As Hong Kong prepares to become FX settlement hub, Peter Pang massively optimistic for Thai expansion

Earlier this week, LeapRate broke the news that the Hong Kong Monetary Authority (HKMA) and Bank of Thailand (BOT) had officially launched a new cross-border payment-versus-payment (PvP) link between Hong Kong’s US Dollar real time gross settlement (RTGS) system and Thailand’s Thai Baht RTGS system (BAHTNET).

As may well have been expected considering the vast potential for business in the region, this development has caught the attention of senior industry figures in the Asia Pacific region, many of whom were addressed yesterday by Peter Pang, Deputy Chief Executive of the HKMA.

Mr. Pang spoke enthusiastically to a wide range of FX industry and banking officials from across the region, and detailed the ethos behind the implementation of the PvP which is set to enhance the ease of doing business between Hong Kong, one of the world’s largest institutional FX centers, and Thailand, a rapidly developing market.

After welcoming the officials, Mr. Pang began by explaining the development timeline of the PvP. ” About a year ago the HKMA and BOT announced in Bangkok to build this PvP link. With the concerted effort of colleagues on both sides, the link went live today as scheduled, after completion of the system development and meticulous testing with the users. The banks in both jurisdictions have been fully engaged to ensure maximum readiness, on both technical and business fronts, for the launch of the link” he stated.

Demonstrating enthusiasm in the milestone achieved for Asian FX business, Mr. Pang continued that “This PvP link is an iconic project that symbolizes the determination of the HKMA and BOT to work together to promote financial integration and financial stability in the region through the linkage of critical financial infrastructure. It will bring significant benefits in three areas.”

US Dollar – Thai Baht FX transactions without settlement risk

“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’ he said.

“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.”

Reduction in settlement risk paves way for new business

Mr. Pang detailed that the reduction in FX settlement risk will open up new business opportunities for banks in both Thailand and Hong Kong, especially when considering that USD against THB transactions accounted for about 75% of Thailand’s FX transactions in 2013.

“Through this link,” Mr. Pang elaborated, “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.”

“With an average daily turnover exceeding $22 billion and over 90 participating banks (including 18 that have a significant presence in Thailand), our USD RTGS system in Hong Kong provides ample USD liquidity and easily accessible correspondent banking service to Thai banks for the PvP service. This should help them develop a wider range of banking services and financial products in Thailand. At our end, banks in Hong Kong will find new correspondent banking opportunities through serving Thai banks in settling their USD FX transactions in Hong Kong. I am sure this new relationship will create opportunities for commercial cooperation on other fronts.”

Hong Kong to emulate North America as settlement hub

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” stated Mr. Pang.

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 US$962 billion equivalent in April 2010 to US$1,227 billion equivalent in April 2013.

“This is in line with the growth in the activities of the two existing cross border PvP links recorded by us. Since 2010, the combined average daily turnover of the links with Malaysia and Indonesia has doubled, reaching a new record of US$5.4 billion last month. This is equivalent to an annual growth of about 23%. Other economies in the region, especially those with significant FX transactions, can similarly be benefited from a reduction in settlement risk and increase in efficiency in the settlement of FX transactions by establishing a PvP link with the USD RTGS system in Hong Kong” concluded Mr. Pang.


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