Bond markets by dfgh4bnmu


									                  Asian Bond Markets

                    David Lynch
               6 Asia Securities Forum
Section 1. Introduction
Section 2. Bond Markets and Their Role
        2.1. A Diverse Market
        2.2. The Role of Bond Markets
Section 3. The International Drive to Develop Bond
        3.1. The BIS Principles and Recommendations
        3.2. APEC Compendium of Sound Practices
        3.3. A Consistent Message but not a Guarantee
Section 4. Asian Bond Markets
        4.1. Statistical Insights
        4.2. Subjective Comments – The APEC Survey
Section 5. Recent Market Developments
         5.1. Japan – Big Does Not Mean Best Practice
         5.2. Singapore – Proving the Need for
         5.3. Hong Kong
         5.4. Taiwan – Creating a Market to Fund National
         5.5. Thailand – In the Midst of Serious Market
         5.6. Korea – From Corporate to Government?
Section 6. The Australian Market
        6.1. The Growth in the Private Sector Bond Market
              Filling the Void?
        6.2. Efficient Clearing and Settlements Systems
Section 7. Concluding Comments

Section 1. Introduction

Asian bond markets are undergoing a marked phase of
development that will impact on the business of investment
banks, securities companies and other financial market
participants. This reflects a number of factors including market
reform, macroeconomic conditions, improvements in the
infrastructure of the financial sector and technical
development, amongst other things.

In my talk today, I endeavour to provide an overview of Asian
bond markets that provides a fair indication of the size and
growth of those markets, the factors stimulating reform and
development and some feel for the dynamics involved.
Hopefully, this will provide a helpful basis from which to assess
the future evolution of the market and a platform from which to
get the best from the following presentations – especially since
there is so much progress to report from Japan, Korea,
Singapore and Taiwan.

To some extent I will give an outsider’s view of the markets
and I will make some comments about markets in general that
may not apply to each individual market. I obviously do not
have anything like the depth of understanding of your local
markets that you do as participants in those markets.
However, an external perspective in itself may be helpful to

The format of the talk is to:
         Define the market and consider what the market does;
        Outline the conditions for an efficient market, which
        have been the focus of significant international

         Review the size and development of the market,
         by reference to development in individual markets;

         Make special reference to the Australian market; and
         Close off with some comments about the future.

I should also mention that these are my personal views and
not necessarily those of the Association or its members.
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Section 2. Bond Markets and Their Role

2.1 A Diverse Market

Bond markets typically trade a wide variety of bonds, even the
less mature markets. Each country’s market has its own
peculiar characteristics, and I will examine some of these a
little later. However, given the rich diversity of bond markets, it
is worthwhile briefly noting the range of bonds that exist.

1. Bonds are debt securities issued at a maturity of greater
   one year.

2. Bonds are issued by a range of entities including:
       Public sector – Central and local governments, state

         Financial Institutions – Banks, finance companies,

         Companies – Manufacturers, utilities etc;

         Foreign entities – Including governments, multilateral
        agencies, banks and companies.

3. A wide range of bond types are commonly issued including:
        Fixed interest rate bonds
        Floating rate notes
        Index linked bonds
        Warrant bonds
        Convertible bonds
        Asset backed bonds.

These descriptions are not exhaustive, but they do give a feel
for the attributes of bonds and the range of issuers that they
serve. A notable feature of the bond market, as distinct from
the equity market, is the central place of government as an
issuer. In fact, this gives it a special place in the architecture
of the financial system, as I shall discuss below.

2.2 The Role of Bond Markets

I consider the government and corporate bond markets
separately because their characteristics differ markedly, as do
their broader economic functions.

Government Bond Markets

Efficient government bond markets improve economic
performance in several ways. A key benefit is that they allow
governments to raise large amounts of finance without
resorting to captive market controls that distort interest rate

In many countries, the size of the government bond market is
highly correlated with the government’s fiscal position and its
need to borrow; for example, Australia and Japan. In other
situations, government bond markets have been created to
enhance the financial system’s infrastructure, rather than as a
means to raise funds; for example, Singapore and Hong Kong.
In other instances, there is no market; for example, Indonesia.

Most Asian markets use some form of auction or tender
process to price the issue of new government securities, which
removes distortions - for example, Singapore in 1987 and
Taiwan in 1991 reformed their system of bond issuance.
However, a recent APEC survey reported that bonds in China
are placed via an administrative allocation mechanism, so the
yields are often below market.

Government bond yields that are determined by the market
reflect economic and financial conditions and accurately signal
the aggregate cost of debt finance. Market determined yields
are more volatile than administered rates but this is a positive
attribute, as it reflects the absorption of new information
(including expectations) into bond prices that is a key part of
the economic signalling process.       For example, empirical
research that I have conducted for Australia shows that the
term structure of interest rates is a useful predictor of
                 economic growth and inflation, but that this relationship did not
                 exist prior to reform of the market in the mid-1980s.

                 Related to this, the ‘risk free’ status of government bonds and
                 the depth of the secondary market together with the relative
                 transparency of the key factors that determine government
                 bond market prices make them a valuable pricing benchmark
                 for corporate bonds and bank loans. In most jurisdictions
                 there is no comparable alternative benchmark rate, or if one
                 exists, then it is less reliable because there is a lack of depth in
                 the market.

                 There is a range of other benefits of efficient government bond
                 markets including:
                         Low transactions costs for investment and risk
                             A broader range of investment and risk management
                             products - standardised debt instruments that provide
                             basis for derivative products, like futures and options,
                          are essential tools for efficient management of
                      financial risk;

                             A secure investment outlet, including source collateral
                             lending activities;

                           An instrument to manage financial institutional
                           for example, through sale repurchase agreements;

                             A means for the monetary authority to implement open
                             market operations.

                 A point that I would like to emphasise is that the government
                 bond market is not a stand-alone market.             It is highly
                 integrated with the other capital, derivative and financial
                 markets.     Government bond prices enhance the range of
                 financial indicators from other markets and other products can
                 leverage off the infrastructure of the government bond market.

                 Finally, market discipline in a liberalised market creates a
                 healthy tension between the government and the markets,
                 which opens out and improves the quality of economic debate.
                 Australia provides a good example of the economic and
                 political interactions that determine a market’s influence
                 through its judgements, expressed in price movements.1 The
                 policy credibility premium offered by the market is a significant
                 incentive for government to maintain responsible policies.

