Market Infrastructure Developments Impacting Asian Bond Markets. Insights for institutional clients

Transcription

1 Market Infrastructure Developments Impacting Asian Bond Markets Insights for institutional clients

2 2 Citi Securities and Fund Services Asian Bond Markets The need to further develop the Asian bond markets has been a consistent theme ever since the global financial crisis. The Asia Pacific bond markets weathered the 2008 financial crisis well; there was no dramatic decline in bond issues in Asia even after the onset. Bond markets in Asia continued to grow rapidly, with the size of local currency bond market pre-crisis which totaled at USD488 billion at end of December 1996, increasing to USD70,811 billion at end of s and central banks encourage the expansion of the Asian bond markets, and policymakers in Asia placed a high priority on bond market development. The corporate bond market issuance in the region supported by local rating agencies as well as local investors, acted as a cushion for corporate financing during the crisis; and that insured against fluctuating sentiment in global markets as well as slowing banking credit. Foreign participation in the bond markets was encouraged. Interest rate and liquidity risk exposures, as well as the promotion to borrow in local currency have been great policy successes, especially in the emerging markets during the past decade, and it fostered the development of domestic bond markets. All these led to a renewed awareness of the need to develop domestic financial and capital markets during periods of turmoil in the international financial markets. s and central banks encouraged the expansion of the Asian bond markets, and policymakers in Asia placed a high priority on bond market development. Bond market development is significant not only as a way of reducing the region s traditional reliance on capital flows, but also for its contribution to the expansion of domestic demand and as a driver of regional financial integration. As a result of the global financial crisis, there is more government cooperation which advances many developments. The following are some key examples of recent developments in the Asian bond markets: Asia Region Asean + 3 Bond Market Forum (ABMF) The Association of Southeast Asian Nations (ASEAN), along with China, Japan and Korea established the ASEAN +3 Bond Market Forum (ABMF) in September 2010 as a common platform to foster standardization of market practices and harmonization of regulations relating to cross-border transactions in the region. ABMF reports its activities to the Task Force 3 (TF3) of the Asian Bond Markets Initiative (ABMI) under the institutional framework of ASEAN+3 Finance Ministers Meeting (AFMM+3). ABMF consists of two subforums: Sub-Forum 1 (SF1) researched, collated and compared regulations and market practices in the region, while Sub-Forum 2 (SF2) looked to harmonize transaction procedures across bonds market infrastructures in ASEAN+3 markets. National members and experts (Citi is one of the International Experts for ABMF) participated in the ABMF SF1 and conducted a survey on regional bond markets, and the legal and regulatory infrastructures in ASEAN+3 with support from the Asian Development Bank (ADB). Key output of the organization, which collaborated with the Asian Development Bank (ADB) is the ASEAN+3 Bond Market Guide publication ( publications/adb/2012/asean+3_bond_market_ guide.pdf). The publication raised awareness and detailed how each market is structured, with the aim to encourage more cross-border bond issuance and investment in the region s local currency bond markets. The report covers comparative analyses, as well as bond market guides for ASEAN+3 members. Summary of findings 1 Over-the-Counter () Market: Bonds could be listed on the stock exchanges in many markets, but most of the instruments are traded on the markets. 2 Bondholder Representative and/or Trustee: The concept of bondholder representative, trustee and commissioned bank are gaining popularity and are evolving. For example, the new Commercial Code in the Republic of Korea, which came into effect in 2012, is redefining the role of commissioned banks.

3 Market Infrastructure Developments Impacting Asian Bond Markets 3 Demand for dim sum bonds in Hong Kong continues to be strong from investors and central banks, who want to diversify their investments or currency reserves into the RMB, and to enjoy the benefits of favorable regulatory and tax regime in Hong Kong. 3 There is opportunity to propose a common self-regulatory framework for qualified market players in the future, to improve properly regulated and exempted private placement markets. 4 Two general approaches are observed in the markets when it comes to public offerings: (1) full disclosure with specific exemptions, and (2) a clearly defined disclosure regime. The key objectives for ABMF Phase 2 will be to facilitate cross-border inter-regional initiatives of issuance and investment of bonds, and it might focus on private placements or exempted market from full-disclosure requirement across jurisdictions. This might create a professional, organized and well-documented common regional private placement marketplace populated by qualified investors, and where the SRO concept would come in as part of discussions on effective governance. Islamic Bonds (Sukuk) Islamic financial assets have expanded from USD150 billion in the mid-1990s to USD1.3 trillion in 2011 globally. Sukuks are one of the most prominent instruments used in Islamic finance, and have been commonly issued for raising funds in domestic and international capital markets. Islamic finance is one of the fastest growing sectors within the global financial services industry, growing at a rate of 10-15% per year with signs of consistent future growth. The market has grown since the Islamic Development Bank (IDB) opened in 1975 to finance economic development and foster social progress in compliance with Shariah principles. Given the strategic importance and influence of investors from the Middle East, Islamic finance is increasingly in demand by investors. In recent years, several countries in East Asia mostly with large Muslim populations have developed Shariah-compliant products and markets. Several of these markets like Malaysia, Indonesia, Thailand, Singapore, Japan, China and Hong Kong are growing with increasing demand for Islamic bonds after they launched their regulatory framework for the issuance of Islamic bonds or Sukuk in their respective markets. Malaysia continues to be the hub for Islamic financial services, while other countries are also launching their own regulatory framework for the issuance of Islamic bonds or Sukuk in their respective bond markets, if not already in place. In