Technical Assistance Report Project Number: 40030 August 2006 ASEAN+3 Regional Basket Currency Bonds (Financed by the Japan Special Fund) The views expressed herein are those of the consultant and do not necessarily represent those of ADB’s members, Board of Directors, Management, or staff, and may be preliminary in nature. ABBREVIATIONS ABMI ADB APEC ASEAN ASEAN+3 BIS CBO ECU EMEAP EMS OREI PAIF PRC RBCBs RETA TA WG – – – – – – – – – – – – – – – – – Asian Bond Markets Initiative Asian Development Bank Asia-Pacific Economic Cooperation Association of Southeast Asian Nations ASEAN, Japan, People’s Republic of China, and Republic of Korea Bank for International Settlements collateralized bond obligation European currency unit Executives’ Meeting of the East Asia-Pacific Central Banks European Monetary System Office of Regional Economic Integration Pan-Asian Bond Index Fund People’s Republic of China regional basket currency bonds regional technical assistance technical assistance working group TECHNICAL ASSISTANCE CLASSIFICATION Targeting Classification Sector Subsector Themes Subthemes – – – – – General intervention Finance Capital markets and funds Sustainable economic growth, regional cooperation, private sector development Promoting macroeconomic stability, promoting economic efficiency and enabling markets, policy/institutional/legal/regulatory reforms NOTE In this report, "$" refers to US dollars. Head Director Team leader Team member M. Kawai, Office of Regional Economic Integration (OREI) S. Madhur, OREI M. Miyachi, Senior Advisor, OREI C. Kaneko, Capital Markets Specialist, OREI I. INTRODUCTION 1. On 1 September 2005, the Association of Southeast Asian Nations (ASEAN)+31 Asian Bond Markets Initiative (ABMI) Working Group (WG) on New Securitized Debt Instruments requested the Asian Development Bank (ADB) to study the issuing of regional basket currency bonds (RBCBs) in Asia. The ABMI is a regional initiative established under the ASEAN+3 Finance Ministers’ Meeting. The President, under ADB’s 3-year Knowledge Products and Service Workplan 2006–20082, approved the technical assistance (TA) concept clearance on 3 October 2005.3 The TA design was discussed and subsequently endorsed by ASEAN+3 on 17 March 2006 at the ABMI Focal Group Meeting held at ADB. The design and monitoring framework is in Appendix 1. II. ISSUES 2. The lack of well-developed local currency bond markets was one of the causes of the 1997 Asian financial crisis. At that time, overdependence on bank financing forced borrowers to take on excessive short-term foreign exchange exposure to finance long-term projects that could only generate local currency revenue. This created two “mismatch” problems: (i) loan maturities became too divergent, to the detriment of both local creditors and borrowers; and (ii) the currencies in which the loans were made became vulnerable to exchange rate volatility, or worse, local currency exchange rate depreciation. When international confidence in one local currency caused a rapid depreciation against the US dollar, a payments crisis ensued, exacerbating the loss in confidence across the region (the “contagion” effect). This led to banking and currency crises in several countries. With improved global macroeconomic conditions in recent years and the structural reforms implemented throughout the region, most crisis-affected economies recovered and have returned to robust growth. However, the lack of efficient bond markets in the region remains, so the absence of alternative sources of long-term local-currency finance continues to be a source of potential financial vulnerability. 3. With this in mind, ASEAN+3 finance ministers established the ABMI in August 2003 to boost development of local currency bond markets. Currently, the ABMI Focal Group4 and four working groups focus on (i) expanding and diversifying issuers on local currency bond markets, and (ii) developing an environment conducive and attractive to bond market participants. The working groups offer policy recommendations to ASEAN+3 finance ministers, who decide on the next steps for bond market development within the region. ADB has supported the ABMI since its inception, particularly through the provision of TA.5 The ABMI also complements work done 1 2 3 4 5 ASEAN+3 includes the 10 members of the ASEAN (Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam), Japan, People’s Republic of China (PRC), and Republic of Korea. ADB. 2005. Three-year ADB-wide KPS Work Plan 2006-2008. Manila The TA first appeared in ADB Business Opportunities