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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
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