Review of Debt Market Development

The Hong Kong Monetary Authority (HKMA) announced today (Thursday) the completion of a review of debt market development in Hong Kong, covering issues related to the Exchange Fund Bills and Notes (EFBN) programme and the three-year rule imposed on Multilateral Development Banks (MDB) since 1998¹.

The HKMA initiated this study earlier this year. The review covered a number of areas related to the EFBN programme, taking account of overseas practices and comments from market participants, including Market Makers (MM) and Recognised Dealers (RD) of EFBNs. Following the review, the HKMA has made the following recommendations to improve the EFBN programme:

(1) Refining the market-making system for EFBNs by providing incentives to encourage MMs to participate more actively in the trading of EFBNs. These refinements include periodically publishing league tables of the best performing MMs and inviting only those MMs to participate in tenders. Consideration will also be given replacing the existing multiple-price auctions of EFBNs with single-price auctions.

(2) Extending the benchmark Exchange Fund Notes (EFN) yield curve to beyond 10 years.

(3) Streamlining the issuance programme by making greater use of re-opening of existing EFN issues.

(4) Introducing an electronic trading platform for EFBNs.

The HKMA will implement the above recommendations in phases over the next two years, allowing sufficient time for introducing changes to the existing systems.

As part of the review, the Currency Board Sub-Committee of the Exchange Fund Advisory Committee also reconsidered a request made by the HKMA to nine MDBs in September 1998 that they should confine their issuance of Hong Kong dollar denominated bonds to tenors of three years or longer in order to help maintain monetary stability in the face of the Asian financial crisis. The Sub-Committee agreed to withdraw the three-year rule, noting that the risks for monetary stability were small and that there would be benefits for the development of the local bond market.

For further enquiries, please contact:
Hing-fung Wong, Officer (Press), at 2878 1802 or
Thomas Chan, Senior Manager (Press), at 2878 1480

Hong Kong Monetary Authority
5 October 2006

¹ The three-year rule refers to the request made in 1998 by the HKMA to nine multilateral development banks (MDBs) to confine their issuance of Hong Kong dollar denominated bonds to tenors of three years or longer. The nine MDBs are Asian Development Bank, Council of Europe Social Development Fund, Eurofima, European Bank for Reconstruction and Development, European Investment Bank, Inter-American Development Bank, International Bank for Reconstruction and Development, International Finance Corporation and Nordic Investment Bank.