on 18 January 2006. There were initially six WGs: (WG1) New Securitized Debt Instruments (chaired by Thailand); (WG2) Regional Credit Guarantee and Investment Mechanism (the PRC and the Republic of Korea); (WG3) Foreign Exchange Transaction and Settlement Issues (Malaysia); (WG4) Issuance of Bonds Denominated in Local Currencies by Multilateral Development Banks, Foreign Government Agencies (PRC); (WG5) Rating Systems and Dissemination of Information (Japan and Singapore); and (WG6) TA Coordination (Indonesia, Malaysia, and Philippines). The WGs were reorganized in 2005: WG 4 achieved its objectives and was dissolved, while WG5 became WG4 and was renamed Working Group on Rating Systems. WG6 was moved directly under the Ad-Hoc Support Team to the Focal Group, an apex body that oversees overall ABMI progress. ADB currently provides (or has provided) TAs for the following ABMI initiatives: ADB. 2003. Technical Assistance for ASEAN+3 Regional Settlement Linkage. Manila (TA 6161-REG, for $300,000, approved on 19 December); ADB. 2003. Technical Assistance for ASEAN+3 Regional Guarantee Mechanism. Manila (TA 6127-REG, for $800,000, approved on 27 October); ADB. 2005. Technical Assistance for ASEAN+3 Regional Multicurrency 2 by other regional forums on bond market development, including the Executives’ Meeting of the East Asia-Pacific Central Banks (EMEAP) and Asia-Pacific Economic Cooperation (APEC).6 4. In line with the recommendations included in ADB’s report on the ASEAN+3 Regional Multicurrency Bonds 7 (footnote 7), a road map was designed with one long-term goal: the possible issuance of Asian basket currency bonds for the region.8 The road map comprised a three-stage development process for multicurrency bonds in the region. The report explored reverse dual currency bonds 9 as the first step for developing multicurrency bonds. It recommended developing RBCBs, comprising a pool of assets denominated in various Asian currencies as the next stage. Developing synthetic currency bonds10 for the region is the final stage. WG1 requested ADB to undertake the second phase of the study and to explore the feasibility of developing RBCBs for the region. 5. The request for this study comes at a time when the region is experiencing relatively volatile foreign exchange movements against the US dollar. While the present cycle may not last long, a period of currency uncertainty has begun. Given the unstable macroeconomic environment and the fact that more economies are moving toward more flexible exchange rate regimes, there is a greater urgency to examine modalities for closer exchange rate coordination across the region. Foreign exchange stability will reduce risks, reducing uncertainties caused by exchange rate volatility, and promoting greater interregional and intraregional trade. A study on exchange rate modalities, as part of the study on developing RBCBs, will provide a platform for further discussion of these issues. 6. Market experience and anecdotal findings also support the case for creating RBCBs. The European currency unit (ECU) experience under the European Monetary System (EMS), established over 25 years ago, may be instructive for Asia. ECU-denominated basket bonds were eventually accepted when it became apparent that ECU notes could lower portfolio volatility and reduce risks. The success of ECU-denominated basket bonds, to some extent, was instrumental in developing Europe into an integrated bond market. Several studies advocate the development of RBCBs.11 7. RBCBs offer several advantages: (i) they provide long-term funding and investment alternatives in local currency instruments, thus reducing the risk of a financial crisis; (ii) they Bonds. Manila (TA 6244-REG, for $400,000, approved on 3 June); and Japan Fund for Information and Communications Technology 9040: the AsianBondsOnline website (http://asianbondsonline.adb.org) and the Asian Bond Monitor. 6 EMEAP initiatives include enhancing the demand-side for bond market development through the Asian Bond Funds 1 and 2. APEC initiatives included the Initiative on Development of Securitization and Credit Guarantee, and Harmonization of Bond Market Rules and Regulations. 7 ADB. 2005. Technical Assistance for ASEAN+3 Regional Multicurrency Bonds. Manila. 8 Support for Asian basket currency bond issuance was endorsed at the ASEAN+3 Finance Ministers’ Meeting held in Istanbul in May 2005. 9 A reverse dual currency bond is issued with the principal and repayment in one currency with a low interest rate, while the coupon is repaid in another currency with a higher interest rate. 10 A synthetic bond uses several Asian currencies for defining a bond’s principal, coupon, and repayment. 