7th asean+3 bond market forum (abmf) meeting

7th ASEAN+3 Bond Market Forum (ABMF) Meeting Hong Kong Monetary Authority, Hong Kong, China

8 9 February 2012

1 of 2

TIME PROGRAM

8 Feb 2012 DAY 1: ABMF Sub Forum 1(SF1)

08:30 – 09:00 Registration

ABMF SF 1

09:00 – 09:10 Welcome Remarks by HKMA (Mr. Esmond Lee, Executive Director of Financial Infrastructure Department, HKMA)

09:10 – 09:20 Opening Remarks by SF1 Chair (Mr. Tetsutaro Muraki, Tokyo-AIM)

09:20 – 10:00 Session 1: Updates on Finalization of Phase 1 Reports - Progress reporting (Mr. Seung Jae Lee, ADB Secretariat) - Confirmation/comments by members

10:00 – 11:10

Session 2: Developing common bond issuance program (Part 1) - Issues and approaches (Prof. Shigehito Inukai, ADB consultant) - Additional issues (Mr. Hiro Suzuki, Barclays Capital) - Additional issues (Mr. Matthias Schmidt, ADB consultant)

11:10 – 11:25 Coffee break (Room 5610 A-B)

11:25 – 12:15 Session 2: Developing common bond issuance program (Part 2) - Q and A

12:15 – 13:30 Buffet Lunch (Room 5603 A-D)

13:30 – 14:30 Session 3: Establishing regional forum of SROs - Issues and options (Mr. Sung Uk Yang, KOFIA) - Q and A

14:30 – 15:30 Information session 1: Local currency bond issuance in the region - Emerging trends in cross border issuance (Mr. Thomas Meow, CIMB) - Q and A


15:50 – 16:30 Information session 2: Developing Islamic finance in the region - Inauguration of Japanese Sukuk market (Mr. Shiina Ryuichi, JSDA) - Q and A

16:30 – 17:30

Session 4: Other issues of SF1 - Updates and management of phase 1 reports (Mr. Seung Jae Lee) - Dissemination of the phase 1 reports (Mr. Matthias Schmidt) - Finalized membership of phase 2 (Mr. Seung Jae Lee) - Q and A

17:30 – 17:40 Wrap up by ADB Secretariat (Mr. Seung Jae Lee, ADB Secretariat)

17:40 – 17:50 Closing Remarks by SF1 Chair (Mr. Tetsutaro Muraki, Tokyo-AIM)

18:45 – 21:00 Dinner hosted by HKMA (Chinese restaurant)

7th ASEAN+3 Bond Market Forum (ABMF) Meeting Hong Kong Monetary Authority, Hong Kong, China

8 9 February 2012

2 of 2

TIME PROGRAM

9 Feb 2012 DAY 2: ABMF Sub Forum2 (SF2)

08:30 – 09:00 Registration

ABMF SF2

09:00 – 09:10 Opening Remarks by SF2 Chair (Mr. Jong Hyung Lee, KSD)

09:10 – 09:40 Session 5: Updates on Finalization of Phase 1 Study Reports - Progress reporting (Mr. Seung Jae Lee, ADB Secretariat) - Confirmation/comments by members

09:40 – 11:00

Session 6: Focus of Phase 2 activities (Part 1) - Issues and approaches (Dr. Taiji Inui, ADB consultant) - Transaction flows of Korea (Mr. Junwoo Chang, KSD) - Transaction flows of Indonesia (Ms. Margeret Tang, ICSD) - Transaction flows of Japan (Mr. Yuji Sato, JASDEC)


11:15 – 12:15 Session 6: Focus of phase 2 activities (Part 2) - Q and A

12:15 – 13:30 Buffet Lunch (Room 5603 A-D)

13:30 – 14:40

Information session 3: Regional settlement infrastructure - RSI Options given by GoE report (Mr. Shinji Kawai, ADB Secretariat) - Linkage of NCSDs in the region (Mr. Shu-Pui Li, HKMA) - Cross border collateral management (Mr. Masayuki Tagai, JP Morgan) - Q and A

14:40 – 15:20 Information session 4: Mitigating FX risks in the region - Increasing the number of settlement currencies (Mr. Lynn Mathews, CLS) - Q and A


15:40 – 16:30

Information session 5: Pricing of bonds and sharing information - Valuation: the role and importance in emerging bond market (Mr. Mohd

Shaharul Zain, BPAM) - Q and A

16:30 – 16:50

Session 7: Other issues of SF2 - Updates of phase 1 reports (Mr. Seung Jae Lee, ADB Secretariat) - Phase 2 membership (Mr. Seung Jae Lee, ADB Secretariat) - Q and A

Wrap up session

16:50 – 17:30 Future work plan and Wrap up (Mr. Seung Jae Lee, ADB Secretariat) - Q and A

17:30 – 17:40 Closing remarks by SF2 Chair (Mr. Jong Hyung Lee)

18:10 – 20:00 Cocktail hosted by HSBC (HSBC Main Building – Turner Room)

FINALIZATION OF PHASE 1 REPORTSFINALIZATION OF PHASE 1 REPORTS

AADB S t i t tDB S t i t tAADB Secretariat teamDB Secretariat team

77thth ABMF MeetingABMF MeetingggHong Kong, China, 8Hong Kong, China, 8--9 Feb 20129 Feb 2012

* Progress and plan presented in the presentation could be changed later* Progress and plan presented in the presentation could be changed later Progress and plan presented in the presentation could be changed later Progress and plan presented in the presentation could be changed later

Progress up to end of Jan 2012Progress up to end of Jan 2012

Original Plan : Publishing by the end of Dec 2011Original Plan : Publishing by the end of Dec 2011Original Plan : Publishing by the end of Dec 2011Original Plan : Publishing by the end of Dec 2011

However delays have been thereHowever delays have been there

Additional comments from members.

Additional revisions from drafting team to ensure highAdditional revisions from drafting team to ensure high quality of the reports

Longer than expected times for editing and type setting

* Hope to have your kind understanding on valuing more * Hope to have your kind understanding on valuing more the quality rather than timingthe quality rather than timingthe quality rather than timingthe quality rather than timing

Progress up to end of Jan 2012Progress up to end of Jan 2012

Reports Finalization

Introduction O

SF1 1. Executive Summary Δ

2. Comparative analysis Δ

3. Market guides of each economy O (PRC & LAO)Δ (Others)( )

SF2 Executive Summary O

(Part 1) Bond markets and their infra. in ASEAN+3 Δ

(Part 2) Bond market s and infra. in each economy Δ

(Part 3) Bond market infrastructure diagrams Δ

Plan for finalization Plan for finalization –– SF1SF1

Parts 7 Feb 17 Feb 24 Feb 29 Feb 16 Mar 23 Mar 31 Mar

Exec. Summary CIR MEM TEAM

Comp. analysis - CIR MEM

Marketguides

PRC CIR MEM TEAM

JPN CIR MEM TEAM

TEAM ADB InternalProcess

FinalReview

By Team

PUBKOR CIR MEM TEAM

LAO CIR MEM TEAM

PHP CIR MEM TEAM

MAL - CIR MEM

THA - CIR MEM

VIE - CIR MEM

INO - CIR MEM

HKG - CIR MEM

SIN - CIR MEM

NOTE : CIR NOTE : CIR –– circulation of final version to members,circulation of final version to members,MEM MEM –– respective member’s final confirmation,respective member’s final confirmation,TEAM TEAM –– ADB secretariat team’s revision, if any.ADB secretariat team’s revision, if any.