                 Corporate Bonds

                 Corporate bonds provide companies with access to long term
                 funds and are an important supplement to equity and bank

 Macfarlane (1995) provides a short but cogent account of the role of financial markets in acting as a
counterweight to sectional interest groups (and policy laxity driven by the politics of the situation) in
Australia; “.... markets play a useful role in helping countries put in place sustainable macro-economic
policies in the face of some quite powerful forces pushing in the opposite direction”.
                    finance. An efficient corporate bond market can assist in the
                    more efficient allocation of capital resources within an
                    economy by emitting price signals and provide companies with
                    a means to better manage their financial risks. In addition, it
                    will provide investors with a broader range of investment

                    Corporate bonds in the industrial countries are typically much
                    smaller than government bond and equity markets and their
                    influence is less pervasive .2 There are several reasons for this.
                    Corporate bonds carry significant credit risk, have lower
                    liquidity, higher transactions costs, less standardisation and
                    information asymmetry is greater. These problems are all
                    greater in less mature markets. Bank bond issues tend to
                    suffer less in this regard, as their credit rating is supported by
                    prudential regulation.

                    An efficient Government bond market is only one part of the
                    necessary infrastructure for a viable corporate bond market.
                    Other elements required are sound trading and settlement
                    systems to disseminate information, reduce operational risks
                    and minimise costs and credit rating mechanisms to undertake
                    the critical task of credit evaluation. The absence of facilities
                    like these can have serious implications for a market; for
                    example, the absence of an efficient bond registry in India
                    provided cover for fraudulent activity in the 1990s.

                    If these conditions are met, there may still be obstacles to the
                    development of a corporate bond market. From a company’s
                    perspective, bonds hold an intermediate position between
                    short-term bank loans and permanent finance through equity.
                    A company that issues bonds has access to long-term finance
                    with fixed interest and principal repayment obligations.
                    Investors in company bonds have little control over the
                    company once they have purchased the bonds.

                    In contrast, banks that give short-term loans to the company
                    have greater control, by virtue of the company's requirement to
                    make regular interest payments and to repay the borrowed
                    funds on due dates. In effect, companies can be kept on a
                    ‘short leash’ by the bank. Various mechanisms, such as
                    covenants and negative pledges, can help overcome this
                    problem for bond issuers. However, it is argued that selling
                    bonds emits an adverse signal about a company’s willingness
                    to accept investor discipline and it is this that limits bond
                    investment activity to a small amount.

                    While this may seem a little convoluted, it is consistent with the
                    heavy weight accorded by investors to a strong credit rating for
                    corporate bond issues. The importance of this factor in the
                    future will depend on companies’ willingness to close
                    information gaps and on the balance of other factors, like
                    ability to manage credit risk, liquidity characteristics,
                    transaction costs and the availability of alternative

                    In Australia’s case at least, another factor that may be an
                    influence is the emergence of a large swap market, which

    This is not always the case in the region - for example, Korea.
                 provides companies with access to fixed interest finance
                 without having to issue bonds. A company can avoid having to
                 pay the standard long-term debt premium by borrowing short-
                 term bank funds, or issuing bank bills, and then swapping it for
                 a long term fixed rate. This works because the company is
                 kept on a ‘leash’ by its short-term debt holder, usually a bank.
                 So while derivatives assist development of a corporate bond
                 market by affording an efficient means of managing interest
                 rate risk, they may also inhibit development of the market by
                 providing a more cost effective way of accessing fixed rate

                 Finally, there is the matter of ‘crowding out’ by government. It
                 is possible that this has been a factor in some countries at
                 various points in time. However, this is not a problem in other
                 countries, so it cannot be the sole impediment to corporate
                 bond market development.
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                 Section 3. The International Drive to Develop Bond

                 There has been a broad international drive to enhance the
                 performance of bond markets, with related research being
                 undertaken by the IMF and World Bank in the 1990s and
                 initiatives by the Asian Development Bank, APEC and others
                 to encourage market development.       Guidelines from both
                 APEC and the Bank for International Settlements to assist in
                 the development of bond markets were released in the past
                 year. I wish to spend a little time on these two initiatives,
                 which are complementary and, to my mind, are not

                 3.1 The BIS Principles and Recommendations

                 The BIS Committee of the Global Financial System (BIS) of
                 the G10 central banks issued a note this year that presented a
                 list of general principles and specific policy recommendations
                 for the creation of a deep and liquid government securities
                 market. The focus of the BIS note is on market design and it
                 provides information that might assist jurisdictions to develop a
                 government bond market.        The BIS recommendations are
                 drawn from the experience of mature markets.

                 The following is       a   list   of   the   BIS   principles   and

  The CGFS is a central bank forum, established by the Governors of the G10 central banks, for the
monitoring and examination of broad issues relating to financial markets and systems with a view to
elaborating appropriate policy recommendations to support the central banks in the fulfilment of their
responsibilities with regard to monetary and financial stability.
Principle 1 - A Competitive Market Structure Should be
Principle 2 – The Market should have a Low Level of
Principle 3 - Minimise Transaction Costs
Principle 4 - Ensure a Sound, Robust and Safe Market
Principle 5 - Encourage Heterogeneity of Market Participants

Many factors affect market liquidity. Institutional factors such
as the regulation of dealers, supervision of financial institutions
and efficient clearing and settlements systems, are important.
Equally, environmental factors such as the macroeconomic
situation and changes in the issuer’s creditworthiness play a
role. However, the main focus of the BIS note is on market

There are five recommendations, which have a practical focus.
They are not contentious and make a lot of sense:
Recommendation 1 - Coherent Debt Management Strategies
Recommendation 2 – Minimise the Liquidity Impairing Effects
of Taxes
Recommendation 3 – Transparency of sovereign issuers and
issue schedules should be ensured. Transparency of trading
information should be encouraged, with due attention to the
anonymity of market participants.
Recommendation 4 – Safety and standardisation in trading
and settlement practices should be ensured.
Recommendation 5 – Repo, futures and options markets
should be developed.

The BIS concludes by noting the typically important role of
central banks in the efficient operation of government bond
markets – for example, the policy information that they
communicate, open market operations and provision of
clearing and settlement facilities.   Central banks need to
further investigate the dynamics of market liquidity, aspects of
which need to be better understood - especially behaviour at
times of stress.