essence, the risk exposure of investors for Sukuk is not materially different from a conventional bond. If material difference exists, it is usually disclosed in the offering documents. Pan-Asian CSD Alliance As part of the continuing journey in deepening and strengthening the financial markets in Asia, to facilitate the Asian bond market development and to enhance the attractiveness of Asian debt securities to foreign investors, the Hong Kong Monetary Authority (HKMA) along with a group of central banks and central securities depositories (CSDs) in Asia, formed an alliance in June 2010 with Euroclear Bank and developed a common platform model. The Common Platform Model enables Asian CSDs to improve the crossborder post-trade infrastructure in Asia, to adopt harmonized procedures, shared technology in processing debt securities in a pragmatic and gradual approach, and to establish an intraregional bond issuance program. Hong Kong Hong Kong is one of the most liberal debt markets in the world. International investors are free to invest in debt instruments locally, and there are no restrictions on foreign borrowers tapping the domestic debt market to finance their business. It has an active and liquid private sector bond market of USD71.7 billion at the end of 2011, accounting for around 44% of total outstanding Hong Kong dollar debt instruments. January 2007 marked a milestone development of Hong Kong s debt market, when the Chinese government gave the green light to mainland financial institutions to issue RMB bonds in Hong Kong. The Hong Kong market of renminbi bonds (dim-sum bonds) is the largest outside Mainland China. In 2011, there were issuances of over RMB100 billion by 81 issuers, three times the total of Over the years, the range of issuers in the renminbi bond market in Hong Kong has diversified from predominantly the sovereign and banks in Mainland China to multinational companies (e.g. McDonald s, Volkswagen) and international financial institutions (e.g. Asian Development Bank) and even non-bank institutions in Mainland China (e.g. Baosteel). Demand for dim sum bonds in Hong Kong continues to be strong from investors and central banks who want to diversify their investments or currency reserves into RMB, and to enjoy the benefits of a favorable regulatory and tax regime in Hong Kong. For example, dim sum bonds in Hong Kong are not subject to any withholding tax. Hong Kong also remains issuers country of choice for dim sum bond issuance, as it has the largest pool of RMB liquidity outside of Mainland China. Hong Kong is also playing a unique role in the internationalization of the RMB. During the early part of 2012, the Hong Kong Monetary

4 4 Citi Securities and Fund Services The China bond market is made up of the inter-bank bond market and the exchange listed bond market. The interbank bond markets is an market and accounts for about 94% of outstanding bond value as well as 99% of bond trading volume. Authority (HKMA) and the UK Treasury announced the launch of a joint private-sector forum to assist London on development of an offshore RMB business. On Apr 18, 2012, the first dim sum bond was sold in London. Hong Kong has also developed a highly efficient and reliable renminbi clearing platform, the renminbi Real Time Gross (RTGS) system to support banks from all over the world in developing various kinds of offshore renminbi business. The renminbi RTGS system in Hong Kong is linked up with China National Advanced Payment System (CNAPS), the large-value renminbi payment system in Mainland China. From June 2012, the operating hours of the renminbi RTGS system will be extended to 15 hours, serving from 08:30 to 23:30 (Hong Kong time). This facilitates financial institutions in different time zones to settle offshore renminbi payments through the Hong Kong infrastructure. At the end of 2011, there were a total of 187 banks participating in the renminbi clearing platform in Hong Kong, of which 165 were branches and subsidiaries of foreign banks and overseas presence of Chinese banks. This has formed a global payment network covering more than 30 countries in six continents, capable of handling renminbi transactions between Mainland China and overseas and among different offshore markets. China The China bond market is made up of the interbank bond market and the exchange listed bond market. The inter-bank bond markets is an market and accounts for about 94% of outstanding bond value, as well as 99% of bond trading volume. It was established in 1997 and has recorded an average annual growth rate of over 50% since The main products in the inter-bank bond market include cash bonds, government bonds, central bank papers, policy bank bonds, short-term papers, MTNs, corporate bonds, financial bonds, local municipal bonds, collective notes, and asset-backed securities, collateral repurchase (repo), out-right repo, bond lending and forward. Currently, policy bank bonds, central bank paper and MTNs are the three most actively traded bonds in the inter-bank bond market. At present, the interbank bond market has over 10,000 members covering all types of financial institutions such as commercial banks, securities companies, insurance companies and various kinds of investment vehicles like mutual funds and pension funds. Among these, commercial banks are the most active participants. The inter-bank bond market facilitates two trading modes: bilateral negotiation and market maker. The bond market officially introduced the market maker mechanism in 2001 to improve market liquidity and enhance efficiency. Currently, 25 market makers provide bid-offer quotation for underlying bonds that cover all types and terms. Another market policy, named the settlement agency mechanism, allows non-financial companies to invest in the inter-bank bond market through settlement agent banks. China Foreign Exchange Trade System (CFETS) and the National Inter-Bank Funding Center act as the unified trading platform for the interbank bond market in China. CFETS has been operating the inter-bank bond market since 1997, and is now developed into a unique electronic bond-trading platform in China with comprehensive functions of trade, post-trading service, risk management and information services (e.g. quotes and prices). There is a straight-through processing (STP) set-up between CFETS and the central depository (CCDC and Shanghai House) through which transaction data is transferred to the settlement system automatically. Citi has been actively monitoring and assisting the market infrastructures in many of these developments. We have compiled a quick summary of key market infrastructure changes impacting bonds to help keep you abreast of these developments in Asia Pacific. We hope that you will find this snapshot useful and informative.

