting the development, operational excellence, safety and efficiency of the financial infrastructure in Hong Kong; and promoting the development of Hong Kong as an offshore renminbi centre and fostering the development of other enabling factors. It also makes recommendations on initiatives for the HKMA and monitors the work of the HKMA. The Sub-Committee is formerly called the Financial Infrastructure Sub-Committee.

An Ordinance establishing a cross-sectoral resolution regime for financial institutions in Hong Kong with a view to avoiding or mitigating the risks otherwise posed by their non-viability to the stability and effective working of the financial system in Hong Kong, including to the continued performance of critical financial functions. The FIRO confers statutory powers on the Monetary Authority, the Securities and Futures Commission and the Insurance Authority as resolution authorities for those financial institutions within the scope of the FIRO that operate under their respective existing regulatory purviews.

A system that facilitates the clearing, settling, or recording of payments, securities, derivatives or other financial transactions. The five major types of FMIs are systemically important payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories.

Financial sanctions refer to measures imposed by international organisations and governments prohibiting the provision of financial services towards, or in support of, certain persons, organizations, activities or regimes.

Financial sanctions may be imposed multilaterally or unilaterally and cover a broad spectrum ranging from comprehensive sanctions against entire regimes to narrowly defined prohibitions on activities involving targeted individuals and entities.

A comprehensive and in-depth analysis of the financial sector of a country or jurisdiction. FSAP assessments are the joint responsibility of the International Monetary Fund (IMF) and World Bank in developing economies and emerging markets and of the IMF alone in advanced economies. An FSAP includes two major components: a financial stability assessment, which is the responsibility of the IMF, and a financial development assessment, the responsibility of the World Bank. The FSAP analyses the resilience of the financial sector, the quality of the regulatory and supervisory framework, and the capacity to manage and resolve financial crises. Based on its findings, the FSAP produces recommendations of a micro- and macro-prudential nature, tailored to the specific circumstances of the country or jurisdiction assessed.

Hong Kong is a member of the FSB, formerly the Financial Stability Forum (FSF). The FSF, which was established by the G7, first convened in April 1999 with a view to reducing vulnerability and safeguard the smooth functioning of financial markets through enhanced information exchange and co-operation in financial supervision and surveillance. Hong Kong's inclusion in the FSF, together with four other non-G7 economies (Australia, the Netherlands, Singapore and Switzerland) is a recognition of its status as a systemically important financial centre. The HKMA regularly attends meetings of the FSF to exchange views on potential vulnerabilities in the international financial system.

In April 2009, the FSF was re-established as the FSB with an expanded membership and broadened mandate. The structure of the FSB consists of a Chairperson, a Steering Committee, a Plenary, and a Secretariat. Under this structure, three Standing Committees on: (a) Assessment of Vulnerabilities;, (b) Supervisory and Regulatory Cooperation; and (c) Standards Implementation; were established to carry out the work of the FSB. Hong Kong is a member of the Plenary meeting and participates in all three Standing Committees.
 

Proliferation financing refers to the provision of funds or financial services related to weapons of mass destruction (WMD) in contravention of national and/or international laws. The term covers a broad range of activities, such as those in support of the development of WMDs or activities relating to the procurement of materials (e.g. dual-use goods) intended to be used in the manufacturing of such weapons.

A supervisory arrangement that allows banks and their partnering technology firms to conduct pilot trials of their fintech initiatives without the need to achieve full compliance with the HKMA's supervisory requirements.

The account held by the Government of the Hong Kong Special Administrative Region for accumulating its fiscal surpluses. In 1976 the bulk of the foreign exchange assets of the Government's General Revenue Account were transferred to the Exchange Fund. From then onwards, the Government has placed the surpluses of the General Revenue Account with the Exchange Fund.

The HKMA must be satisfied that any person who is, or is to be, a chief executive, director or controller or an executive officer (defined as an individual who is responsible for supervising regulated securities and futures activities) of an authorized institution should be a 'fit and proper' person to hold that position. In applying the fit and proper test, the HKMA generally takes into account the following factors: the person's reputation and character, the person's knowledge and experience, and past record, if any, of non-compliance or criminal activity.

The HKMA must also be satisfied that an authorized institution has adequate systems of control to ensure that each person who is a "manager" of the institution is a fit and proper person. A "manager" is an individual who is principally responsible for the conduct of any major affairs or business of the institution.

Stored value remaining on the stored value facility (SVF), but does not include SVF deposit. For legal definition of the term, please refer to section 2 of the Payment Systems and Stored Value facility Ordinance.

Records of transactions in financial assets and liabilities among various sectors of an economy or among these sectors and non-residents during a period of time. They are useful for analysing the interrelationship between the supply of credit and economic activity, and the effects of changes in interest rates on borrowing and holdings of financial assets.

The stock of assets denominated in foreign currency or currencies held by a government as investments, and used, where necessary, in financial transactions to support the exchange rate of the domestic currency. Foreign currency reserves are also used for making payments in foreign currencies without the need to sell the domestic currency in the market.

