EFAC Sub-Committees (I)

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21 Apr 2005

EFAC Sub-Committees (I)

This first of two articles explains the background to the recent establishment of new sub-committees under the Exchange Fund Advisory Committee (EFAC).

There was some media interest in my references, when attending the Legislative Council Panel on Finance Affairs in February, to the formation of the Investment Sub-Committee of the Exchange Fund Advisory Committee (EFAC). We have in fact been gradually building up a structure of sub-committees to assist EFAC in the performance of its very extensive functions and in particular in overseeing the work of the Hong Kong Monetary Authority (HKMA). The structure comprises two sets of sub-committees - the oversight sub-committees and the technical sub-committees.

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There are two oversight sub-committees -the Governance Sub-Committee and the Audit Sub-Committee. Officials of the HKMA are not members of these two sub-committees, and rightly so given the need for effective checks and balances. The two oversight sub-committees are both chaired by Mr Marvin Cheung, who is well known to the financial community. Furthermore, there are no bankers on the Governance Sub-Committee. There is a need obviously to avoid any possibility of conflict of interest when the HKMA has the responsibility of supervising banks and the authority to decide whether individual bankers are fit and proper to be chief executive officers of banks. This is a point emphasised by a few Legislative Council Members.

There are three technical sub-committees - the Currency Board Sub-Committee, the Investment Sub-Committee and the Financial Infrastructure Sub-Committee. The roles of these technical sub-committees are reflected in their names, and there are clear terms of reference laid down, all with the approval of EFAC. There are clear links between these terms of reference and the functions and responsibilities of the HKMA articulated in the letters exchanged between the Financial Secretary and the Monetary Authority in June 2003. Readers will be able to find more detailed information about these technical sub-committees (and the oversight sub-committees) on our website (www.hkma.gov.hk) and in the 2004 Annual Report published earlier this week. All the three technical sub-committees are chaired by me as Monetary Authority, with the involvement of HKMA officials as members, along with non-official members with the necessary technical expertise.

The work of the Currency Board Sub-Committee should already be quite familiar to those interested in the monetary affairs of Hong Kong, given that the records of the meetings of this sub-committee are published regularly after approval by EFAC. This high degree of transparency has helped considerably to promote a general understanding of our monetary system and to strengthen public confidence in the Linked Exchange Rate system.

The investment management of the Exchange Fund, now amounting to over HK$1,000 billion, is a big and complex task. The Fund has well-defined purposes and these are laid down in the Exchange Fund Ordinance. For example, one of the purposes for which the Exchange Fund can be used is "to affect directly or indirectly the exchange value of the currency of Hong Kong". Investment management of the Exchange Fund must have primary regard to these purposes, in that it should be done in a manner that facilitates the need for use arising from these purposes. The Exchange Fund is therefore not an ordinary investment fund like a provident fund or a retirement fund. The liquidity requirement of the Fund is much higher and the risk appetite, in view of the fact that the money belongs to the people of Hong Kong, is much lower. And there is strong public expectation for good investment performance. This has recently been made more prominent in view of the importance of the investment return on the fiscal reserves deposited with the Exchange Fund to the public finance.

To assist EFAC in steering the work of the HKMA concerning investment management, and to devote more time to looking at and keeping up-to-date with the increasingly technical issues involved in this work, the Investment Sub-Committee was formed. Important decisions on investment management, including the consideration of new forms of investment instruments, and the investment benchmark continue to be the responsibility of EFAC, which is chaired by the Financial Secretary.

I shall, in the next Viewpoint column, talk about the work of the EFAC Infrastructure Sub-Committee.

 

Joseph Yam

21 April 2005

 

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Related Information:

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Last revision date : 21 April 2005