The BIS notes that there are costs associated with its
recommendation (for example, the establishment of a clearing
and settlements system), which will vary with the stage of
development of m arkets in general. These costs have to be
taken into account when considering the benefits to market

3.2 APEC Compendium of Sound Practices

It was agreed at the APEC Finance Ministers Meeting in
Canada in May 1998 to begin work on a collaborative initiative
on the development of domestic bond markets in the region.
There was consensus on the need to develop domestic bond
markets to help recycle the large amount of domestic savings
in Asian countries. At the time, reduced capital inflows and
tight liquidity had resulted from the Asian financial crisis, so the
                 initiative was seen as a timely stimulus to capital market
                 development.     Hong Kong and China coordinated this

                 One project that emerged from this process is the compilation
                 of a Compendium of Sound Practices to cover five areas
                 critical to the development of domestic bond markets, namely
                 Government       Policies,  Regulatory   Framework,    Market
                 Infrastructure, Liquidity and Risk Management.           The
                 Compendium was issued in September 1999 and is to serve
                 as a guide for the development of domestic bond markets in
                 APEC member economies .4 The Compendium includes an
                 extensive list of important elements to bond market
                 development. I have presented a couple of examples under
                 each heading below.

                 i. Government Policies

                        Develop a comprehensive bond market development
                        strategy in consultation with the central bank and

                           Strike a balance between sovereign debt management
                           and bond market development strategy.

                 ii Regulatory Framework

                          Full, timely and accurate disclosure of financial
                          material to investors.

                           Regulation should promote transparency in trading
                          price reporting and to deter manipulation and unfair

                 iii Market Infrastructure

                           There should be clear and unambiguous rules and
                           procedures that govern all aspects of the operations of
                         market infrastructure system, with an effective
                         regulatory regime and contingency arrangements in

                         In order to reduce replacement cost risks, it is
                         for the settlement of trades to take place as soon as
                         possible after the trade has been confirmed. A
                         common benchmark is T+3 days or shorter.

                 iv. Liquidity

                           Accurate and reliable benchmark yield curves enable

  Another project is a Website, which would provide a resource centre for sharing information about the
debt markets in APEC member economies. The Website is to link up relevant reports, statistics and other
details concerning the development of domestic bond markets. The Asian Development Bank has agreed
to set up this APEC Bond Market Initiative Website on behalf of the APEC member economies.
                                market participants to price the credit and liquidity of
                                domestic debt issues appropriately.

                                Transaction costs should be kept low to enhance
                                trading activities, eg through a competitive dealer
                                structure and standardising trading conventions and
                                settlement processes. The liquidity impairing effects
                                of taxation should be minimised.

                v. Risk Management

                        Governments and private issuers should maintain a
                        profile that provides protection against temporary

                       Credit rating agencies should be encouraged to
                       and improve their credibility and reputation, for
                       by avoiding conflict of interests in their ownership and
                       maintaining the highest possible level of transparency
                       and objectivity in the rating processes.

                3.3 A Consistent Message but Not a Guarantee

                The recommendations that emerged through the BIS and
                APEC present a consistent picture of the conditions that are
                necessary to get the best out of a government bond market.5
                However, they are not necessarily sufficient as a variety of
                other factors, like confidence, may also affect market

                Figure 1
                                 Australia – Yields Liberalised in 1982

                     per cent

                                 8.00                                                                                             Yield
                                 5.00                                                                                             Inflation











  Analysis of mature markets points to such factors as being of vital importance. For example, s ee
Schinasi and Todd Smith, Fixed-Income Markets in the United States, Europe and Japan: Some Lessons
for Emerging Markets, IMF Working Paper, WP/98/173.
Experience in Australia bears out the importance of these
points. Initiatives in the 1980s were instrumental in creating a
vibrant, efficient market. For example;
         Yields on Commonwealth Government bonds became
         market determined when the tendering system was
         introduced in 1982 and have since reflected market
         conditions and economic expectations (see figure 1),

         Portfolio constraints (that is, captive market
         arrangements like requirements on institutions to hold
         government stock) were eliminated,

        Debt management strategy has been improved (for
        example, maturities were shortened, issues were
        focussed and benchmark stocks established).

Figure 2
                Australia – Growth in Turnover

               (scaled in terms of GDP)

Market liquidity (turnover/stock) has increased from less than
one prior to the reforms to over eight (see figure 2) – or 40
including sale repurchase agreements (repos). Transaction
costs have fallen sharply and a range of interest rate risk
management products have emerged – for example, Sydney
Futures Exchange bond futures turnover is nearly three time
that of outright transactions in the cash market.
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Section 4           Asian Bond Markets

As you may have gathered from my earlier comments, there is
a great variety of bond markets within the Asian region, with
many undergoing quite fascinating developments within the
past decade or so. Some markets are well established and
quite mature, while others are only beginning to emerge.

I will not deal with the markets individually in any great detail,
but rather present a broad-brush overvi ew (with the exception
of the Australian market). That said, I look forward with
interest to the presentations from Korea, Japan and Singapore
that are to follow, because developments in those markets
give interesting insights into bond market development.
      4.1 Statistical Insights

      Asian bond markets have typically received much less popular
      attention than equity markets. However, the benefits from
      efficient bond markets are becoming more widely understood.
      I shall conduct a quick statistical tour of a dozen Asia-Pacific
      countries/regions to help assess the current situation and
      recent progress.

      Table 1

                          Selected Asia-Pacific Bond Markets –

                    Amount              Secondary           % Issued          % Issued
                   outstanding            market
                                                               by               by
                  US$      %GDP       Turnover ratio      Public sector    Private sector

Australia         218         61            11.6                41                59
China*            110         12             na                 60                40
Hong Kong          50         30            5.8                 28                72
India             112         33             na                 74                26
Indonesia           2          0             na                 40                60
Japan            4,488       104            5.0                 76                24
Korea             277         74            3.1                 51                49
Malaysia           67         89            0.7                 40                60
New Zealand*       34         60            5.1                 55                45
Singapore          20         24            6.4                 89                11
Taiwan             70         25            3.1                 51                49
Thailand*          11         10            0.2                 72                28

USA              11,557      148             na                 69                31

      Note: Data for China, New Zealand and Thailand are for 1997.

      Source: APEC Bond Survey, Bank of Indonesia, KSDA 2000 Securities
      Market in Korea, and Bank for International Settlements (for India). Turnover
      data for Taiwan seem to cover outright transactions only.

      Table 1 presents an outline of bond markets in the Asia-Pacific
      region in 1998, with the exception of China, New Zealand and
      Thailand for which the data cover 1997. Much of the data in
      the table are derived from country responses to the APEC
      bond market development project, which were updated earlier
      this year. This data includes short-term issues, as well as debt
      securities with maturity greater than one year. Bond market
      outstanding amounts are measured in US dollars and data for
      the USA are provided for purposes of comparison. I have also
      noted the split between public sector and private sector bonds
      on issue.

      In making observations below, I would emphasise that there is
      no single measure of bond market development. A large
      market may or may not indicate a mature market – other
      factors like market liquidity, transactions costs (including bid-
                   offer spreads) and market infrastructure must also be taken
                   account of.