5 Market Infrastructure Developments Impacting Asian Bond Markets 5 Contact Us Asia Pacific Jeffrey Williams Regional Head, Direct Custody & Asia Pacific jeffrey.williams@citi.com Rudy Ingkiriwang Regional Head, Asia Network Management rudy.ingkiriwang@citi.com Judy Yip To Market Advocacy, Asia Pacific judy.yipto@citi.com AUSTRALIA CHINA HONG KONG Martin Carpenter +61 (2) martin.carpenter@citi.com Kevin Sc Wong +86 (21) kevin.sc.wong@citi.com Cindy T Chen cindy.t.chen@citi.com India INDONESIA JAPAN Aashish Mishra +91 (22) aashish.k.mishra@citi.com Daniel Wijono +62 (21) daniel.wijono@citi.com Yasuhiro Yanakawa +81 (3) yasuhiro.yanakawa@citi.com Korea MALAYSIA PHILIPPINES Hee-Jin Kim +82 (2) heejin.kim@citi.com Benedict Ler +60 (3) benedict.ler@citi.com Theresa Reyes +63 (2) theresa.reyes@citi.com SINGAPORE TAIWAN THAILAND Alvin Goh alvin.nc.goh@citi.com Hsiao-Chi Wang hsiaochi.wang@citi.com Dol Watanasri +66 (2) dol.watanasri@citi.com VIETNAM Ha Thu Nguyen +84 (43) hathu.nguyen@citi.com

6 6 8 APAC Major Markets Bonds Australia (GMT+10) DST Hong Kong (GMT+8) Japan (GMT+9) Singapore (GMT+8) Size of LCY Bond Market (USDBn) 1 1,902 ( 23%, 77%) 171 ( 53%, 47%) (Dim Sum Bond 40) 11,897(JGB 91%, 9%) 211 ( 61%, 39%) Bond Volume (USDBn) 1 Not available , Bond Turnover Ratio (%) 1 Not available (223%), (21%) JGB (128%), (8%) (60%), (-) Growth from Prior Year (%) 1 Not available (-97%), (308%) JGB (24%), (10%) (-12%), (-) Market Infrastructure ASX * (5%) (95%) SEHK trades only SGX HKSCC JGBCC CDP CHESS Austraclear CCASS CMU JASDEC BOJ JGBs CDP MAS Both Both Dematerialized Both Dematerialized Dematerialized, but not for all corporate debts * in debt is mainly. No listed government and semi-government bond trading on ASX, only very small amount of corporate debt traded (mainly listed companies convertible notes and interest rate securities). A bond can be transferred between CMU and CCASS for clearing and settlement (if it is an eligible listed instrument in both CMU and CCASS). * All trading are. Listing only remains on Tokyo Stock Exchange (TSE), but no trading. T+3 T+3 T+2 T+2 T+2* T+3 T+1 but commonly contracted at T+3 T+1 but commonly contracted at T+3 T+3 T+3 T+0 to T+2 (negotiable) T+0 to T+2 (negotiable) * Domestic trades only; offshore and cross-border trades are T+3 or negotiable T+1 to T+3 (negotiable) but generally T+1 with primary dealers T+1 to T+3 (negotiable) but generally T+1 with primary dealers Developments Covered Bonds: Australia is one of the last developed countries to allow banks to sell covered bonds, with first issue on Nov 16, As part of Australia s implementation of the Basel III liquidity reforms in 2012, regulatory demands for Australian banks to hold more of their capital in liquid government debt securities led the country short on public government debt to meet demands. The Australian Prudential Regulation Authority (APRA) released a response paper on Jul 12, 2012 in relation to the issue of covered bonds and securitization. of covered bonds in Australia has boomed in 2012, to improve their liquidity risk positions to face Basel III s liquidity provisions in the country. Australian Securities & Investments Commission (ASIC) has released a Consultation Paper in Jul 2012 to implement the Australian s decision to facilitate retail trading of Commonwealth Securities (CGS) as part of fostering a deep and liquid corporate bond market. Dim Sum Bonds: RMB denominated bonds launched has developed rapidly since 2010 in response to the growth in demand for RMB. in the 1H2012 totaled HKD67.2 billion. On Jun 14, 2012, the Central issued offshore RMB sovereign bonds for the fourth time since the first issue in The bond was also listed and traded in RMB on the SEHK on Jul 3, Since Aug 19, 2010, HKEx supported the trading and clearing of products denominated in RMB, including bonds listed on HKEx. Pan Asian Bond Platform: HKMA, Bank Negara Malaysia (BNM) and Euroclear Bank developed a common platform model to provide cross-border repurchase services, allowing banks to use bonds held through the platform as collateral for short-term funding in RMB, USD or EUR. A pilot platform became operational on Mar 30, On Jul 5, 2012, the China State Council approved special incentive policies to build a pilot financial zone in Shenzhen Qianhai, to expand overseas RMB capital return channels with the support of Hong Kong RMB offshore business development. Banks located in the Qianhai area will be supported to issue RMB loans overseas, and they are authorized to issue bonds in Hong Kong to boost the area s economic development. RMB Qualified Foreign Institutional Investors (RQFII) Scheme officially launched on Dec 16, 2011, with an initial quota of RMB20 billion (~USD2 billion) and has been increased to RMB270 billion as of Nov 13, The scheme is only available to Hong Kong subsidiaries of China mutual fund companies and securities