HKMA, Euroclear Bank and JP Morgan to launch cross-border collateral Management service

22 June 2012

The Hong Kong Monetary Authority (HKMA) has announced the signing of bilateral agreements with Euroclear Bank and JP Morgan Worldwide Securities Services to cooperate in delivering a cross-border collateral management service, due to commence on Monday 25 June.

Bilateral agreements were signed this week by Peter Pang, the HKMA’s deputy chief executive, Olivier Grimonpont, general manager, regional head, Asia-Pacific of Euroclear Bank and Kirit Bhatia, managing director, head of technical sales, Asia ex-Japan of JP Morgan.

The HKMA says that the new service enables international financial institutions to use securities held with Euroclear Bank or JP Morgan as collateral in tri-party repo transactions with members of HKMA’s Central Money Markets Unit (CMU), to access liquidity from Hong Kong, particular the Hong Kong dollar and offshore renminbi (RMB).

Euroclear Bank or JP Morgan will act as tri-party collateral management agents to the repo transactions, ensuring that administrative obligations, such as collateral valuations, eligibility, haircuts and substitutions are carried out automatically on behalf of the two counterparties to the securitised deal.

The new arrangement is the first add-on service following the March launch of the pilot platform for the cross-border investment and settlement of debt securities between Euroclear Bank, HKMA and Bank Negara Malaysia. The HKMA says that further collateral management developments are foreseen, with the Authority to further expand the cross-border collateral management service to allow local financial institutions to use their securities as collateral to obtain foreign currency liquidity, such as the US dollar, from international financial institutions in the second half of 2012.

The collateral management service aims to develop and promote a cost effective and efficient repo market in Hong Kong. In turn, this helps enhance financial stability through the greater use of collateral to cover exposures in secured lending and borrowing. Finally, it also opens an efficient channel for financial institutions to widen their liquidity sources and obtain offshore RMB liquidity from Hong Kong. Many institutions have indicated interest in utilising the service when it becomes available to the market.

Peter Pang, deputy chief executive of the HKMA, said: “The launch of the cross-border collateral service is a timely and an effective solution for the market which will provide a solid foundation for the repo market development in future and enhance stability of our financial system. It will also facilitate the expansion of cross-market renminbi funding activities through the cross-border collateral management arrangement, and further strengthen Hong Kong’s role as the global hub for offshore RMB business.”

By Neil Ainger

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