                   Several points are immediately apparent from table 1:

                   The Asian bond market in aggregate is far smaller than the US
                   market. However, the US market is also larger than the bond
                   markets of the major European economies combined; 6

                   The Japanese bond market is much larger than the other
                   markets in the region, even if they are combined;

                   Asian bond markets are more closely grouped in terms of
                   GDP, which is overall a better measure of relative market size,
                   though the USA is still a stand-out and the Japanese market is
                   relatively large - this suggests that there is scope for many
                   countries to further develop their bond markets;7

                   Market liquidity, as measured by turnover on the secondary
                   market, is quite variable across countries, with Australia
                   leading the way in this regard;

                   In general, there is a reasonable mix of public sector and
                   private sector bonds on offer in the region. The importance of
                   government bonds reflects the fact that bonds are issued
                   mainly to finance budget deficits and infrastructure
                   developments. Singapore had a low level of private sector
                   issues, while Hong Kong was at the other end of the spectrum
                   largely due to bank debt issues.

                   Figure 3

                                 Bond Market Growth 1995-98

                           Note: Data for Thailand and China are for 1995-97.

                   Efforts have been made in the 1990s to develop corporate
                   bond markets as a source of company finance in most

    See Schinasi and Todd Smith.
    This observation could be made of many European economies too.
   countries. For example, local credit rating agencies have been
   established in Malaysia, Indonesia, Thailand and Taiwan to
   help overcome information asymmetry; Korea has opened its
   market further to foreign investors; Asian Development Bank
   ‘dragon bonds’ have been issued in Taiwan and a Bond
   Dealers Club was formed in 1994 to organise and establish
   Thailand’s market.     Even Japan’s large market is being
   reformed to improve both the issuing and secondary markets.

   Turning to growth trends in the market between 1995 and
   1998, as shown on figure 3, there are some interesting
   observations to make;

            In US dollar terms, a number of countries recorded
            growth, notwithstanding local currency depreciation in
            some instances notably China (to 1997), Hong Kong,
            Taiwan and Korea.

           In local currency terms, Indonesia, Malaysia and
           Australia also recorded significant growth, while
           Thailand’s market was broadly stable to 1997.

   Analysis of liquidity on Asian bond markets gives a further
   insight into their level of development. In this regard, I have
   drawn upon the data gathered as part of the APEC bond
   initiative to calculate some indicative data, which I have
   presented as table 2.

   Table 2

           Sector Liquidity on Asian Bond Markets –

                   (secondary market turnover ratio)

                Government     Other public     Financial         Corporate
                                  sector       Institutions
Australia           27.6            7.5             4.0              8.9
Hong Kong           23.1             -               -               5.8
Japan               6.8             1.0             0.6              0.4
Korea*              0.6             0.2             2.5              1.6
Malaysia            0.5             0.3             1.5               0
New Zealand*        10.5             -               -               5.1
Singapore           7.2              -               -               6.4
Taiwan              6.3             0.1              0               0.1
Thailand*            0               0               0               0.7
   Note: Data for Korea, New Zealand and Thailand are for 1997.
   Source: Asian Development Bank/APEC Bond Study.

   The picture that emerges is one that might have been
   expected from our analysis above and from previous studies.
   The most active markets have a turnover ratio in double digits
   and government markets exhibit the highest rate of turnover.
   This reflects their typical advantage of size, depth,
   standardisation, low risk etc and illustrates the importance of
   government bond markets as a piece of financial sector
   I should note that the markets in some countries have
   progressed significantly since 1997/98; for example, in Korea
   the total bond turnover ratio increased from 1.3 in 1997 to 6.6
   in 1999. Also, the data in table 1 includes short-term securities
   (for example, treasury bills) and repurchase agreements, both
   of which boost turnover figures significantly, as I will discuss
   briefly later.

   Table 3 updates data for the amount outstanding on bond
   markets, using data for domestic debt securities that are
   published by the Bank for International Settlements. These
   data are broadly comparable to the data above, though not
   precisely the same. Two aspects of the data are noteworthy,
   apart from the fact that they give a more up to date picture of
   some Asia-Pacific bond markets. First, it is possible to strip
   out short dated debt securities and identify ‘pure’ bonds.
   Second, it is possible to provide a breakdown of the issuers of
   these bonds, which provides us with additional insights in to
   the structure of the market.

   Table 3

              Domestic Bonds Selected Markets – March

                      (securities over 1 year to maturity)

                 Amount          % Issued by      % Issued by       % Issued by
                                 Public sector      Financial        Corporates
                   US$ bn                            Instits
Australia            111                68             11                21
China                243                67             32                 2
Hong Kong              8                62              0                38
India                122                78              0                22
Japan               4,902               77             11                12
Korea                152                43             20                38
Malaysia              52                44              0                56
New Zealand           11                 -              -                 -
Singapore             15                87              0                13

USA                12,041               59              20               21
UK                  583                 70               8               23
Germany            1,258                50              50                0

   Source: Turnover figure for Hong Kong is a June 1999 average daily figure
   Bank for International Settlements and Bank of Indonesia.

   Several points are worth noting from this table:

           The picture of the Asia-Pacific bond markets is
           with table 1; the USA and Japan dominate in US dollar

            Government issues more clearly dominate the
            longer-term debt markets – perhaps reflecting their
        low risk standing;

        The actual corporate sector is typically a modest part
        of the market, with private sector issues boosted by
        bank debt security issues (even though banks typically
        issue relatively more short dated debt securities than
        long term bonds).

It was suggested in the APEC survey that one reason for the
lower corporate bond issuance is that Asian corporations are
often assigned lower public credit ratings, which makes private
sector bonds less attractive to international and local investors,
and means a higher funding cost to corporations.             It is
therefore quite common for companies in Asia to rely heavily
on bank credit as the major source of financing. Economies
where private sector bonds accounted for more than 50% of
total bonds issued are Australia, Hong Kong and Malaysia.
The bond market infrastructure in these economies is more
developed, making the issuance of corporate bonds and bank
CDs more efficient.

The mix of local currency bondholders varies from market to
market. In Australia, Japan and Korea, banks and financial
institutions are the major holders. In Singapore and Malaysia,
contractual savings institutions, such as the provident funds
are active buyers of bonds.

Non-resident investor participation in local currency bonds is
low in most countries, including Japan, Malaysia, Singapore
and Hong Kong. For example, in 1999 foreign investors held
6% of Japanese government securities, while in Malaysia the
comparable figure was 1% in 1998. In contrast, non-residents
hold over 40% of bonds issued by the Commonwealth
Government in Australia, while New Zealand’s market also has
a high foreign investor presence. Bearing in mind that foreign
investors hold over 30% of both US and German government
securities on issue, this suggests that there is potential to
considerably expand the extent of foreign participation in many
Asian bond markets.

