HKMA launches new liquidity facility

The Hong Kong Monetary Authority (HKMA) today unveiled a new discount facility that will see the central bank accept government bonds as collateral in its liquidity operations for the first time.

The new repo facility, which will provide up to HK$10 billion ($1.2 billion) in overnight liquidity against Hong Kong dollar-denominated government bonds, aims to "provide greater flexibility for banks to manage liquidity", the HKMA said in a statement.

The central bank added it would obtain funding from the market as necessary to maintain the size of the ‘aggregate balance' – the level of interbank liquidity, comprising banks' clearing and reserve accounts at the HKMA, which make up part of the monetary base.

The HKMA has long operated a discount window accepting bills and notes from Hong Kong's Exchange Fund as collateral.

Like the Exchange Fund Paper discount window, the government bonds discount facility will operate on a two-tiered system. The first 50% of a bank's holdings of government bonds will be subject to interest at the base rate, while borrowings based on the second 50% will have to pay the base rate plus 5% or overnight Hibor, whichever is higher.

The market for Exchange Fund bills and notes (EFBN) is considerably larger than the market for government bonds. At the end of November, there were outstanding bills and notes worth HK$752.3 billion and outstanding government bonds worth HK$96.5 billion.

The government bond discount facility will begin operating on December 15.

‘Streamlining' tenors

The HKMA also announced today it would be "streamlining" the tenors of EFBN and government bonds with the aim of creating a "single benchmark yield curve".

Exchange Fund bills occupy the shorter end of the yield curve with maturities ranging from three months to a year. Notes have longer tenors, ranging from two to 15 years, while government bonds are issued at maturities of between two and 10 years. As such, there is currently a degree of overlap.

As of January 2015, the HKMA will seek to eliminate the overlap. Exchange fund notes will no longer be issued for maturities of three years and above, while government bonds will not be issued for less than three years. The overall volume of outstanding Exchange Fund paper will be maintained however, through the issuance of new Exchange Fund bills.

The HKMA said it expected to increase issuance of government bonds to keep pace with investors' demands for longer-dated paper as the Exchange Fund notes are phased out.