08

					           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

                                                   2
Overview of payment and settlement infrastructure in Hong Kong
                                            Rupiah Payment
                                           Rupiah Payment                       Ringgit Payment              Guangdong
                                                                               Ringgit Payment              Guangdong
                                                 System
                                                System                              System                    Province
                                                                     DvP           System                    Province
                                              in Indonesia
                                             in Indonesia                         in Malaysia
                                                                                 in Malaysia                 Shenzhen
                                                                       PvP                                  Shenzhen

                                 Mainland                  PvP                  RTGS/
                                                                                Cheque
                                  China                                                         Cheque             Macau
                                                                                                                  Macau
                                                                  US Dollar
                                                                   US Dollar
              Clearstream                                                           DvP
                                                                  Payment
                                                                   Payment                    CCASS
                                                                   System                      CCASS     RTGS/
                                                                    System                               Cheque    Cheque
                                                  D   vP                             Pv           DvP
                                                                                        P
      Euroclear                                                         PvP
                                  Central                                                         Hong Kong
                                                                                                   Hong 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
                                                                                                                       3
CMU      –   Settlement system for bonds          CCASS          – Settlement system for shares
How RTGS sophistications help
 reduce settlement risks and
enhance settlement efficiency?




                                 4
    Case study 1

Mitigating Herstatt Risk
         by PvP
      via CCPMP


                           5
                      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
                                                                                         6
                                                                                         6
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




                                                              7
Implementation – PvP mechanism using Cross
currency payment matching processor (CCPMP)

 HKD RTGS in HK                                          USD RTGS in HK

   Bank B
  Bank B         Bank A
                Bank A                                      Bank B
                                                           Bank B             Bank A
                                                                             Bank A


                           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
                                                                                       8
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

                                                                                        9
        Case study 2


Improving Settlement Efficiency
               by
      Liquidity Optimiser


                              10
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

                                                                           12
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
                                                        13
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

  To help bank users to minimize the amount of liquidity
  keeping in the system, thereby saving the cost of
  funding


                                                           14
     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

				
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