11 See Itoh, T. 2003. Promoting Asian Basket Currency Bonds. Tokyo. University of Tokyo; and Dammer, C., and R. McCauley. 2006. Basket Weaving: The Euromarket Experience with Basket Currency Bonds. Bank for International Settlements (BIS) Quarterly Review March 2006: 79 – 92. BIS. Basel, Switzerland. Despite the merits of RBCBs, outlined in the latter report by C. Dammer and R. McCauley, the following issues should be addressed in developing an RBCBs market: (i) effects on domestic bond markets, (ii) loss of liquidity, and (iii) linkage between private and public sector use of Asian currency unit-denominated bonds. However, the authors concluded that ultimately the issuers, particularly public institutions, need to weigh any policy benefits of basket issuance against any opportunity loss borne by borrowers. These issues will be examined in detail in the proposed regional TA. 3 widen the investor base regionally as bonds denominated in a basket of Asian currencies can appeal to both intraregional and extraregional investors; (iii) a diversified pool of currencies in the basket bond minimizes currency risks for both issuers and investors;12 (iv) improved pricing and lower funding costs from economies of scale help issuers, compared with single currency bond issuance; (v) they provide an optimum structured portfolio for investors as risks are spread out and reasonable returns are largely assured; and (vi) they promote greater acceptability of Asian currencies internationally in the long run. 8. The current macroeconomic environment and the benefits of RBCBs have stoked interest in this type of instrument. However, the perceived impediments to developing efficient and liquid ASEAN+3 bond markets have discouraged the private sector from introducing RBCBs to the market. In addition, there is no guarantee that an issue will succeed or that subsequent issues will cover the research and development cost as initial structuring costs can be relatively high, so returns on the investment may not be viewed attractive enough in view of the high cost and risks. The proposed ADB study could ease some of these uncertainties by showing support for developing a new financial product that could help spark regional bonds market development. 9. The design of a RBCBs market should assist individual Asian economies to meet economic challenges, so RBCBs issuance should be both substantial and sustainable. It is imperative that a RBCBs market must be based on real economic and commercial needs. With this in mind, in its preliminary work, WG1 suggested that a feasible and effective way of developing RBCBs is to use a structure of asset-backed securities, enabling a pool of underlying assets to be created and denominated in multiple Asian currencies. Possible underlying asset classes could include (i) government bonds, (ii) residential mortgages, (iii) account receivables, and (iv) sector loans such as those to small and medium-sized enterprises.13 Growing securitization markets, such as commercial mortgage-backed securities, residential mortgage-backed securities, or collateralized bond obligation (CBO) markets will provide significant opportunities for developing RBCBs. 10. Several issues must be addressed to ensure that the structure of the initial RBCBs is viable. As bond market development varies across economies, a limited number of currencies from countries with well-developed bond markets should dominate the basket; other currencies may be included later. Both public and private sector roles should be considered when determining how the new product development is sequenced. Incentives for issuers and investors will be crucial, as the success of any RBCBs hinges largely on the support of market participants. Impediments that inhibit the introduction or growth of RBCBs in Asia should be addressed. To properly structure and develop RBCBs in the region, an assessment is needed of securitization laws relevant to RBCBs issuance; and laws relating to bankruptcy, asset liquidation, disclosure, taxation, and special purpose vehicles. Helping define an appropriate legal framework will also assist ASEAN+3 economies as they move toward regional 12 In Shimizu and Ogawa. 