Developments in Financial Infrastructure

The government is committed to improving Hong Kong's position as a
premier financial centre by, inter alia, providing state-of-the-art financial
infrastructure. Consultants will be engaged to examine how to set up a
secure intranet linking regulators and regulated institutions as a first step
towards straight through processing across the financial system, how to
link the securities clearing system to the banking clearing system, and
explore the feasibility of setting up a single clearing corporation for both
stocks and futures to reduce risks and increase efficiency. Subject to
funding approval, consultancy studies will commence in 1998.

The HKMA has also worked closely with the banking community to
enhance the robustness of Hong Kong's interbank payment system. With
the effort of the HKMA and the banking industry in the past few years,
Hong Kong's interbank payment system successfully changed to the new
Real Time Gross Settlement (RTGS) system in 1996.

The operator of the new payment system is the Hong Kong Interbank
Clearing Limited (HKICL), a company jointly owned by the HKMA and
the HKAB. The HKICL was set up in May 1995 to take over in phases the
clearing functions provided by the former Management Bank of the
Clearing House, the Hongkong and Shanghai Banking Corporation Limited.
This process was completed in April 1997.

The RTGS system is a single-tier settlement structure with all banks
maintaining settlement accounts with the HKMA. All RTGS payments are
settled in real time and are final, irrevocable and unconditional. The banks'
settlement accounts are not allowed to go into overdraft. Intraday
liquidity, which is often the most difficult issue facing any RTGS system,
can be obtained by the banks through the use of their Exchange Fund Bills
and Notes for intraday repurchase (repo) agreements with the HKMA.

The RTGS system has operated smoothly since its introduction. After a
few initial teething problems, the banks have been able to comply with the
Clearing House Automatic Transfer System (CHATS) throughput
guidelines issued by the HKMA, which requires the settlement of not less
than 35 per cent of the daily CHATS throughput by noon and 65 per cent
by 2.30 pm each day. In order to further enhance the capacity, response
time and resilience of the RTGS system, HKICL has upgraded its
mainframe computer to a more powerful and faster model. The HKMA
has also worked closely with the HKICL to set up off-site, 'hot' back-up
facilities for HKICL's operating system to further enhance its robustness
and resilience. Hot back-up facilities mean that data are transferred to the
facilities in parallel to the main operating system. It is a real time full
back-up that can immediately assume all functions when the main
operating system breaks down. This back-up computer centre will start
operation in 1998.

The RTGS system has provided the building block for Payment versus
Payment (PvP) for foreign-exchange transactions upon establishment of
linkages of payment systems between Hong Kong and other economies.
The HKMA has reached agreement in principle with the People's Bank of
China to establish a PvP link between the Hong Kong dollar payment
system and the Renminbi payment system when China's National
Automated Payment System (CNAPS) goes live on RTGS. A PvP link will
reduce the settlement risk in foreign exchange transactions arising from
the difference in timing in the final settlement of the two currencies
involved. Initial discussions have also been held between Hong Kong,
Australia and New Zealand on similar PvP linkages.

The Central Moneymarkets Unit (CMU) Service, which was established in
1990 and operated by the HKMA to provide a clearing and custodian
system for Exchange Fund Bills and Notes, was extended to cover private
sector debt issues in 1994. It has recorded remarkable growth since then
and 260 CMU members, which are mostly financial institutions in Hong
Kong, participate in the system. In 1997, there were 554 issues with a
total value of $199 billion lodged with the CMU. In addition to Hong Kong
dollar denominated debt instruments, the system started to accept foreign
currency denominated debt instruments in 1996. In December 1997, a
Securities Lending and Borrowing Programme for CMU private sector
debt securities was introduced to all CMU members. It enhances the
liquidity of private sector debt securities in the secondary market through
the market making process and improves settlement efficiency by
reducing settlement failures.

The CMU system was fully integrated with the new interbank payment
system when the latter went live on RTGS in December 1996.
Delivery-versus-payment (DvP), both real time and end-of-day, became
available. This matches international best practice in providing efficient,
robust and risk-free clearing and settlement facilities for debt securities. It
also enables the banks to obtain intraday liquidity through intraday 'repo'
in a safe and efficient manner. Further software changes were introduced
to the CMU system in November 1997 to improve it.

The CMU was linked to Euroclear and Cedel, the two largest international
clearing systems in the world, in December 1994. These links, the first of
their kind in East Asia, allow overseas investors and traders easy access
to the Hong Kong dollar debt market. In December 1997, bilateral linkages
between the CMU and the central securities depositories in Australia were
established. These linkages facilitate cross-border holding and trading of
debt securities and reduce settlement risk of cross-border securities
transactions by facilitating DvP settlement.

While the interface between the interbank payment system and CMU has
enabled real time and end-of-day DvP for CMU securities to take place,
the HKMA has held talks with the Hong Kong Stock Exchange and the
Hong Kong Securities Clearing Company on establishing a link between
the interbank payment system running on RTGS and the CCASS (clearing
system for Hong Kong shares) to introduce real time and end-of-period
DvP for share transactions. Implementation of the new facility is expected
to take place in mid-1998.

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