Multi-currency cross-border payment arrangements between ...

1 FEATURE ARTICLE1 HONG KONG MONETARY AUTHORITY QUARTERLY BULLETINJUNE 2009 Multi-currency cross-border payment arrangementsbetween Hong Kong and Mainland ChinaThe establishment of Multi-currency cross-border payment arrangements betweenHong Kong and the Mainland on 16 March 2009 marked an important step instrengthening co-operation on the development of the two economies financialinfrastructure. The arrangements enable banks in both economies to makecross-border payments more efficiently with reduced settlement risks and article describes how this new payment service works and its benefits to banksand their the Financial Infrastructure DepartmentBackgroundIn recent years, the number of cross-border foreigncurrency transactions between banks in MainlandChina and across the region has increased markedly,reflecting the growth of financial markets on theMainland.

2 To cope with this increasing demand andto promote the safety and efficiency of foreign-currency payments and settlements, the People sBank of China (PBoC) launched China DomesticForeign Currency payment System (CDFCPS) in2008. The CDFCPS, a Real Time Gross Settlement(RTGS) system covering eight foreign currencies1,facilitates real-time money transfers of the relevantcurrencies among domestic banks in Mainland Chinaparticipating in the this backdrop, the HKMA and the PBoChave been working closely to examine ways toleverage the Multi-currency settlement capabilityshared by both the newly established CDFCPS onthe Mainland and Hong Kong s Clearing HouseAutomated Transfer Systems (CHATS)2 to furtherpromote payment efficiency and safety betweenbanks in the two economies. Both authorities sawmerit in offering a new cross-border payment channelfor Multi-currency settlement supported by the twopayment systems.

3 In February 2009, the PBoC andthe HKMA signed a Memorandum of Understandingon the establishment of Multi-currency cross-borderpayment arrangements . The service was introducedon 16 March with the full support of the article explains the mechanism of these cross-border payment arrangements , their usage so far andthe key benefits to banks in Mainland China andHong of the paymentarrangementsA key objective of setting up the paymentarrangements is to meet the increasing demand forcross-border foreign-currency payment serviceswithin the region, particularly between Hong Kongand the Mainland, as a result of closer economic andfinancial ties. The authorities also want to encourage1 The eight foreign currencies are: the Hong Kong dollar, USdollar, euro, British pound, Japanese yen, Australian dollar,Canadian dollar and Swiss covers the Hong Kong dollar, US dollar, euro ARTICLEMULTI-CURRENCY cross-border payment arrangements between HONG KONG AND MAINLAND CHINA2 HONG KONG MONETARY AUTHORITY QUARTERLY BULLETINJUNE 2009competition among banks to benefit users of thesystem.

4 The payment arrangements provide banksand their customers with a new payment option inaddition to the various existing payment more efficient system will help to stimulate anupgrading of service standards by existing providersof the more conventional payment channels. Theenhanced competitive environment will eventuallytranslate into more attractive pricing and businessterms that will benefit the banks and their will also help increase the use of the variousmulti-currency payment systems operating in bothHong Kong and the Mainland, thus opening them upto a wider group of market players. The introductionof the new service is in line with the HKMA s effortsto develop Hong Kong into a payment and settlementhub in the Asian of serviceThe scope of the payment arrangements coverscross-border payment and settlement items ofrelevant foreign currencies in compliance with theMainland s rules and regulations on foreign exchangecontrol, to be observed by Mainland banks using thepayment arrangements to settle cross-borderpayment considering the business demand and theinfrastructure currently in place, the HKMA and thePBoC have decided that the payment arrangementswould initially cover the Hong Kong dollar, US dollar,euro and British pound.

5 The development ofcross-border payment arrangements for othercurrencies will depend on market the paymentarrangementsThe PBoC has appointed four banks as theSettlement Institutions (CSIs) for various currenciescovered by the CDFCPS. The cross-border paymentarrangements are established through the MainlandSIs and their designated Agent Banks in Hong Kongfor the four currencies covered. Table 1 provides alist of the Mainland SIs and the Agent Mainland SI is required to open a settlementaccount with its respective Agent bank in HongKong. For a payment from Hong Kong to theMainland, the Agent bank will credit the settlementaccount and send the payment details to its MainlandSI for payment execution through the CDFCPS. For apayment from the Mainland to Hong Kong, the AgentBank will debit the settlement account and credit thefunds into the beneficiary bank s account in HongKong through 1 CSIs and their Agent Banks in Hong KongCurrencyCSIsAgent Banks in Hong KongHKDC hina Construction Ban kChina Construction Ban k, Hong Kong BranchUSDBank of ChinaBank of China (Hong Kong)EuroIndustrial and Commercial bank of ChinaIndustrial and Commercial bank of China (Asia)GBPS hanghai Pudong Development Ban kCitiban k (Hong Kong)

