HK CHATS USD, RMB, and Euro RTGS Funds Transfer Activity

 As a general rule, a country has a clearing system (payment system) or systems for its national currency only. That’s because payments are generally settled through accounts at the central bank or equivalent for each currency. 

In most countries there usually are separate systems dedicated to specific purposes—large value payments, small repetitive payments (whose delivery may not be as time-sensitive), check clearing, etc. 

As an example, the USA has FedWire for large domestic payments, CHIPS primarily for cross-border payments, ACH for small repetitive payments, and one Fed and one private check clearing system.

If you’re interested in a country’s payment systems, you can refer to the BIS CPMI’s Redbook which has details on the payment and settlement systems, e.g., securities of its 27 member countries. 

It also publishes data on volume and value of transactions in its member countries available through BIS Statistics. But note this information comes with a 1 year lag. Preliminary data for Year X is released in December Year X+1 with final figures released generally during 1Q Year X+2.

HK has four such system under CHATS (Clearing House Automated Transfer System):  

1. HKD (launched 1996)
2. USD (launched August 2000)
3. Euro (April 2003) and 
4. RMB (June 2007).

The rationale for the USD and Euro systems was to enable banks in HK and Asia to settle transactions among themselves during their (local) business hours.

The RMB service was set up to facilitate the volume of transactions between the HKSAR and Mainland China and later to facilitate cross-border RMB payments because the Mainland’s national payment system (CNAPS) (AKA “HVPS” in the BIS CPMI reports) only accepts Chinese characters. That makes it difficult for foreign banks' payments to be processed because they must first be translated into Chinese.

Each of HK’s four RTGS systems have a settlement institution (SI):

1. HKD – Hong Kong Monetary Authority
2. USD - Hong Kong Shanghai Bank HK
3. Euro - Standard Chartered Bank HK 
4. RMB – Bank of China HK

Each of three banks listed is a HK incorporated subsidiary of their parent. They also act as the issuers of HKD currency notes.

Similar to other systems—CHIPS or CIPS—there are two classes of participants/members for CHATS HKD, USD, and Euros. RMB is handled differently as will be discussed.

1. Direct Participants (DP) that hold accounts with the SI and are the only institutions that can input payment orders directly into the system and that receive credits from the system. 
2. Indirect Participants (IDPs) work through a DP with whom they have a correspondent account which the DP debits or credits. They do not have accounts with the SIs.

Hong Kong Interbank Clearing Limited (HKICL) runs the computer infrastructure for each system. It does not make payments. It performs the processing of information on payments and sends that information to the SI’s who then debit or credit the DP’s accounts on their books.

If the DPs are acting on behalf of IDPs, they in turn debit or credit the correspondent accounts they hold for the IDPs for transactions in CHATS.

All communications between the DPs, HKICL, and the SIs are transmitted via SWIFT as is currently the case with CIPS.

Banks outside of HK participate in CHATS HKD, USD, and Euro systems but as IDPs, subject to approval of the relevant SI and HKMA, except of course for HKD where the HKMA is the SI.

Banks outside of HK may participate directly in CHATS RMB by opening an account with the SI, BoC HK, subject to approval by the SI and the HKMA. Note that difference.

You can find a list of participants for each system here.

Or a master list here for all four currencies sorted by membership status and country. This is quite useful as it shows the status of an individual bank’s participation in each of the four currency CHATS as well as breaking out banks by country.

There are also other lists for HKICL's cross border services with the Mainland here.

Now to the volume statistics.

I’ve prepared two charts.

1. One for the USD and RMB.
2. And a second for Euros. 

The second chart is necessary because the Euro volume is a fraction of the other two currencies.

Note the charts start in 2007 the year CHATS RMB began service.

OECD Statistics were used for conversion of RMB and Euro clearing into USD equivalents. 

Source of the actual clearing data is the HKMA's Table T031201 from its Monthly Statistical Bulletin. 

If you’re interested in value of transactions from the year “dot”, you can refer to T031201.

One further word of introduction.  Well OK, more than one word.  But that's what you'd expect from AA.

Typically, there are two types of payments reflected in such statistics:

1. Interbank Transactions – Settlement of FX and deposit placement transactions
2. Customer Transactions – Commercial and personal payments

Generally interbank transactions are the much larger amount. 

That’s almost certainly the case here.

Why?

CLS International Bank which is the primary global service for netting FX transactions do not currently handle transactions denominated in RMB. As per the HK CHATS participants list, CLSIB only appears to for HKD CHATS. It does not appear as a member of the other CHATS currency clearing arrangements.

If you’re wondering why netting FX transactions and thus netting FX settlement risk is a “big deal”, take a look at this article on Herrstatt Bank which brought this risk to the fore with a “crash”.

As is clear from the above, RMB payments dwarf those in the USD.

For the first four years after RMB CHATS was founded its volumes compared to USD CHATS were small.  So small they don't show up in the chart above.

The USD equivalent of RMB payments was USD 5 billion, USD 22 billion, USD 14 billion, and USD 138 billion respectively during those years.

In 2012 and 2015 RMB CHATS service extended its operating hours and cutoff times to accommodate those Clearing Members not in Hong Kong.

Of note is the fact that of the 209 RMB Clearing Members 65 are banks outside of HK, mostly--but not all--branches of PRC banks.

RMB CHATS also handles RMB check clearing and some securities settlement services. 

As for USD CHATS, yearly volumes seemed to have reached a plateau at about USD 10 trillion. Compare that to the USD 1.5+ trillion processed by NY CHIPS each business day to get a sense of the relative HK CHATS position in global USD clearing.

Another important point to note: USD clearing transactions in HK take place on the books of HKSB Hong Kong. A USD CHATS participant can use those funds to make a payment in USD CHATS. 

