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SCMP Reporter

NEWS of the launch of the Hong Kong Monetary Authority's Central Moneymarkets Unit Service (CMU Service) for Hong Kong dollar debt is a significant and encouraging development in giving the local debt market new substance.

  The creation of such a clearing system is fundamental. Trying to develop a mature debt market without one is like eating a nut loaf without the nuts.

  CMU Service will perform the role of a central custodian and clearing agent for Hong Kong dollar debt instruments issued by private sector issuers.

  It is intended to develop this market by providing an efficient clearing system for debt instruments which can reduce transaction costs as well as settlement risk.

   Observers might note it was only 18 months ago that such a central clearing system, with continuous net settlement, was launched in share trading.

  According to the monetary authority, the amount outstanding in Exchange Fund bills, notes and government bonds comes to $31.4 billion.

   Average daily turnover is $17.86 billion while the highest daily turnover was $37.34 billion.

    One reason why the clearing system is being set up is because there is demand for Hong Kong dollar denominated debt and it will aid the liquidity of good quality Hong Kong dollar debt instruments.

  Instruments inside CMU Service will be called CMU instruments.

  There is a need for better benchmarks for long-term interest rates for Hong Kong dollar debt, and a good market infrastructure with effective and efficient clearing and custody.

  To date, instruments remain scattered in the market among many custodians locally. There is the cumbersome, inefficient and risk-ridden physical delivery of such paper. Settlement and/or transfer of titles may take several days.

  The ease of a participant's operation in the market is dependent on the integrity of the players and there is settlement risk, not to mention the problems associated with defective paper.

  Currently matching is done through communication by authenticated fax or telex.

   The whole thing is a bit of a mess.

  So the Hong Kong Monetary Authority, having seen a problem, has gone about solving it, which is rather enlightened for civil service bureaucrats, but this is Hong kong.

  It concluded: ''We need a central custody system for Hong Kong dollar instruments in Hong Kong.''   The point of the exercise is to achieve greater market efficiency, reliability, the reduction of settlement risk, and the cutting of costs along with clearing and valuation transaction. In future matching will come via Swift.

  CMU members will come from the members of the Hong Kong Capital Markets Association, authorised institutions in Hong Kong and exempt dealers under the securities ordinance.

  Members will operate within a legal framework set down in the CMU membership agreement.

  There are plans ahead to develop stock lending and other market instruments to aid liquidity and over users more product variety.

  Under CMU there is no membership fee and a $32 per year fee for a nominal holding of $1 million. The transaction charges involve $5 per deal instruction on both the buyer and the seller. The lodgement-withdrawal fee is $5 per certificate per lodgement and $50 per certificate per withdrawal.

  In primary issues the custodian charge will be borne by the issuer-arranger as an up-front charge for the whole tenure.

  For those instruments that belong to existing issues, the custodian charge will be borne by the lodging CMU member for the rest of the tenure.

  The monetary authority has no plans at present to promote the service as a central clearer for other note denominations.

  It is technically feasible, the authority says, but on its step-by-step approach to developing the services it has not placed this advance in its sights just yet.

  This is just so much diplomatic balderdash to ensure the fur of other jurisdictions in the region is not ruffled.

   Of course should the private sector demand the system provide facilities for other Asian currency notes, then the authority could then argue it was merely responding to a perceived market demand in the market.



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Hong Kong Monetary Authority (HKMA)

CMU to give debt market substance