Clearing and Settlement Systems Ordinance

inSight

08 Jul 2004

Clearing and Settlement Systems Ordinance

Following the enactment of the Clearing and Settlement Systems Ordinance on 2 July, the HKMA is further equipped to carry out its oversight role in these areas.

The important task of safeguarding financial stability by market regulatory authorities commonly includes three distinct components - supervision of financial institutions, surveillance of financial markets and oversight of important clearing and settlement systems. The last component usually receives much less public attention than the first two. So I would like to explain here our work in this less prominent, but no less important, policy area, taking advantage of the passage of the Clearing and Settlement Systems Bill by the Legislative Council last week.

First of all there are two technical terms that need to be explained or clarified - "clearing and settlement systems" and "oversight". In the financial markets, clearing and settlement systems refer to the arrangements (not just the machinery) for the clearing and subsequent settlement of transfer of funds or securities between financial institutions. These funds or securities could be denominated in local or foreign currencies and the transfer could take place within the same jurisdiction or across the border. Thus a set of robust and efficient clearing and settlement arrangements is the cornerstone of the financial intermediation activities in an international financial centre. "Oversight" in the sense of supervision involves a regulatory role. Curiously, this English word has two almost exactly opposite meanings - one is "a failure to notice something" and the other is "watchful care". In the central banking circle, oversight is often used to denote activities of the central bank in making sure that the clearing and settlement systems deliver safe and efficient services to support the stability, integrity, diversity and efficiency of the financial system. By maintaining a "watchful care" of these important systems, the central bank can avoid the "failure to notice something" which has significant implications for financial stability.

Prior to the enactment of the Clearing and Settlement Systems Ordinance, there were no explicit legal provisions in Hong Kong for the oversight of clearing and settlement systems such as the real time gross settlement (RTGS) systems for the Hong Kong dollar, US dollar and euro. The HKMA's de facto oversight role was derived from a number of sources, for example through the HKMA's role as the settlement institution for the Hong Kong dollar RTGS system, the HKMA's shareholding in the Hong Kong Interbank Clearing Limited, and through contractual relationships with certain clearing and settlement system operators. This de facto system of oversight has served Hong Kong well, as demonstrated by our consistently safe and robust financial infrastructure. But the fact remains that these oversight arrangements fall short of having statutory backing. A second issue here is that there is also no statutory provision confirming the finality of settlements effected through such systems. The possibility of a successful challenge, however remote, to the finality of such settlements under insolvency or other laws in Hong Kong could put Hong Kong's financial and monetary stability at risk.

These two issues were highlighted by the International Monetary Fund (IMF) in 2003 in its Financial Sector Assessment Programme (FSAP) assessment of the financial system in Hong Kong. In its final report, the IMF recommended that there should be statutory backing for the responsibilities currently assumed by the HKMA in overseeing the clearing and settlement systems in Hong Kong. It also recommended that, as a matter of priority, appropriate legislation should be introduced to ensure finality of settlements effected through such systems. The newly enacted Clearing and Settlement Systems Ordinance, which precisely sets out to address such concerns, should thus enable us to go a long way towards meeting the best international standards for oversight of clearing and settlement systems.

The new legislation will also facilitate the admission of the Hong Kong dollar into the Continuous Linked Settlement (CLS) system - a global clearing and settlement system for cross-border foreign exchange transactions. Many major international currencies have already been admitted to the system: these include the US dollar, euro, Japanese yen, pound sterling, and Swiss franc. As in other jurisdictions, the CLS system requires, as a pre-condition for entry, that the laws of Hong Kong provide for settlement finality for both transactions through the CLS and the underlying RTGS system in Hong Kong.

In a speech earlier this year I talked about the attributes of a Mach Two International Financial Centre. One key attribute is the development of a platform for financial transactions to be conducted in major foreign currencies in a safe and efficient manner. In the years to come, the HKMA will spare no effort in this direction and will do its best to maintain the edge we already have in our financial infrastructure. The new legislation will provide us the foundation needed for taking forward this important task. I am therefore much indebted to the Legislative Council for putting this new law in place, to the Hon. Sin Chung-kai for his able chairmanship of the Bills Committee and to members of the Bills Committee, who gave us much useful advice on the draft Bill.

 

Joseph Yam

8 July 2004

 

Related Press Release

 

Related Information:

Related Speech:

 

Click here for previous articles in this column.

 

 

Document in Word format

Latest inSight
Last revision date : 08 July 2004