Payment Rail Systems
Karthikeyan Sundaram
Karthikeyan Sundaram
May 27, 2024

How does the US Dollar RTGS System work in Hong Kong?

In this article, we explore how the US Dollar RTGS System operates in Hong Kong. We'll delve into its features, benefits, and the mechanics of its operation, highlighting how it ensures efficient and secure real-time gross settlements for US dollar transactions in the region. Discover the system's critical role in supporting Hong Kong's financial infrastructure and maintaining the integrity of its payment processes.
How does the US Dollar RTGS System work in Hong Kong?

The US dollar RTGS system (also known as US dollar CHATS) was launched in August 2000 with The Hongkong and Shanghai Banking Corporation as its settlement institution. The US dollar RTGS system not only processes US dollar interbank payments on an RTGS basis, but also handles US dollar bulk clearing and settlement of cheques and stock market-related payments.

Banks in Hong Kong are entitled to access the system and can apply for direct membership through the settlement institution or indirect membership by settling their payments through direct members. Participation of other financial institutions has to be approved by the HKMA and the settlement institution on a case-by-case basis.

The USD clearing system in Hong Kong is built on the same infrastructure and operates similarly to the HKD clearing system. The key functions of the USD clearing system are as follows:

  • USD Real Time Gross Settlement (RTGS)
  • Delivery versus Payment (DvP): USD-denominated debt securities through a linkage with the Central Moneymarkets Unit and Traded USD bonds through a linkage with Malaysia’s Real Time Electronic Transfer of Funds and Securities
  • Central Clearing and Settlement System Real-Time DvP
  • Payment versus Payment (PvP) for Foreign Exchange Transactions: USD/HKD, USD/EUR , USD/CNY, USD/Malaysian Ringgit , USD/Indonesian Rupiah and USD/Thai Baht
  • Clearing and Settlement of Local USD Cheques: Including demand drafts, cashier's orders, and remittance advices
  • USD Cross-Border Joint Cheque Clearing
  • Electronic Bulk Clearing for USD CCASS: Both same-day and next-day settlement and USD IAH related transactions
  • USD Credit Card Items: Interbank payments regarding transactions processed by UnionPay International
  • Electronic Bulk Clearing and Same-Day Settlement of USD Electronic Bill Payment and Electronic Donation Items
  • Clearing and Settlement of USD Electronic Cheques (e-Cheques)

Business Use Case

The USD RTGS in Hong Kong closely mirrors the HKD RTGS, with a few key differences. The USD Settlement Institution (SI) is a commercial bank, and each direct participant must open and maintain a settlement account with the USD SI, where USD transactions are settled across its books. The system adopts a two-tiered membership structure: banks in Hong Kong can join as either direct or indirect participants, while other institutions approved by the USD SI and the Hong Kong Monetary Authority (HKMA) can also join the clearing system.

Let's discuss an example of how the system works:

  • Initiation: HK Trading Ltd. initiates a payment to Global Imports Inc. through its bank, Bank A.
  • Bank A Processing: Bank A checks if HK Trading Ltd. has sufficient funds in its account. If everything is in order, Bank A sends the payment instructions to the USD RTGS CHATS system.
  • CHATS Processing: The USD RTGS CHATS system processes the payment in real time. It ensures that the transaction is secure and that Bank A has sufficient liquidity to cover the payment.
  • Settlement: Once the checks are completed, the payment is settled instantly. The funds are transferred from Bank A to Bank B, where Global Imports Inc. holds its account.
  • Confirmation: Global Imports Inc. receives the payment in its account at Bank B immediately. Both businesses receive confirmation of the transaction.

Advantages and Disadvantages

The USD RTGS CHATS system offers several advantages. It ensures immediate, real-time settlement of payments, reducing the risk of payment delays and providing certainty in the timing of payments. This system supports high-value transactions, making it ideal for businesses that require quick and secure transfers. Additionally, it operates with robust security measures, minimizing the risk of fraud. The system's integration with other financial infrastructure in Hong Kong enhances its efficiency and reliability, providing a seamless payment experience for users.

However, there are some disadvantages to the USD RTGS CHATS system. The cost of transactions can be relatively high, making it less suitable for smaller payments or businesses with tight budgets. Additionally, the system requires participants to maintain sufficient liquidity, which can be challenging for smaller institutions. The complexity of the system may also require specialized knowledge and resources, which can be a barrier for some businesses. Finally, while the system operates during business hours, it may not provide the 24/7 availability that some global businesses require.