Liquidity and Risk Management in the RTGS System Hong Kong Experience

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1 Joint Banque de France/ European Central Bank (ECB) conference 9 June 2008 Liquidity and Risk Management in the RTGS Hong Kong Experience Mr Esmond Lee Executive Director (Financial Infrastructure) Hong Kong Monetary Authority 1

2 Overview of Hong Kong s and Settlement Infrastructure Euroclear AustraClear - Australia Clearstream AustraClear - New Zealand Mainland China Central Moneymarkets Unit (CMU) South Korea DvP DvP DvP DvP US US Dollar Dollar PvP EURO EURO DvP PvP DvP PvP PvP Ringgit Ringgit in in Malaysia Malaysia CCASS CCASS DvP RMB RMB Guangdong Guangdong Province Province Hong Hong Kong Kong Dollar Dollar PvP Shenzhen Shenzhen Macau Macau Continuous Continuous Linked Linked Settlement Settlement (CLS) (CLS) CMU Cross-border bond settlement link Cross-border payment link Settlement system for bonds CCASS DvP: Delivery vs. PvP: vs. Settlement system for shares 2

3 Structure of HKD RTGS Settlement Institution (HKMA) Clearing Operator (HKICL) 140 banks Bank Bank Bank Bank Bank Bank Single-tier Structure HKICL - Hong Kong Interbank Clearing Limited - a private company jointly and equally owned by the HKMA and the Hong Kong Association of Banks, is responsible for the computer system operation of the HKD, USD and Euro clearing systems and CMU. 3

4 HKD RTGS Turnover Efficiency HKD RTGS turnover efficiency Ranged between 8 to 12 times Various optimisers helped enhance turnover efficiency In 2007 and first 5 months in 2008: efficiency exceeded 15 times 4

5 HKD RTGS Turnover Efficiency (Cont d) Intraday Repo Turnover RTGS Turnover Efficiency Jan to Mid May 2008

6 Intraday Liquidity Management of Hong Kong s RTGS No intraday overdraft is allowed, banks need to maintain adequate credit balances - for smooth RTGS payments during the day - for bulk clearing at the specified settlement time Throughput Ratio (% of total value settled daily) At 12:00 (noon) At 3:00 p.m. Guideline HKMA provides interest-free intraday liquidity to banks through intra-day repo using Exchange Fund Bills/Notes issued by HKMA as repo securities So far banks in Hong Kong can generally meet the throughput guideline ratios 6

7 Evolution in Intraday Liquidity Management in Hong Kong First stage of development How to satisfy the demand for intraday liquidity interest-free intraday repo Second stage of development How to increase the efficiency of intraday liquidity management various optimisers introduced in recent years 7

8 Overview of the Various Optimisers in Hong Kong 08:30 Opening of HKD RTGS 09:30 ~ CCASS Bulk 10:00 Settlement Run 10:45 CCASS optimiser CHATS payments ~ 13:45 7 RLO runs at 30-minute intervals 14:15 ~ CLG Bulk 14:45 Settlement Run CHATS optimiser +CCPO 15:15 ~ 17:15 5 RLO runs at 30-minute intervals 17:30 Closing of HKD RTGS CCASS Bulk Settlement Run for the money settlement of stock market transactions presented on the previous day CLG Bulk Settlement Run for the settlement of cheque presented on the previous day 8

9 CHATS* Optimiser (launched on 14 June 2004) CHATS optimiser is a special type of RTGS payment which is designed to be settled together with the CLG bulk settlement run for cheques between 14:15 and 14:45 Improves the overall liquidity of banks as banks can make use of the CHATS optimiser to settle RTGS payments and cheques simultaneously in an offsetting manner during the CLG bulk settlement run The use of this device also facilitates the recycling of funds and smoothes payment flows as banks no longer need to sit on substantial funds to settle their payment obligations during the CLG bulk settlement run Instead, they can rely on funds borrowed from other banks which are paid to them by CHATS optimiser Widely used by banks, particularly during times of large fund flows associated with Initial Public Offerings * CHATS Clearing House Automated Transfer is the name of the RTGS systems in Hong Kong 9

10 RTGS Liquidity Optimiser (RLO) (launched on 23 January 2006) A total of 12 scheduled RLO runs each working day between 10:45 and 17:15, at 30-minute intervals Enables banks to offset their payment instructions queued in the RTGS system on a multilateral basis Increases banks overall liquidity efficiency as banks no longer need to sit on substantial funds during the day for meeting their payment obligations Apart from scheduled RLO runs, additional RLO runs can also be triggered by HKMA on a need basis (e.g. to clear outstanding payment queues at times of large interbank payment flows) to ease banks liquidity pressure 10