Plan for finalization Plan for finalization –– SF2SF2

Parts 7 Feb 17 Feb 24 Feb 29 Feb 16 Mar 23 Mar 31 Mar

Exec. Summary

CIR MEM TEAM TEAMADB

InternalProcess

FinalReview

By Team

PUB

Part1 (ASEAN+3)

Part2 (each economy)

Part1 (Diagrams)

NOTE : CIR NOTE : CIR –– circulation of final version to members,circulation of final version to members,

MEM MEM –– respective member’s final confirmation,respective member’s final confirmation,

TEAM TEAM –– ADB secretariat team’s revision, if any.ADB secretariat team’s revision, if any.

Thank youThank youyy

Comments are welcomeComments are welcome

ADB S t i t TADB S t i t TADB Secretariat TeamADB Secretariat Team

Confidential (participants only)

7th ABMF SF2 Phase 2 Scope and concept (tentative draft)Scope and concept (tentative draft)

9 February 2012 in Hong Kong, China9 February 2012 in Hong Kong, China

Taiji InuiNTT DATA CorporationADB Consultant - Financial Information Technology Specialist

ABMF SF2Focus of Phase 2 activities

1. Issues and approaches (Dr. Taiji Inui, ADB consultant)

2. Transaction flows of Korea (Mr. Junwoo Chang, KSD)

3 Transaction flows of Indonesia (Ms Margeret Mutiara Tang)3. Transaction flows of Indonesia (Ms. Margeret Mutiara Tang)

4. Transaction flows of Japan (Mr. Yuji Sato, JASDEC

5 Confirmation/comments by members and experts5. Confirmation/comments by members and experts

2

ABMF SF2Agreed activities of SF2 phase 2

1 C ti id tifi ti f t ti fl i1. Continue identification of transaction flows, messaging and market practices.

1-1 DVP flows and procedure for corporate bondsp p

1-2 Interest payment and redemption of government bonds and corporate bonds

2 ISO 20022 Fit and gap analysis2. ISO 20022 Fit-and-gap analysis

3. Propose a roadmap and policy recommendations to standardize and harmonize transaction flows

4. Information sharing : LEI, data collection, …

3

ABMF SF21-1. DVP flows and procedure for corporate bonds

Aim

Identifying DVP flow and procedure of corporate bond in each market to discuss cross-border STPmarket to discuss cross border STP

Outputp

① Market infrastructure diagram and flowchart of DVP transaction for both domestic and cross-border trades

②② List of Market practices which have some impact on the flow

③ Describe barriers against corporate bond transactions by non-residentsresidents.

4

Trading

Corporate Bond Market Infrastructure Diagram

T k OTC k

JP

Trading

Trade matching JASDEC (PSMS)

Tokyo OTC market

or ors

r d

CCPTra

ns.

Flo

w fo

Fore

ign I

nve

sto

Tra

n. Flo

w for

Corp

ora

te B

ond

Settlement match.

Bond settlement JASDEC (B k E T f S )

JASDEC (PSMS)

o d sett e e t

Cash settlement

(Book-Entry Transfer System)

BOJ (BOJ-NET Funds Transfer System)

JASDEC: Japan Securities Depository Center, Inc. OTC: Over the CounterPSMS: Pre-Settlement Matching System

5

ABMF SF2Bond Markets in ASEAN+3

Corporate bond related infrastructures and stakeholders will be made or added to the diagram

Trade

Seoul OTC

Tokyo OTC

ChinaOTC

Inter-bankBond Market

Hong KongOTC

MalaysiaOTC

JakartaOTC

Manila OTC

SingaporeOTC

ThailandOTC

SSE

BruneiCambodiaLao PDRMyanmar

MM LA KH BN VN TH SG PH MY KR JP ID HK CN

VietnamOTC

Corporate bond related infrastructures and stakeholders will be made or added to the diagram

Tradematch.

JASDECPSMS

KRX

PDExTCH

PTIHNX

SSE&

SZSE

CFETSHKMACMU

BMSETP

PDEx

CCPJGBCC

PDExeDvP

KRX

Settle. Match.

Bond Settle.

KSDHKMA

CMU

BNMRENTAS-SSDS

BIBI-SSSSPDTC

MASMEPS+ SGS

TSDPTI

TCHPTI

VSD

CSDCCJASDEC

PSMS

CCDC

PDExRoss STP

Facility

BTBTr-ROSS

（Netting）

BOJBOJ-NET

Cash settle.

BOJBOJ-NET

BOKBOK-Wire+

CommercialBanks

PBOCHVPS CNAPS

HKMACHATS

BNMRENTAS-

IFTS

BIBI-RTGS

BSPPhilPass

MASMEPS+ RTGS

BOTBAHTNET

BIDV

6

NOTE: Exchange Market

Central Bank

Commercial Bank

Direct intersystem connection

Indirect connection . Trade data (bond settlement instructions) are entered to CSD by agent custodians.

Seller Buyer1 T d

Bond Transaction FlowOTC Market (Corporate Bonds) / DVP (BOJ-NET) through Trade Matching (PSMS)

JP

y1. Trade

2. Trade Report2. Trade Report

JASDEC(PSMS)

3. Trade Matching

4. Notice of Matching Status


5. Settlement Matching6. Notice of Matching Status


Standing Settlement Instruction

14. Settlement Report(Bond)

7. Holding Bonds14. Settlement Report

(Bond)

JASDEC(Book Entry Transfer

System)

13.Bond Settlement

(Bond)

8.Fund Settlement Datafor DVP

11. Notice of Receipt Completion (Cash)

(Bond)

BOJ(BOJ NET)

11.Cash Settlement

9. Payment Request(Cash)

10. Payment Instruction(Cash)

12.Settlement Report(Cash)

12. Settlement Report(Cash)

7

3 A T d

Trade Execution

Bond Transaction Flow for Foreign Investors OTC Market (Corporate Bond) / DVP (Image)

JP

or BankManager)

Manager)

InternationalBroker

Domestic Broker

din

g &

Ma

tch

ing

1 Trade Order

3 Agreement on Trade& Confirmation

2 Trade Order

4 Trade Confirmation5 Trade Confirmation PSMS

Counter-party

Execution (OTC)

or Bank

nvestm

ent

Mnvestm

ent

M

gord

er

Tra

d

(JASDEC)

(direct

or

In(d

irect

or

In

Cle

ari

n

Cro

ss-B

o

al In

vesto

r (

al In

vesto

r (

Global Custodian

DomesticCustodian

A Di t ng

& S

ett

lem

en

t

JASDECBook Entry

6 Settlement Instruction 7 Settlement Instruction

10 Transaction Status Update

12a DVP Request

11a Notification of DVP Settlementand Acceptance

A C hn Institu

tion

an Institu

tion

a As Direct Participant

BOJ-

Ma

tch

inEntry System

A C h em

en

t

16 Settlement Confirm 14 Settlement Confirmation

17 Securities Statement

12a DVP Request

13a Settlement Confirmation

11b Notification of DVP Settlementand Acceptance

As Cash Correspondent

Fore

ign

Fore

ign NET

(RTGS)

As CashCorrespondent

Ca

sh

Se

ttle

19 Cash Statement

15 Funding of Trades

18 Cash Statement

12b DVP Request

13b Confirmation of Debit/Credit

and Acceptance

8

ABMF SF21-2. Interest payment and redemption of government bond and corporate bond

Aim

Identifying flow and procedure of interest payment and redemption of government bond and corporate bond in each market to discussof government bond and corporate bond in each market to discuss cross-border STP

Output

① Flowchart of interest payment and redemption for both domestic and cross border tradesand cross-border trades

② List of Market practices which have some impact on the flow

③ Describe barriers against interest payment and redemption for③ Describe barriers against interest payment and redemption for non-residents.

Could you refer to the presentation

9

y pfrom Chair and Vice-chairs, please?

ABMF SF2Survey on corporate actions

1. Some members and experts have expressed the intentions that corporate actions should be included to the scope of phase 2 activities. The importance of corporate actions has been pointed out from the viewpoint of enhancing straight-through processing (STP) For example “Statement on the Need for Universalthrough-processing (STP). For example, Statement on the Need for Universal,

Standardized Messaging in Corporate Actions”, written by the Association of Global Custodians (AGS), recommended that issuers should comply with international standard ISO 15022 when they contact with market participantsinternational standard, ISO 15022, when they contact with market participants.