companies, and approved RQFIIs are allowed to issue RMB funds in Hong Kong and use the funds raised to invest in China s securities market (20% equities, 80% fixed income). People s Bank of China (PBOC) has granted some overseas insurance companies based in Hong Kong to invest in China interbank bond market. The Hong Kong government launched a consultation on the legal and tax framework required to support the development of Islamic financing in the region. In May 2012, HKMA adopted a four part approach to boost the Islamic bond market, including (1) improving related financial infrastructures, (2) enhancing international profile of Hong Kong, (3) promoting product development and (4) raising market awareness. Hong Kong also signed a Memorandum of Understanding (MOU) with Bank Negara Malaysia. Pan Asian Bond Platform aims to strengthen the cross-border issuance of, and foreign investment in local bonds in Hong Kong and Malaysia, which will spur trading of sukuk and dim sum bonds, as Hong Kong aims to become China s hub for Islamic finance and offshore RMB transactions. As of Oct 29, 2012, the is finalizing a bill that will provide a taxation framework for Islamic bonds, that it hopes to introduce to the Legislative Council in early This proposal is seen as enhancing Hong Kong s competitiveness in financial services and enabling the city to serve as a gateway for international Islamic finance. JGBs and extra budget: Japanese Bonds (JGBs) are the main bonds issued. Reconstruction JGBs have been issued from fiscal year 2011, to finance bulk of the spending on rebuilding from the Mar 2011 earthquake. only market: JGBs are always traded on an basis, bilaterally between market participants. JBT as trading platform: 60% of the bond trades are executed at the Japan Bond Co. Ltd. (JBT), also known as the brokers broker (BB) in the market. Bilateral netting by trading parties is the market practice, except for Japan Bond Corporation (JGBCC) assumed trades. JGBCC: The CCP acts as the clearing house for the trades, currently utilized by broker/ dealer community only. More JGBCC coverage expected: JGB clearing to be fully centralized at single clearinghouse, JGBCC, by additional participation of domestic banks, trust banks and brokers in the first half of 2014, reducing settlement and default risks. Domestic JGB settlement cycle reduction: Market participants trading under the Japan Securities Dealers Association (JSDA) rules shortened the domestic JGB settlement cycle reduction in two phases; from T+3 to T+2 on Apr 23, Furthermore, reduction to T+1 is under discussion. Tokyo Pro-Bond Market is a listing board at the Tokyo Stock Exchange (TSE), which recently listed three MTN type programs for professional investors. However, the actual settlement is being made bilateral in the market like other corporate bonds. Revenue bond: Effective Apr 1, 2012, revenue bond becomes Japanese Bond Income Exemption Scheme (J-BIEM) eligible instruments for non-resident investors in the fiscal year 2012 Tax Reform, to allow tax exemption on interest arising from profit-linked bonds. It is specifically to be issued in the area affected by the Mar 2011 Japan earthquake. Tax regulations amended Apr 1, 2011 to offer tax exemptions to Sukuks for non-resident investors, to bring more investment opportunities for Islamic investors to the Japanese debt market. Effective Apr 1, 2012, JASDEC started to handle J-Sukuk in its Corporate Bonds Book-Entry System. Effective Jul 8, 2011, a selected list of Singapore Bonds (SGS Bonds) traded mainly with primary dealers (banks) began to trade on the Singapore Exchange Limited (SGX). The initiative provides market investors access to the SGS bonds market and prices through the SGX existing infrastructure, rather than rely on SGS Bonds dealer banks. Since Jul 6, 2012, SGX was ready to list, quote, trade, clear and settle securities denominated in RMB. In Oct 2012, SGX began trading of retail bonds (small denomination corporate bonds) target for retail investors. SGS are settled electronically through the local interbank payment system MAS Electronic Payment System (MEPS+). Corporate bonds normally settle via CDP. There are approximately 20 Singapore Securities (SGS) listed on SGX. They are settled on a T+3 basis, unlike the traditional SGS settled via (MEPS) on a T+1 basis. On Mar 14, 2012, MAS announced three initiatives to broaden and deepen the Singapore corporate bond market: (1) to include the provision of swap liquidity to primary dealer banks handling Singapore Dollar (SGD) debt issuance for foreign corporations; (2) the creation of a lending platform for SGD debt securities; (3) and the initiation of a price discovery platform for SGD corporate bonds. In 2005, Singapore was accepted as a full member of the Islamic Financial Services Board (ISFB), and in Jan 2009, MAS launched its first Islamic bond program worth SGD200 million.

