The Monetary Authority has signed a memorandum of understanding with Bank Indonesia to establish a large-value payment-system link between Indonesia and Hong Kong, with completion set for 2009.

The two central banks will set up a link between the Indonesian rupiah real time gross settlement system - or RTGS - in Indonesia and the US dollar RTGS system in Hong Kong.

This will be a cross-border payment-versus-payment link between two RTGS systems for two different currencies in the Asian region, and will reduce foreign-exchange settlement risk during business hours in Indonesia and Hong Kong.

Under the payment-versus-payment mechanism, the delivery of a currency in a foreign-exchange trade is conditional upon the delivery of the other currency in the trade, thus reducing the risk of non-delivery of any currency through real-time settlement in the same time zone.

Confidence boost

The link will increase the efficiency and safety of payment systems in Indonesia and in the region, particularly the management of foreign-exchange settlement risk exposure for the foreign-exchange transactions involving the US dollar and Indonesian rupiah.

Banks in Indonesia will gain operational efficiency in executing the settlement of the foreign-exchange transactions and provide an assurance to their counterparties of their ability to settle these transactions during Asian hours.