2. In this regard, if market participants conform to ISO 20022, information distributions about various types of corporate actions will become more flexible because of using XML Also issues about corporate actions have beenbecause of using XML. Also, issues about corporate actions have been discussed in various institutional frameworks. Therefore, discussions of ABMF need to be focused on the main purposes of the ABMF.

3 Considering the current situation of ASEAN+3 and our outcome of the Phase 13. Considering the current situation of ASEAN+3 and our outcome of the Phase 1, interest payment and redemption of government bond (and possibly corporate bond) would be appropriate topics to start our survey on corporate action.

10

ABMF SF2Issuance of government bond and payment

①① Draw the typical business flowchart for issuance of government bond to domestic investors.

② If non-residents are able to participate in issuance of government bond, draw f fthe flowchart of the process.

May be less important issue d h dl d l t hand handled later phase.

11

ABMF SF22. ISO 20022 Fit-and-gap analysis

Aim

2-1 Fit & gap analysis of business flows and market practices

Identifying gap of DVP flow of government bond in each market withIdentifying gap of DVP flow of government bond in each market with model cross-border DVP flow to realize cross-border STP

2-2 Fit & gap analysis of message items

Identifying gap of government bond settlement instruction and confirmation of each market with that of ISO 20022 (sese 023.001.01 and sese 025.001.01) to realize cross-border STP)

Output

2-1 Identifying technical barriers including market practices preventing the flow from cross-border STP

2-2 Identifying message items in each market different from international standardinternational standard

12

ABMF SF22-1 Fit and gap analysis of business flows and market practices.

1. Fit and gap analysis between typical cross-border DVP transaction and local procedures

① By presenting model cross-border DVP transaction flow, challenges and barriers from cross-border STP viewpoints in each market considering market practices and business processes will be surveyed.

② Technical barriers related to DVP transaction flows including market practices may be② Technical barriers related to DVP transaction flows including market practices may be discussed. Also, short-term solutions, and medium- to long- term solutions are to be answered from the members and experts.

Barriers on each market presented by GoE report may be a good reference for this survey.Barriers on each market presented by GoE report may be a good reference for this survey.

Also, other barriers may be discussed.

2. Using a tool (MyStandard provided by SWIFT)2. Using a tool (MyStandard provided by SWIFT)

MyStandard is a tool for fit and gap analysis between local practices adopting SWIFT message and ISO20022.

Based on the phase1 survey of DVP transaction flows, discuss the solutions for barriers to enhance cross-border DVP on each market.

13

ABMF SF2Cross-border DVP (1/2)

Bond Cash Seller Buyer Market CommentsCase

Bond Cash Seller Buyer Market Comments

1 JPN JPN JPN JPN JGB is traded in Tokyo market and settled in BOJ-NET. Cash is settled in BOJ-NET for JPY.

Tokyo (Domestic) market

2 JPN JPN JPN HKG JGB is traded in “cross border market” and2 JPN JPN JPN HKG JGB is traded in cross-border market and settled in BOJ-NET. Cash is settled in BOJ-NET for JPY.

3 JPN JPN HKG JPN JGB is traded in “cross-border market” and settled in BOJ-NET. Cash is settled in BOJ-NET for JPY.

4 JPN JPN HKG HKG JGB is traded in Hong Kong market and settled in BOJ-NET. Cash is settled in BOJ-NET for JPY.

5 JPN HKG JPN JPN JGB is traded in Tokyo market and settled in BOJ-NET. Cash is settled in CHATS for HKD.

6 JPN HKG JPN HKG JGB is traded in “cross-border market” and settled in BOJ NET Cash is settled in CHATS

Sell JGB in Tokyo to get HKD in Hong Kong “Cross border market”settled in BOJ-NET. Cash is settled in CHATS

for HKD.Hong Kong. Cross-border market

needs to be created.

7 JPN HKG HKG JPN JGB is traded in “cross-border market” and settled in BOJ-NET. Cash is settled in CHATS for HKD.

14

8 JPN HKG HKG HKG JGB is traded in Hong Kong market and settled in BOJ-NET. Cash is settled in CHATS for HKD.

Local subsidiary of Japanese bank gets liquidity in Hong Kong by

selling JGB in Hong Kong.

ABMF SF2Cross-border DVP (2/2)

Bond Cash Seller Buyer Market CommentsCase

Bond Cash Seller Buyer Market Comments

9 HKG JPN JPN JPN EFBN is traded in Tokyo market and settled in CMU. Cash is settled in BOJ-NET for JPY.

Local subsidiary of Hong Kong bank gets liquidity in Tokyo by

selling EFBN in Tokyo.

10 HKG JPN JPN HKG EFBN i t d d i “ b d k t” d10 HKG JPN JPN HKG EFBN is traded in “cross-border market” and settled in CMU. Cash is settled in BOJ-NET for JPY.

11 HKG JPN HKG JPN EFBN is traded in “cross-border market” and settled in CMU Cash is settled in BOJ-NET

Sell EFBN in Hong Kong to get JPY in Tokyo “Cross-border market”settled in CMU. Cash is settled in BOJ NET

for JPY.in Tokyo. Cross border market

needs to be created.

12 HKG JPN HKG HKG EFBN is traded in Hong Kong market and settled in CMU. Cash is settled in BOJ-NET for JPY.

13 HKG HKG JPN JPN EFBN is traded in Tokyo market and settled in CMU. Cash is settled in CHATS for HKD.

14 HKG HKG JPN HKG EFBN is traded in “cross-border market” and settled in CMU Cash is settled in CHATS forsettled in CMU. Cash is settled in CHATS for HKD.

15 HKG HKG HKG JPN EFBN is traded in “cross-border market” and settled in CMU. Cash is settled in CHATS for HKD.

15

16 HKG HKG HKG HKG EFBN is traded in Hong Kong market and settled in CMU. Cash is settled in CHATS for HKD.

Hong Kong (domestic) market

ABMF SF22-2 Fit & gap analysis of message itemsfor government bond DVP transaction

1. 10 common elements for Securities Settlement Instruction and Securities Settlement Confirmation

http://smpg.webexone.com/

2. Detailed Fit & Gap analysis based on ISO 20022 sese 023.001.01 for Securities Settlement Instruction and sese 025.001.01 for Securities Settlement Confirmation

16

ABMF SF2

CFETS

Business Process FlowchartChina Bond Market （OTC Market) / DVP

Seller Buyer

CN

y

1. Trade

2. Trade Data

CCDC（CBGS）

4. Settlement instruction4. Settlement instruction4. Settlement instruction

receiving

5. Settlement instruction

3. Trade Data3. Trade Data

6. Settlement contract producing

5 Smatching

7. Contract executing on delivery day

5. Settlement instruction matching notice

7. Settlement executing t t ti

7. Settlement executing t t ti

5. Settlement instruction matching notice

13.Bond Delivery

8. Seller’s bond locking

9. DVP fund settlement request

14. Settlement confirmation

status noticestatus notice

14. Settlement confirmation

PBoC

9. DVP Fund settlement request

12. DVP Fund settlement notice

17

12. DVP Order

（CNAPS）

10. Fund transfer processing

11. Fund transfer notice 11. Fund transfer notice

ABMF SF2Message Elements10 Common Elements in Settlement Instruction

Business elements Additional information

1. Message reference 16x / Max 35 text

2. Trade Date ISO 8601 Date/Time

3. Settlement Date ISO 8601 Date/Time3. Settlement Date ISO 8601 Date/Time

4. Quantity of Financial Instrument Expressed as units (equities) or face amount (Fixed Income)

5. Financial Instrument ISO 6166 International Securities Identification Number [ISIN]Number [ISIN]

6. Settlement Amount Currency and amount

7. Safekeeping Account to be credited or debited 35x / Max 35 text

8. Place of Settlement ISO 9362 Business Identifier Codes [BIC] taken [ ]from the list of PSET’s BIC published on www.smpg.info. See also Place of Settlement MP.

