A tap issue of 91-Day Exchange Fund Bills totalling $6 billion will be tendered January 11 for settlement on January 14. Monetary Authority Chief Executive Joseph Yam said the move will help meet demand for Exchange Fund paper and satisfy banks' intraday liquidity needs.

The bills will be on offer solely for competitive tenders and will mature on April 14.

Tap issues are ad-hoc issues of Exchange Fund paper in addition to the regular tenders. The launch of the tap issue is primarily to address a rise in demand for Exchange Fund paper arising from banks' intraday liquidity needs. On the settlement day the Aggregate Balance will be cut by about $6 billion.

The issuance of new Exchange Fund paper is in line with the three refinements to the Linked Exchange Rate system introduced in May 2005. It is consistent with Currency Board principles since the additional issuance simply represents a shift of funds within the Monetary Base from the Aggregate Balance to the Exchange Fund paper. The Monetary Base remains fully backed by foreign reserves.

Rising demand

Demand for short-dated Exchange Fund paper for intraday liquidity to meet settlement obligations through the Real Time Gross Settlement System has risen in recent months, alongside the rise in equity-market transactions.

The volume of intraday repos of Exchange Fund paper has been rising, and has sometimes exceeded 80% of the Exchange Fund paper held by banks. However, the total issuance of Exchange Fund paper has been virtually unchanged since 1998. Strong demand for the paper is reflected in part in the widened spread for short-dated Exchange Fund paper against local interbank interest rates which exceeded 400 basis points at one time.

People who wish to tender for the bills can do so through any eligible market makers on the published list. Each tender must be for $500,000 or integral multiples thereof. Tender results will be published here, the Reuters screen (HKMAOOE) and Bloomberg. More details about the Exchange Fund Bills Issuance Programme can be viewed here.