30 June 1999

The Chief Executive
All authorized institutions

Dear Sir/Madam,

Guidance Note on the Year 2000 Problem No. 3/99
Demand for Banknotes

As you are aware, the Year 2000 problem has a behavioural aspect, i.e. customer and market behaviour may be affected by the perception of the problem, irrespective of the actual operational risks. One possible manifestation of such behavioural impact is that the public may wish to hold more cash around the century date change. In any case, given the additional demand for cash for the millennium celebrations, the demand for banknotes is expected to be higher in the run up to the Year 2000 than normal year-end demand. This will have implications on both the liquidity management and the cash handling functions of authorized institutions (AIs). I am therefore writing to advise you to prepare well in advance for these potential issues. This Guidance Note concentrates on the cash handling functions. Liquidity management issues will be dealt with separately at a later stage.

It is well recognised that the Hong Kong banking sector is one of the best prepared in the world for the Year 2000. That alone however is not sufficient to minimise possible behavioural problems which also depend on public awareness and confidence. For these reasons, we have required AIs to carry out customer awareness programmes and have commenced our own communications efforts to keep the public informed of Year 2000 progress in the banking sector. These efforts should help the public to make more rational decisions regarding the Year 2000 issue.

The HKMA has also been working with the three Note Issuing Banks (NIBs) to increase the supply of banknotes to meet demand in the run up to Year 2000. In fact, the additional orders placed for the printing of banknotes will increase the aggregate banknote reserves from the normal level of HK$90 billion to HK$150 billion by the end of this year, representing an increase in the ratio of banknotes in reserves to circulation from 100% to 160% approximately. The HKMA and the NIBs have also been discussing additional arrangements that may be useful for the transportation and delivery of banknotes to banks during the Year 2000 period.

Notwithstanding these efforts, the HKMA believes that the AIs' management should put in place appropriate banknotes handling arrangements in the run up to the Year 2000, and to stress test them in advance to the extent possible. This is particularly important to those AIs which have retail operations. In general, your institution is advised to consider the following measures:

Preventive measures

1. Strengthen awareness among your customers that your institution has been taking adequate steps to address the Year 2000 problem. Inform them through appropriate channels that these steps are to ensure that business will be as usual prior to, during, and after the Year 2000 transition.
   
   
2. Rigorously test all banknotes-related machines such as cash counting machines, ATMs and connections to ATM network providers to ensure that they are Year 2000 compliant.
   
   
3. Provide appropriate assurances to customers to allay unnecessary anxieties on their part.
   
   
4. Monitor any changes, especially shortening, in deposit maturities.

Risk mitigation measures

5. Assess the amount of banknotes that may be needed in the run up to the Year 2000. Factors to be considered include demand in previous corresponding periods, withdrawal trends in the months before the millennium, shortening in deposit maturities, the long holidays (including the Government proposed holiday on 31.12.1999, the millennium horse racing and other celebrations), additional demand for cash as a precautionary measure, etc.
   
   
6. Liaise with your corresponding NIB(s) well in advance to agree on the amount of banknotes required and the delivery arrangements.
   
   
7. Review the existing arrangements and capacity for distribution and storage of banknotes e.g. manpower, vault capacity, insurance coverage, related vendors such as armoured carriers and security companies. If applicable, consideration should be given to suitably diversifying the stocks of banknotes to other main branches so as to minimise the frequency of transportation required during the peak demand period.
   
   
8. Review the needs for replenishing ATMs more frequently and plan for additional manpower required during the peak demand period e.g. on Year 2000 critical dates and particularly the period from 31 December 1999 to 3 January 2000. Review the appropriateness of messages displayed on screens when the ATMs, for example, temporarily run out of cash, have to suspend services for reasons not relating to Year 2000, accept certain types of cards only (which might happen when a particular shared network encounters operational difficulties), so that the public will not be mistaken or panic.
   
   
9. Set up ATM hotline service for customers to ease concerns if over-usage slows abilities of ATMs to meet customer needs.
   
   
10. There might be larger demand for cashier orders and bank drafts in the run up to Year 2000. AIs' management should review the existing arrangements to ensure that adequate inventory of the required stationery and effective procedures will be in hand to meet any additional demand in an efficient manner.
    
    
11. Consideration may also be given to entering into standby arrangements with an alternative NIB(s) and/or AI(s) with respect to securing an additional source of banknote supply in case of need.
    
    
12. Find out from system providers such as EPSCO, JETCO, MasterCard and Visa what their contingency measures are and how they might impact upon your cash handling operations.

Contingency measures

13. Draw up contingency measures for manually operating receipt, storage, retrieval and payment of cash in case there are problems with those machines handling these functions. These measures should be rehearsed and if extra manpower and resources are needed, they should be planned for well in advance.

The importance of adequate preparations for potential increases in the demand for banknotes should not be underestimated. While the above measures provide a general guide, they are by no means comprehensive and exhaustive. The HKMA expects institutions, especially those with retail operations, to develop appropriate responses to this scenario having regard to their own position and market developments. The institutions should also stay in close touch with their corresponding NIB(s) and continue to review and update the measures in the run up to the Year 2000. In the coming months, the HKMA Year 2000 on-site teams will conduct examinations on selected institutions to determine that they are taking appropriate measures to address these issues.

Given the sensitivity over the Year 2000 problem, some measures contained in this Guidance Note could be picked up by people who might want to cause disruptions to your operations for whatever reasons, especially during the Year 2000 period. You should therefore be extra vigilant in relation to whom these measures are disclosed. Should you have any questions on the above, please contact our Mr. Pont Chiu, Head (Support Services), at 2878-8238, Mr. Philip Tse, Senior Manager (Currency), at 2878-8241 or Mr. Vincent Lee, Senior Manager (Banking Development), at 2878-1384.

c.c. Chairman, HKAB
       Chairman, DTCA
       General Manager, EPSCO
       General Manager, JETCO
       MasterCard International (Attn: Mr. Simon Hoi)
       Visa International (Attn: Mr. Ivanov Yim)
       SFS (Attn: Ms Vivian Lau)