A tidy two-way Convertibility Undertaking for the Aggregate Balance will be in place by June 20, and it is time to revisit the question of transferability between Certificates of Indebtedness and the Aggregate Balance, Monetary Authority Chief Executive Joseph Yam says, adding the public will be unaffected by any changes.

In his latest Viewpoint article on the authority's website, Mr Yam said following the refinements to the Linked Exchange Rate system introduced last month, the outstanding issue now is the question of transferability between Certificates of Indebtedness and the Aggregate Balance.

He noted the crucial component of the Monetary Base, in terms of ensuring that monetary management is effective, is the Aggregate Balance, which will by June 20 have a tidy two-way Convertibility Undertaking centred around 7.8, the Linked Exchange Rate.

Essential feature

"With the Aggregate Balance now enjoying a clear, two-way Convertibility Undertaking, there is theoretically no longer the need for separate convertibility undertakings for the other components of the Monetary Base, for as long as these other components are transferable with the Aggregate Balance," Mr Yam said.

"Exchange Fund paper is already transferable with the Aggregate Balance through automatic intra-day repos, which is an essential feature of our inter-bank payment system, and through over-night repos using the Discount Window. Furthermore, there is always the option to issue more Exchange Fund paper if there is a need to reduce the Aggregate Balance.

"The Certificates of Indebtedness can be made similarly transferable with the Aggregate Balance through issuing and redeeming them against the clearing balances of the three note-issuing banks."

Talks suggested

The Currency Board Sub-Committee has considered the matter again and has recommended that discussions be held with the three note-issuing banks, as they may be affected by this technical change.

As far as banknote holders - or the public - are concerned, Mr Yam said they will be unaffected by any changes.

"The banknotes that they hold continue to be fully backed by the US dollars in that the CIs backing the banknotes are part of the Monetary Base, and, as the published Currency Board accounts show, the Monetary Base, using the Linked Exchange Rate of 7.8, is more than fully backed by the US dollars held in the Exchange Fund."