7 9 11 ASEAN Markets Bonds Indonesia (GMT+7) Malaysia (GMT+8) Philippines (GMT+8) Thailand (GMT+7) Vietnam (GMT+7) Size of LCY Bond Market (USDBn) ( 85%, 15%) 298 ( 60%, 40%) 83 ( 88%, 12%) 250 ( 80%, 20%) 20 ( 90%, 10%) Bond Volume (USDBn) Not available Bond Turnover Ratio (%) 1 (39%), (13%) (85%), (11%) (58%), (-) (78%), (6%) Not available Growth from Prior Year (%) 1 (37%), (64%) (30%), (91%) (48%), (-) (-7%), (48%) Not available Market Infrastructure IDX MYX PDEX BEX HNX HOSE KPEI BSC TCH KSEI BI BMD Bank Negara BTR-RoSS PDTC TSD VSD Dematerialized Dematerialized Immobilized Dematerialized Immobilized Immobilized BEX enhances the bond s secondary market. Prior to BEX, bonds were traded in. T+2 T+2 T+3 T+3 T+1 T+1 T+2 T+2 or UpCom T+1 T+1 T+2 (negotiable) T+2 (negotiable) T+2 (negotiable) T+2 (negotiable) T+1 T+1 T+2 (negotiable) T+2 (negotiable) No standard process (negotiable) No standard process (negotiable) T+1 (market conversion for domestic transactions T+1, parties can still agree on T+0 basis). Developments trading of government bonds began in Sertifikat Bank Indonesia (SBI): Prior to Mar 2011, the issued treasury bills with a three month tenor. SBI was the main tool used by BI for open-market operations to control the liquidity of the banking system, and is the most actively traded money market instrument in Indonesia. The holding period before investors can sell SBI to the secondary market was extended to six months in May Although IDX provides facility to trade debt instruments in its Jakarta Automated System (JATS), it is not used and instead, market participants usually trade and settle debt instruments off the exchange. ECLEARs The Indonesian and Guarantee Corporation (KPEI) clearing house has an electronic clearing system called E-CLEARS (Electronic System), in which KPEI has established a STP linkage from brokers to the House in the 3rd quarter of of government bonds is done through the Indonesia Scripless Securities System (BI-S4), a settlement system for government debt instruments. Bapepam-LK revised the regulation to have fund managers use bond pricing published by the Indonesia Bonds Pricing Agency (PHEI), as the mandatory pricing source for fixed income. Bapepam-LK and the Indonesia Stock Exchange (IDX) plan to establish an Investor Protection Fund (IPF) in the later half of 2012, to help players on the capital market and investors avoid scams. The Indonesian Bonds Pricing Agency (PHEI) began to publish the fair market value (price) of Indonesian Bonds in foreign currency denomination (Indonesian Global Bonds) in Mar Onshore commercial banks that participate in the trading of government debt instruments such as government bonds and treasury bills, are in discussion to possibly be eligible to become members of the Indonesia Stock Exchange (IDX). Indonesia s central bank began buying RMB denominated bonds issued in Mainland China, joining a growing number of countries moving to add the Chinese currency to their foreign-exchange reserves. In Dec 2010, Bank Indonesia formed a committee with Shariah scholars accounts to speed up the approval process for new products. Indonesian Islamic bond sales is believed to recover from the slowest half in three years as the government finances transport and power projects which ensure stable cash flows. The government may offer as much as USD1 billion worth of dollar-denominated Islamic bonds in the second half of 2012, in a bid to finance its budget deficit. In Jul 2000, the Securities Commission (SC) assumed the function of single approval authority for all corporate bond issues in Malaysia, following amendments to the Securities Commission Act 1993 (SCA). On Mar 30, 2012, the Hong Kong Monetary Authorithy (HKMA), Bank Negara Malaysia (BNM) and Euroclear Bank jointly launched the pilot platform for the cross-border investment and settlement of debt securities. The Pilot Platform aims to strengthen the cross-border issuance of, and foreign investment in, local bonds in Hong Kong and Malaysia. Bank Negara Malaysia had extended its real-time gross settlement services in its Real-time Electronic Transfer of Funds and System (RENTAS) to include Renminbi. Renminbi can now be used to settle real-time interbank funds transfer and securities services, as well as issuance of scripless securities depositories for all unlisted debt instruments. Electronic Platform (ETP) facilities launched on Mar 10, 2008 for the trading and reporting of government and corporate bonds, and all secondary market activities allowed dealers to easily match bids with offers, negotiate deals and access historical data through a common computerized network. Securities Commission Malaysia launched the Malaysian retail bonds and sukuk framework, that provided retail investors direct access to invest in bonds and sukuk. During the introductory phase, retail investors will be able to invest in bonds and sukuk issued or guaranteed by the Malaysian government. Bond Info Hub is a one-stop center detailing all bond related information in Malaysia. In Jul 2011, Securities Commission issued revised guidelines for private debt securities and sukuk in line with the broader objectives of the Capital Market Masterplan 2. The revised guidelines include: (1) streamline the approval process and time-to-market for the issuance of corporate bonds and sukuk, (2) remove the mandatory rating requirement for selected issues or offers, (3) provide greater disclosure of relevant information for debenture holders. Malaysia is the Islamic capital market center. Approximately 70% of Malaysia s domestic debt issuance is in the form of sukuks, making it the world s largest Islamic bond market with over 60% of global sukuk issuance originating from Malaysia. Bank Negara Malaysia issued its first Sukuk ljarah Notes in Feb Exempted investors from paying taxes on capital gains made on Shariah-compliant debt denominated in currencies other than the ringgit through On Sep 27, 2012, Bursa Malaysia introduced rules to facilitate listing and trading of exchange traded bonds and sukuks on the Exchange. bonds are issued through underwriters rather than through primary dealers. Benchmark Bonds: As part of the country s debt consolidation program, the government issued Benchmark bonds in exchange for old bonds, thereby creating very liquid bonds up to 10 years. Peso-Denominated Global Bonds: The US Securities and Exchange Commission-registered bonds, the first deal of its kind from Asia are peso-denominated and are traded onshore but settled offshore. These