11 Cross-Currency CHATS Optimiser (CCPO) (launched on 23 October 2006) Cross-Currency CHATS optimiser is the HKD leg of a USD/HKD PvP payment which is designed to be settled together with the CLG bulk settlement run for cheques between 14:15 and 14:45 CCPO = CHATS optimiser + PvP mechanism Banks in need of HKD funding can make use of this device to perform simultaneous settlement of USD/HKD PvP transactions and HKD cheque items during the CLG bulk settlement run, i.e. they can apply the proceeds received through these USD/HKD FX transactions to simultaneously clear their HKD payment obligations in the CLG bulk settlement run Improves banks liquidity efficiency, especially when they face constraints posed by credit lines as FX settled by PvP will not consume any credit limit 11

12 Cross Currency CHATS Optimiser (cont d) Illustration Bank B does not have sufficient funding to settle its payment obligation under the CLG bulk settlement run and its intended borrowing from Bank A may exceed the counterparty trading limit Instead of straight borrowing, Bank B may do a USD/HKD swap with Bank A, i.e. Bank A sells HKD to Bank B for USD in PvP settlement mode, which will not consume the counterparty trading limit Through the PvP link between the HKD RTGS and USD RTGS systems in Hong Kong, Bank B obtained HKD from Bank A and applied the HKD proceeds to settle its obligation in the HKD CLG bulk settlement run CCPO enables this HKD leg of the PvP transaction to be settled together with the HKD CLG bulk settlement run simultaneously in an offsetting manner 12

13 CCASS* Optimiser (launched on 28 January 2008) CCASS optimiser is a special type of RTGS payment which is designed to be settled together with the CCASS bulk settlement run between 09:30 and 10:00 Allows banks to create payment instructions to be settled together with the CCASS transactions in the CCASS bulk settlement run simultaneously and in an offsetting manner Facilitates banks expecting to receive money in the CCASS bulk settlement run to recycle the funds to those banks in need of funds, and therefore: enhance liquidity management among banks improve the recycling of funds avoid undue impact on money market activities, especially when the stock market turnover is high * CCASS Central Clearing and Settlement a system for settling equity share transactions. There is a bulk settlement run in the RTGS system for money settlement arising from CCASS transactions in early morning 13

14 CCASS Optimiser (cont d) Since the CCASS settlement run is scheduled for early morning at 09:30, the banks in preparing funding for meeting the payment obligations at the CCASS settlement run may have impact on their funding position on the previous day Hypothetical case Bank A Bank B Funding position on the previous day HK$5 bn -HK$5 bn Transfer of funds during CCASS run at 9:30 a.m. -HK$5 bn +HK$3 bn On the previous day, Bank A may not wish to lend money to Bank B because Bank A will need to retain sufficient funding for settlement on next day morning and worries that Bank B may not have HK$5 bn to repay Bank A before 09:30 the next day. 14

15 CCASS Optimiser (cont d) With CCASS optimiser, Bank B will only need to raise HK$2 bn (HK$5 bn HK$3 bn to be received in the bulk settlement run) from the market before 09:30 on the day of settlement as the optimiser allows Bank B to settle its payables and receivables on a multilateral basis: - Bank A lends HK$5 bn to Bank B on the previous day - Bank B repays HK$5 bn to Bank A by CCASS optimiser on settlement day - Bank B is expecting to receive HK$3 bn in the CCASS run, thus the net funding impact on Bank B is reduced to HK$2 bn Bank B is easier to repay on settlement day before 09:30, thus Bank A is more willing to lend to Bank B on the previous day Interest rate volatility on the previous day is avoided; jittery of banks to prepare for the CCASS bulk settlement run at 09:30 on the settlement day is reduced 15

16 Possible Measures that can be taken up by the RTGS s to Enhance Liquidity Management Increase the potential pool of eligible securities for intraday repo arrangement Lengthen the operating hours of the local/national RTGS systems HKD RTGS system cut-off time will be extended from 17:30 to 18:30 in November 2008 Introduce liquidity-saving devices in the local/ national RTGS systems (such as optimisers in Hong Kong) Develop an intra-day money market 16

17 Re-visit the Intraday Money Market RTGS system in Hong Kong has a history of over 11 years So far, no intraday money market at least no quotation of intraday money on Reuters and Bloomberg screens Possible pricing options for overnight money: different interest rates for (i) repayment at different times of the day or (ii) repayment by optimisers instead of normal RTGS payments There is still no effective device to price the intraday value of money, let alone having it traded in the market 17

18 Thank you 18