Hong Kong Monetary Authority Annual Report 1997
MARKET INFRASTRUCTURE
Hong Kong has a robust market infrastructure which contributes to its competitiveness as an international financial centre and ensures the stability of the financial system in the face of volatile capital flows. In furtherance of its efforts to improve the financial market infrastructure in Hong Kong, the HKMA embarked on a number of initiatives in 1997, including the further enhancement of the interbank payment system to reduce settlement risks, the establishment of linkages between the Central Moneymarkets Unit and other central securities depositories in the region, the introduction of a securities lending programme and the establishment of the Hong Kong Mortgage Corporation Limited.
OBJECTIVE
One of the mandates of the HKMA is to promote the efficiency, integrity and development of the financial system, particularly payment and settlement arrangements. In pursuit of this mandate, the HKMA has undertaken a number of important initiatives in reforming Hong Kong's interbank payment system and promoting the development of the debt market and the secondary mortgage market.
ACHIEVEMENTS
INTERBANK PAYMENT SYSTEM
In December 1996, the HKMA successfully cut over to a new interbank payment system based on RTGS principles, which is one of the world's most advanced systems. Considerable efforts were made in 1997 to ensure the smooth operation of the new system.
In order to further enhance the capacity, response time and resilience of the RTGS system, Hong Kong Interbank Clearing Limited (HKICL) upgraded its mainframe computer to a more powerful and faster model in March 1997. The HKMA has also been working closely with HKICL to upgrade the existing back-up facilities to a "hot" off-site back-up computer centre for HKICL's operating system, which would start operation in 1998.
In the initial months of implementation, there were some teething problems in the banks?compliance with the throughput guideline of settling not less than 35% of the value of each day's Clearing House Automatic Transfer System (CHATS) payments by noon and 65% by 2:30 p.m. With the support of the bank treasurers in the Informal Working Group on Liquidity Management under RTGS, the HKMA informed banks in March that sanctions might be introduced should the non-compliance problem persisted. The banks subsequently complied with the throughput guideline without the need for introducing any sanction.
With these measures, the RTGS system met fully the objectives of providing a reliable and efficient interbank payment system. In 1997, the system processed an average daily throughput of 13,169 CHATS transactions (involving $342 bn), 269 CMU secondary market transactions (involving $17 bn) and 617 intraday repo transactions (involving $33 bn) on weekdays. The processing of the three daily bulk volume clearing runs for the net settlement for stock market transactions, low-value bulk electronic payment items and paper cheques had also been smooth. On average, the bulk clearing processing time was 11.3 minutes for the clearing of cheques, 3.9 minutes for CCASS (stock market transactions) and 3.6 minutes for low-value bulk electronic payment items. The Liquidity Adjustment Window, which was designed as a fall-back intraday facility was triggered only 33 times involving $2 bn, showing that the banks were generally managing their intraday liquidity reasonably well.
Joint Clearing Facility for Hong Kong Dollar Cheques presented in Shenzhen
The HKMA and the Shenzhen Branch of the People's Bank of China reached an agreement in December 1997 on a new Joint Clearing Facility to speed up the processing of Hong Kong dollar cheques issued by banks in Hong Kong and presented in Shenzhen. This Joint Clearing Facility, which was implemented on 5 January 1998, reduced the processing time from 14 days to two days.
DEBT MARKET DEVELOPMENT IN HONG KONG
The local debt market continued to expand in 1997 notwithstanding the financial turmoil in Asia. The outstanding amount of Hong Kong dollar debt securities stood at $345.5 bn as at end-1997, representing a 23.7% increase over end-1996 and equivalent to 26% of the GDP. Exchange Fund Bills and Notes accounted for 29.4% of the outstanding debt securities. All issues of the Exchange Fund paper were oversubscribed, by an average of 2.82 times. Debt issues by multi-lateral agencies and the private sector accounted for the remaining 70.6%.
Asiaclear: Linking CMU with other central securities depositories in the region
To further improve the efficiency of the debt market infrastructure and as a step towards Asiaclear, the CMU established a linkage with the central securities depositories in Australia in December 1997. The linkage facilitates cross border holding and trading of debt securities in Hong Kong and Australia. It will also enlarge the investor base, broaden the domestic debt markets and reduce settlement risk by facilitating Delivery versus Payment (DvP) settlement for cross-border securities transactions.
Besides Australia, the HKMA is making good progress in setting up a bilateral securities linkage on reciprocal basis with the central securities depository in New Zealand. This linkage is expected to be in place by the middle of 1998.
Securities Lending Programme under CMU
As another enhancement to the market infrastructure, the CMU successfully launched a Securities Lending Programme for private sector securities on 1 December 1997. The Programme aims to enhance the liquidity of private sector debt securities by providing an efficient mechanism to utilize securities held by long-term investors for short-term use by the more active market participants. The Programme will also improve settlement efficiency of CMU private sector debt securities and increase their attractiveness to investors by enhancing the yields for the lenders.