bonds are a part of the government s proactive management of external liabilities, particularly with respect to reducing its vulnerability to foreign currency risk. Local regulators require direct delivery from dealer to investor s designated 3rd party custodian. There is no CCP for fixed income yet. settle directly between broker/dealer & buyer/seller. securities are settled through the Registry of Scripless Securities (RoSS), usually on same day and on a semi-dvp basis. Tax: Under the Tax Code of 1997, income tax exemption on investments including bonds is granted to sovereign entities in the Philippines. Dollar-linked Promissory Notes are Peso-denominated coupon bonds, where cash flows are adjusted to the USD/PHP exchange rate at the time of payment. The Philippines market is predominantly composed of government securities (81% of the market s total outstanding). The private sector commercial paper market is small, presenting many obstacles to foreign investors. However, the development of the europeso bond market for foreign issuers has generated interest. The country is looking to the capital markets to help finance its infrastructure funding needs. The government is working with the World Bank and its private sector arm, the International Finance Corporation, to create instruments that matches funds to infrastructure requirements as well as tapping private infrastructure funds. In 2010, both corporations and the government started to issue 50- year and 100-year bonds. From Aug 2010 onward, Thai companies were permitted to issue and list FCY denominated bonds. In July 2011, the Ministry of Finance issued Inflation Link Bonds (ILBs) which protect the principal against inflation. Since May 2011, the cities of Bangkok and Pattaya and other selected local governments were allowed to raise funds through bond issues. However, the central government will not guarantee these issues but the SEC will supervise the bond issues and a credit rating will be required. The Finance Ministry and the Interior Ministry are working together on this regulation and regulatory framework needs to be finalized. The Thai Ministry of Finance has permitted seven foreign entities to issue Baht-denominated bonds or debentures in Thailand by Sep 30, Citi is one of the permitted entities with authorized issue amount of 10,000 million Baht. The Bond Electronic Exchange (BEX) was established by the Stock Exchange of Thailand (SET) and started trading on Nov 26, Securities eligible for trading on SET s BEX were bonds issued by SET-listed and MAI-listed companies. Prior to that, all bonds were traded. In 1999, Citi was instrumental in setting up the book-entry system for government bonds with the Bank of Thailand (BOT). Citi continues to actively participate in the Thailand Securities Depository s Working Committees to implement Real-Time Depository Records and Straight-Through-Processing (STP). BOT is currently working on a project to improve efficiency in the settlement system for government to facilitate real time delivery versus payment (DVP). bonds are the most actively traded securities, accounting for approximately 80-90% of total trade. The Thai bond market showed improvements in many aspects in 2011, and is expected to expand further in 2012 with the growth of both demand and supply. On Aug 22, 2012, SEC launched the project SMEs Bond to promote fundraising channel for small and medium-sized businesses until year end On May 15, 2012, Islamic Bank of Thailand sent request for proposals (RFP) to a group of banks to submit proposals for bahtdenominated sukuk. A state-run Thai Islamic bank is expected to issue an Islamic bond soon, but no specific date has been identified. Since Jul 2006, only HNX has sponsored auctions of government bonds. However, foreign investors are not eligible to participate in auctions and may only acquire government and provincial bonds in the secondary market. Decree 01 came into effect on Feb 20, The decree specifies which organizations are allowed to issue government guaranteed bonds and the purposes for which government guaranteed bonds can be issued, and provides additional clarity on the role of the State Bank of Vietnam in international government bond issues. On Oct 14, 2011, Decree 90 on corporate bond issuance was issued to unify previously separate regulations on domestic and international issuance into one decree. HNX Bond Platform: In Sep 2009, the Hanoi Stock Exchange (HNX) launched a specialized market to trade government bonds, local government bonds, and other governmentguaranteed securities. New systems - HNX is in the midst of plans to facilitate the development of Vietnam s bond market, of which a variety of new systems are to be installed in the first half of In May 2012, the exchange allowed new type of products such as launch of electronic procurement, yield curve and bond index on treasury bonds with plans to issue in the later part of On Sep 24, 2009, HNX opened the Specialized Bond Market to help develop the local bond market in terms of both scale and depth. In Dec 2011, the Ministry of Finance (MOF) approved a pilot project for swaps on government bonds with remaining time to maturity of 1.5 to 2.5 years. The State Treasury will issue new bonds with indentures and covenants for swaps. The amount of government debt outstanding will remain unchanged. In Jul 2012, HNX, VSD and some government bond issuers signed a multilateral memorandum with an aim to enhance the operations of Bond issuance, registration, listing and settlement in the local market. On Aug 6, 2012, HNX launched an electronic auction system for government bonds, government-guaranteed bonds and municipal bonds, which helps shorten timeframe of auction approval and bidding results.

