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ASOBANCARIA Treasury Congress:
The Future Challenges of the Colombian Financial
Sector Trading Desks
The Malaysian Experience on the
Development of Corporate Bond
Markets
Kamarudin Hashim
Securities Commission, Malaysia
Cartagena, Colombia
21 September 2007
Malaysia … in brief
Some facts on Malaysia:
Capital: Kuala Lumpur
Population: 27 million
Climate: Equatorial
Monetary Unit:
1 Ringgit = 100 Sen
1 USD = 3.5 Ringgit
Main Exports:
Petroleum, Palm Oil,
Electronics, Rubber,
Textiles.
2
Securities Commission
• Established on 1 March 1993, under the
Securities Commission Act 1993
• Ultimate responsibilities include investor
protection and promoting development of the
capital market
• Self funding statutory body with investigative
and enforcement powers
3
Outline
• Efforts to Develop Malaysian Corporate
Bond Market Post 1997
• Current State of Malaysian Bond Market
• Malaysian Bond Market Participants
• Securities Commission’s Initiatives for
Corporate Bond Market Development
4
The 1997 Asian financial crisis highlighted …
• The Malaysian banking
sector was dominant source
of funding
• Funding mismatches were
aggravated in tight liquidity
situation
• Lack of well developed bond
market meant a lack of
alternative avenue for
funding
5
Efforts adopted to develop a vibrant & efficient
bond market: Post ’97 crisis
Government: National Bond Market Committee
Develop (1999)
Corporate
Bond Market
Bond market-specific Inter-agency
mandate to focus membership to ease
attention & effort: implementation:
1. Overall policy • Ministry of Finance
direction for orderly • Bank Negara
development
• Securities
Critical factors 2. Study development Commission
for successful issues • Economic Planning
implementation 3. Identify and Unit
recommend • Bursa Malaysia
implementation • Employees Provident
strategies Fund
• Private sector
Developmental agenda post 97’ crisis (cont’d)
Establishing a Robust and Efficient Bond Market :
The 5 Pillars
1. 2. 3. 4. 5.
Establish Introduce Widen Improve Facilitate
reliable and efficient & issuers and liquidity in introduction
efficient facilitative investors the of risk
benchmark issuance base secondary management
yield curve process for market instruments
corporate
bonds
7
SC’s focus in developing the corporate
bond market
Capital Market Master Plan (CMP)
152 recommendations
» 17 recommendations for corporate bond market
» Among them:
• promote Malaysian Government Securities as
benchmark, and encourage program issuances
• full disclosure-based issuance framework
• ABS issuance framework
• participation of retail investors via bond funds
• establish markets in MGS futures and options
8
Main Thrust of Regulatory Regime for
Corporate Bond Market
• Centralize the approval process for the issuance of bonds
with the SC
• Introduce transparent and facilitative approval process:
(i) Due diligence
(ii) Full disclosure
(iii) Compliance with rules and guidelines
• Introduce disclosure-based regulation:
(i) Regulation of disclosure
(ii) Monitor quality of disclosure
(iii) Full & timely disclosure to investors
(iv) Market driven
9
SC’s Major Guidelines on Bond Market
On Issuance of bonds,
• Guidelines on the offering of private debt securities
• Guidelines on the offering of Islamic securities
• Guidelines on the offering of asset-backed securities
• Guidelines on the offering of structured products
On investors protection,
• Guidelines on minimum contents requirements for trust
deeds
• Guidelines on Registration of Bond Pricing Agencies
• Practice Note on Recognition of Credit Rating Agencies
* Guidelines available at website: www.sc.com.my
10
Facilitative approval process for corporate bonds
Prior to 2000 Since 1 July 2000
Type of Submission Merit based Disclosure based regime
Time frame for 1 to 3 months 14 & 28 working days for PDS & ABS
approval issues upon full submission
Utilisation of Subject to Transparent NBMC negative list
proceeds regulator’s internal (since been revoked)
criteria on
productive purposes
Underwriting Must be fully Decided by issuer and adviser
requirement underwritten
Minimum credit BBB and P3/MARC3 No minimum investment grade
rating requirement
Disclosure - • Stringent due diligence for
requirements investor protection
• Posting of IM (OC) /TDs
• Fine and apprehend on false and
misleading statement
11
Outline
• Efforts to Develop Malaysian Corporate
Bond Market Post 1997
• Current State of Malaysian Bond Market
• Malaysian Bond Market Participants
• Securities Commission’s Initiatives for
Corporate Bond Market Development
12
Significant progress has been made….