Deposits which involve customers buying foreign currencies in the spot market and placing them as deposits with authorized institutions, while at the same time entering into a contract to sell these foreign currencies (principal plus interest) forward in line with the maturity of such deposits. For most analytical purposes, these deposits should be regarded as Hong Kong dollar time deposits. money supply figures for the Hong Kong dollar are adjusted to include foreign currency swap deposits, while those for foreign currency are adjusted to exclude these deposits.

The risks of loss associated with the settlement of foreign exchange transactions, which include principal risk, replacement cost risk, liquidity risk, operational risk and legal risk. Of these risks, the most important risk type is principal risk, in which one party pays the currency it sold but does not receive the currency it bought (also called the “Herstatt risk”).

The Future Fund was established on 1 January 2016. Placements by the Future Fund comprise an initial endowment from the balance of the Land Fund and periodic top-ups from the General Revenue Account as directed by the Financial Secretary. These placements are divided into two portions: one linked with the performance of the Investment Portfolio and another linked with the performance of the Long-Term Growth Portfolio.

See also Land Fund.

An authorized institution (AI) would be considered a G-SIB if in the opinion of the Monetary Authority the risks associated with the AI are such as to render the AI capable of having a significant impact on the effective working and stability of the global financial system were the AI to become non-viable.

See also Systemically Important Authorized Institution (SIB).

A Sub-Committee established under the Exchange Fund Advisory Committee to monitor the performance of the HKMA and make recommendations on remuneration and human resources policies, and on budgetary, administrative and governance issues.

The HKMA issues coins and $10 currency notes on behalf of the Government. An agent bank is responsible for the storage and distribution of coins and currency notes to the public. The transactions between the HKMA and the agent bank are settled in US dollars at the rate of HK$7.80 to one US dollar. Coins and currency notes in circulation are therefore fully backed by foreign currency reserves held in the Exchange Fund. Changes in the circulation are automatically matched by corresponding changes in the foreign currency reserves.

See also banknote.

A debt instrument where the funds raised are channelled to fund projects or investments that contribute to environmental sustainability.

A publication by the HKMA providing guidance to institutions seeking authorization under the Banking Ordinance about the scheme of supervision contained in the Ordinance and the policies and approach of the Monetary Authority in implementing it.

This capital buffer is applicable to an authorized institution (AI) designated by the Monetary Authority as Global Systemically Important Authorized Institution (G-SIB) or Domestic Systemically Important Authorized Institution (D-SIB). The HLA requirements must be met with Common Equity Tier 1 capital.

See also capital buffers.

The monitoring of authorized institutions by the banking supervisory authority in the place where the authorized institution is incorporated. The HKMA is the home supervisor to authorized institutions incorporated in Hong Kong and exercises consolidated supervision over these authorized institutions, their subsidiaries and their local and overseas branches.

See also host supervisor.

A statutory body established in 1981 under the Hong Kong Association of Banks Ordinance (HKAB Ordinance) to replace the Hong Kong Exchange Banks Association. All banks are required to become members of HKAB and to observe the rules made by the Association under the HKAB Ordinance. The main objects of HKAB, among others, are to further the interests of banks, to make rules for the conduct of the business of banking, to act as an advisory body to its members in matters concerning the business of banking, and to provide facilities for the clearing of cheques and other instruments.

See also DTC Association and Hong Kong Interbank Clearing Limited.

Hong Kong Association of Banks (HKAB) Hong Kong dollar Interest Settlement Rates are commonly known as the Hong Kong Interbank Offered Rate or HKD HIBOR. The benchmark fixing for the HKAB HKD interest settlement rates is the estimated offer rate at which deposits in HKD for the Contract Period are being quoted to prime banks in the Hong Kong interbank market at 11:00 a.m. on the relevant business day. This is calculated by averaging the middle quotes after excluding the highest three quotes and lowest three quotes received from the 12-20 contributing banks, which are appointed by HKAB. While HKAB is the benchmark owner of the HKD interest settlement rates, the Treasury Markets Association is the benchmark administrator.

A statutory body created under the Deposit Protection Scheme Ordinance to establish and maintain the Deposit Protection Scheme in Hong Kong. The Board’s functions include the following: (i) maintaining the Deposit Protection Scheme; (ii) collecting contributions payable by Scheme members; (iii) managing the Deposit Protection Scheme Fund; (iv) making payments to depositors in the event of a failure of a Scheme member; and (v) recovering payments made to depositors from the assets of the failed Scheme member.

To enable safe and efficient settlement of interbank payments denominated in the Hong Kong dollar, the HKMA has introduced the Hong Kong Dollar Clearing System since 1996. Interbank payments are settled on a Real Time Gross Settlement basis. In addition, the system offers a range of advanced and sophisticated clearing and settlement functions. The key functions include a delivery versus payment (DvP) facility for Hong Kong dollar-denominated shares, payment versus payment for RMB/HKD, USD/HKD and EUR/HKD foreign exchange transactions, and processing of Hong Kong dollar cheques. The system is also linked to the Central Moneymarkets Unit to cater for the DvP of Hong Kong dollar-denominated debt securities and repurchase agreement facilities.