9. Receiving/Delivering Agent ISO 9362 Business Identifier Codes [BIC] or CSD Local Code

10. Client of Receiving/Delivering Agent ISO 9362 Business Identifier Codes [BIC]

11. Country specifics as per local market practice Country specifics as per local market practice (if

18

y p p p(if any)

y p p p (any)

Source: SWIFT (Ms. Morioka), original source SMPG “Settlement Common Element” http://smpg.webexone.com/

ABMF SF210 Common Elements Analysis (1/2)

Optional/Business

①Message reference

Format MultiplicityOptional/

Mandatory Element Name

DefinitionSettlement Instruction

②Trade Date

③Settlement Date

④Quantity of Financial Instrument

⑤Financial Instrument

⑥Settlement Amount

⑦Safekeeping Account to be credited or debited

⑧Place of Settlement

⑨Receiving/Delivering Agent

⑩Cli t f R i i /D li i

19

⑩Client of Receiving /Delivering Agent

⑪Country specifics as per local market practice (if any)

ABMF SF210 Common Elements Analysis (2/2)

Optional/Business

①Instruction Identification

Format MultiplicityOptional/

Mandatory Element Name

DefinitionSettlement Confirmation

②Trade Date

③Effective Settlement Date

④Effective Settled Quantity of Financial Instrument

⑤Financial Instrument

⑥Effectively Settlement Amount

⑦Safekeeping Account to be credited or debited

⑧Place of Settlement

⑨Receiving/Delivering Agent

⑩Cli t f R i i /D li i

20

⑩Client of Receiving /Delivering Agent

⑪Country specifics as per local market practice (if any)

ABMF SF2Government Bond Settlement Instruction (1/3)

21An example and image

Source: Bank of Japan


Message Definition ReportMessage Definition ReportISO 20022 Securities Settlement and Reconciliation/Maintenance Cycle 2010-2011Edition May 2011, Approved by the Securities SEG on 1 February 2011



ABMF SF22-2 Fit & gap analysis of message itemsfor government bond DVP transaction

Issues:

1 Fit and gap analysis based on 10 common elements is1. Fit and gap analysis based on 10 common elements is sufficient?

2. Fit and gap analysis based on detailed message items of ISO g p y g20022 is too mach for ABMF SF2?

3. Fit and gap analysis for other messages is necessary?

24

ABMF SF23. Propose a roadmap and policy recommendations

Aim

① Sharing roadmap in each economy to standardize and harmonize transaction flows

② Propose a reference roadmap in ASEAN+3 to realize cross-border STP to standardize and harmonize transaction flowsSTP to standardize and harmonize transaction flows

OutputOutput

① Roadmap and policy recommendations

② More specifically, a roadmap Identifying technical barriers including market practices preventing the flow from cross-border STP and finding short and medium- to long- term solutions to remove the barriers will be discussedremove the barriers will be discussed

25

ABMF SF2Roadmap

1. ISO20022 migration plan

① Basic migration plan of ISO 20022 from ISO 15022 (or proprietary) to ISO 20022.ISO 20022.

② Migration plan in each economy.

2. Medium- to long- term plan of life cycle of market infrastructures including trading, clearing, and settlement systems

③ Medium- to long- term plans and strategies about infrastructures and market practices. Also, background idea of such plan and strategies p , g p gneed to be discussed.

3. Events in ASEAN+3

④ E t j t d th l hi h h i t④ Events, projects and other plans which may have some impacts on bond trading and settlement.

⑤ Purposes and polices of each events and projectsj

26

ABMF SF2Roadmap

4 Technology advancement related to bond trading and settlement4. Technology advancement related to bond trading and settlement

⑥ Technology advancement: available schedule, merits of using these technologies. If possible, grounds and reasons.

1. Policy recommendation relating to barriers on technical t d b i i l di k taspects and business processes including market

practices will be focused on and discussed mainly. 2. Policy recommendation relating to regulatory changes y g g y g

including tax and foreign exchange regime will not be main issues but shared as reference information. Information on regional infrastructures will also be

27

Information on regional infrastructures will also be shared.

ABMF SF2Follow-up of phase 1 surveys

1. Review and update the bond market diagrams and flowcharts

In phase 2 surveys, we will study corporate bond markets: overview of market, related organization, trading, CCP and security and cash settlement. For comparison to corporate bond market, members and experts will update phase 1 surveys as necessary.

2. Matching

Trade matching, post-trade matching, pre-settlement matching and settlement matching may be discussed for government bond and corporate bond more in detail

3. Cross-border STP

① In order to identify business processes (such as cross-border repo,

securities lending, cross-border collateral) with higher priority from cross-securities lending, cross border collateral) with higher priority from cross

border STP viewpoint, further input from members and experts will be

appreciated.

②② Cut-off time of each market may be surveyed and discussed from cross-

border STP perspective.

28

ABMF SF2Follow-up of phase 1 surveys

4. Structure of securities accounts

Members supply the information about structure of securities account in each CSD. (E.g. structure of registry)

5. Country codes

Phase 1 report was edited according to ADB publication rules including country codes, which is different from international standard (ISO 3166-1 alpha2), ADB team will work on adoption of ISO country code in phase 2 activities.

29

ABMF SF2Codes of ASEAN+3 Economies

ISO 3166-1 alpha-3ISO 3166-1 alpha-2 ADB 3 letter code

BRNBN BRU

C b di

Brunei Darussalam

KHMKH CAM

People’s Republic of China (PRC)

Hong Kong , China

Cambodia KHMKH CAM

CHNCN PRC

HKGHK HKG

Indonesia

Japan

Republic of Korea

IDNID INO

JPNJP JPN

KORKR KORRepublic of Korea

Malaysia

Lao, PDR

KORKR KOR

LAOLA LAO

MYSMY MAL

Philippines

Singapore

Myanmar MMRMM MYA

PHLPH PHI

SGPSG SIN

30

g p

Thailand

Viet Nam

SGPSG SIN

THATH THA

VNMVN VIE

ABMF SF2Other issues

If there is any other issues to be discussed as a topic of phase 2 of ABMF SF2 studies, could you propose i l ?it, please?

31

ABMF SF2Could you do me a favor, please?

ADB consultant for SF2 would greatly appreciate it if members and experts provide with following information currently available in each market soon after this meeting.g

① DVP flow of corporate bond

② Interest payment flow of government bond

③ Interest payment flow of corporate bond

④④ Market practices and rules in each economy

⑤ Latest market guide including URL explaining them

32

ABMF SF2

Preaching to Buddha

3333

ABMF SF2

+3

Thank you so much

Taiji Inui ADB consultantNTT DATA Corporation

34

NTT DATA CorporationPhone: +81-50-5547-1282E-mail: [email protected]

This PowerPoint slides are made solely for the discussions at the 7th ABMF on 9 February 2012. Views expressed are those of the presenter and do not necessarily reflect those of the Asian Development Bank, NTT DATA CORPORATION or any other organizations.

ABMF SF2Objectives and challenges of SF2

SF2 E h i i l STPSF2: Enhancing regional STP

Some barriers may have impact on message standard and cross-border STP

Barriers related to SF2

35

Source: The ABMI GoE report

Bond issuance & Entitlement processing

Jun-Woo Chang

Assistant Manager of Bond Entitlement Teamg

Korea Securities Depository

Contents

Ⅰ. Korea Treasury Bond Investment

1. Overview & Primary Market

2. Secondary Market

3. KTB Redemption

4. KTB Primary Dealer

5. Taxation

Ⅱ. Corporate Bond Investment

1. Blanket Registration & OTC Market

2. Exercising Rights

2

Contents

Ⅰ. Korea Treasury Bond InvestmentⅠ. Korea Treasury Bond Investment

3

Ⅰ- 1. Overview

Concept

− Korea Treasury Bond(henceforth KTB) is a typical government bond

that the Korean government issues to raise funds for public projectsor to redeem outstanding KTBs.

