The US Dollar Clearing System

inSight

23 Mar 2000

The US Dollar Clearing System

The state-of-the-art US dollar clearing system to be launched later this year will boost Hong Kong's competitiveness as an international financial centre.

An international financial centre is where financial intermediation of an international dimension takes place. For Hong Kong to move forward as an international financial centre, we must provide the means for international financial intermediation to be conducted here.

International financial intermediation consists of channelling international surplus funds, from the savings of governments and people, into investments, through the banking system, the debt and equity markets, and their derivative products. That is why the development of Hong Kong's banking, debt and equity markets is a paramount policy objective. Our aim is to see substantial foreign funds to be deposited in banks licensed in Hong Kong and for loans to be raised in Hong Kong. We would like debt issues to be organised in Hong Kong and for international funds to be invested in them. We would also like to see international companies raising money through listing on our stock market, and international investors investing in their shares.

Hong Kong has generally been successful in providing a favourable environment to facilitate international financial intermediation. There is little doubt that the "appropriate economic and legal environment", as specified in Article 109 of the Basic Law for the maintenance of Hong Kong as an international financial centre, already exists.

But we need to do more. The recent rapid advances in information technology and increasing financial liberalisation have transformed international financial intermediation. Financial transactions can now be conducted by the touch of a few buttons. Financial markets have become a lot more efficient. But that same efficiency has brought greater volatility and risks that can be highly destabilising, as the Asian financial turmoil illustrated. Consequently, there has been heightened awareness of the risks involved in international financial intermediation and of the need for managing them prudently. It has become essential for the favourable environment provided by an international financial centre to facilitate international financial intermediation to include a robust financial infrastructure.

Just as physical infrastructure facilitates the movement of people and goods, the financial infrastructure facilitates the movement of money. For it to be popular, the financial infrastructure should be convenient, inexpensive, safe and efficient. Financial transactions, after they have been agreed bilaterally or through the market place, need to be effected, in terms of making the necessary payments and settlements. A financial transaction is not finally concluded until the necessary payments are made and the securities or financial instruments, if any, are settled. Ideally, finality of payment and settlement should be achieved as soon as possible after the transaction has been agreed. For as long as this is not achieved, or the obligations of any one of the parties to the transaction are not discharged, the risks are there that the transaction, for one reason or another, may fail.

I believe therefore that the competitiveness of an international financial centre will increasingly depend on the robustness of its financial infrastructure. To this end, the HKMA has been promoting payment and settlement arrangements that operate on real time and on a gross, transaction-by-transaction basis without netting. This enables the finality of the transaction to be achieved as soon as possible, with the discharge of the obligations of the parties to the transaction synchronised. It is the underlying thinking behind the Real Time Gross Settlement (RTGS) payment system that we built back in 1996 for large Hong Kong dollar transactions. It is also the reason why large-scale Initial Public Offerings in the stock market are not expected to lead to even the slightest hiccup in the Hong Kong dollar market.

International financial intermediation also involves transactions conducted in foreign currencies, perhaps predominantly so. Indeed, there is no real need for certain financial transactions of such a nature to be denominated in Hong Kong dollars at all. Often, the entities raising money do not need Hong Kong dollars and the investors are mostly from overseas. Although the financial markets in Hong Kong are attractively liquid and well organised, forcing international financial transactions to be denominated in Hong Kong dollars introduces possible currency and funding risks for both investor and borrower, and destabilising influences on the local currency.

There is now a need to extend the capability of our robust financial infrastructure to enable it to cope with the payment and settlement of foreign currency transactions in the same efficient manner as it copes with Hong Kong dollar transactions. This will boost our competitiveness as an international financial centre through attracting to Hong Kong international financial transactions denominated in US dollars. It will also minimise the destabilising influences on the Hong Kong dollar that might otherwise be generated were these transactions to be routed through the Hong Kong dollar.

We are thus busy building a US dollar payment system that will be as efficient, convenient, inexpensive and risk-free as our Hong Kong dollar payment system. On present indications, it will be ready by the end of this year. I hope the international financial community, particularly those operating in the Asian time zone, will give this project the support it deserves. Furthermore, the Hong Kong dollar and US dollar payment systems will be seamlessly linked together to enable the RTGS payments of Hong Kong dollar and US dollar to be synchronised. This arrangement will be the first of its kind in the world.

 

Joseph Yam
23 March 2000

 

More information on Settlement and Payment Systems may be found here.

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Last revision date : 23 March 2000