PvP cross-currency FX swap
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Box 1: Settlement of a foreign exchange transaction using the traditional network of correspondent banks and interbank payment systems in the currencies concerned
Box 8: Settlement infrastructure for foreign exchange transactions in Hong Kong
Hong Kong has four RTGS payment systems (CHATS1): the HKD CHATS system for the settlement of transactions in Hong Kong dollars and the USD CHATS, EUR CHATS and RMB CHATS for the settlement of foreign exchange transactions in the US dollar, euro and Chinese renminbi, respectively. These four systems are linked by a PvP system called the “Cross-Currency Payment Matching Processor” (CCPMP), which enables payment instructions to be settled simultaneously, thus eliminating settlement risk. The common operator of these four systems is a private company, Hong Kong Interbank Clearing Ltd (HKICL), owned jointly by the local central bank (Hong Kong Monetary Authority, HKMA) and an association representing the Hong Kong banking industry, Hong Kong Association of Banks (HKAB). The USD CHATS system also set up a PvP link with Malaysia’s RTGS system (RENTAS)2 in November 2006 and with Indonesia’s RTGS system (BI-RTGS) in January 2010.
The chart above presents the PvP mechanism, taking as an example the settlement of a USD/HKD trade. Bank A sells HKD to Bank B in exchange for USD. On the settlement day, (i) Bank A sends a payment instruction to Bank B via the HKD CHATS system, (ii) Bank B initiates a “mirror” instruction via the USD CHATS system; (iii) the HKD and USD CCPMP systems link the two instructions. The HKD and USD CHATS systems hold in their respective settlement accounts funds in HKD for Bank A and funds in USD for Bank B. If the two banks have sufficient liquidity in the currencies involved, (iv) the two payment systems transfer the funds to the respective counterparties simultaneously.
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