Changes in Benchmark yields

− Issue amount and trade volume of KTBs are the highest in the government bond.(Especially 5 year KTB)

G t dG t d N t dN t dGuaranteed Guaranteed Corporate BondCorporate Bond

(3 (3 -- Year)Year): ~ ’98. 8: ~ ’98. 8

NonguaranteedNonguaranteedCorporate BondCorporate Bond

(3 (3 -- Year)Year): ’98. 9 ~ ’00.12: ’98. 9 ~ ’00.12

KTBKTB(3 (3 -- year)year)

: ’01. 1 ~ ’04. 4: ’01. 1 ~ ’04. 4

KTBKTB(5 (5 -- year)year)

: ’04. 5 ~ present: ’04. 5 ~ present

4

Ⅰ- 1. Primary Market

Types of KTBs Outstanding amount of KTB

3-yrOutstanding amount of KTB % of GDP

(tril. KRW)

280.9

310.1

300

350

25%

30%

5-yr

10-yrFixed rate

239.3227.4

206.8

200

250

20%

25%

10 yr

20-yr 123.1

170.5

150

200

10%

15%

KTBi Inflation linked(10-yr)

34.242.6

50.9 55.6

81.5

50

100

5%

5

0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0%

• Source : MOSF in Korea, <ktb.mosf.go.kr>

BOK, <www.bok.or.kr>


Issuance Procedure & Method

MOSF establishes theMOSF establishes theMOSF establishes the MOSF establishes the KTB issuance scheduleKTB issuance schedule

MOSF submits the planMOSF submits the planto National Assemblyto National Assembly

AnnouncingAnnouncingissuance scheduleissuance schedule

and notifyingand notifying

AuctionAuction

Announcement ofAnnouncement ofauction resultauction resultto National Assemblyto National Assembly

Consideration and approvalConsideration and approvalof National Assemblyof National Assembly

and notifying and notifying tender offertender offer

auction resultauction result

Delivery of KTBs andDelivery of KTBs andpayment of bid amountpayment of bid amount

Types of KTBs Auction Date

3 – year KTBs First Monday of each month

5 – year KTBs Second Monday of each month

10 – year KTBs Third Monday of each month

6

10 – year inflation linked KTBs Third Wednesday of each month

20 – year KTBs Fourth Monday of each month


Fungible Issues

− Fungible KTBs are issued by unifying the issuing date and the coupong y y g g prate at the interval of 6 months, 1 year, or 2 years.

3 and 5 - year KTBs : At 6 month interval10 and 20 –year KTBs : At annual interval

− Issuance of fungible bondsIn this system, bonds being issued for a certain period of time are required to have the same terms and condition such as maturity and q ycoupon rates. Thereby, the bonds issued during this period are treated as a single issue.

− Why?FungibleIssuesWhy?

To establishTo establishTo reduce theTo reduce the

Issues

7

To establishTo establishthe reliablethe reliable

benchmark yieldbenchmark yield

To boostTo boost

liquidityliquidity

To reduce theTo reduce theadministrativeadministrative

costcost


KTB Issuance Plan in 2012

− Issuance amount(expected)( p )

Plan to issue 79.8 trillion KRW( 1.5 compared to amount of 2011)2Oter5 trillion KRW(The net increase) is aimed at financing.54.8 trillion KRW is for refunding including redemption at maturity.

Prior Task in 2012 Long-term Task

3030--yr KTB issuanceyr KTB issuance

Bid amount adjustmentBid amount adjustment

Maintaining monthlyMaintaining monthlyissue amount as evenlyissue amount as evenly

as possibleas possibleBid amount adjustmentBid amount adjustment

of individual investorof individual investor(1 → 0.1 million KRW)(1 → 0.1 million KRW)

E t i f i t lE t i f i t l

Dispersion of maturityDispersion of maturityin Gov’t bondin Gov’t bond

8

Extension of interval Extension of interval in fungible issuancein fungible issuance(1 year → 2 years)(1 year → 2 years)

Improvement of riskImprovement of riskmanagement systemmanagement system

Ⅰ- 2. Secondary Market

Overview

− The KTB secondary market is known for its high liquidity.The KTB secondary market is known for its high liquidity.

The KTB turnover ratio(trading volume/outstanding) of gov’t bonds including monetary stabilization bond is the highest in the Asian region, followed by Japan and excluding Hong Kong whose outstanding volume is small (Source : ADB).

Bid-ask spread is 0.7bp(as of 2011), the smallest in the Asian countries (Source : ADB).

6 0%

8.0%

10.0%

12.0%

•Credit Rating : S&P

•Source : Bloomberg, yield as of May 22, 2009

<High <High interest rate interest rate level level : Comparison of : Comparison of 55--year year Government Bond Government Bond Yield>Yield>

0.0%

2.0%

4.0%

6.0%

9


Bid-Ask Spread of Gov’t BondTurnover Ratio of Gov’t Bond

(bp)

1. 2

1. 4 6

0 6

0. 8

14

0. 2

0. 4

0. 62

0

Korea

Japan

Malaysia

ngapore

llippines

China

donesia

0

Ko

rea

Mala

ysia

Th

ailan

d

Sin

gap

ore

Ch

ina

Ho

ng

ko

ng

hilip

pin

es

10

* Source : ADB, Asian Bonds Online, as of 2011* Source : ADB, Asian Bonds Online, as of 2011

M

Sin Pil

Ind S H P


Korea Exchange Bond Market(Overview)− KRX created the government bond market (the KTS) to facilitate the

trading of government bonds between the government bond dealers

Market Division Purpose Eligible Bonds Participants

Stimulation of GB

g g gand securities firms.

Institutional Investors

Market

KTSIssuance & TradingEstablishing fair price by constructing benchmark yields

KTBsMSBsKDIC bonds

Securities companies

Banks

Institutional investors(pension,Funding through

KTBs MSBs KIBs & investors(pension, insurance companies)

Repo

Market

collateral bondsFacilitating bond lending & borrowing

KTBs, MSBs, KIBs & corporate bonds(AA or higher)

Retail Bond

Stimulating individual investors’ bond

Bonds whose quotation amount is less than

Retail Primary Dealers

Ordinary

Bond

Market

Bond Market investment

amount is less than KRW 5 bn. Ordinary investors

Small-lot

Public Bond

Providing liquidity to the non-voluntarily holding bonds

National Housing BondsSeoul Subway BondsRegional Development

Exclusive members for buying small-lot bondsTh l bli

11

MarketMarket

bonds Regional Development Bonds

The general public

OthersTrading equity-linked bonds etc.

