Powerpoint slides

1
ASEAN3 Seminar on Developing Corporate Bond
Markets in Asia
Building a Favorable Regulatory Environment
forCorporate Bond Market- The Malaysian
Experience
Loong Yeow Boon Securities Commission,
Malaysia 27 September 2007 (Shanghai, P.R. China)
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Outline

• Importance of Favourable Regulatory Environment
• Regulatory Framework Post Financial Crisis
• Current State of Malaysian Corporate Bond Market
• Continuous Enhancement of Regulatory Environment

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1997 Asian Financial Crisis Highlighted

• Over-reliance of bank loans for corporate
  funding, even for long-term infrastructure
  projects
• Funding mismatches were aggravated in tight
  liquidity situation
• Lack of well developed bond market meant a lack
  of alternative avenue for funding

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Conducive Regulatory Framework is the Missing Link

• Institutional investors sat on sizeable funds
• Interest rates on downward trend
• Key intermediaries had been established
• Market infrastructure was in place
• Issuers in need of funds

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Fair, Efficient Transparent for
Well-Functioning Bond Market
Investors
Issuers

• Conducive regulatory framework that ensures
• Fairness
• Efficiency
• Transparency

• Investors protection
• Market returns
• Liquidity
• Timely access to relevant information

• Expeditious issuance process
• Lower funding cost
• Ability to borrow long
• Clear and consistent rules

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Outline

• Importance of Favourable Regulatory Environment
• Regulatory Framework Post Financial Crisis
• Current State of Malaysian Corporate Bond Market
• Continuous Enhancement of Regulatory Environment

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Governments Initiatives to Develop Bond Market
Governments Commitment
National Bond Market Committee

• Bond market-specific mandate
• Overall policy direction for orderly development
• Study development issues
• Identify and recommend implementation strategies

• Inter-agency membership to ease implementation
• Ministry of Finance
• Bank Negara
• Securities Commission (SC)
• Economic Planning Unit
• Bursa Malaysia
• Employees Provident Fund
• Private sector

Critical factors for successful implementation
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Proper Sequencing of Regulatory Policies
The 5 Pillars
1. Establish reliable and efficient benchmark
yield curve
2. Introduce efficient facilitative issuance
process for corporate bonds
3. Widen issuers and investors base
4. Improve liquidity in the secondary market
5. Facilitate introduction of risk management
instruments
Priority actions 1. Designate Msian Government
Securities as benchmark bonds 2. Centralise
approval of corporate bond market with the SC
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Clear Delegation of Authorities

• Ministry of Finance
• Co-ordinate developmental efforts of Government
  agencies
• (under the National Bond Market Committee)
• Grant tax incentives stamp duty exemption for
  primary and secondary market transactions,
  withholding tax for non-residents, real property
  gains tax for asset-backed securities and etc

• Bank Negara Malaysia
• Manage public debt and MGS issuance
• Own and operate FAST, RENTAS and BIDS
• Regulate involvement of financial institutions in
  bond market

• Securities Commission
• Sole approving authority for corporate bond
  issuance
• Regulates primary and secondary bond market
  activities
• Supervises market intermediaries such as rating
  agencies and trustees

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Main Thrust of Regulatory Regimefor Government
Bond Market

• Introduction of auction calendar for Malaysian
  Government Securities (MGS)
• Creation of benchmark yield curve with key
  tenures of 3, 5 and 10 years
• Provide reliable pricing guidance for corporate
  bond issues
• Review of principal dealers system
• Introduction of long-dated MGS and MGS futures
• Free up captive demand on MGS

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Market-Driven Regulatory Frameworkfor Corporate
Bond Market

• Centralise approval process for issuance of bonds
  with the SC w.e.f 1 July 2000
• Introduce facilitative legal and regulatory
  framework
• (i) Provisions on investor protection
• (ii) Fine and penalties on breaches and
  offences
• Adopt disclosure-based regulation
• (i) Approval upon full submission of
  documents to SC
• (ii) Ensure adequate disclosure to investors
• (iii) Monitor quality of disclosure

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Facilitative approval process for corporate bonds
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SCs Major Guidelines on Bond Market

• On Issuance of bonds,
• Guidelines on the offering of private debt
  securities
• Guidelines on the offering of Islamic securities
• Guidelines on the offering of asset-backed
  securities
• On investors protection,
• Guidelines on minimum contents requirements for
  trust deeds

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Clear Visions and Plans to Drive Development
Direction from NBMC
Securities Commission
Capital Market Master Plan (CMP) 152
recommendations, of which 17 for bond market

• Objectives Strategic Initiatives
• Fund-raising centre
• Investment mgt industry
• Market institutions
• Intermediaries
• Regulatory regime
• Islamic capital market centre

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Tax incentives to widen issuers base

