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Sophistications in

RTGS systems in
Hong Kong

Ms Haster Tang
Payment Systems Operation Division
Hong Kong Monetary Authority

10 February 2009
Overview
Overview of financial infrastructure
in Hong Kong

Case study 1 : Mitigating Herstatt risk by CCPMP

Case study 2: Improving settlement efficiency by


liquidity optimiser

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Overview of payment and settlement infrastructure in Hong Kong
RupiahPayment
Rupiah Payment RinggitPayment
Payment Guangdong
Ringgit Guangdong
System
System System Province
DvP System Province
ininIndonesia
Indonesia
ininMalaysia
Malaysia
Shenzhen
PvP Shenzhen

Mainland PvP RTGS/


Cheque
China Cheque Macau
Macau
US
USDollar
Dollar
Clearstream DvP
Payment
Payment CCASS
System CCASS RTGS/
System Cheque Cheque
D vP Pv DvP
P
Euroclear PvP
Central Hong
HongKong
Kong
DvP
Moneymarkets Dollar Payment
Dollar Payment
Unit (CMU) System
System
AustraClear Dv P
P Pv
- Australia PvP

Euro Renminbi
Renminbi
Euro Payment
AustraClear Payment
Payment Payment
- New Zealand System System Continuous
Continuous
System System
Linked
Linked
Settlement
Settlement
South Korea DvP (CLS)System
(CLS) System

Cross-border bond settlement link DvP: Delivery vs. Payment


Cross-border payment link PvP: Payment vs. Payment
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CMU – Settlement system for bonds CCASS – Settlement system for shares
How RTGS sophistications help
reduce settlement risks and
enhance settlement efficiency?

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Case study 1

Mitigating Herstatt Risk


by PvP
via CCPMP

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Issue - Herstatt Risk
Hong Kong New York

Bank A’s correspondent bank


confirms receipt of US dollar
fund next day morning Bank A’s
Bank A corresponding
bank in US

Risk involving
Hong Kong US dollar settled
dollar settled
whole principal amount
at night time in
at day time for over 20 hours Hong Kong

Herstatt Risk

Payment instruction Bank B’s


Bank B corresponding
bank in US
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Solution - PvP settlement for FX transactions
Hong Kong

Bank A „ To mitigate Herstatt


risk, the two
currency legs
should be settled
simultaneously i.e.
Payment-versus-
USD RTGS HKD RTGS payment (PvP)
„ How to ensure the
simultaneity?
Bank B

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Implementation – PvP mechanism using Cross
currency payment matching processor (CCPMP)

HKD RTGS in HK USD RTGS in HK

BankBB
Bank BankAA
Bank BankBB
Bank BankAA
Bank

HKD Cross USD Cross


HKD Currency Currency USD
HKD Payment Payment
USD
RTGS
RTGS RTGS
RTGS
Matching Matching
Processor Processor

HKD
HKD Matching USD
Settlement USD
Settlement Settlement
Settlement
Institution
Institution Institution
Institution

Payment flow Message flow


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Linkages using CCPMP technology
Malaysia Hong Kong

RMB RTGS

Ringgit RTGS
HKD RTGS

USD RTGS
Indonesia
EUR RTGS

Rupiah RTGS

= Real Time Gross Settlement System = Payment-versus-payment link


= Link under construction

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Case study 2

Improving Settlement Efficiency


by
Liquidity Optimiser

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Issue – Pressure to increase turnover efficiency

Turnover in HK$ bn
Hong Kong dollar RTGS system No. of transactions

Average daily turnover in value


900 24000
Average daily turnover in volume
22000
800
20000
700 18000
600 16000
14000
500
12000
400
10000
300 8000
6000
200
4000
100
2000
0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

„ Turnover of HK dollar RTGS system more than doubled (+127%) from 1997
to 2008
„ Highest turnover in a day: HK$1.7 trillion (US$ 214 bn eqv) [5 Nov 2007 –
refund day of Alibaba.com IPO]
„ Need to find ways to use interbank liquidity more efficiently (i.e. a given
amount of liquidity in the RTGS to support more interbank transfer) 11
Solution – Multilateral offsetting
Payment instructions queued in RTGS system
Payment 1 Bank A to pay HK$5 million to Bank B
Payment 2 Bank B to pay HK$7 million to Bank A

Without multilateral offsetting


• Bank A needs HK$5 million and Bank B needs HK$7 million
to settle the two payment instructions separately

With multilateral offsetting

Bank A HK$5 million Bank B Liquidity needed to settle the


two payments
offsetting
Bank A: 0
Bank A HK$7 million Bank B Bank B: HK$2 million

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Implementation –
RTGS Liquidity Optimiser (RLO)

The mechanism is made possible by implementing a


multilateral offsetting feature with sophisticated
queue management algorithm in the RTGS system,

gaining the advantages of …

the instantaneous settlement finality of the RTGS


+
the liquidity efficiency of net settlement system
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Benefits of Implementation –
RTGS Liquidity Optimiser (RLO)
The mechanism serves :
… To optimize the use of the liquidity in the RTGS system
to settle as many as possible payments that have been
posted in the queue, thereby avoiding any possible
payment gridlocks

… Tohelp bank users to minimize the amount of liquidity


keeping in the system, thereby saving the cost of
funding

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Various Optimisers implemented in Hong Kong
08:30 Opening of HKD RTGS System

09:30 CCASS Bulk Settlement Run CCASS optimiser

10:45

~ 7 RLO runs at 30-minute intervals


RTGS
payments 13:45

14:15 CLG Bulk Settlement Run CHATS optimiser +


Cross currency CHATS optimiser

15:15
~ 7 RLO runs at 30-minute intervals
18:15

18:30 Closing of HKD RTGS System


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 cheques presented on the previous day 15
Thank you