2004. Risk Properties of Asian Monetary Unit Denominated Bonds. Tokyo. Analytical results showed that issuing a basket currency bond would contribute to reduced foreign exchange risk for bond issuers in East Asian economies (excluding those with exchange rate pegs). In addition, the currency basketdenominated bonds could reduce foreign exchange risk for international investors in many cases. R. McCauley and G. Jiang also find similar diversification benefits. (McCauley, R. and G, Jiang. 2004. Diversifying with Asian Local Currency Bonds. Bank for International Settlements [BIS] Quarterly Review. Basel: BIS [November]). 13 The first Pan-Asian collateralized bond obligations (CBOs) of Korean small and medium-sized enterprise loans were successfully issued in December 2004 and sold to investors in Japan and other Asian markets. Although the CBOs involved only two countries, their success prompted greater interest among ASEAN+3 economies to examine similar schemes with a view to using multiple Asian currencies and underlying assets. 4 standardization of bond market infrastructure. Finally, partial credit enhancement by bilateral or multilateral agencies should be explored if it helps the RBCBs market to develop. III. A. Impact and Outcome THE TECHNICAL ASSISTANCE 11. The TA aims to reduce regional financial vulnerabilities by offering ways to provide funding and financing alternatives to bond markets. The expected outcome is to increase the volume of cross-border bond issuance and investment in Asian currency bond markets in the region. This will assist governments by offering policy recommendations that facilitate the development of RBCBs in the region, remove impediments, and encourage capital market development for new debt instruments. The TA complements efforts by ADB’s Office of Regional Economic Integration (OREI) to (i) promote regional economic policy dialogue by contributing active support to ABMI, and (ii) conduct research in the area of regional cooperation and integration. B. Methodology and Key Activities 12. The study will identify relevant lessons for Asia from European experiences. Given that the success of the RBCBs will be mainly market-driven, ADB and the TA consultants will consult with market participants through meetings and/or conferences as well as increasing existing dialogue with all other stakeholders. The TA design will be relatively flexible to accommodate views from the private sector and government officials. ADB, together with the TA consultants, will communicate regularly with WG1 members to discuss the TA design and develop appropriate policy recommendations. The scope of the TA, with preliminary agreement from WG1 members, includes the following components. 13. In view of the rapidly changing bond market environment in the region, the study will review (i) recommendations made in an earlier study on the ASEAN+3 Regional Multicurrency Bonds (footnote 7), and (ii) the rationale of how RBCBs helps reduce regional financial vulnerabilities. The study will also identify the potential for RBCBs development within ASEAN+3 by defining the positive and negative aspects of RBCBs markets for investors, issuers, and intermediaries; and their contribution to bond market development in general. 14. The study will examine the experience of ECU-denominated basket currency bonds in terms of market development, including an analysis of (i) exchange rate adjustments by the Exchange Rate Mechanism, (ii) the role played by public and private sectors, and (iii) other macroeconomic adjustments that were required. Relevant lessons may also be drawn from the Asian Bond Fund 2.14 15. The study will identify the conditions necessary for the RBCBs market. Major impediments to creating RBCBs will be examined and a review of existing market conditions for entering RBCBs will be carried out. These assessments will help determine a suitable currency composition for the RBCBs. 14 The framework for Asian Bond Fund 2, launched by EMEAP in 2005, comprises two components: (i) the Pan-Asian Bond Index Fund (PAIF), and (ii) the Fund of Bond Funds. The PAIF and eight sub-funds are passively managed by private sector fund managers against a Pan-Asian bond index and relevant domestic bond indexes for the eight EMEAP markets (http://www.emeap.org). Given the relevance of the PAIF to the development of RBCBs, lessons learned will be included in the study. 5 16. The study will design its recommendation based on practical cases. For example, an asset-backed securities product could be structured backed by a pool of underlying assets that are denominated in multiple Asian currencies. Various types of underlying assets (such as government bonds, mortgage loans, and account receivables) and various types of loans will be analyzed along with their potential market demand. The study will identify the possible issuers and investors, as well as currencies that could make up the first RBCB issuance. Regulatory, infrastructure, or market impediments will also be identified. The role of government and the private sector will also be assessed to ensure proper sequencing of product development and market entrance. 