The HKMA is delighted to work with Euroclear Bank and J.P.Morgan, the two premier global tripartite repo system operators, to bring this concept to fruition. With security pools valued at EUR 10.8 trillion and $ 17.9 trillion respectively, both institutions provide a huge reservoir and a highly sophisticated platform to support cross-border cross currency lending with ample choices of securities as collateral. Linked up by the HKMA’s Central Moneymarkets Unit (CMU) as an agent, CMU members will be able to enjoy the collateral management service of the global repo operators which include functions like auto-selection and auto-substitution of collateral, collateral eligibility filters, daily mark-to-market and prudent haircut execution, all of which will help financial institutions in their collateral management processes. As a further development, we are working with our two partners to expand the repo service to allow financial institutions in Hong Kong to use their securities kept with the CMU, Euroclear and J.P. Morgan as collateral to obtain foreign currency liquidity such as US dollars from the global broker dealers in the second half of 2012. This will help local companies and financial institutions to obtain foreign currency liquidity as they expand their business overseas. Finally, the HKMA has a long term vision for repo financing to become a more important source of funding for companies and banks in Hong Kong.
The new collateral management service, with its cross-border, cross-system, cross-time zone and cross-currency capabilities, will provide an efficient repo infrastructure that will help develop the repo market in Hong Kong. The importance of the repo market as a financing channel has assumed added prominence since the outbreak of the global financial crisis in 2008. Due to a combination of the large inflows of funds into Hong Kong in late 2008 and early 2009 and heightened risk aversion, the interbank money market has been less active in recent years and financial institutions have been more careful in lending funds to each other on an uncollateralized basis. The average daily turnover of the uncollateralized interbank market has dropped significantly, by 71% from $ billion in November 2007 to $ billion in March 2012. The higher frequency of flight to quality, and resultant tightness in the global supply of US dollar, has also affected turnover in the currency swap market. The average daily turnover of the Hong Kong dollar swap market also reduced notably by 32% from $ billion to $ billion in the same period. While the Hong Kong banking sector is now faced with ample liquidity, the situation will not be permanent and we will need to find new ways to facilitate efficient interbank borrowing. Development of the repo market will help to activate the money market by addressing the credit risk through the collateralized arrangement. The cross-border funding issue is particularly important to Hong Kong given its role as an international banking centre.