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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




                 35