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SCMP Reporter

AIMING to reduce the settlement risk in the interbank payment system, the Hong Kong Monetary Authority issued a consultation paper yesterday to the banking community for comment on the feasibility of real-time gross settlement (RTGS).

  The paper recommends the use of RTGS as soon as possible and suggests more detailed studies on the practical issues in introducing RTGS.

  Interim measures on improving the existing payment system were also suggested for the transition period before the full implementation of real-time settlement, which could take a few years.

  At present, payments made can only be finally settled on the next day, and banks incur risks between the payment time and settlement time.

  The longer this gap, the more money is frozen in the system which cannot be used until settlement is complete.

  With the introduction of RTGS, payment is processed continuously and settlement is done as soon as the paying bank has sufficient funds, thus eliminating the settlement risk.

  For bank clients, RTGS would mean funds, at least large amounts, were available for use virtually minutes after they were received.

  Bank treasurers would then be able to monitor cash flow on a real-time basis.

  ''In other words, money can be used more efficiently, and safely, and herein lies the competitive edge that we must acquire for Hong Kong, if we are to continue to develop as an international financial centre,''said Joseph Yam, chief executive of the authority.

  The value of interbank payments which rose sharply from an average of $130 billion a day in March last year to $216 billion a day in December, has underpinned the need for an efficient payment system.

  A few financial centres are moving in the same direction, towards real-time settlement, such as Singapore, Japan and Britain.

  ''RTGS will put us at par with the more advanced centres,'' said Norman Chan, executive director (monetary management) at the authority.

  Having instantaneous settlement, other risk-free payment systems can be introduced. It serves as the building block for real-time delivery versus payment (DVP) for securities and payment versus payment (PVP) for foreign exchange transactions.

   While the advantages of RTGS abound, some practical issues have to be solved. Banks will shoulder higher costs in maintaining their daily liquidity in the non-interest-bearing clearing accounts since they need to keep a reasonable amount of funds in theaccount.

  Banks may have to change their present practice of managing payment flows in order to adapt to the new system which requires instant fund transfers upon payment instructions.

   Computer systems will also have to be modified to accommodate the change.

  Upon receiving the go-ahead from the banking sector, further studies will be made to assess the cost of RTGS.

  In the meantime, interim measures are recommended to reduce the settlement risk.

   These include advancing final settlement for large cheques and interbank transfers made through the Clearing House Automated Transfer System (CHATS), thus achieving same-day settlement.

  Banks are also encouraged to use electronic transfer such as CHATS and not cheques for large payments.

    Meanwhile, a real-time cheque information tracking system, similar to the one already in use in Singapore, will be installed to facilitate monitoring the amount of cheques processed in different bank branches.



Banks told they need real-time settlement