• Stamp duty exemptions for bonds issues approved
  by SC
• Tax deductions on expenses incurred in the
  issuance of ABS and Islamic bonds
• Tax neutral framework for ABS and Islamic bond
  transactions
• Real Property Gains Tax (RPGT) exemptions for
  securitisation transaction

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Tax incentives to widen investors base

• Resident
• Exemption of interest income received by
  individuals, close end funds and unit trust funds

• Non-resident
• Blanket exemption from withholding tax for
  interest income derived by non-residents, w.e.f
  11 September 2004

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Outline

• Importance of Favourable Regulatory Environment
• Regulatory Framework Post Financial Crisis
• Current State of Malaysian Corporate Bond Market
• Continuous Enhancement of Regulatory Environment

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Robust Growth in Domestic Bond Market

• As at end-June 2007,
• Outstanding size including short-term instruments
  amounted to USD150 billion
• Local currency bond market as a of GDP is
  currently 2nd largest in Asia (ex. Japan)
• Sukuk comprised 34 of outstanding bonds
• Malaysia has the largest Sukuk market in the
  world

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Sustainable Corporate Bond Issues

• Corporate bonds as a of total corporate
  financing increased to 57.8 in 2006 (21.2 in
  1998)
• Represents a significant source of long-term
  financing for private sector
• Contributed to addressing maturity mismatches in
  private sector financing

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Growing Liquidity In Secondary Market

• Liquidity has increased significantly since 1997,
  and relatively high by regional standards
• Government efforts to enhance investors base,
  including withholding tax exemption to attract
  foreign investment
• Inclusion in major bond indices (e.g. Citibank
  WGBI)

Average annual turnover ratio (as at end-2006)
Source ADB
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Outline

• Importance of Favourable Regulatory Environment
• Regulatory Framework Post Financial Crisis
• Current State of Malaysian Corporate Bond Market
• Continuous Enhancement of Regulatory Environment

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Our Aims as Significant Centre for Origination
and Investment for Bonds

• Eligible Foreign Issuers of Ringgit-denominated
  bonds
• Multilaterals
• Sovereigns
• Quasi-sovereigns
• MNCs
• Deemed approval for AAA-rated issuers, except
  MNCs
• Facilitative foreign exchange rules
• Malaysia as International Islamic Financial
  Centre (MIFC)

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International Issuers of Ringgit-denominated Bonds
Issuers ADB IFC IBRD ADB KfW
Size RM400 m RM500 m RM760 m RM3.8 b RM2.5 b
Type Fixed Rate Bonds Islamic Bonds Islamic Bonds Medium Term Notes Fixed Rate /MTN
Tenor 5 yrs 3 yrs 5 yrs 15 yrs programme 7 yrs/ 10 yrs programmes
Rating AAA AAA AAA AAA AAA
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Facilitative Regulatory Framework for
Foreign-currencies Bonds

• Eligible Issuers
• Multilaterals
• Sovereigns
• Quasi-sovereigns (domestic and foreign)
• MNCs (domestic and foreign)
• International documentation is acceptable
• Deemed approval for min A-rated issues
• Withholding tax exemption if structured as sukuk
  issue

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Establishment of bond pricing agencies

• Guidelines on the Registration of Bond Pricing
  Agencies (January 2006)
• A bond bond pricing agency contributes to market
  liquidity by
• Providing independent and objective fair value
  for bonds
• Adopting a systematic valuation approach which
  incorporates specific pricing methodologies,
  relevant market data and robust market feedback
• Facilitating daily mark-to-market valuation of
  bond portfolios, especially unit trust schemes

Enhance price transparency and discovery
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Greater regulatory oversight over credit rating
agencies

• Practice Note on Recognition of Credit Rating
  Agencies (January 2006)
• Incorporates IOSCOs Code of Conduct Fundamentals
  for Credit Rating Agencies
• The recognition system seeks to ensure that CRAs
• Exercise high standards of professionalism and
  due diligence in rating and monitoring corporate
  bonds
• provide adequate and timely dissemination of
  rating information

Enhance investor protection and investor
confidence
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Initiatives in the pipeline

• Introduction of electronic information
  dissemination and trading system by early 2008
• Real-time dissemination of pre and post-trade
  info
• Enhance efficiency in trade execution
• Improve price transparency and discovery
• Facilitate market surveillance

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Conclusion

• Building favourable regulatory environment
  requires
• Bold decisions by policy makers, taking into
  account prevailing market conditions
• Market must be fair, efficient and transparent
• Proper sequencing holds the key
• Robust market consultation process
• Constant review of policy decisions as market
  changes and develops

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For further information on Malaysian Bond Market
Please visit following websites http//www.sc
.com.my (Securities Commission
Malaysia) http//www.bnm.gov.my (Bank Negara
Malaysia) https//fast.bnm.gov.my/fastweb (Fully
Automated System for Issuing/Tendering) http//rm
bond.bnm.gov.my (Ringgit Bond Market) Or
contact me at ybloong_at_seccom.com.my