17. The study will propose recommendations to WG1 on what can be done to enable and encourage RBCBs market development. The study will cover developing member countries such as Indonesia, Malaysia, PRC, Philippines, and Thailand. C. Cost and Financing 18. The total cost of the TA is estimated at the equivalent of $650,000. The TA will be financed on a grant basis by the Japan Special Fund, funded by the Government of Japan. Detailed cost estimates and financing plans are in Appendix 2. Participating ASEAN+3 members have financed the costs of individual WG1 activities and intend to continue to do so. D. Implementation Arrangements 19. ADB will be the Executing Agency for the TA. In consultation with WG1, especially the WG1 chair, OREI will administer the TA and supervise the work of the TA consultants. 20. Three international consultants (one bond markets specialist, one securitization specialist, and one financial market specialist) will be hired for a total of 16 person-months. The consultants will have extensive experience in bond markets and securitization market development in the region. The outline terms of reference for consultants are in Appendix 3. The consultants will be hired and engaged by ADB as individual consultants in accordance with ADB’s Guidelines on the Use of Consultants. 21. The TA will be implemented over a period of 8 months and is expected to begin in September 2006, to be completed by April 2007. A series of consultation with market participants will be held in October 2006. Thereafter, the first draft report is expected to be presented to WG1 in November 2006. With market participants’ inputs, as well as those from government officials, the draft of the final report will be submitted to WG1 in February 2007. A final presentation to WG1 is expected in March 2007. The outline of the final report is in Appendix 4. Upon completion, the report will be disseminated within ADB and on appropriate websites;15 external publication of the report will be subject to approval by WG1 members. IV. THE PRESIDENT'S DECISION 22. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance not exceeding the equivalent of $650,000 on a grant basis for ASEAN+3 Regional Basket Currency Bonds, and hereby reports this action to the Board. 15 For example, http://www.asianbondsonline.adb.org. 6 Appendix 2 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Financial vulnerabilities in the region are reduced through the development of domestic and regional bond markets Outcome Increased number of both issuers and investors accessing ASEAN+3 bond markets Performance Targets/Indicators Size and liquidity, including both number and volume of bond issuance and liquidity in regional bond markets Data Sources/Reporting Mechanisms Market statistics on growth of bond markets in ASEAN+3 Assumptions and Risks Assumption • Conducive market conditions Increased cross-border issuance, inbound and regional investment, and trading in Asian currency-denominated bonds Market statistics on crossborder issuance and investments in Asian currency-denominated bonds Assumptions • Conducive market conditions • Adequate commitment and support from governments Assumptions • Access to information and data • Sufficient market consultation and input reflected in the report for implementation Risk • Lack of agreements or consensus obtained in the process of finalizing proposals by ASEAN+3 officials Output Recommendations on road map and proposed steps to develop ASEAN+3 regional basket currency bonds market ASEAN+3 governments agree to issue ASEAN+3 basket currency bonds Current indicators and available statistical data from government agencies and financial institutions Feedback from market participants, self-regulatory organizations and policymakers through market consultations, seminars, and surveys RETA final report Appendix 3 7 Design Performance Summary Targets/Indicators Activities with Milestones Data Sources/Reporting Mechanisms 1.1 Conduct consultation with market participants (October 2006). 2.1 Present preliminary findings to WG1 (November 2006). 