The Exchange Fund is not a pure investment fund, and marking its assets to their market values is an accounting requirement related to the fund's need for liquidity, Monetary Authority Chief Executive Joseph Yam says.

In his lastest Viewpoint article, published on the authority's website today, Mr Yam said the fund plays an important role in maintaining the exchange rate and financial stability.

"In a long period of monetary and financial stability, particularly exchange rate stability, despite highly volatile international financial conditions, there is an understandable tendency for the community to overlook the fact that this stability is underpinned by, among other things, a substantial Exchange Fund with a clear statutory purpose.

"Although the Asian financial crisis of 1997-98 occurred only a few years ago when the Financial Secretary had to use the Exchange Fund extensively to maintain exchange rate and financial stability, some appear to have forgotten this important role of the Exchange Fund, and have come to regard the Exchange Fund as a pure investment fund. This perhaps reflects a certain complacency on the part of the community, something that, in my opinion, we can ill afford."

Noting people's hope that the Exchange Fund need not be used at all, Mr Yam said unforeseeable monetary shocks that require the use of the fund can never be ruled out. The fund's investment therefore places a lot of emphasis on liquidity, so that its assets, possibly in large volumes, can be readily turned into liquid funds when necessary.

Noting the authority has been marking both the financial assets and liabilities of the Exchange Fund to market since 1994, Mr Yam said the effect of increasing interest rates on the bond price cannot be ignored when claiming the rate of return.