However, if it wants to use its USD funds for a payment to a bank in Europe or the USA, it’s very likely that that payment would transmit NYC via CHIPS.

One other interesting factoid is that USD denominated credit card transactions for (China) Union Pay International transit USD CHATS.

As mentioned above, Euro CHATS are not included in the above chart because the volumes are relatively small and really wouldn’t show up.  

So here's a separate chart.

In 2007 the USD equivalent of Euro clearing was some USD 383 billion. Since then volumes have decreased to around USD 100 billion. 

Part of the explanation is the number of participants as the chart below shows. 

HK CHATS PARTICIPANTS
	HKD	USD	RMB	EUROS
DIRECT	161	111	209	37
INDIRECT	NA	86	NA	17
TOTAL	161	197	209	54

There just doesn’t seem to be much interest in Euros among HK and other Asian banks.

Clearly, there is strong interest from around the world in CHATS RMB clearing with 209 Clearing Members (DPs), 65 of which are banks outside of HK. That strong interest is reflected in the annual clearing volumes of RMB through HK which currently dwarf those handled by CIPS. 

Earlier post on CIPS here..

Update on CIPS China – Impressive Progress But .

 

Back some four years ago there was a great deal of ideologically-driven hysteria from the usual sources that the creation of China’s Cross-Border Interbank Payment System (CIPS) sounded the death knell for the US dollar.

I wrote a post then that “put a finger in that optic”.

Four years later it’s time for an update.

Summary

CIPS has come a long way since 2015, but still lags US dollar cross-border payment systems. Also it lags the existing cross border RMB payment system CHATS in Hong Kong, as a forthcoming post will demonstrate.

Analysis

From 2016 through 2019 CIPS has grown remarkably both in terms of value (648%) and number (678%) of transactions.

In 1Q2020, CIPS processed 444,000 payments equivalent to US$ 1.37 trillion. It seems poised to post a 12% increase over 2019.

Over its “life” there has been an equally impressive growth in number of participants.

There are two types of participants: Direct and Indirect.

What is a Direct Participant (DP)?

It is a bank located with Mainland China that has an account with CIPS and the Chinese National Payment System (CNAPS) aka HVPS. Think of HVPS as the Chinese equivalent of the US Fedwire. These are the only banks that may directly input payments into and receive payments the CIPS system.

The DPs include foreign owned banks in the PRC. These are called "FMIs" in the CIPS “literature”

What is an Indirect Participant (IDP)?

It is a bank located in Mainland China or overseas that has a correspondent account with one of more of the Direct Participants. Note that an IDP is not restricted to working with a single DP.

The IDP sends its payment orders to its Direct Participant correspondent for input into CIPS. The DP sends the payment order into CIPS, the DP's account with CIPS is debited for the payment.  The DP debits the IDP's account on its books. 

Any CIPS credits in favor of the IDP are credited to the DP's account with CIPS. The DP then credits the account of the IDP on its books. In this respect this is a mirror of CHIPS in New York City.

What are the benefits of CIPS?

1. CNAPS/HVPS operates in the Chinese language only. CIPS allows a bank to send in an English language instruction which CIPS then “translates” into Chinese.
2. It speeds up payments. CIPS participants send their payments direct to a DP in the PRC. They do not have to work through a bank in their time zone that first processes their payment, then relays it to one or more banks for payment in the PRC.
3. CIPS is open 24 hours five days a week plus an additional four hours providing coverage in all time zones.

As of 31 December 2015, CIPS had 19 Direct Participant Banks and 185 Indirect Participant Banks with 50 countries in the world covered according to the Peoples Bank of China “2015 China Payment System Development Report” page 116.

As of 31 July 2020, CIPS has 33 Direct Participants (list here).and some 951 Indirect Participants in 97 countries, according to CIPS Participants’ Announcement #55. 

Among the Indirect Participants were 421 banks in Mainland China, 310 in the rest of Asia, 124 in Europe 37 in Africa, 26 in North America, 18 in Oceania, and 15 in South America, according to the same CIPS information.

Again an impressive change from its beginnings in October 2015.

If you’re interested in following this topic or checking AA’s math, data on CIPS performance is available in PBC quarterly and annual payment reports. You can access them here. 

Growth is very impressive. Trillions of US Dollars in payments per year sounds very impressive.

But let’s take a look at comparatives.

Based in New York, CHIPS bills itself as the “largest private sector USD clearing system in the world”. A claim supported by the average daily value of the transactions it processes.

CHIPS says that it processes some USD 1.5 trillion per day.

According to the BIS CPMI Payment Statistics for 2018, that would seem to be an understatement. Dividing the aggregate amount shown there (USD 418 trillion) by 252, the average is more like USD 1.7 trillion per working day.

Whatever the amount CHIPS processes the equivalent of CIPS yearly volumes in roughly 3 business days.

Per the same CPMI report (Table 8), CHIPS processed 115 million messages in 2018 or 82 times the messages processed by CIPS.

CIPS has made remarkable progress but still lags in US Dollar cross-border payments. And lags the HK RMB CHATS payment system.

That is not surprising.

It is relatively “early days” for the RMB as a global currency.

CIPS is a "youngster" compared to HK RMB CHATS –founded in 2007.

The US Dollar, Euro, and Sterling still dominate cross-border financial transactions with roughly a 75% to 77% share of all payment orders transmitted through SWIFT.

(SWIFT does not process payments but is a secure communication service for the transmission of financial information).

Per SWIFT the RMB generally has around a 2% share in global cross-border payment traffic.

You can see the statistics here in SWIFT’s RMB Tracker for July.

Sign up for the RMB Tracker here.