The Exchange Fund was established by the Currency Ordinance of 1935 (later renamed the Exchange Fund Ordinance). Since its establishment, the fund has been responsible for backing Hong Kong dollar note issues. The role of the fund was expanded in 1976 to include the backing for coins issues. The Coinage Security Fund was merged with the Exchange Fund on December 31, 1978.

The Government transferred the fiscal reserves of its General Revenue Account (apart from the working balances) to the fund to centralise the investment management of its financial assets. Through this transfer, the bulk of the Government's financial assets are placed with the fund. Prior to April 1, 1998, fiscal reserves were placed with the Exchange Fund as deposits on which market interest rates were paid by the Exchange Fund to General Revenue. With effect from April 1, 1998, the arrangement was changed and the return on the fiscal reserves placed with the Exchange Fund was linked to its overall return.

When the Hong Kong Special Administrative Region (SAR) was established on July 1, 1997, the Chief Executive appointed the Financial Secretary as the public officer to receive, hold and manage the Land Fund, as part of the Hong Kong SAR Government reserves. Between July 1, 1997 and October 31, 1998, under the direction of the Financial Secretary, the Land Fund was managed by the HKMA as a separate portfolio from the Exchange Fund. With effect from November 1, 1998, the assets of the Land Fund, which remained as a separate government fund, were merged into the Exchange Fund and managed as part of the Investment Portfolio of the Exchange Fund.

A resolution was passed by the Legislative Council under the Public Finance Ordinance to authorise the transfer of $120 billion from the Land Fund to the General Revenue Account to meet the Government's expenditure requirement. A further transfer of $40 billion was made under a similar resolution passed by the Legislative Council in June 2004.

The Exchange Fund's primary statutory role, as defined in the Exchange Fund Ordinance, is to affect the exchange value of the Hong Kong dollar. Its functions were extended to maintaining the stability and integrity of the monetary and financial systems, with a view to maintaining Hong Kong as an international financial centre, when the Exchange Fund (Amendment) Ordinance 1992 came into force.

The HKMA manages the Exchange Fund. Apart from ensuring that the fund meets its statutory responsibilities, the HKMA's principal activity is the day-to-day management of the fund's assets. These are invested mainly in Organisation for Economic Cooperation and Development (OECD) bonds and equities.

To meet the objectives of preserving capital, providing liquidity to maintain financial and currency stability and generating an adequate long-term return, the Exchange Fund is managed as two distinct portfolios. The first is a Backing Portfolio, which holds highly liquid US-dollar-denominated debt securities to fully back the monetary base. The second is an Investment Portfolio, which aims to preserve the fund's long-term purchasing power. The asset allocation strategy of the Exchange Fund is guided by the investment benchmark, which defines the bonds and equities mix as well as the overall currency composition of the fund. The details of the management of the fund and the investment style adopted are set out and explained in the HKMA's annual report.

On December 31, 2005, the Exchange Fund's total assets stood at $1,066.8 billion, of which foreign currency assets amounted to $971.2 billion (or US$125.3 billion). The accumulated surplus of the Exchange Fund amounted to $443.1 billion. The fund's financial position from 2000 to 2005 inclusive is shown in the Appendices. Foreign currency asset figures have been published monthly since January 1997 to demonstrate the Government's continued commitment to greater openness and transparency. In addition, an abridged balance sheet of the Exchange Fund and a set of Currency Board accounts are published monthly.

Another function related to the Exchange Fund is currency issuance. Bank notes in denominations of $20, $50, $100, $500 and $1,000 are issued by the three note-issuing banks: Standard Chartered Bank (Hong Kong) Limited, the Hongkong and Shanghai Banking Corporation Limited and Bank of China (Hong Kong) Limited. The note-issuing banks may issue currency notes only by surrendering non-interest-bearing US dollar backing at a fixed exchange rate of $7.80. Thus the fund enjoys the seigniorage from the notes.

Through the HKMA, the Government issues new $10 currency notes and coins of $10, $5, $2, $1, 50 cents, 20 cents and 10 cents denominations. Sufficient quantities of the $10 note and all denominations of coins have been maintained for injection into the market when required. The total value of notes and coins in circulation at year-end was $156.3 billion.