The HKMA and BOT are fully committed to the successful implementation of this PvP link. Over the past year, exceptional effort has been made by BOT to engage Thai banks to encourage participation and adequate preparation for its implementation. On our side, apart from rendering support on the technical front, we have been in close dialogue with the participating banks of the USD RTGS system, especially those active in correspondent banking activities, to facilitate Thai banks to identify suitable correspondent banking service providers in Hong Kong. These efforts are bearing fruit. About half of the banks in Thailand, including most of those active in the FX market, participated in the pre-launch tests together with their USD correspondent banks in Hong Kong. On the back of the keen interest observed, I am confident that we will see sizeable flow of transactions through this link. 8. Expanding the footprint of the local financial market infrastructure is a strategy actively pursued by the HKMA to develop Hong Kong into a regional payment and settlement hub. This PvP link with Thailand is the third of its kind in the region, preceded by the launch of the links with Malaysia and Indonesia, in 2006 and 2010 respectively. According to the latest triennial survey on global FX market activity of the Bank for International Settlements, the average daily turnover in FX transactions in Asia increased by 27.5% from $ billion equivalent in April 2010 to $ billion equivalent in April 2013.
First and foremost, this PvP link will help eliminate settlement risk in US dollar-Thai Baht foreign exchange (FX) transactions. Prior to this link, the settlement of the two currency legs was done in different time zones and in an uncoordinated manner – Thai Baht (THB) in the Asian time zone, followed by US dollar (USD) during New York hours. With the new PvP link, all payments can be made within the Asian time zone and in a coordinated manner by adopting the PvP mode. Under this arrangement, when a Thai Bank delivers (or receives) THB to (or from) its counterparty in Bangkok, the correspondent bank of the Thai Bank in Hong Kong receives (or delivers) USD at the same time. Hence, the risk due to time lag in settling the two legs of the FX transaction can be removed. 5. Second, the reduction in FX settlement risk will open up new business opportunities for banks in both Thailand and Hong Kong. USD against THB transactions accounted for about 75% of Thailand’s FX transactions in 2013. Through this link, banks in Thailand can benefit from the highly flexible and cost-effective solution offered by the USD RTGS system in Hong Kong for managing the settlement risk of their USD FX transactions. The seven-and-a-half-hour PvP window offers a high degree of convenience to the system users.