8 12 14 Major Registration Markets Bonds China (GMT+8) India (GMT+5½) Korea (GMT+9) Taiwan (GMT+8) Size of LCY Bond Market (USDBn) 1 3,448 ( 75%, 25%) 710 ( 73%, 27%) 1,290 ( 41%, 59%) 194 ( 80%, 20%) Bond Volume (USDBn) 1 2,335 Not available Bond Turnover Ratio (%) 1 (52%), (115%) Not available (96%), (18%) Not available Growth from Prior Year (%) 1 (-2%), (26%) Not available (4%), (12%) Not available Market Infrastructure SSE SZSE NSE BSE NDS FIMMDA (20%) (80%) KRX GTSM SHCH CCIL NSCCL CCIL ICCL CCIL NSCCL/ICCL KRX KSD CSDCC CCDC RBI NSDL CDSL KSD TDCC CBC Dematerialized Dematerialized Dematerialized and small portion are physically held Some corporate bonds (physical bonds) are not deposited at TDCC, so the bond market as a whole is not immobilized or dematerialized T+0/T+1 T+0/T+1 T+1 T+2 KRX T+1 T T+2 T+2 T+0/T+1 T+0/T+1 T+1 T to T+2 (negotiable) T+1 to T+30 (negotiable) T+1 to T+30 (negotiable) T+2 T+2 The settlement cycle for bond is T+1 (government bonds in the KRX-Stock Market Division), T (other bonds in the KRX-Stock Market Division), or it could be negotiable between T+1~T+30 (in the market). In general up to T+2 for both government and corporate bonds (between arrangement of counterparties). Formosa bond: settled on T+3 or more. Developments On Oct 20, 2011, the Ministry of Finance launched a trial program allowing some of its provincial and municipal governments to issue bonds directly in their own name. On Jun 8, 2012, China Securities Regulatory Commission (CSRC) approved high yield bonds issuance, part of a push to broaden the range of financing routes for smaller and medium-sized companies. Starting from Jul 2, 2012, CSDCC began to charge settlement fees for corporate bonds and specific net management plans. With effective from Jul 16, 2012, SZSE adjusted the settlement cycle from T+1 DVP to T+0 for corporate bonds, T+1 for cash in a netting mode. In Feb 2012, China Securities Index Co., Ltd launched China Securities Index Co., Ltd. (CSI) bond valuation, which provides a benchmark to gauge fair market value for bond investors. On Sep 30, 2011, Shanghai Stock Exchange (SSE) announced that they had been working with the CSDCC on repos for convertible bonds. SSE planned to allow repos for convertible bonds after the technical preparation is completed. However, QFIIs are not allowed to participate in the bond repos. China intends to expand its capital markets and open them more widely to foreign investors by Its goal is to reach world s top three by 2015 from its place at top fifth biggest in Plans include to encourage foreign companies to issue renminbi-denominated bonds and list on the SSE. In Apr 2012, China Banking Regulatory Commission (CBRC) tightened controls on banks bond underwriting by requiring the banks to treat corporate bonds that they underwrite as credit lines and include them in their loan books. On Jul 5, 2012, the State Council approved special incentive policies to build a pilot financial zone in Shenzhen Qianhai, to expand overseas RMB capital return channels with the support of Hong Kong RMB offshore business development. Banks located in the Qianhai area will be supported to issue RMB loans overseas and authorized to issue bonds in Hong Kong to boost the area s economic development. In Jul 2012, CSRC for the first time allowed Qualified Foreign Institutional Investors (QFIIs) to trade fixed income products traded in interbank bond market. However, detail implementation rules by Public Bank of China is pending before QFIIs can start investment in interbank bond market. In Aug 2012, the Securities and Exchange Board of India (SEBI) mandated issuers to offer the Applications Supported by Blocked Amount (ASBA) facility as an alternative method for making an application for public issue of debt securities. Under ASBA, the application amount needed for bids is blocked in the investor s bank account and transferred on receipt of instructions from the registrar. In Jul 2012, SEBI and the Reserve Bank of India (RBI) permitted Qualified Foreign Investors (QFIs) to invest in corporate debt securities (without any lock-in or residual maturity clause) and mutual fund debt schemes subject to a total overall ceiling of USD1 billion. In 2012, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) enabled facilities for trading of long term infrastructure category bonds amongst Foreign Institutional Investors (FIIs) in the lock in period. In Jun 2012, the Ministry of Finance (MOF) increased limits for FIIs to invest in long term securities by USD5 billion and reduced the residual maturity requirement for investment under these limits from five years to three years. MOF also revised the lock in period requirement to one year and residual maturity requirement to 15 months for the limit of USD22 billion for FII investment under the long term infrastructure debt category. On Dec 1, 2011, Fixed Income Money Market and Derivatives Association of India (FIMMDA) launched a new Trade Reporting and Confirmation platform (F-TRAC) for reporting of trades in Certificates of Deposits (CDs), Commercial Papers (CPs), Corporate Bonds, and Repos in Corporate Bonds. From Apr 2012, all Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) regulated entities need to settle Over-the-Counter () trades in Commercial Papers (CPs) and Certificates of Deposits (CDs) through either the National Securities Corporation Limited (NSCCL) or the Indian Corporation Limited (ICCL) on lines of the process for settlement of corporate bond trades. Effective Nov 21, 2012, the Reserve Bank of India (RBI) has reduced the settlement cycle of primary auctions in Treasury Bills (T-Bills) from the Trade Date T+2 cycle to T+1 cycle. In Aug 2012, the Working Group set up by the RBI to suggest measures for enhancing liquidity in Securities and Interest Rate Derivatives submitted its final report. The Group recommended a gradual increase in limits for FIIs to invest in Securities and an evaluation of withholding tax on these instruments. Recommendations also include introduction of futures contracts that have high probability of attracting participant interest such as Interest Rate Futures (IRF) based on overnight call borrowing rate, a review of the Securities and Exchange Board of India (SEBI) guidelines requiring FIIs to surrender limits in debt securities on their sale/ maturity, allowing FIIs to take trading positions in IRFs and changing the settlement cycle of primary auctions in Treasury Bills to T+1 from T+2. On Jul 1, 2011, SEBI permitted Non-Banking Financial Companies (NBFCs) categorized as Infrastructure Finance Companies (IFCs) by the Reserve Bank of India (RBI) to be considered as eligible issuers for FII limit in corporate debt of the long term infrastructure category. In Dec 2011, the Reserve Bank of India implemented guidelines relating to introduction of Credit Default Swaps (CDS). Since Jan 2006, the Republic of Korea began issuing 20-year government bonds to satisfy requests from pension funds and insurance companies. Corporate bond issuance surged 30.5% in 2011, as local firms sought funds to repay debts maturing in early Dim Sum Bond: First issued in Korea by Korea Eximbank on Aug 11, Kimchi Bond: To restrain foreign loans from growing rapidly, Bank of Korea in Oct 2011 announced that financial firms are banned from buying