4.2 Subjective Comments - The APEC Survey

The APEC survey of Asia-Pacific bond markets found that
most APEC economies have maintained government
benchmark yield curves up to about 10 years. Exceptions
were Korea and Thailand, where corporate bonds are used as
the yield curve benchmark, though the importance of
government bond yields is increasing. The existence of a yield
curve is one thing, but its reliability is another and survey
respondents cited concerns in this regard. This is a subject
that I considered in the mid-1990s and I have to admit that
empirical analysis of interest rate term structure supported this
position, but I understand the situation to have improved since

Other potential impediments to the development of liquid bond
markets in the region that were identified included;

        Lack of local institutional investors
                         Under-developed securities trading, clearing and

                         Lack of liquidity

                         Lack of committed market makers

                         Long settlement periods

                         Absence of bond lending programmes
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                Section 5.        Recent Market Developments

                The statistical picture does not capture the vibrancy of market
                development within the region at the moment. In particular, a
                number of countries are putting into effect significant initiatives
                to develop their bond markets. I am not in a position to report
                on all of them and I am mindful of the presentation that the
                panellists will give. However, I do wish to give you some feel
                for the nature of the progress that is underway and planned.

                5.1 Japan – Big Does Not Mean Best Practice

                The Japan bond markets are the largest in the region and
                have great diversity. The Government, financial institutions
                and companies are all significant issuers of bonds, of which
                there is a wide selection including straight bonds, warrant
                bonds and convertibles.      However, the authorities have
                acknowledged the need to improve the efficiency of the
                markets. My comments here are in relation to the Japanese
                Government securities (JGS) market and draw upon a paper
                presented to an ADB/OECD bond conference in April this

                The stock of JGS was US$3.4 trillion at end-1999 and this
                amount is increasing contrary to the trend in most industrial
                countries. JP Morgan estimates that JGSs will account for as
                much as 36% of the global government securities outstanding
                as of end-2001.

                Reforms already underway

                There have been a number of reforms to the market to help
                absorb the large amount of new issues, as well as a desire to
                respond to financial market globalisation:
                       Market management - Improvements were made to
                       issues eg a 30 year coupon bond was introduced in

                       Taxation - Securities transactions tax was abolished in
                       April 1999 and new non-resident withholding tax

 These comments are draw from a paper, “The Reforms in the Japanese Government Securities Market”,
by Masaaki Shirakawa, Bank of Japan.
          were introduced;

          Transparency of issues - The Government started to
          announce an indicative quarterly issue schedule from
          March 1999;

          Settlements – The settlement lag was shortened to
          in 1997 and RTGS is to start by end-2000.

Consequently, the efficiency of the market has been improved.
For example, the smoothness of the yield curve has improved

But there are still problems

The liquidity of the JGS market is the lowest in the major
countries, in the sense that the bid-ask spreads are the largest
and the turnover ratio is the lowest amongst G7 countries. In
addition, more than half of the amount on issue is held by the
public sector and non-resident investment is low.

Reason cited for further reform include:
          The need for the market to absorb a large amount of
          new issues and lower the cost of borrowing;

       The need to develop a whole range of fixed income
       including an efficient corporate bond market;

        A deep and liquid market could make the financial
        system more resilient to external shocks, especially in
        cases where the credit worthiness of individual
        institutions were questioned.

        A liquid market with a more heterogeneous holding
        pattern, including greater foreign investment, could
        maintain fiscal discipline.

Future reforms?

A number of issues still have to be addressed to maximise
market efficiency:
         Transparency - while real-time price and trade
         of JGSs is available to dealers to a great extent, the
         available to investors is very limited at this moment.

        Debt management - Issuance volume is still heavily
        to 10-year bonds. Possibly, the 4 and 6 year bonds
        be merged to create a large 5-year benchmark, and 20
        and 30-year bonds for a large 30-year benchmark.

          Taxation - The non-resident withholding tax exemption
                           needs to be further refined to better accommodate
                           investors using international custodians .9

                  One lesson from Japan is that developed markets may still
                  require reform, if only to keep abreast of economic and
                  technical developments. Another is the value in maintaining
                  an efficient bond market that can efficiently satisfy government
                  cyclical and structural funding needs. Over time the market
                  will vary in importance as a source of funds, but there is
                  always an advantage in keeping the market primed to provide
                  an increased amount of funds.

                  There are also very interesting developments in the Japanese
                  corporate bond market, that will shortly be taken up by Mr
                  Koichi Suzuki in his presentation.

                  5.2 Singapore – Proving the Need for Infrastructure

                  Unlike Japan and many other countries, the Singapore
                  Government does not need to borrow funds through
                  government bonds to finance is net expenditures, as it
                  operates a balanced budget policy.         The market was
                  revamped as far back as 1987, to operate along the same
                  lines as the US Treasury bond and bill markets. The principal
                  objectives of developing the government securities market in
                  Singapore is to:

                           Provide a liquid investment alternative with little or no
                           risk of default for individual and institutional investors;

                           Establish a liquid government bond market which
                           as a benchmark for the corporate debt securities
                       market; and

                           Encourage the development of skills relating to fixed
                           income securities and broaden the spectrum of
                           services available in Singapore.

                  Market makers assist in the provision of market liquidity and
                  the reforms sufficient to stimulate an active secondary market,
                  with both outright and repurchase agreement (repo) trading
                  expanding. Singapore has continued to improve the operation
                  of its market:

                           Debt management - In order to broaden the bond
                  market, improve its liquidity and create a more reliable
                  benchmark yield curve, the Government decided in 1998 to
                  increase the issuance of government securities, especially
                  longer-dated bonds, and encourage statutory boards and
                  foreign entities to issue Singapore dollar bonds. A focussed
                  SGS issuance program aimed at building larger and more
                  liquid benchmark sizes was also announced last May.

 Government securities held by non-residents are tax-exempt if non-residents deposit them to a domestic
office of financial institutions that are participants of the JGS book entry system, and if their identity is
certified by the head of the domestic office. Investors may use global custodians and international central
securities depositories that do not have a domestic office in Japan.
                            Taxation – From February 1998 interest on Singapore
                    government securities (SGS) earned by non-residents who do
                    not have a permanent establishment in Singapore are exempt
                    from tax.
                             Related markets – A new repo facility was introduced
                    for primary dealers in May 2000, together with measures to
                    assist development of the repo market.

                    Singapore has placed heavy emphasis on the value of the
                    government bond market as a piece of infrastructure. It has
                    assisted in the development of the corporate bond market and
                    complemented other changes in that area. It was announced
                    in 1998 that approved foreign entities can issue Singapore
                    dollar denominated bonds – a relaxation of the policy to
                    prevent internationalisation of the SG$.        This gave a
                    considerable boost to the market, with related issues
                    amounting to SG$3.7 billion in 1999 (of a total SG$ corporate
                    bond issuance of $9.2 billion).

