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