Local banks now have an additional channel to settle foreign exchange transactions safely and efficiently, thanks to the inclusion of Hong Kong dollar in the Continuous Linked Settlement System which helps eliminate settlement risks for foreign exchange transactions.

The CLS System is a global clearing and settlement system for cross-border foreign exchange transactions operated by CLS Bank International.

The inclusion of the Hong Kong dollar into the CLS System enables foreign exchange transactions involving the Hong Kong dollar to be settled through the CLS System on a payment-versus-payment basis, thus removing the settlement risk in these transactions.

The finality of settlement for transactions made through CLS is protected by Hong Kong laws, and CLS is a clearing and settlement system designated under the Clearing & Settlement Systems Ordinance.

The Hong Kong dollar joins the Korean won, New Zealand dollar and South African rand to become the newly included eligible currencies of CLS Bank. Together with the existing 11 eligible currencies, there are now 15 currencies eligible for settling through CLS Bank.

Herstatt risk eliminated

The Monetary Authority's Deputy Chief Executive Peter Pang said the move is a further endeavour to eliminate the Herstatt risk, that is, settlement risk arising from the two legs of a foreign exchange transaction being settled in different time zones.

The US Dollar Clearing System launched in Hong Kong in 2000 and the Euro Clearing System in 2003 have helped provide an effective mechanism for removing the Herstatt risk in foreign exchange transactions involving the US dollar, the euro and the Hong Kong dollar, he added.