Kimchi bonds, which are foreign currency-denominated bonds issued in South Korea. Covered Bond: Effective Jun 30, 2011, the Financial Supervisory Service (FSS) announced new guidelines for issuance of covered bonds by banks. Korean Housing Finance Corporation (KHFC) is the only entity in Korea to issue covered bonds. The issuance format is attractive to Korean banks primarily because of their ability to get off-balance sheet treatment. From Sep 2012, the Republic of Korea began to issue 30-year government bonds. On Mar 2011, Korea launched its preliminary primary dealer system with the aim of enhancing market-making and promoting development of its treasury bond market. KRX operates the Electronic System (ETS) for trading between primary dealers. Since Jan 31, 2011, the Ministry of Strategy and Finance (MOSF) started to provide Korea Bonds data in English. Effective Jul 25, 2011, the Bank of Korea restricted foreign exchange agencies investments in foreign currency denominated bonds issued domestically for Korean won financing to control the country s short term foreign currency debt to avoid any capital outflow when the market is unstable. Effective Jan 2012, tax on foreign currency bonds for non-resident investors were implemented. Non-residents or local entities of foreign corporations will no longer benefit from tax exemption on interest from foreign currency bonds in Korea, issued on and after Jan 1, 2012 by the Korean government, local authority, or a domestic corporation. Korea s corporate bond market is well developed among other Asian counterparts. Gross settlement of securities and cash model (DVP1 model) after the netting model is introduced. The case by case settlement is speeding up the settlement process and provides better linkage with the DVP1 model for settlement of government bonds. The country s bond issuance activity had been low in the recent years due to inflation, and the proportion of financial institutions bonds has declined, while corporate bonds issued have increased. Formosa Bond: The first Formosa Bond was issued in Feb Formosa bonds are foreign currency-denominated bonds sold by foreign institutions in Taiwan to the local market. In Jun 2010, Citigroup Inc. issued the largest Formosa Bond and was also the first US financial institution issuer in the Formosa Bond market. Dim Sum Bond: In May 2012, the Financial Supervisory Commission (FSC) and the Central Bank of China (CBC) reached an agreement allowing domestic listed firms to float Dim-sum bonds in Hong Kong, but the raised funds cannot be remitted back to Taiwan. Foreign Institutional Investor (FINI) s aggregate investment in the following instruments must not exceed 30% of total net-remitted-in capital: 1) bonds (regardless of tenors); 2) Money market instruments (only bills with remaining maturity of 90 days or less are allowed); 3) Money market funds; 4) Premiums paid and net settlement amount for certain derivative products On Oct 17, 2012, FSC expanded the scope of foreign brokerage business to allow the selling of foreign bonds with a bond rating of BB (or higher) to professional Investors. Central government bonds are issued in the book-entry form. Effective Jan 2012, government bond repos settled via repo slip instead of actual transfer requires delivery of payment certificate along with the repo slip to terminate the repo transaction at expiration. Revised ruling by the FSC allows banks to accept bonds issued by the China government, as well as other foreign central governments or time deposits issued by the world s top 1,000 banks (ranked by asset or capital) as qualified collateral for NTD credit extension.

9 Market Infrastructure Developments Impacting Asian Bond Markets 15 Acronym Glossary ABS Asset-Backed Securities JBT Japan Bond Co. Ltd. APRA Australian Prudential Regulation Authority J-BIEM Japanese Bond Income Exemption Scheme ASX Australian Securities Exchange JGB Japanese Bond BEX Bond Electronic Exchange JGBCC Japan Bond Corporation BOJ Bank of Japan JSDA Japan Securities Dealers Association BMD Bursa Malaysia Depository (BMD) KPEI The Indonesian and Guarantee Corporation BNM Bank Negara Malaysia KRX Korea Exchange BSC Bursa Securities KSD Korea Securities Depository BSE Bombay Stock Exchange KSEI Kustodian Sentral Efek Indonesia BTR Bureau of Treasury LLB Inflation Link Bond CBC Central Bank of the Republic of China (Taiwan) MAS Monetary Authority of Singapore C-BEST Central Depository Book-Entry System MOF Ministry of Finance CCASS Central and System MOSF Ministry of Strategy and Finance CCDC China Central Depository & Co. Ltd MYX Bursa Malaysia Bhd CCIL Corporation of India Limited NDS Negotiated Dealing System CCP Central Counterparty NSCCL National Securities Corporation CDP Central Depository (Pte) Ltd NSDL National Securities Depository Limited CDS Credit Default Swaps NSE National Stock Exchange CDSL Central Depository Services (India) Limited Over-The-Counter CGSDTCC CHESS CSDCC CMU CSD CSRC DVP ETFs ETP ETS FCY FIIs FINI FIMMDA FSC GMT GTSM HKEx HKMA HKSCC HNX HOSE ICCL IDX China Securities Depository Trust & Co. Ltd House Electronic Sub-Register System China Securities Depository and Corporation Central Money Markets Unit Central Securities Depository China Securities Regulatory Commission Delivery Versus Payment Exchange-Traded Funds Electronic Platform Electronic System Foreign Currency Foreign Institutional Investors Foreign Institutional Investor Fixed Income Money Market and Derivatives Association Financial Services Commission Greenwich Mean Time GreTai Securities Market The Hong Kong Exchanges & Hong Kong Monetary Authority Hong Kong Securities Company Hanoi Stock Exchange Ho Chi Minh Stock Exchange Indian Corporation Limited Indonesia Stock Exchange PDEX PDTC QFIIs RBI RMB SBV SC SCA SEBI SEC SEHK SET SGS SGX SHCH SRO SSE STP SZSE TCH TDCC TSD TSE VSD Philippine Dealing & Exchange Philippine Depository & Trust Corp. Qualified Foreign Institutional Investors Reserve Bank of India Renminbi State Bank of Vietnam Securities Commission Securities Commission Act Securities and Exchange Board of India Securities Exchange Commission Hong Kong Stock Exchange Stock Exchange of Thailand Singapore Securities Singapore Exchange Limited Shanghai House Self-Regulatory Organization Shanghai Stock Exchange Straight Through Processing Shenzhen Stock Exchange Thailand House Taiwan Depository Corporation Thailand Securities Depository Co. Ltd Tokyo Stock Exchange Vietnam Securities Depository JASDEC Japan Securities Depository Center Inc.