1 2 3 4 5
Benchmark Issuance Issuers & Hedging
Liquidity
yield curve process investors instruments
Introduction PDS and ABS Broadening of Non-FIs allowed Introduction
of auction Guidelines investors base to conduct repo of 3, 5 and 10
calendar for for OTC market years MGS
Malaysian Structured since July 2000 Guidelines on Futures
Government Products Securities
Securities Guidelines Facilitative Borrowing and
(MGS) framework for Lending
Islamic Ringgit & non- Programme
Review of Securities Ringgit bonds
principal Guidelines issued by MDBs, Introduction of
dealers MFIs, foreign on-line
system govts, quasi-govt Institutional
agencies & MNCs Securities
Introduction Custodian
of MGS15 and Program (ISCAP)
MGS20
Witholding tax
exemption
13
Robust Growth in Domestic Bond Market
As at end-June 2007,
Outstanding size
including short-term
instruments amounted
to USD149 bil
Local currency bond
market as a % of GDP
is currently 2nd largest
in Asia (ex. Japan)
Govt and Corporate
bonds represent
around 50% each of the
market
14
Malaysia is the 3rd Largest Debt Market in Asia
(ex-Japan)
Source: ADB as at end-2006
15
Wide Range of Corporate Bond Issues
• Wide range of corporate
bonds issued:
straight bonds (fixed and
floating rates)
medium term notes
convertible bonds
asset-backed securities
(incl. residential mortgage
backed securities)
• 51% of outstanding
corporate bonds consist of
Islamic bonds (sukuk)
largest Sukuk market in
the world
16
International Entities That Have Issued
Bonds in Malaysia
MDB ADB IFC IBRD ADB KfW
RM400 m RM500 m RM760 m RM3.8 b RM2.5 b
Size
(USD115 m) (USD142 m) (USD217m) (USD1.09 b) (USD715m)
Fixed Rate Islamic Islamic Medium Term Fixed Rate
Type
Bonds Bonds Bonds Notes /MTN
15 yrs 7 -yr/10-yr
Tenor 5 yrs 3 yrs 5 yrs
programme programme
Rating AAA AAA AAA AAA AAA
17
Ratings of Corporate Bonds
• About 80% of
outstanding corporate
bonds are rated AAA
and AA by Malaysian
credit rating agencies
• Mandatory for
corporate bonds to be
rated
• Historical default rates
of corporate bonds
are relatively low
18
Outline
• Efforts to Develop Malaysian Corporate
Bond Market Post 1997
• Current State of Malaysian Bond Market
• Malaysian Bond Market Participants
• Securities Commission’s Initiatives for
Corporate Bond Market Development
19
Malaysian Bond Market Participants:
The Regulators
Securities Commission
• Sole approving authority for corporate bond issues
• Formulates legal and regulatory framework governing
corporate bond market
• Supervises secondary bond market activities which are
provided for under the law
• Supervises market intermediaries such as rating agencies,
trustees, arrangers
20
Malaysian Bond Market Participants:
The Regulators
Bank Negara Malaysia (Central Bank)
Manages public debt and Malaysian Government Securities
issuance
Operates and maintains bond market infrastructure :
BIDS (reporting), FAST (issuance) & RENTAS (settlement)
Regulates activities of financial institutions
Bursa Malaysia (Stock Exchange)
• Regulates and monitors listed bonds
21
Malaysian Bond Market Participants:
The Issuers
Government of Malaysia
• To finance development expenditure
• To fund the budget deficit
Corporations and Quasi-Government Agencies
• To finance projects and business expansions
• To finance working capital requirements
• To refinance existing debts
22
Malaysian Bond Market Participants:
The Investors
• Only sophisticated investors allowed to invest in
bonds issued without a prospectus
• Minimum lot size of RM5 million
Institutional Investors: Retail Investors
• Pension Funds • High net worth
• Insurance Companies individuals
• Financial Institutions
• Asset Management Companies
• Unit Trust Funds (mutual funds)
• Corporations
23
Other Bond Market Participants
Credit Rating
Trustees Intermediaries
Agencies
• There are two local • Represents the Some Intermediary roles:
credit rating agencies interest of bond
Lead Arranger
(CRA): holders • Advises issuers on
throughout the structuring a bond
tenor of the
(i) RAM Rating
bond • Invites potential
Services Berhad investors to subscribe
(RAM); and to bond issues
• Acts in a
fiduciary Dealers
(ii) Malaysian Rating
capacity for • Authorized to
Corporation Berhad bond holders, participate in the bond
(MARC) safeguarding market and transact for
and enforcing third parties
their rights
under the Trust
Deed
24
Outline
• Efforts to Develop Malaysian Corporate
Bond Market Post 1997
• Current State of Malaysian Bond Market
• Malaysian Bond Market Participants
• Securities Commission’s Initiatives for