Equity-linked bondsOther corporate bonds

Securities companiesOrdinary investors


KRX Market System

Dealer Trade Execution

KTS Trading

Server Server

Quotes/Inquiry

S ad gSystem •

••

| | | |

Execution/Reply

Primary Dealer Browser Internet

Retail bondTrading System

12


OTC Market Overview

OTC TradingO C ad gStructure

OTC TradingMechanism

13


Foreign Investment Procedures

1.Standing Proxy 2.Investment

FSS*Custodian

(Standing Proxy)Foreign Investor

Sta d g o yAgreement

4.Order

2.Investment Registration

2.IRC

3.Opening SecuritiesA/C 5.Settlement

4.Order5.SettlementInstruction

5.Money Wire

Custodian(Securities Company, Bank)

Securities Company

6.Settlement4.Trading

14

KTS, OTC Market*FSS : Financial Supervisory Service

Ⅰ- 3. KTB Redemption

Overview− The principal amount of KTBs is fully paid back on the maturity date

and the interest is paid every 6 months until maturity.p y y

The business dayThe business day

After the payment dateAfter the payment datePrincipal & Interest

Legal Holiday(Sunday)

Principal & InterestPayment date

Financial Institutions’ Holiday (Saturday)

The business dayThe business day

Before the payment dateBefore the payment date

Redemption ofGovernment Bond

Holiday (Saturday)p yp y

Issuer

GovernmentBond Holder

Government Bond

Transferring Principal & Interests

15

Expiration of Government Bonds

Ⅰ- 3. KTB Redemption

KTB Redemption Procedures

4 Transfer Principal & Interests

KTB Holder

1. Entrust Redemption Business

4. Transfer Principal & InterestsInto KTB holder’s A/C

Bank of Korea KSDGovernment Correspondent

B k

5. Transfer Principal & InterestsInto KTB holder’s A/C

KSDBank

2. Debit from GovernmentChecking A/C

3. Transfer Principal & InterestsInto Checking A/C at BOK

4. Transfer Principal & InterestsInto Checking A/C at BOK

KTB Amount of Redemption

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

unit : KRW tril.

16

13.5 14.7 8.7 14.4 15.1 24.3 27.7 40.1 43.4 48.5

Ⅰ- 4. Primary Dealer

Overview− Primary Dealership was introduced in 1999 to reform the financial

market structure.To promote the market for KTBsTo establish the stable funding base for the government

⇒ PDs have played a leading role in the development of Korea bond market.

– As of the end of 2010, there are 20 PDs(12 securities companies, 8 banks)

Primary DealersExclusive underwritingRights for KTBs

Market-MakingObligation

PrimaryMarket

SecondaryMarket

17

Market Market

Ⅰ- 4. Primary Dealer

Qualification for PD

Submission of request for designation as PDSubmission of request for designation as PD

Review by the MOSFReview by the MOSFFinancial soundness, trading record for benchmark KTB,Financial soundness, trading record for benchmark KTB,

Trading record in the secondary market, amount of outstanding KTBs heldTrading record in the secondary market, amount of outstanding KTBs held

Decision on suitability as PDDecision on suitability as PD

Privileges & Duties of PDs

Privileges Duties

Exclusive participation in the KTB auctions

The optional right to purchase KTBs within 3 business days after the auction at the cut off yield(Non competitive bid II)

To meet 10% minimum underwriting requirement of the total KTBs issuance

Two-way market making quotes must be displayed for all benchmark issues every trading day.

18

cut-off yield(Non-competitive bid II)

Regular consulting partners for the Government Bond Division of the MOSF

Trading of KTBs (to trade at least 200% of the average KTB trading volume of PDs)

KTB holdings at least KRW 1 bn.

Ⅰ- 5. Taxation

Taxation on Individual & Corporation

Individual Investor Institutional Investor

Applicable act Income Tax Act Corporate Tax Act

Taxable income Coupon payments Coupon payments + Capital gains

Withholding taxCoupon payments are subject to withholding tax

(The tax amount is calculated by length of holding period.)(The tax amount is calculated by length of holding period.)

Withholding tax rate14%(The inhabitant tax equivalent to 10% of the income tax will be levied.)

14%

Collection of withholding tax

When the coupon is paid or when the bonds are sold, the withholding tax on the coupon will be withheld according to the length of holding period.

Withh ldi t

When the bonds are sold : In principle, the seller collects the tax.

(If th ll i i di id l th b ( ti ) i t d ithh ld it )

19

Withholding agent (If the seller is an individual, the buyer(corporation) instead withholds it.)

When the coupon is paid : Bond coupon payer collects the tax.

Ⅰ- 5. Taxation

Withholding Tax Rate on Bond Interest Income

Class. ~’90.12 ~’95.12 ~’97.12 ~’98. 9 ~’99.12 ~’00.12 ~’01. 6 ~’04.12 ~present

Cor. tax 12% 20% 20% 20% 22% 20% 20% 15% 14%

Ind. tax 16% 20% 15% 20% 22% 20% 15% 15% 14%

Taxation on Foreigners

− Foreign corporations and non-resident investors are subject to 14% ofincome tax on interest income and 20% of tax rate on capital gain.

Whether taxation is imposed or not as well as the tax rate are determined by a bilateral treaty between Korea and countries concerned.

– Exemption from withholding tax on interest income and capital gains for foreign investors was abolished.

KTBs purchased until Nov. 12 2010, are non-taxable before they are sold.

20

The interest income of KTBs purchased between Nov.13 and Dec.31 2010 is non-taxable, but the interest, accrued after Dec.31 2010, is taxable.

Contents

Ⅱ. Corporate Bond InvestmentⅡ. Corporate Bond Investment

21

Ⅱ - 1. Blanket Registration

Concept

U d th B d Bl k t R i t ti S t b d i t d i− Under the Bond Blanket Registration System, bonds are registered in

KSD’s name in bond registrar.Combined System (Deposit System + Registration System)Relevant Law : Financial Investment Services and Capital MarketRelevant Law : Financial Investment Services and Capital Market Act(Article 309), Registration of Bonds and Debentures Act

− Through the Blanket Registration System, settlement of bond transaction,i t f i i l d i t t t d i t d tireceipt of principle and interest payment, and associated operations are

processed through the Participant Account Book and Client AccountBook, simplifying settlement and entitlement processing.

Bond Registrars

− Bank of Korea : Government bonds(except National Housing Bond)

22

( p g )− Banks : Bonds issued by themselves− KSD : Public & Corporate bonds

Ⅱ - 1. Blanket Registration

Flow Chart of Blanket Registration

IssuerIssuer ProposerProposerl(bl k )①Proposal(blanket registration)

②Notifying blanket registration

⑦Notifying the entry⑦Notifying the entry

of Account book

SecuritiescompanySecuritiescompanyRegistrarRegistrar DepositoryDepository

③Writing on Register ④Writing on Account book ⑤Notifying the entry ⑥ Writing on Client

23

of Account book⑥ g

Account book

Ⅱ - 1. OTC Market

Bond Trade & Settlement in OTC Market

−Most of corporate bonds are traded in OTC market.Korea Financial Investment Association (KOFIA) presents [FreeBond]Korea Financial Investment Association (KOFIA) presents [FreeBond] system to trade bond in OTC market.[FreeBond] gives the messenger service and trading board.

– Corporate Bond is cleared(matched) and settled in KSD.− Settlement Structure in KSD is DVP Model І.

Settlement Party A KSD Settlement Part BSettlement Party A KSD Settlement Part BTrade Data

Central

Matching

Trade Data

Matching Status Advice(unmatched)

Matching Status Advice(unmatched)

Settlement Data Settlement Data

Settlement Report

SecuritiesSettlement

SystemSettlement Report

(matched) (matched)

PaymentS tCash Payment Cash Payment

24

SystemCash Payment Cash Payment

BOK

Ⅱ - 1. OTC Market

Foreign Investment in Bond

Trading Vol, KRW bn Holding Vol, KRW bn

894 816

1000

1200

100000

120000

816

600

800

60000

80000

117

223 179

377 415

336 305

200

400

20000

40000

117 83

0

200

0

20000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

25

Buying Selling Holding vol. of Cor. bond

• Source : FSS in Korea, <fisis.fss.or.kr>

Ⅱ - 2. Exercising Rights

Overview− Entitlement management of corporate bond is to do business services for

task from participants or their clients.p p

12

1

344

26


Flow Chart of Bond Redemption and Payment

KFTC(2) Submit Bonds (D-day) (2) Exchange Confirmation

(D-day)(D day)

(5) Credit to Account (5) Credit to Account

(3) Netted Settlement Amount Calculation (D-day)

BOKKSD’s BankPayment Bank

Notification of Bondholder's

(D-day 14:30)(D-day 14:30)

(1) Application for Exchange

(4) Net Settlement

(7)Deposit Principal &

KSD Bond IssuerRegistrar

Bondholder s List

g(D-1)

(6) Payment of Principal & Interest

(D-day 14:30)Principal &

Interest

KSD

(7) Principal & Interest Payment

(7) Principal & Interest Payment List Notification

Bond Deposit (Blanket Receipt of Principal & Interest)

27* KFTC: Korea Financial Telecommunications & Clearing Institute

KSD Participant

Bondholder

(8) Payment

Principal & Interest)


Equity Linked Bond− Equities are issued by Rights Exercise of Equity Linked Bonds such as

Convertible Bond(CB), Exchangeable Bond(EB) and Bond with ( ), g ( )Warrant(BW).