                    5.3 Hong Kong

                    The Hong Kong government bond market was activated in
                    1991, with a HK$500 million issue of two-year bonds,
                    prompted in part with a need to finance infrastructure projects.
                    Under a market making system, a strong secondary market
                    quickly developed.    In early 1993 it was announced that
                    government bonds would be replaced by Exchange Fund
                    Notes (EFNs), the proceeds of which would be invested, rather
                    than being used to finance infrastructure projects, as the
                    government had no net funding requirement. The program of
                    debt issuance is to assist development of the local debt market
                    by increasing the supply of high quality HK$ debt securities
                    and creating a benchmark yield curve.

                    The market continued to develop, with a five-year EFN
                    released in 1994 and a ten-year EFN in October 1996. Tax
                    does not appear to be an issue10 and EFNs can be used to
                    access HKMA overnight liquidity. EFNs are issued through
                    competitive tender bids and a regular supply of securities with
                    varying maturities helps to maintain a reliable yield curve.
                    Typical of most bond markets, trading on the secondary
                    market is generally over-the-counter (OTC) market and
                    makers facilitate trading. It is now a vibrant market, as evident
                    from the table above, and is an outcome that is consistent with
                    the BIS and APEC recommendations.

                    Recent initiatives include:
                            Liquidity/transparency - EFNs were to be listed on the
                    stock exchange in August 1999 to enhance liquidity and wider
                    the investor base.        Private sector initiatives include a
                    government bonds index, extended trading hours for clients
                    and promotion of the market to retail investors.
                            Infrastructure - EFNs may be used as collateral for
                    trading stock options and futures. The CMU has established
                    the infrastructure to enable the Stock Exchange Options
                    Clearing House and HKFE Clearing Corporation to use EFNs

     EFNs are exempt from profits tax and stamp duty.
as common margin collateral for the trading of stock options
and futures.

The development of the Hong Kong government securities
market illustrates the capacity to develop and maintain a
vibrant market, as a part of financial sector infrastructure. In
this context, there has been a significant rise in the amount of
private sector debt outstanding.

Figure 4
              Hong Kong Dollar Debt Outstanding
                               (HK$ billion)

                   Data are sourced from HKMA.

Clearing and Settlement

A particular aspect of Hong Kong’s market that I would like to
mention here is the innovative approach to clearing and
settlements. The Central Moneymarkets Unit (CMU) Service
operated by the HKMA was set up in 1990 to provide
computerised clearing and settlement facilities for Exchange
Fund Bills and Notes.

In December 1993, the HKMA extended the service to other
HK dollar debt securities. Since December 1994, the CMU
has been linked to the Euroclear and Cedel. This international
link helps promote HK dollar debt securities to foreign
investors. All debt instruments cleared through the CMU are
either immobilized or dematerialised, and transfer of title is
made in computer book entry form.

The HKMA has been promoting the linkage of CMU with other
Central Securities Depositories (CSDs) in the Asia Pacific
region through establishing a network of bilateral linkages in
order to facilitate cross border trades of securities in Asian
         In December 1997, the HKMA became a member of
Reserve Bank Information and Transfer System (RITS) for
Australian government securities and Austraclear (for private
sector debt securities in Australia). The link enables CMU
members to hold and trade securities in RITS and Austraclear
through HKMA’s membership in both systems.
       In April 1998, the HKMA and the Reserve Bank New
Zealand (RBNZ) have set up a bilateral securities linkage on
reciprocal basis between CMU and Austraclear New Zealand,
a clearing system for both government and private sector debt
issues operated by RBNZ.
         A bilateral linkage between the CMU and the Korea
Securities Depository on a reciprocal basis was to begin in the
second half of 1999.

Looking towards the future, it is increasingly likely that bond
markets in the region will have a greater international
dimension. The approach of the Hong Kong authorities seems
forward looking and something that should be observed
closely by others with less mature market infrastructure.

5.4    Taiwan – Creating a Market to Fund National

A strong fiscal stance limited the size of Taiwan’s government
bond market until the early 1990s; the a    mount on issue was
small and trading was minimal. Below market yields dampened
investor demand and bonds were held mainly for liquidity
management purposes. However, a significant part of the
National Development Plan from 1991 was financed through the
bond market, which boosted the market. In November 1991 a
US Treasury bond type auction system was introduced, based
on designated primary dealers (19 securities companies and 23
banks in 1994), replacing a fixed price allocation system
amongst banks that was not very market sensitive.

Figure 5
        Trading on Taiwan’s Government Bond
                       (NT$ billion)

Source: Central Bank of China. Table 2 appears to include outright transactions
only for Taiwan.

Figure 6
Amount Outstanding on Taiwan’s Government Bond
                 (NT$ billion)
                 Source: Central Bank of China. The data here are not comparable to
                 that reported in the APEC Survey.

                 Taiwan’s market illustrates the pace at which turnover on the
                 secondary market can increase once correct conditions are put
                 in place. Growth in turnover has been sustained, as illustrated in
                 figures 5 and 6, though outright trading a small part of the total,
                 as repos apparently constitute the main part of the market.

                 In contrast, Taiwan still faces challenges in maximising the
                 benefits from its corporate bond market according to a recent
                 media report.11 Apparently, the market has a low level of
                 liquidity for a variety of reasons including low tranche size,
                 transaction taxes (arguably) and a reluctance to trade bonds,
                 amongst other things. Mr Chao-Zon Yang will shortly give a
                 more informed insight into Taiwan’s bond market.

                 5.5 Thailand – In The Midst of Serious Market Development

                 In the context of the Asian economic crisis, which started in
                 Thailand in 1997, the Governor of the Bank of Thailand
                 recently stated, “ I can turn back the clock and have a wish,
                 my list may be long. But high in its ranking would be a well
                 functioning Thai baht bond market.12

                 In this context the Governor noted that the existence of a deep
                 and liquid bond market allows financial institutions to prepare
                 themselves better for risk management. In Thailand, the lack
                 of a liquid bond market meant that the only way to obtain
                 liquidity under pressure was for the banks to come to the Bank
                 of Thailand using their entire loan portfolio as collateral. Also
                 in the absence of an efficient bond market, Thai companies
                 had to borrow offshore and bear the related foreign exchange
                 risk. Experience has shown that the corporate sector still has
                 to fully develop the skill base to manage these exposures.

