IN a move that will take away the controversial clearing house function of the Hongkong Bank, a feasibility study on Hong Kong's inter-bank payment system released yesterday suggests the setting up of a clearing house jointly owned by all banks and the central bank. The study was commissioned by the Hong Kong Association of Banks (HKAB) on the introduction of a real time gross settlement (RTGS) for Hong Kong's inter-bank payment system. The existing system, running on a next-day settlement basis, incurs inherent risks which arise from the time gap between payment and settlement. The banking sector had long considered a settlement system based on real time calculation as being the solution to eliminate settlement risks. Real time gross settlement allows each payment to be processed continually and make possible instantaneous final settlement. Included in the study - which was yesterday sent to the Hong Kong Monetary Authority (HKMA), the territory's central bank - is the proposal to establish a new clearing and settlement company to be jointly owned by the HKMA and HKAB. Financial liabilities of this new clearing company would be guaranteed by the HKMA and the three continuing members of HKAB - Hongkong Bank, Standard Chartered Bank and Bank of China. There will be a single tier system in which all licensed banks would maintain clearing accounts with the HKMA. The single-tier system will be replacing the two-tier system in operation in the banking sector. At present, the payment and settlement arrangements are provided by the clearing house of the HKAB, which contracted the Hongkong Bank as the management bank to operate the clearing system. There are 10 settlement banks and 159 sub-settlement banks and Hongkong Bank acts as the management bank for the clearing house of the whole sector. If the single-tier system is implemented, HKMA will be the sole settlement bank serving all 169 banks. Hongkong Bank's role as the management bank has always been a subject of debates as some bankers disliked the practice of having a commercial bank accessing confidential information about the clearing positions of its rivals. If the recommendation for the clearing house is put into practice and Hongkong Bank's position as the management bank is removed, that will supposedly create a more level playing field in the sector. The study also concludes that it will be feasible to implement the RTGS project in phases beginning in February 1996. The study recommends the adoption of a system that complies with international standards, has final settlement across the books of the HKMA and a seamless interface with the central money-markets unit operated by the HKMA. The interface would enable the banks to obtain intraday liquidity through same-day repurchase agreement to fund their clearing account payments. Because the central money-markets unit is forging links with other international settlement systems, the interface will connect the domestic system with the international ones to facilitate real time delivery versus payment (DVP). The capital cost involved in the entire project is still being assessed, but is expected to be cheaper than similar systems elsewhere, given the small size of the city and its advanced telecommunications systems and electronic banking technology. 'The report offers a clear direction for the development of Hong Kong's payment and settlement systems,' chairman of HKAB Paul Selway-Swift said. The association would review the report in detail although it was comfortable with the main conclusions reached. Chief executive of HKMA Joseph Yam said: 'I am pleased with the report's main conclusion that Hong Kong would be able to implement an RTGS system which meets the international standards within a short time frame. 'However, we need to study in greater detail the report's findings according to the basic parameters advised by CPS (Committee on Payment System). 'We will present HKMA's recommendations on the way forward to the Exchange Fund Advisory Committee.'