Flow Chart

KSDParticipant Transfer Agent②Request for conversion ③Request for conversion

⑥Receipt /⑦Writing on account book

① Request for conversion

④Notifying request records

⑥Receipt /Issue stocks

⑦Writing on account book( Potential stocks)

⑧Writing on client account

ClientBond Issuer

① Request for conversion

⑤Registration ofcapital change

account book

28

Thank You

DVP Settlement &Interest/Redemption Payment

IndonesiaIndonesia7th ABMF Meeting - 9 February 2012

Bond Trading

• A bond exchange trading platform istrading platform is available, provided by the IDX for the exchange members.

• Market participants prefer to transact bonds in the OTC Market.

• Market participantshave the obligation to report each bond transaction to B LK th hBapepam-LK through Bonds Transaction Reporting System within 30 minutes.

KSEI Sub Registry A

Sub Registry B

CommercialBank

Exte

rnal

Tra

nsactio

n

Sub Account 1

Sub Account 2

Sub Account 3

Sub Account X

Sub Account Y

Sub Account Z

n

CC--BESTBESTBROKER A Custodian Bank B

Internal TransactionCC BESTBEST

DVP Bond Settlement

BondSeller

Buyer

Bond Reporting System

Sellery

T+0 – Trade Executed

T+2 1. Settlement 2. Prematching * 3. Settlement in T+2 Sett e e tInstruction

e atc g

4. Settlement Confirmation

and SaleProceed (nett)

3 Sett e e tKSEI and Purchase

Payment (nett) 5. TaxPayment

Seller’sLocal

LocalTax

Office

KSEI’sPAYMENT

3. Settlement in KSEI andSale Proceed (nett)

CustodianOfficePAYMENT

BANKS

* Prematching Buyer and Seller calculate the nett proceed of the Seller after deducting the withholding tax Prematching – Buyer and Seller calculate the nett proceed of the Seller after deducting the withholding tax of the Accrued Interest during the holding period and Capital Gain (if any). Seller Custodian needs to provide the info on the Purchase Price and the tax rate (tax documents to be provided if treaty rate to be applied)

Corporate Bond - Interest Payment

ISSUERCUSTODIAN

3. Tax Docs

4. List of Bond Holders

1. Announcement

ISSUERBANK

2. Tax Docs for investors who want to

5. Fund Payment(gross before tax)

7. Credit Interest

Payment or

11. Proof of Tax Payment

10. Tax Doc

LOCAL BOND HOLDER

who want to enjoy tax treaty benefit

6. Interest Payment(Nett of Tax)

8. Tax Documents + Tax Payment

Payment or Repatriate

KSEI’sPAYMENTBANKSLOCAL

TAX OFFICE

( )BANKS

• KSEI calculates the interest amount due to each bond holder, including the tax obligation


g g

• All payments executed by the payment banks are based on KSEI’s instructions

• Foreign Investors who are not domiciled or who do not wish to enjoy treaty benefits, are not required to submit any tax documentsubmit any tax document

Corporate Bond – Redemption Payment

ISSUERCUSTODIAN

3. Tax Docs + info on Purchase Price

4. List of Bond Holders

1. Announcement

ISSUERBANK

5. Fund Payment(gross before tax)

7. Credit Redemption

and last


10.Tax Doc

2. Info on Purchase Price & Tax

LOCAL6. Redemption and Interest

8. Tax Documents + Tax Payment

and last Interest

Payment or Repatriate

KSEI’sPAYMENTBANKS

Price & Tax Docs for investors who want to enjoy tax treaty benefitLOCAL

TAX OFFICEBOND HOLDER

Payment(Nett of Tax)

BANKS

• KSEI calculates the interest and redemption amount due to each bond holder, including the tax


y

p gobligation

• All payments executed by the payment banks are based on KSEI’s instructions

• Foreign Investors who are not domiciled or who do not wish to enjoy treaty benefits are not required to• Foreign Investors who are not domiciled or who do not wish to enjoy treaty benefits, are not required to submit any tax document

THANK YOUTHANK YOU

Interest and Redemption payment process for Corporate Bonds

7th ABMF7th ABMF

Feb.9, 2012,

Japan Securities Depository Center, Inc.

1. payment request 8 tax payment

Interest Payment

Issuer Paying Agent Tax Office

(before income tax)

2. fund payment (before income tax)

4 t

8. tax payment (income tax)

JASDEC

3 bondholders’

4. payment request (after income tax)

5. approvalLocal Tax

Office3.

B dh ldA t Account

3. bondholders tax status data

6. 6.

8. tax payment (local tax) *

3.

3.

BondholderAccount Management

Inst.

Account Management Inst.

7. Interest

3.3. 3.

Bondholder Account Management

Bondholder

7.

7. Interest payment 7.

1

gInst.* each AMI will pay local tax respectively.

1. payment request 8. tax payment

Redemption Payment (with final interest payment)

Issuer Paying Agent Tax Office

1. payment request (before income tax)

2. fund payment (before income tax)

4. payment

p y

(income tax)

delete bond registration

b.

c.

JASDEC

request (after income tax)

5. approvalLocal Tax

Office3.

redemption (DVP)

redemption notice

a.

b.

B dh ldA t Account

3. bondholders’ tax status data

6. 6.

8. Tax payment (local tax) *

3.

3.

(DVP)

BondholderAccount Management

Inst.

Account Management Inst.

7. redemption

3.3. 3.

Bondholder Account Management

Bondholder

7.

7. redemption payment 7.

2

gInst.* each AMI will pay local tax respectively.

Interest / Redemption Payment

Issuer shall make fund payment to Paying Agent.

Interest and redemption payment to bondholders shall be made via multi-layer holding structure by the order of;

paying agent account management institutions

bondholders

Bondholders shall entrust Account Management Institutions in advance to receive the interest and redemption payment on their behalf.

3

Interest / Redemption Payment

Relevant-parties shall pay the interest and redemption, calculated based on balance of:

Iss er Pa ing AgentIssuer Paying Agent;-- The total issue amount of the applicable book-entry bond.

Paying Agent JASDEC Participants;

-- The amount of the applicable book-entry bond for each JASDEC Participant.

Account Management Institutions Bondholders;-- The amount of the applicable book-entry bond for each account of the bondholders

in the Transfer Account Book maintained by the Account Management Institutions.

Interest shall be calculated by multiplying balance, interest rate and terms of interest calculation periodinterest calculation period…

All fractional numbers are rounded down.

4

Thank you.

Yuji SATOYuji SATO

Japan Securities Depository Center, Inc.