                 Prior to the Asian crisis the Government had little need to have
                 recourse to the bond market. This has changed and the
                 amount of public sector bond has increased substantially
                 during the past 2 years. Currently, there is close to one trillion

  Asiamoney, July/August 2000.
  Comments on Thailand are substantially from a contribution by Governor M.R. Chatu Mongol Sonakul to
the ADB Conference on Government Bond Market and Financial Sector Development in Developing Asian
Economies in March this year.
baht in public sector bonds outstanding, amounting to about
25% of the country’s GDP.

Against this backdrop, the authorities are promoting
development of the domestic bond market. Measures that
have been undertaken include -

         Debt Management and Transparency - An attempt is
being made to introduce a quarter-ahead calendar of regular
issuance. Proposals are on the way to fine-tune the current
legal framework, to permit greater flexibility in the management
of treasury balance, so that a regular issue flow can be

         Yield curve - There is now a yield curve available on
the internet that spans from less than one-year, out into the
15-year tenor. Along with the low interest environment, this
has boosted the issuance of corporate bonds.

        Liquidity - The Bank of Thailand is currently working on
the promotion of a market making dealing system.

        Settlements - Work is ongoing to promote a fully
automated system of delivery versus payment (DVP)
settlement system, information disclosure, and instituting
appropriate code of conduct on market participants.     At
present there is a semi-automated real-time DVP system in

Daily trading volumes have quickly picked up and amounts to
         -4                                 o
about 3 billion baht per day, compared t about 1 billion-2
baht in 1999. Annual turnover for 1999 for certain popular
issues amounted to one-third of its outstanding amount. Bid-
spreads are narrowing to a level not significantly far from the
more developed bond markets.

5.6 Korea – From Corporate to Government?

Korea’s corporate bond market is one of the largest in the region
and traditionally more important than the government market. In
the past, the Government’s policy to maintain a balanced budget
hindered development of the government bond market. Most
government and public sector securities were short-term
instruments (Treasury bills, Foreign Exchange Equalisation
Fund bonds, Grain Management Fund bonds).

However, the Government announced a comprehensive plan to
develop the market in 1998. During the financial crisis the
Government had issued bonds to assist the restructuring
process. Meanwhile corporate bonds became less suitable as a
benchmark because of the difficulty in issuing due to increased
risk. This was also reflected in the dramatic decline in corporate
bond issues guaranteed by financial institutions.

The Government plan involved several elements, including:
        Development of a 3 year treasury bond to meet the
        conditions for a market benchmark – a role traditionally
        taken by corporate bonds;
         Bonds will be issued on a regular basis and
         interest payment methods will be standardised;

       Primary dealers will have a privileged position in the
       primary market but will be required to act as market
       in the secondary market; and

         The OTC settlement system will be improved, amongst
         other things.

As a move to enhance interest rate risk management, futures for
government bonds were introduced in 1999, with modest trading
recorded in the first year. Thus, there is a broad range of
initiatives in train to significantly upgrade the government bond

The Korean market is particularly interesting to observe, as the
balance between the government and corporate bond market
sector shifts and the role of bank guarantees in corporate issues
diminishes. This may lead to a market structure more similar to
that reported in the USA and elsewhere.
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6. The Australian Market

Both State and Federal Government bond markets in Australia
have been improved considerably since the 1980s, as I have
already discussed. However, there are two remaining points
that I would like to make in relation to Australia.

6.1 The Growth in the Private Sector Bond Market – Filling
the Void?

Perhaps the most interesting feature of the bond market in
recent years has been the rapid development of the private
sector bond segment of the market. Bank securities, asset
backed bonds and corporate bond issues are each significant
and have experienced solid growth in the last few years. This
is illustrated in table 4 and figure 7, from which it is evident that
private sector bonds are filling part of the void left by the
decline in Federal Government bonds on issue. A modest, but
significant, expansion in bond issuance by non-residents has
also occurred over this period

In the early 1990s, bank debentures and public enterprise
bonds dominated the market for non-government debt.
However, there has been significant growth in new issues,
though this h occurred from a small base. It appears that
this is a structural shift rather than a blip in the market

Table 4
Australian Bond Markets – Amount Outstanding
                   (A$ billion)

                                  1988     1992     1996      mid-
                 Asset Backed Bonds                   0.4      6.7        11.6   23.5
                 Company Bonds                        0.3      7.2        4.7    16.8
                 Banks and other FIs                           11.9       4.0    19.0
                 Non-resident                           -      2.2        2.2    9.5
                 Federal Government bonds              38       40         94     72
                 State/local government bonds          22       54         48     49

                 Source: Reserve Bank of Australia and financial press.

                 Figure 7
                 The Bond Market – Private Sector Bonds and Federal
                               & State Govt. Bonds
                              (Amount outstanding)

                 Notes: Quarterly data – derived from Reserve Bank Bulletin data.

                 Asset Backed Bonds - A significant market for asset backed
                 bonds emerged that reflects substantial growth in the
                 securitisation of home loans but also includes a range of other
                 securities based on corporate trade and consumer credit
                 receivables, amongst other things.13 This is an innovative
                 market, in terms of structures developed and assets
                 securitised, w hich should ensure that the market continues to
                 deepen over the near term, at least.

                 Company Bonds - The market for corporate bonds issued by
                 domestic private companies has only recently emerged as a
                 market of significance. Low nominal interest rates were a
                 factor behind this. However, access per se was a problem in
                 the past market, so this may reflect a structural change as well
                 as the effects of interest rates that may have been be low

                 Foreign Company Bond Issues - This market picked up with
                 the establishment of a $400 million 10 year bond programme
                 for a UK utility in 1997. This followed an issue by the Korean
                 Exchange Bank, after the Government had relaxed measures
                 under section 66 of the Banking Act to improve market access
                 for foreign banks. Again, there is significant potential for the
                 market for foreign entity issues to grow, though it will be
                 restricted to high quality credits, as in the rest of the corporate
                 bond market.

  Securitisation refers to the process of issuing marketable securities against an income stream provided
by a pool of otherwise illiquid assets, such as mortgage loans.
The corporate bond market has the potential for further growth.
A number of factors, both on the demand and supply side,
have emerged that will support the long-term development of
the market.

The demand for corporate debt securities is rising because:
        The interaction of an aging population and government
        policy will provide a growing pool of superannuation
        seeking investment outlets;

        Household      financial    saving       shifted    towards
        with market linked returns;

        The demand for better returns will gradually direct
        funds away from low credit risk securities towards
        credit risk; though the necessary credit evaluation
        skills take time to develop, which tempers the markets
        growth in the near term;

           Market development feeds on itself - deeper markets
         more liquid and thus have lower transactions costs
    that in
         turn stimulate trading;

        The Government is committed to development of the
        market and recently widened a non-resident
        tax exemption that applies to offshore issues by
        Australian companies to include onshore issues by
        these companies too.