3.1 Present final report to WG1 (March 2007). Assumptions and Risks Inputs • ADB • International consultants with appropriate skills and expertise • ASEAN+3 governments • Market participants, including private sector Inputs ADB – $650,000 16 person-months of international consulting ($480,000) Travel expenses for international consultants ($75,000) Printing reports and communications expenses ($10,000) Presentation to WG members and market players ($50,000) Miscellaneous administration and support costs ($10,000) Contingencies ($25,000) ADB = Asian Development Bank; ASEAN = Association of Southeast Asian Nations; ASEAN+3 = ASEAN, Japan, People’s Republic of China, and Republic of Korea; RETA = regional technical assistance; WG1 = working group1. 8 Appendix 2 COST ESTIMATES AND FINANCING PLAN ($'000) Total Cost Item Asian Development Bank Financinga 1. Consultants a. Remuneration and Per Diem i. International Consultantsb b. International and Local Travelc c. Reports, Printing, and Communications 2. Training, Seminars, and Conferencesd 3. Miscellaneous Administration and Support Costs 4. Contingencies Total a b 480.0 75.0 10.0 50.0 10.0 25.0 650.0 Financed by the Japan Special Fund, funded by the Government of Japan. Assuming 16 persons-month of international consulting at $30,000 per month. c Assuming 15 international trips at $5,000 per trip. d Assuming two seminars (presentation to Working Group 1 and/or market consultation) at $25,000 per seminar. Source: Asian Development Bank estimates. Appendix 3 9 OUTLINE TERMS OF REFERENCE FOR CONSULTANTS A. Bond Markets Specialist—Team Leader (international, 6 person-months) 1. The team leader will have extensive experience in capital markets, especially bond markets, and have working experience with government officials in the region. The team leader will coordinate with the other two international consultants, incorporate their views into the report, and perform the following tasks: (i) Conduct regional and country reviews (including Indonesia, Malaysia, Philippines, Singapore, Thailand, and Viet Nam) on the readiness and ability to develop and participate in regional basket currency bonds issuance. This would include an assessment of regulatory frameworks, technical capabilities, and the stage of market development of respective bond markets. Identify workable products from an investors’ perspective for developing a regional basket currency bonds market. Various underlying assets for consideration include government bonds, residential mortgages, and small and medium-sized enterprise loans. The positive and negative aspects for each asset type should be discussed. Examine the potential demand from investors for a regional basket currency bonds. Assess and identify initial currencies that could be included as part of the basket currency bonds. Identify impediments faced by investors, including regulatory, technical, or market concerns. In designing regional basket currency bonds, consider the sequence of actions and the roles of both the private and public sector. Prepare questionnaires to be used to address issues related to basket currency bonds for interviews with major market participants during consultations, seminars, and conferences. Survey results will be analyzed and included in the final report. Provide appropriate recommendations for policymakers on how to enable or encourage development of regional basket currency bonds market in the region. Prepare and present the interim and final report to Working Group (WG) 1, together with the other consultants. Assist the Asian Development Bank (ADB) in organizing meetings and reporting meeting minutes for market consultation meetings. Perform other tasks as reasonably requested by ADB. (ii) (iii) (iv) (v) (vi) (vii) (viii) 10 B. Appendix 3 Securitization Specialist (international, 7 person-months) 2. The securitization specialist will have extensive experience in asset securitization, including experience in structuring asset-backed securities and knowledge of securitization laws in the region, such as those relating to regulatory, bankruptcy, taxation, and special purpose company laws. The consultant shall perform the following tasks: (i) Prepare the introduction of the final report by reviewing and summarizing the findings of the ASEAN+3 1 Regional Multicurrency Bonds study 2 ; and highlight relevant issues for further study under the new technical assistance. Identify the (a) rationale, (b) the positive and negative aspects of developing regional basket currency bond markets to issuers, (c) investors for specific Asian currencies, and, (d) the overall contribution to bond market development (e.g., adding