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Fact Sheet 4 HONG KONG MONETARY AUTHORITY DEBT MARKET DEVELOPMENT IN HONG KONG In the course of the last decade, the Hong Kong Monetary Authority (HKMA) has taken a number of steps to develop the infrastructure and assist in the growth of the debt market in Hong Kong These measures have included • the introduction of the Exchange Fund Bills and Notes Programme, • the creation of a benchmark yield curve extending to 10 years, • the establishment of an efficient central clearing and custodian system for debt securities (the Central Moneymarkets Unit - the CMU) and linking it to Euroclear, Cedel and other central securities depositories in the Asian Pacific region, • the granting of profits tax exemption/concession for qualifying debt securities, • the extending of the market making system for Exchange Fund paper to debt securities established by statutory corporations, • the use of Exchange Fund paper as margin collateral for trading in stock options and futures • the listing and trading of Exchange Fund Notes on the Stock Exchange of Hong Kong, • the implementation of the Real Time Gross Settlement (RTGS) System, and • the establishment of the Hong Kong Mortgage Corporation Partlv as a result of these measures, the debt market in Hong Kong has developed rapidly The total outstanding public and private sector debt issues has increased more than fifteenfold from about HK$27 billion at end-1989 to HK$407 1 billion at the end of June 1999 Exchange Fund Bills and Notes Exchange Fund Bills and Notes are Hong Kong dollar debt securities issued by the HKMA to provide a cost-effective instrument for conducting money market operations The issue of Exchange Fund Bills and Notes has also facilitated the development of the local debt market by increasing the supply of high quality Hong Kong dollar debt paper and establishing a reliable benchmark yield curve for Hong Kong dollar debt (Chart 1) The Exchange Fund Bills programme was introduced in March 1990 Under this programme, bills of 91 , 182- and 364-day maturity are put up for tender regularly Two-year and three-year Exchange Fund Notes were introduced in May 1993 and October 1993 respectively This was followed by the inaugural issue of five-year Exchange Fund Notes in September 1994, seven-year Exchange Fund Notes in November 1995, and ten-year Exchange Fund Notes in October 1996 At the end of June 1999, the total amount of Exchange Fund Bills and Notes outstanding was HK$98 8 billion (US$12 7 billion) Trading in these instruments is highly active, with a daily average turnover of HK$16 8 billion (US$2 2 billion), which represents about 17 0% of the outstanding amount Central Moneymarkets Unit The HKMA operates the Central Moneymarkets Unit (CMU), which was set up in 1990 to provide a computerised clearing and settlement facility for Exchange Fund Bills and Notes In December 1993, the HKMA extended the service to other Hong Kong dollar debt securities It offers an efficient, safe and convenient clearing and custodian system for Hong Kong dollar debt instruments Since December 1994,
Fact Sheet 4 HONG KONG MONETARY AUTHORITY the CMU has been linked to Euroclear and Cedel. This helps promote Hong Kong dollar debt securities to overseas investors. In January 1996, the CMU Service was further extended to cover non-Hong Kong dollar debt securities. The CMU handles debt instruments which are either immobilised or dematerialised, and transfer of title is effected in computer book entry form. At the end of June 1999, 822 private debt issues, with a total nominal value of HK$226.6 billion (US$29.1 billion) were lodged with the CMU, an increase of 17.4% compared with the end of 1997. In December 1996, a seamless interface between the CMU and the newly launched Real Time Gross Settlement (RTGS) interbank payment system was established. The CMU system now provides real time and end-of-day Delivery versus Payment (DvP) services. In April 1997, an agreement was reached between the HKMA and the Reserve Bank of Australia (RBA) for the CMU of the HKMA to join the RBA's Reserve Bank Information and Transfer System (RITS) which is the central clearing and settlement system for Australian government paper. Subsequent to the linkage with Australia, the CMU set up a securities link with the Austraclear New Zealand System, a clearing system operated by the Reserve Bank of New Zealand (RBNZ), in April 1998. The bilateral linkage was established on a reciprocal basis. Both the HKMA and the RBNZ have become members of each other's clearing system. The bilateral linkages between Hong Kong and Australia and New Zealand will help to broaden the investor base of the debt markets in these economies by facilitating crossborder trading and holding of securities. The third bilateral securities link in the region, with South Korea, commenced operation on 8 September 1999. Granting of profits tax exemption/concession for qualifying debt securities As a measure to promote the development of a high quality debt market, Exchange Fund Bills and Notes have been exempted from profits tax. Since 1992, the SAR Government has also granted the exemption of profits tax on Hong Kong dollar debt securities issued by the multilateral agencies with top credit ratings. To date, ten multilateral agencies have been granted tax-exempt status. At the end of June 1999, the outstanding amount of Hong Kong dollar debt securities issued by the multilateral agencies was HK$68.9 billion. In addition, since May 1996, interest income and trading profits derived from eligible debt securities can enjoy a concessionary tax rate equal to 50% of the standard profits tax rate. All debt instruments, regardless of their currency denomination, will qualify for the tax concession if they fulfill the eligibility criteria. There are two such types of eligible securities: • debt instruments issued by the MTRC, KCRC, AA and HKMC, lodged with and cleared through the CMU, with a minimum denomination of HK$50,000 or its equivalent in a foreign currency, with an original maturity of not less than five years, and issued to the public in Hong Kong; and • debt instruments lodged with and cleared through the CMU, with an investment grade rating specified by the HKMA, with a minimum denomination of HK$50,000 or its equivalent in a foreign currency, with an original maturity of not less than five years, and issued to the public in Hong Kong.
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