Note Issuance Programme for the Airport Authority
Following the $10 bn Note Issuance Programme set up for the MTRC in 1995, the HKMA arranged a similar programme for the Airport Authority (involving $5 bn) in October 1997. Under the Note Issuance Programme, the HKMA acts as the arranger, agent and operator for the debt issues. These securities will be covered by the existing market-making arrangements for Exchange Fund Bills and Notes and are eligible securities for repo under LAF. This helps to enhance the liquidity of the paper and hence improve their attractiveness to investors.
THE HONG KONG MORTGAGE CORPORATION LIMITED
Another major initiative launched in 1997 was to put in place an effective market in frastructure to kick start the development of the secondary mortgage market through the establishment of the HKMC. A healthy development of this market will entail significant benefits to Hong Kong in terms of promoting banking and monetary stability, debt market development and home ownership.
The HKMC was incorporated in March 1997 as a public limited company under the Companies Ordinance. The Corporation is wholly owned by the Government through the Exchange Fund with a capital base of $1 bn. Following months of intensive preparatory work, the HKMC commenced operation in October 1997. The first batch of mortgage purchase, involving a total size of $650 mn, was successfully completed in November. The HKMC purchased the second batch of mortgages involving $1 bn in February 1998 through tender. For 1998 as a whole, the Corporation plans to acquire $10 bn to $15 bn through a combination of private placements and tenders. By the end of 1997, 12 AIs had signed up as approved sellers of the HKMC.
On the funding side, the HKMC set up a $20 bn Note Issuance Programme (NIP) in January 1998 in which the HKMA acts as the arranger, agent and operator for the debt issues.
The inaugural issue under the NIP, with an issue size of $500 mn, was successfully launched on 11 March 1998. The 3-year Notes, were 5.44 times oversubscribed with an average accepted yield of 8.43%, 52 bp above that for 3-year Exchange Fund Notes.
A second issue was launched on 1 April 1998. It was 5.54 times oversubscribed and the average accepted yield (8.58%) was 50 bp above the 3-year Exchange Fund Notes. The favourable reception reflected a strong market appetite for fixed rate paper issued by the HKMC. The tight spread over the yield of the 3-year Exchange Fund Notes clearly demonstrates the high credit standing of the HKMC.
A separate debt issuance programme using the conventional underwritten approach is being set up to broaden the investor base to cover the institutional investors. In time to come, the Corporation also plans to set up a multi-currency Euro-Medium Term Note Programme to tap funds in the international capital markets.
A $10 bn revolving credit facility was arranged in January 1998, under which the HKMC may obtain short-term financing from the Exchange Fund to bridge the gap between the mortgage purchase and the issue of debt securities.
CHALLENGES
FURTHER IMPROVEMENTS IN THE PAYMENT SYSTEM
To reduce the pressure on the payment system and money market caused by heavy IPO subscriptions, the HKMA has proposed an alternative arrangement involving deferred settlement of special IPO cashier's orders and auto-credit refund to unsuccessful applicants. The proposed arrangement has been endorsed by the Securities and Futures Commission, the HKAB and the Stock Exchange of Hong Kong, and will be implemented in the first half of 1998.
Leveraging upon the capability of the RTGS system, the HKMA is extending the DvP facility for debt securities transactions to shares transactions. A link between the HKICL and the Hongkong Clearing (a clearing system for shares) is being developed to provide both real-time and end of period DvP for shares transactions in order to reduce settlement risks and improve settlement efficiency. The link is scheduled to be launched in mid-1998.
FURTHER DEVELOPMENT OF THE SECONDARY MORTGAGE MARKET
Consistent with its objective of promoting the development and liquidity of the residential mortgage market in Hong Kong, the HKMC is developing the necessary market infrastructure for promoting fixed rate mortgages as an additional financing option for home buyers. Unlike other economies such as the US, fixed rate mortgages have not been popular in Hong Kong. Banks are constrained in their ability to originate fixed rate mortgages given the short-term and floating rate nature of their funding sources. The HKMC is well-placed to promote such mortgages as it can use the fixed rate funds tapped from institutional investors (such as pension and insurance funds) to acquire fixed rate mortgages from banks.
A six-month pilot scheme was launched by the HKMC on 18 March 1998 to promote fixed rate mortgages in Hong Kong, with the participation of two banks. Under the pilot scheme, the interest rate on the mortgage loans is fixed for the first three years at 10.5%. The borrowers are being given a choice at the end of the 3-year period either to re-fix the mortgage rate for another term at the then prevailing fixed rate specified by the HKMC or to convert the mortgage loan to a floating rate basis. Initial response to the pilot scheme has been favourable. By end of March 1998, 96 loans involving $154 mn have been approved in principle.