LegCo Paper No. CB(1) 154/96-97(01)

ills committee Paper
Banking (Amendment) Bill 1996
Origination of Mondex Value
and Multi-currency and cross border use of Mondex

Introduction

1. In response to Members’ request, this paper provides further information on:

  1. whether Mondex value could be created without the HKMA’s knowledge; and
  2. safeguards on multi-currency and cross border use of Mondex value.

Whether Mondex value could be originated without HKMA’s knowledge

2. It should first be noted that unissued Mondex value stored on the purse of the Mondex Originator does not have any purchasing power - it is analogous to the banknotes printed but not issued in the vault of the note printing plant. It is not "activated" until it is transferred to the member bank’s purse against payment of the equivalent value by the member bank to the Originator. Under the Transfer Rules of the Mondex scheme, the Originator’s purse is prohibited from transferring value to a merchant’s or customer’s purse, and can only transfer value to an overseas originator for cross border settlements (see next section) or member bank’s purse for distribution of Mondex value to member bank’s customers. This provides a built-in safeguard against creation of value by the Originator without going through its member banks. If necessary, the HKMA may request the local Originator to obtain an independent confirmation from the Global Key Centre, which manufactures Mondex value (see below), on the amount of Mondex value ordered by and manufactured for the local Originator.

3. As regards the procedures for manufacturing Mondex value, Mondex value is "manufactured", on the instructions of an Originator, within the Global Key Centre (GKC) located in the UK. Such "manufacturing" involves the process of loading encrypted electronic information representing electronic value to a temper-resistant IC chip on the Originator’s card. There is dual control of value manufacture where both the representatives of Mondex International (the company which oversees the global operation of the Mondex scheme) and the Originator will be present during the value manufacture process. Every stage of the value manufacture operation is audited to ensure that all computer chips are fully accounted for, including those that fail testing and have to be discarded. The security and control of GKC has been reviewed by an independent accounting firm at the request of the Bank of England.

4. The HKMA considers that the risk that Hong Kong dollar denominated Mondex value can be created without the HKMA’s knowledge is small. The local Originator would be required to provide periodic reports to the HKMA on the amount of Mondex value originated, issued and outstanding. As stated earlier, the HKMA may seek independent confirmation from the GKC on the amount of Mondex value ordered by and manufactured for the local Originator (although value on the Originator’s purse is, in practice, not "activated" until it is transferred to a member bank’s purse). As for Mondex value issued and transferred to member banks, payments must be made by the member banks to the Originator in return for such Mondex value. Hence the Originator cannot issue value without a corresponding increase in its assets, and this can be verified through the periodic reports required by the HKMA.

5. It should also be noted that in approving the Originator as a special purpose vehicle, the HKMA would need to be satisfied that it has adequate systems of internal controls and accounting systems, and that the management of the company is fit and proper. With these safeguards, the HKMA should be able to rely on the Originator to provide accurate information and returns on its operation. If necessary, the HKMA has the power under the Banking Ordinance to require the auditor of the Originator to report on the state of affairs and systems of control of the Originator.

6. In view of the above, it is considered that the existing procedures for ensuring accurate information about the amount of Mondex value issued and outstanding are sufficient.

Safeguards on multi-currency and cross border use of Mondex value

7. Following the concerns raised by Members on multi-currency and cross border use of Mondex value, the HKMA has obtained further information from the Hongkong Bank on the matter. The relevant correspondence is at Annex.

8. The bank has confirmed that all Mondex value in Hong Kong dollar (HKD) denomination will only be originated and issued by the local Originator. That is, even if HKD Mondex value were to be used internationally, it will be originated by the local Originator in Hong Kong. Details of how the value is to be transferred and distributed to overseas customers are still being examined by Mondex. It is however important to note that regardless of whether the HKD Mondex value is sold and used locally or abroad, all such value will be originated from Hong Kong by the local Originator and will be backed up by HKD assets held in Hong Kong, and on which HKMA’s supervisory powers will be applicable.

9. The situation in respect of foreign currency Mondex value would be similar, i.e. such value will be issued by its respective overseas Originator which will provide the backing for such foreign currency Mondex value, whether it is used in the place of origination or in other countries like Hong Kong.

10. Mondex is aware of the various issues involving multi-currency and cross border use of Mondex value. The settlement and operational procedures require detailed examination, and Mondex is still formulating its policies in this area. Multi-currency and cross border use of Mondex value will not be featured in the soft launch, and this will be a medium term development. Mondex has undertaken to consult the HKMA on details in due course.

11. The HKMA considers that as the policies and procedures for multi-currency and cross border use of Mondex are still being developed, it is difficult at this stage to introduce any specific regulations for such use.

12. The HKMA will closely monitor the development in this area. As the Bill already contains provisions which allow the HKMA to impose conditions on the authorization of stored value cards, the HKMA will be able to set appropriate regulations, as and when necessary, in respect of multi-currency and cross border use when such procedures and policies for such developments have become clearer and more certain.

Hong Kong Monetary Authority
October 1996

Last Updated on 15 December 1998