HSBC gets all clear for US dollar settlement

HSBC has been appointed to settle US dollar trades in Hong Kong for another five-year period.

The Hong Kong Monetary Authority (HKMA) has re-appointed HSBC as the settlement institution for the US dollar clearing system in Hong Kong for a second five-year period. The bank has welcomed the news and says it hopes the next five years will bring an increase in the number of institutions using the system.

The HKMA made the announcement on Monday saying that, since its implementation in 2000, the system has helped to increase settlement efficiencies and eliminate settlement risks.

The real-time gross settlement system was set up to give local banks the ability to settle foreign exchange transactions in the Asian time zone. And unlike other US dollar clearing systems in Asia (such as those in Japan, Philippines and Singapore) the Hong Kong system includes payment-versus-payment (PvP) settlement for foreign exchange transactions involving the US dollar and cheque clearing, and delivery-versus-payment (DvP) settlement of US dollar denominated securities.

Stephanie Hestler, head of institutional sales for HSBC's cash management division, says, "The Hong Kong system is more advanced because of this added functionality. And the growth of the business over the last five years is a key indication of its success."

The HKMA says, in the first quarter in 2005, the clearing system settled a daily average of 5,366 transactions, and had an average daily turnover of $7 billion. Of this, the daily PvP turnover amounted to 65 transactions or $2.7 billion.

Hestler says, in growth terms, transaction volumes have increased 410% since 2000, equal to a rise of about 41% year-on-year. At the same time, transaction values have increased 135% or 25% year-on-year.

She says while there is no specific plan to alter the system, HSBC will "work closely with the HKMA and the payment processor to look for ways of continually improving the system and meeting market needs".

The next five years is likely to bring an increase in the number of third party banks clearing their US dollar transactions through the system. There are currently 69 direct participants (local and foreign banks with Hong Kong banking licenses) and 119 third party participants (those banks domiciled offshore) that connect through a direct member.

"We would expect to see more growth in the number of indirect participants from around the region," says Hestler, adding that HSBC already provides third-party connectivity to 109 offshore banks.

"Obviously we're delighted that the HKMA has re-appointed us to the role of settlement institution," concludes Hestler.