The supply of corporate debt securities is rising because:
         Financial innovation favours financial
         through securitisation of bank loans and direct issues
         the capital markets by the highly rated companies;

         There is increased awareness of the advantages of
         financial assets and the capital management benefits
         of securitisation;

           The financing of infrastructure is shifting from
           government towards private entities and projects of
           nature absorb enormous amounts of investment funds;

           Debt financing of entities previously owned by the
           Government have become part of the private sector
           debt market;

           Government is reducing its debt-financing requirement
           through greater financial discipline and by retiring
           debt through the proceeds of privatisations, providing
         an opening for replacement issues by the private

 The switch from government bonds to corporate bonds is more
 complex for investors than might appear at first sight. In
 particular, the focus of exposure with government bonds is
 orientated towards economic risk (like inflation), while
 corporate bonds involve a high level of micro-corporate-
 specific risk (that is, credit risk). Adjusting to the new skill base
 required will form part of the maturing process for the market.

 Projecting current trends forward, there is a concern that a
 shortage of fixed interest paper will emerge as the private
 sector may be unable to meet superannuation fund demand
 for high quality fixed interest paper, if government budget
 surpluses continue. Similar fears of a shortage emerged in the
 past but as it happened an economic downturn avoided the
 problem. The Government has stated that it will maintain an
 effective government bond market, but there is some unease
 at the reduction in debt outstanding. In addition, reform of the
 tax system will need to establish a commercial balance in the
 distinction that it makes between debt and equity instruments.

 6.2 Efficient Clearing and Settlements Systems

 The final aspect that I would like to mention is clearing and
 settlement. As mentioned above, facilities to clear and settle
 bond trades securely and efficiently are a vital part of the bond
 market infrastructure. This aspect o bond market trading is
 particularly    affected    by    technological   change      and
 internationalisation of capital markets.

 Figure 8
 Trading, Clearing and Settlement in Australia
                                       Other Debt (inc.
Instrument     Govt.                                        Futures
                                       corporate bonds)

Trading        OTC                     OTC                  SFE
Confirmatio    RITS                    Austraclear
Novation                                                    SFECH

Clearing       RITS                    Austraclear          SFECH

Settlement     RITS                    Austraclear          SFECH
Registry       RBA                     Computershare,
                                       RBA, Others

 The Reserve Bank’s R     ITS system settles around 750 trades,
 totalling A$14 billion, per day in Commonwealth Government
 securities.   The Austraclear system settles around 3,500
 trades per day, including corporate debt and semi-government
 Figure 8 summarises the trading, clearing and settlement
 systems for the bond and futures market. Payment systems
 developed to meet the specific needs of individual markets,
 which reduced competition between them.

 Futures transactions on the Sydney Futures Exchange are
 novated and are settled net. RITS and Austraclear operate on
 a gross basis. Each system contains checks as part of the
 clearing process (eg real time tests against cash limits).
 Austraclear and RITS provide irrevocable transfer of title
 against simultaneous payment on a transaction-by-transaction
 basis through out the day.       Austraclear and RITS have
 associated registries. Austraclear participates in CEDEL and
 Euroclear and is a member of SWIFT.

 The costs of operating the systems are given on table 5.

 Table 5
 Clearing and Settlement: Value, Volume, Assets and
                                   RITS             Austraclear       SFECH(a)
Value of transactions              A$3 500 bn(b)    A$5,200 bn        A$10,183 bn
Number of transactions             189 000(b)       871,397           30,251,000(c)
Assets held/Open interest A$80bn                    A$231 bn          A$118 bn
Total transaction revenue          A$4 mn           A$12.3 mn         $59 mn (d)
 (a)       The SFECH data represent the notional values traded. They are not
           comparable with cash market values.
 (b)       Excludes intraday repurchase transactions with the Reserve Bank.
 (c)       These are the number of contracts traded, which is the key revenue
 (d)       SFECH levies a single charge per contract for both trading and
           so this figure is not just clearing and settlement activity.

 Key issues under consideration by market participants at
 present are t e need to increase the efficiency of the system
 and reduce costs, and generating additional competition within
 the payments system. At the end of last year the Reserve
 Bank of Australia held a meeting of stakeholders to discuss
 options to ensure that Australia’s clearing and settlement
 system remain competitive.

 Change is seen as being driven by:
            Domestic business pressure – heightened by
            demutualisation of exchanges;

           International trends – apparent consolidation of
           in some jurisdictions;

          Technology – increased convergence between
          and international markets;

            Legal and regulatory change – including corporate
            law reforms;

            Policy – need to enhance competition within the
         payments system.

One option is to amend the existing system to remove
impediments to competition and this is already underway to a
significant degree, with CLERP and other reforms. At the
other extreme is the creation of single system that spreads
more widely the heavy fixed costs of clearing and settlements
systems. The choices are complex and still under review.

In September 2000, Austraclear and the Sydney Futures
Exchange announced that they would merge (subject to
certain conditions being satisfied). Building on the existing
services, it is anticipated that the combined entity will have the
capability to deliver new services and products that will enable
it to compete effectively in the increasingly global market. This
could include cross-margining, collateral management and
repo clearing.
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7. Concluding Comments

This has been a rapid excursion through many of the Asian
bond markets, so the detail of individual markets has been
passed over to a significant degree. The following speakers
will deal with specific issues in respect of their countries.
However, I would like to close with some general comments.

It appears likely from the initiatives underway that government
bond markets in the Asian region will play a more prominent
and constructive role going forward. This aspect of financial
sector infrastructure will provide a much better base for the
corporate bond market. However, this will not be the only
factor to affect market growth and development.

The 1997 Financial System Inquiry in Australia noted that the
increasing capacity of large firms to access markets directly is
partly a result of improved information technology which allows
ultimate lenders to inform themselves about the characteristics
of borrowers more easily and at a lower cost. The nquiry I
concluded that the future of Australia’s corporate debt market
would depend on three factors:
         The number of companies able to achieve a
         sufficiently high credit rating to attract demand for their
         paper from investors;

         The willingness of investors to hold a portion of lower
         rated paper in their debt portfolios; and

         The intensity of competition from alternative sources of
         funds from both the banking sector and offshore debt

This is probably a fair assessment of the factors likely to
influence Asian corporate bond markets as well. For example,
with rising income and aging populations, many countries are
in the process of enhancing their superannuation
arrangements that are increasing demand for financial
investments. Given the initiatives underway in the region, it is
possible that corporate bond markets can record solid,
sustainable growth over the next few years.

4 October 2000

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