WITH luck, a debate on ring-fencing may have been clarified, thanks to Dutch banking giant ABN-AMRO. ABN-AMRO Bank set something of a precedent last week - its Hong Kong branch managed to sell HK$1 billion worth of floating-rate certificates of deposit (FRCDs). The precedent was set even though the FRCDs' documentation carried a ring-fencing clause recommended by the Hong Kong Monetary Authority. Ring-fencing clauses release a head office from having to redeem CDs or other debt securities issued by a Hong Kong branch. The release trigger follows any political upheaval, or something similar, causing the Hong Kong branch to not meet principal or interest payments. Such clauses are standard on CD issues. They have become a particularly sensitive issue in Hong Kong because of the hand-over in 1997. The debate started after an American deal included ring-fencing clauses. The bank wanted investors to be aware that in the event of upheaval preventing the Hong Kong branch from being able to repay debt, they would not be able to redeem the debt at its head office. Then a semi-government statutory body questioned such a clause, and subsequently avoided CDs issued by local branches of foreign banks if they were ring-fenced. US banks have also been let off the ring-fencing hook by recent US and New York State legislation, protecting US banks' head offices against paying up if political risk is the reason their branches cannot meet repayment obligations. Early this year Banque Paribas caused some bewilderment by issuing debt securities through its Hong Kong branch, including a ring-fencing clause. In this case although the market was used to ring-fencing clauses, investors were upset to see such a clause on a US dollar issue. Other European and US banks have exploited nervousness over debt maturing past 1997 by issuing from their US and Euro medium-term note (MTN) programmes, which have the advantage of not being ring-fenced. They included top credits such as Commonwealth Bank of Australia, which raised HK$50 million early this year. Merrill Lynch also publicised the fact that its immensely successful HK$1 billion issue earlier this year was not ring-fenced. The lack of a ring-fencing clause means the borrowers pay less in interest. The trouble is that some big offshore banks with branches in Hong Kong have been accused of wanting to have their cake and eat it too. They have been accused of trading on their credit ratings, which are usually higher than Hong Kong's, when raising cash in Hong Kong dollars. But for obvious reasons, no issuer of Hong Kong dollar debt can have a higher rating than Hong Kong itself, so a top AAA rating internationally cuts no ice when the AAA-rated issuer seeks Hong Kong dollars here. According to Moody's Investors Service, the only way a top foreign bank could have a higher Hong Kong dollar rating than the Hong Kong Government would be if its head office guaranteed the debt. That has yet to happen - and the only way to benefit from their rating, if higher than Hong Kong's, is to issue from an offshore MTN programme. Ironically, when ABN-AMRO tried to raise money through a ring-fenced CD early this year, it had to drop the clause before signing at the request of the managers of the deal, according to debt market newsletter Basis Point. This time around seven banks, mostly European, joined the deal, even though the FRCDs carried the clause - the first time the clause recommended by the Monetary Authority has been included. Under the wording of the new clause on ring-fencing, issuers 'may not be required to repay the deposit at its head office or any other of its branches outside Hong Kong . . . to the extent that the Hong Kong branch cannot repay the deposit due to (a) act of war, insurrection or civil strife or (b) an action by the government or any instrumentality of or in Hong Kong preventing such repayment'. This clears the air. Investors in such debt know exactly where they stand when they buy Hong Kong dollar debt. One result of the new clause means that Hong Kong dollar debt that is not ring-fenced will be cheaper to issue than debt that is ring-fenced, creating a two-tier debt market. But that is only fair - if a financial institution is willing to stand by its debts, no matter what, it should be rewarded.