See also US Dollar Clearing System, Euro Clearing System and Renminbi Clearing System.

Hong Kong Financial Reporting Standards (HKFRS) include the following pronouncements issued by the Hong Kong Institute of Certified Public Accountants:

• Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards
• Interpretations.

Since 2005 HKFRS have been modelled on International Financial Reporting Standards (IFRS), which include the following pronouncements issued by the International Accounting Standards Board (the successor of the International Accounting Standards Committee):

• International Financial Reporting Standards and International Accounting Standards
• Interpretations.

HKFRS and IFRS set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in general-purpose financial statements. They may also set out such requirements for transactions and events that arise in specific industries.

An institute established in August 1999 by the HKMA with the objective of conducting research in the fields of monetary policy, banking and finance that is of strategic importance to Hong Kong and the Asian region. With the establishment of the Hong Kong Academy of Finance (AoF) in June 2019, the HKIMR becomes a subsidiary of the AoF and expands its monetary and financial economic research to cover also Applied Finance Research and Thought Leadership. The Institute hosts distinguished visiting scholars and researchers to undertake research on monetary and financial issues and carry out projects that are highly relevant to questions of interest to the financial industry and regulators in Hong Kong and that provide the financial industry in Hong Kong with ideas regarding its strategic development in the long run.

A private company jointly owned by the HKMA and the Hong Kong Association of Banks. HKICL was established in May 1995 to take over in phases the clearing functions provided by the former Management Bank of the Clearing House, The Hongkong and Shanghai Banking Corporation Limited. This process was completed in April 1997. HKICL provides interbank clearing and settlement services to all banks in Hong Kong and operates the computer system of the Central Moneymarkets Unit.

The rate of interest offered on Hong Kong dollar loans by banks in the interbank market for a specified period ranging from overnight to one year.

The government authority in Hong Kong with responsibility for maintaining currency and banking stability. The HKMA was established on 1 April 1993 by merging the Office of the Exchange Fund with the Office of the Commissioner of Banking. Its specific functions and 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 the safety and stability of the banking system through the regulation of banking business and the business of taking deposits, and the supervision of authorized institutions; and
• to enhance the efficiency, integrity and development of the financial system, particularly payment and settlement arrangements.

The Chief Executive of the HKMA is the Monetary Authority appointed by the Financial Secretary, who is advised by the Exchange Fund Advisory Committee on matters relating to the control of the Exchange Fund and on the operation of the HKMA.

A public limited company incorporated under the Companies Ordinance and wholly owned by the Government through the Exchange Fund. The HKMC was incorporated in March 1997 with a view to developing Hong Kong's secondary mortgage market. Its business is being developed in two phases. The first phase involves the purchase of mortgage loans for its own portfolio, which it funds largely through the issuance of unsecured debt securities. In the second phase, the HKMC securitises mortgages into mortgage-backed securities and offer them for sale to investors. In March 1999, the HKMC also launched the Mortgage Insurance Programme to provide insurance protection to banks against the risk of payment default by borrowers.

HKNPL prints all of the banknotes for Hong Kong's three note-issuing banks. HKNPL's note printing plant at Tai Po was purchased by the Hong Kong Special Administrative Region Government from De La Rue in April 1996 through the Exchange Fund. HKNPL is majority owned by the Government, with minority shareholdings by the three note-issuing banks and China Banknote Printing and Minting Corporation.

HKTR is an electronic system operated by the Monetary Authority for submitting and receiving reports on over-the-counter derivative transactions for the purposes of the reporting obligation under section 101B of the Securities and Futures Ordinance.

A banking supervisory authority in the place where a branch of a foreign incorporated authorized institution is located. In Hong Kong, the HKMA is the host supervisor to branches of foreign banks. The HKMA's approach to the supervision of branches of foreign banks is broadly in line with that applied to locally incorporated institutions except that capital-based supervisory requirements are not applied to such branches.

See also home supervision.

In relation to an authorized institution (AI) incorporated in Hong Kong, non-executive directors who are independent of the AI's management and free from any business or other relationship that could materially affect their independent judgment. Some non-executive directors may represent the interests of the AI's shareholders or have some form of connection with the AI, which means that they cannot be considered as independent. Independent directors are appointed to the board of directors to provide effective checks and balances on the powers of executive directors and the management and to give objective advice on activities of the AI and decisions taken by the board of directors.

The first-time sale of equity shares of a company through public subscription. An active response to an IPO will usually lead to a brief increase in demand for short-term liquidity.

One of the components of the Cyber Resilience Assessment Framework (C-RAF). It is to be applied on top of the traditional penetration testing. Simulation test scenarios will be designed to replicate current real-life cyber attacks based on specific and up-to-date threat intelligence.

The availability of funding for borrowing (to meet short-term payment obligations) or lending (to temporarily dispose of surplus funds productively) in the interbank market.

The market in which banks borrow or lend money among themselves to accommodate short-term shortages or to dispose productively of surplus funds in their clearing accounts.

The risk to an authorized institution’s financial condition resulting from adverse movements in interest rates that affect the authorized institution’s banking book positions.

See Rules on Interest Rates and Deposit Charges.