The strategy for developing financial infrastructure requires striking a balance between anticipating future business demand and avoiding over-provision. The recent decision to go ahead with a euro clearing system for Hong Kong is a part of this strategy.
Financial infrastructure is something that I have written on and spoken about extensively in the recent past. I have been doing this simply because, despite the technical nature of the subject, I feel that it will be of increasing importance in determining the competitiveness of Hong Kong as an international financial centre. Earlier this month we took another significant step in the construction of this financial infrastructure by taking the decision to go ahead with the construction of a real time gross settlement (RTGS) payment system for the euro and by appointing Standard Chartered Bank as the settlement institution for the project.
It may be useful for me once again to describe briefly what exactly our overall strategy is in the development of the financial infrastructure of Hong Kong. We live in a financial world where boundaries and barriers are progressively collapsing, whether as a result of conscious policy decisions in favour of liberalisation or because of the new vistas opened up by the march of information technology. In short, financial markets are becoming increasingly global, and time and location restrictions for conducting transactions are breaking down. Corresponding to this trend should be an increasing emphasis on ensuring that transactions carried out are expeditiously if not instantaneously settled, in the sense that money is paid over and the financial products change hands. In terms of market terminology, this means increasing emphasis on achieving delivery versus payment (DVP) for transactions in financial products and payment versus payment (PVP) for foreign exchange transactions. I use "should be" instead of "is" because it seems that the attention being given by market practitioners to the management of settlement risks is lagging behind the pace of financial market globalisation. I hope, and as banking supervisor I urge, greater efforts in this area.
Here, and particularly in view of financial stability considerations, the role of Government as the "market enabler" comes in. The objective is very simply the provision of a robust financial infrastructure for all types of financial transactions, initiated from whatever location, in whatever time zone, in whatever currency whether at the wholesale or retail level, to be conducted and settled real time. In technical terms, this can be described as "universal access to multiple currency, 24-hour, RTGS, DVP and PVP". In practical terms, such a financial infrastructure would enable you, if you chose, before going to bed or in the early morning hours, at home, through your computer, to sell your US dollar Treasury bonds, convert the US dollar proceeds into euros and place the money on deposit. And these transactions would be done at reliable market prices known to you and settled immediately, in other words, real time, at minimal transaction costs. And they would be final. You would be able to sleep happily afterwards.
This of course is very much the ideal situation. In practice we have to consider the cost-effectiveness of the provision of such a financial infrastructure and, importantly, the interests of the financial intermediaries. For example, it would not be cost-effective to provide RTGS services in Hong Kong for the Brazilian real when there is not a lot of interest in Hong Kong, or in the Hong Kong time zone, in financial transactions involving that currency. What little interest there is can of course be met by accessing the more liquid domestic markets and associated settlement arrangements in Brazil, even if that means either placing an order overnight with agents or getting up in the middle of the night to do it yourself.
So we have to consider the business case before deciding whether or not particular elements in that ideal financial infrastructure should be provided. As far as I am aware, the Government has no plans to build a six-lane tunnel directly linking Lamma Island and Cheung Chau, not for the time being anyway. There is no point in constructing highways if no one wants to drive down them. However, things are never so black and white, and so there may be cases in which we would advocate the construction of a footpath or the provision of a ferry service to see whether our reasonable expectation of traffic would emerge. There is a likelihood that the traffic may turn out not to be there or that the facility fails to generate any significant traffic. Alternatively, the traffic may be so heavy that we may need quickly to expand the footpath into a major highway. So, depending on the circumstances, as we see them, and there is a lot of uncertainty involved, we have to be sensible in our approach.
Joseph Yam
18 July 2002
Related Press Release:
HKMA Appoints Standard Chartered Bank as Settlement Institution for the Euro Clearing in Hong Kong, 3 July 2002
Related Viewpoint articles:
Hong Kong's Financial Infrastructure, 24 May 2001
Hong Kong's Financial Infrastructure (II), 31 May 2001
Hong Kong's Financial Infrastructure (III), 7 June 2001
Click here for previous articles in this column.
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