liquidity, currency risk diversification, and optimum portfolio diversification). Assess the general conditions required for the development of regional basket currency bonds. Conduct regional and country reviews (Japan, People’s Republic of China and Korea) on the readiness to develop and adopt regional basket currency bonds. This will include an assessment of the regulatory framework, technical capability, and stage of market development of respective bond markets. Identify workable products and structures for developing a regional basket currency bonds market. Various underlying assets for consideration include government bonds, residential mortgages, and small and medium-sized enterprise loans. The positive and negative aspects for each asset type should be discussed. Identify possible issuers and the optimum structure for regional basket currency bonds. Based on the potential currencies that could be included initially, identify impediments that will be faced when structuring regional basket currency bonds, including regulatory, technical, or market concerns. In designing regional basket currency bonds, consider the sequence of actions and the roles of both the private and public sector. Review and comment on the recommendations, prepared by other consultants, for policymakers for consideration on how to enable or encourage the development of regional basket currency bonds markets in the region. Assist the team leader to prepare a questionnaire to be used to address issues related to basket currency bonds for interviews with major market participants during consultations, seminars, and conferences. Survey results will be analyzed and included in the final report. (ii) (iii) (iv) (v) (vi) (vii) 1 2 ASEAN+3 includes the 10 members of the ASEAN (Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam), Japan, People’s Republic of China (PRC), and Republic of Korea. ADB. 2005. Technical Assistance for ASEAN+3 Regional Multicurrency Bonds. Manila. Appendix 3 11 (viii) (ix) Together with the other consultants, prepare and present the interim and final report to WG1. Assist ADB in organizing meetings and reporting meeting minutes for market consultation meetings. Perform other tasks as reasonably requested by ADB. (x) C. Financial Market Specialist (international, 3 person-months) 3. The financial market specialist will have extensive experience in Asian financial markets and knowledge of the development experience European bond markets. The consultant shall perform the following tasks: (i) Provide diagnostics and relevant lessons learned from the experience of the ECU-denominated basket bonds market. This will include an analysis of the exchange rate adjustment by the Exchange Rate Mechanism (ERM), the role played by the public and private sector in developing European currency unit (ECU)-denominated basket bonds, and other macroeconomic adjustments that were required. Identify lessons learned from the launch of the Asian Bond Fund and adopt these in designing regional basket currency bonds. Identify the optimum structure for the regional basket currency bonds, together with other consultants, and assess the potential currencies that could be included initially in the basket currency bonds. Review and comment on the recommendations prepared by other consultants for policymakers on how to enable or encourage the development of regional basket currency bonds markets in the region. Prepare and present the interim and final report to WG1 together with the other consultants. Assist ADB in organizing meetings and reporting meeting minutes for market consultation meetings. Perform other tasks as reasonably requested by ADB. (ii) (iii) (iv) (v) (vi) (vii) 12 Appendix 4 OUTLINE OF THE FINAL REPORT I. II. III. EXECUTIVE SUMMARY INTRODUCTION BACKGROUND A. Review of ASEAN+3 Regional Multicurrency Bonds B. Aspects of Developing Regional Basket Currency Bonds PAST EXPERIENCE A. European Experience B. Asian Bond Fund MARKET ASSESSMENT A. General Conditions for the Issuance of Regional Basket Currency Bonds B. Regional and Country Review—Market Development IDENTIFICATION OF OPTIMUM STRUCTURE A. Underlying Assets and Potential Product Range B. Currency Component C. Potential Issuers D. Potential Investors E. Optimal Structure for Regional Basket Bonds F. Impediments G. Demand Estimate H. Sequencing RECOMMENDATIONS A. Suggestions for Policymakers: How to Encourage and Enable the Introduction and the Growth of Regional Basket Currency Bonds IV. V. VI. VII.
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