6 FEATURE ARTICLEMULTI-CURRENCY cross-border payment arrangements between HONG KONG AND MAINLAND CHINA3 HONG KONG MONETARY AUTHORITY QUARTERLY BULLETINJUNE 2009 Under these payment arrangements , participatingbanks on the Mainland and in Hong Kong are able toissue and receive cross-border payment instructionsin Hong Kong dollars, US dollars and euros throughthe RTGS systems of these three currencies, whichare already established in both the Mainland andHong Kong. Diagrams 1 and 2 illustrate the flow offund transfers for these three currencies. However,there is a slightly different arrangement for the Britishpound as an RTGS system for the pound is not yetavailable in Hong Kong. Mainland participating bankscan issue and receive their cross-border paymentinstructions through the Mainland s RTGS system forthe British pound, while participating banks in HongKong will need to issue and receive their cross-border payment instructions for the pound throughthe conventional correspondent banking network ofthe appointed Agent bank for the pound in help banks signify payments made through thepayment arrangements , three new payment codes, 63 , 64 and 65 have been introduced to instructions bearing payment codes 63 and 64 are used for Mainland-related CommercialTransfers and Mainland-related Liquidity Transfersrespectively, and classified as customer payments.

7 Those bearing payment code 65 are used forMainland-related Return Payments and classified as member payments .CDFCPSP articipatingBanksRTGSP articipatingBanksMainland ChinaHong KongReceivingBankPaying BankRTGSS ettlementInstitution(HKSI)China Domestic Foreign Currency payment System (CDFCPS)HKD, USD and Euro RTGS SystemsCSI s AgentBank in HK+42131 The paying bank in Hong Kong sends a payment instruction through the RTGS system and remits the funds to the receiving bank on the Mainland through the respective currency s Agent bank in Hong Agent bank in Hong Kong receives the funds through the RTGS Agent bank in Hong Kong will credit the funds into the CSI s account maintained at its bank and notify the CSI of the payment CSI credits the funds into the receiving bank through the CDFCPS.+CSI s account with their respective Agent bank in Hong Kong (balance increased).

8 CDFCPSS ettlementInstitution(CSI)DIAGRAM 1 The operating model of cross-border fund transfers from Hong Kong to the MainlandFEATURE ARTICLEMULTI-CURRENCY cross-border payment arrangements between HONG KONG AND MAINLAND CHINA4 HONG KONG MONETARY AUTHORITY QUARTERLY BULLETINJUNE 2009 Key benefitsThe payment arrangements provide banks in Asiawith a Multi-currency cross-border mechanismoperating in the same time zone, which allows themto provide real-time foreign-currency money-transferand settlement services to their customers with notime difference. This increases the efficiency ofcross-border Multi-currency payments and reducessettlement risks and costs. It also satisfies the needfor same-day payments arising from financial andbusiness activities in Hong Kong and on theMainland. In addition, as the time required for liquiditytransfers, cross-border payments and remittances isreduced under the payment arrangements ,participating banks can benefit from enhancedliquidity efficiency and management, and providebetter and more efficient cross-border paymentservices to their customers at competitive generally, the introduction of this wide-rangingcross-border payment and settlement mechanismcovering multiple currencies marks an important stepin further deepening the financial co-operationbetween the Mainland and Hong notable feature of the payment arrangements istheir pricing structure.

9 Instead of entering into abilateral agreement with each of the Agent Banks onthe price to be charged, participating banks enjoy acompetitive, unified rate published by each AgentBank when using the payment arrangements for thetransfer of funds. The pricing structure conforms toindustry trends and is straightforward andtransparent with the removal of the lengthy andcomplex pricing negotiation process, thereby makingthis new payment channel more KongReceivingBankPaying BankRTGSS ettlementInstitution(HKSI)HKD, USD and Euro RTGS SystemsCSI s AgentBank in HK 13421 The paying bank on the Mainland sends a payment instruction through the CDFCPS and remits the funds to the receiving bank in Hong Kong through the CSI receives the funds through CSI notifies its Agent bank in Hong Kong of the payment details; its Agent bank in Hong Kong will deduct the remittance amount from the CSI Agent bank in Hong Kong will credit the fund to the receiving bank through Hong Kong s RTGS systems.

10 CSI s account with their respective Agent bank in Hong Kong (balance decreased).CDFCPSS ettlementInstitution(CSI)Mainland ChinaChina Domestic Foreign Currency payment System (CDFCPS)DIAGRAM 2 The operating model of cross-border fund transfers from the Mainland to Hong KongFEATURE ARTICLEMULTI-CURRENCY cross-border payment arrangements between HONG KONG AND MAINLAND CHINA5 HONG KONG MONETARY AUTHORITY QUARTERLY BULLETINJUNE 2009 UsageIn the first two months of operation, the paymentarrangements handled 130 transactions with a totalvalue of approximately HK$50 million feedback has so far been positive and themarket-driven usage of the payment arrangements isexpected to pick up gradually. The encouraginggrowth trend of CDFCPS s usage may provide someuseful references in this regard. Since the full launchof CDFCPS in August 2008, the number ofparticipating banks has doubled and is expected togrow further.