Corporate Bond Market Development
25
Flexible and facilitative regulatory framework
for foreign currency denominated issues
» Eligible Issuers:
• Multilaterals
• Sovereigns
• Quasi-sovereigns
• MNCs (including locally incorporated MNCs)
» International documentation acceptable
» Deemed approval for min A-rated issues (fast track
approval accorded)
26
Tax incentives for issuers & investors
For Issuers:
• Tax neutral framework for ABS and Islamic bond transactions
• Tax deductions on expenses incurred in the issuance of ABS and
Islamic bonds
• Stamp duty exemptions:
Securitisation transactions
Islamic bonds approved by SC
Resident Investors
Income tax exemption for individuals and mutual funds on income
derived from RM bonds
Income tax exemption for resident investors on income derived
from non RM bonds
Non-resident Investors
No tax for non resident investors on income from both RM and
non RM bonds
27
Establishment of bond pricing agencies
• Guidelines on the Registration of Bond Pricing Agencies
(January 2006)
Registration criteria: independence, expertise, due process in
bond pricing, fees and fit and proper requirements in respect
of its directors and key management
• A bond bond pricing agency contributes to market liquidity by:
Providing independent and objective fair value for bonds
Adopting a systematic approach to valuing bonds which
incorporates specific pricing methodologies, relevant market
data and robust market feedback
Facilitating daily mark-to-market valuation of bond portfolios
Enhance price transparency and discovery
28
Greater regulatory oversight over
credit rating agencies
• Practice Note on Recognition of Credit Rating Agencies by the
Securities Commission for the Purpose of Rating Bond Issues
(January 2006)
Recognition criteria are in line with the principles set out in
the International Organization of Securities Commission’s
Code of Conduct Fundamentals for Credit Rating Agencies
(IOSCO CRA Code)
• The recognition system seeks to ensure that CRAs:
Exercise high standards of professionalism and due diligence
in rating and monitoring corporate bonds
provide adequate and timely dissemination of rating
information
Enhance investor protection and investor confidence
29
Enhance investor protection mechanism in
the secondary bond market
• Enhance access to bond market information
Posting of principle terms & conditions (term sheets),
information memoranda (OC) and trust deeds on SC’s
website
Encourage post-issuance disclosure by issuers,
advisers, rating agencies and trustees
• Monitoring by regulators, rating agencies and trustees
• Prevention of bond trading offences via market
surveillance and enforcement by the regulators
30
Initiatives in the pipeline
Enhance electronic price and information dissemination system
• Real-time dissemination of pre and post trade info
• Improve price transparency and discovery
• Facilitate market surveillance
Promote self-regulation
• Single professional body & single code of conduct and ethics for
intermediaries dealing in bonds
• Promote greater professionalism among market intermediaries
• Enhance enforcement of rules
31
Existing trading platform in secondary bond
market - OTC
1. Phone-based dealing 2. Phone-based dealing 3. Reporting of trades
between FIs and investors among FIs and brokers done to BIDS (BNM Sys)
5. Clearing and settlement via 4. Dissemination of prices to
RENTAS system (BNM Sys) information service providers
such as Bloomberg
32
ETP to enhance efficiency in OTC Market
(2) Manual ETP ETP
(2) Real time
Reporting (Bursa) (Bursa)
reporting
(3) Delayed (3) Real
information time info
(1) On-line Investors of
Investors of access
Dealer 1 OTC bond Intermediaries OTC bond
market ETP market
(1) Trading (1) Electronic
via trading
phone/EBS
Investors of (1) On-line Investors of
Dealer 2 OTC bond Intermediaries access OTC bond
market market
Existing OTC Trading ETP
33
Despite ETP, OTC trading is still an option
• Wholesale market as opposed to retail
• Efficiency can be maintained due to lower trading transactions
compared to equity
• Price discovery
• Trading information dissemination
• Valuation by bond pricing agencies
• Sufficient level of disclosure and transparency
• Regular reporting to bondholders through trustees
• Rating reviews and update by CRAs
• All trades done with at least an FI as counterparty
• FIs closely supervised by BNM
• Effective surveillance & monitoring of conduct
• Close collaboration between SC and BNM
34
GRACIAS &
Thank you
www.sc.com.my
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