5

Pan-Asian CSD AlliancePilot Platform and Add-on Services

9 February 2012

Pan Asian CSD Alliance Initiative

Objective

To improve post-trade infrastructure for bond clearing and settlement in the iregion

Participants

A group of central banks and CSDs in the region

I d Whit P i J 2010Issued a White Paper in June 2010

Outlined blueprint of a Common Platform Model in Asia

Recommended Pilot Platform as a tactical interim solution for gradual migration to Common Platform ModelCommon Platform Model

Benefits of a gradual approach

Pragmatic and flexible. Allows individual countries to develop their local bond markets at own pace and join the Pilot Platform when ready

Leverage existing infrastructures to limit upfront investment

Individual CSDs to remain independent and retain autonomy in terms of legal entity, finance, business development and customer relationships

2

Pilot Platform

Key services:

BNM’s outbound link to Euroclear

CMU’s outbound link to BNM

Full coverage of Asian local bonds in the ICSD securities database (on-going)

I d b dImproved cross-border access:

Malaysian investors may hold and settle cross-border foreign securities on a DvP basis via BNM’s link to Euroclear

Hong Kong investors may hold and settle Malaysian securities (e g domesticHong Kong investors may hold and settle Malaysian securities (e.g. domestic Sukuk) on a DvP basis via CMU’s link to BNM

Raised awareness on Asian local bonds as the bond details will be visible to a larger group of international investors

Early movers: HKMA, BNM, Euroclear

Target launch date: March 2012

3

Pilot Platform: Overview

Flexible access Investor CSDICSDDirect access

• ICSD database

Leverage existing links

Increase coverage of ICSD database

Issuer CSD

• Local systems • Local systems • Local systems

Issuer CSD Issuer CSD

• Local database • Local database • Local database

Foreign currency RTGS connectivity toolForeign currency

facilities

4Foreign currency

RTGS

Evolution of Pilot Platform: Add-on Services1 Cross-border Collateral Management Service1. Cross border Collateral Management Service

Existing Arrangement

Global Triparty Repo System (e.g. Euroclear, JP Morgan)

Securities Securities

Collateral Collateral(2) SettlementCollateralTaker/Lender

CollateralGiver/Borrower

Cash Cash

Triparty repo service agreement


(1) Funds transfer

(3) Funds transfer

Domestic market

Borrower

Master repo agreement(e.g. GMRA)Lender

5

(collateral taker)(collateral giver)

Evolution of Pilot Platform: Add-on Services1 Cross border Collateral Management Service (Cont’d)1. Cross-border Collateral Management Service (Cont’d)

Enhance financial stability by improving settlement efficiency of repo transactions

Proposed Arrangement – Phase I

Enhance financial stability by improving settlement efficiency of repo transactions entered between domestic participant and international participants who may not be members of the same repo system

Phase 1 – CSD-intermediated access to global tri-party repo system to be launched i H1 2012in H1 2012

Global Triparty Repo System(e.g. Euroclear, JP Morgan)(e.g. Euroclear, JP Morgan)

CMU S t


CMU System(act as an agent)

M t t



6

CMU Member(repo buyer/

lender)

Euroclear Member(repo seller/borrower)

Master repo agreement(e.g. GMRA)

service agreement

Evolution of Pilot Platform: Add-on Services1. Cross-border Collateral Management Service (Cont’d)

Benefits

(Cont’d)

Extend the services of global triparty repo systems to cover domestic financial institutions

P id dditi l h l f ll t li d l di /b iProvide additional channels for collateralised lending/borrowing and enhance financial stability of local markets

Increase transparency and help monitoring of monetary stability p y p g y yof the local market

Target launch date: H1 2012

7

Evolution of Pilot Platform: Add-on Services1 Cross-border Collateral Management Service (cont’d)1. Cross-border Collateral Management Service (cont d)

To increase settlement efficiency for both local banks and foreign institutions with

Proposed Arrangement – Phase II

To increase settlement efficiency for both local banks and foreign institutions with cash legs settlements in local RTGS system

Phase 2 – DvP links between global tri-party repo system and local RTGS systems to be launched by Dec 2012

Global Tripartite Repo System RTGS System

Money lenderRepo buyer

MoneySecurities

Domestic Participant

(acting through CMU)

MoneySecurities

International Participant

8

Money borrowerRepo seller

Participant

Evolution of Pilot Platform: Add-on Services

Benefits

1. Cross-border Collateral Management Service (cont’d)

Benefits

Enhance the settlement efficiency – no need to transfer funds between the domestic market and global tripary repo system g p y p y

Particularly importance in times of crisis and when the market lacks of liquidity

Target launch date: Dec 2012

9

Evolution of Pilot Platform: Add-on Services2. Corporate Action Platform

Existing arrangementExisting arrangement

Paying agents do not have account positions of bond holders and thus require Asian CSD to provide such information

Lack of standardized distribution channels for bond issuers to disseminateLack of standardized distribution channels for bond issuers to disseminate corporate action information to bond holders, e.g. by fax and/or by email

Lack of standardized communication format and timetable between individual paying agents and bond holders – creates issues for custodians that provide a safekeeping service

Manual intervention increases operational risk

Notice of corporate actions Request for a/c

CSD in Asia

a/c positions

Paying Agents(acting on behalf of

bond issuers)

(proprietary channels and formats)

Instructions (e.g.

positions Members of CSD

in Asia/ global custodians

10

voting, exercising option etc) (proprietary channels and

formats)Settlement instructions arising

from corporate actions

Evolution of Pilot Platform: Add-on Services2. Corporate Action Platform (Cont’d)

Proposed Arrangement

A platform accessible by multiple CSDs in the region to achieve harmonization, improved efficiency and lower operational risks and costs in handling complex and high volumes of corporate actions for more debt securities

To be launched in H2 2014Notice of corporate actions

(standardized format)

Notice of corporate actions (standardized

format)Paying Members of

CorporateAction Platform

Custody instructions (e.g. voting, exercising option etc)

Reports oncustody Instructions

(standardized

Paying Agents

(acting on behalf of bond issuers)

CSD in Asia/ global

custodians

p )



Interface

11

CSD in Asia

CSD

in Asia

CSD in Asia

Evolution of Pilot Platform: Add-on Services

Benefits

2. Corporate Action Platform (Cont’d)

Benefits

Improve efficiency and reduce operational risks and costsand costs

Promote standardization across Asian markets

F ilit t CSD t h dl l dFacilitate CSDs to handle more complex and higher volume of corporate actions

Att t i ti f d bt i t t t bAttract more varieties of debt instruments to be lodged in the local CSDs, e.g. convertible bonds, corporate bonds such as RMB bonds

12

, p

Possible first component of the Common Platform

Principles

The local infrastructure (e.g. the local Central Securities Depository - CSD) acts as collateral agent

CCPInterbank Central Bank

p

CSD) acts as collateral agent

The local infrastructure retains its contractual relationships with its domestic members

Settlement occurs within local

Common CollateralManagement System

Settlement occurs within local CSD accounts

Collateral management is fully integrated with local settlement processing

Balances Settlement instructions

Benefits from enhancements made to the Common Collateral Management System

Collateral Giver

Collateral Taker

Settlement Processing

13

CSD

W F dWay Forward

Prepare for the launch of the Pilot PlatformPrepare for the launch of the Pilot Platform

Continue exploring additional services to be introduced to gradually migrate to the Common Platform Modelto gradually migrate to the Common Platform Model

Organise workshops/bilateral meetings for interested economies

Invite more countries to join

14

February 9, 2012

CROSS BORDER COLLATERAL MANAGEMENT

WORKING WITH MARKET INFRASTRUCTURES TO ENHANCE GLOBAL L IQUIDITY

Masayuki Tagai, Executive Director

EN

TI

AL

Global Market Infrastructures

Treasury & Securities Services

AN

DC

ON

FI

DE

TL

YP

RI

VA

TE

ST

RI

C

WHY COLLATERAL?

1

Financing Options and the Increasing Need for Collateral Management

Unsecured Financing

100% credit/counterparty exposure

High finance charge

Global Awareness of Counterparty Credit Risk

Increased bilateral collateralization

Bank to bank, broker

Highest capital requirements

Buy Sell-Back/Sell Buy-Back

End-users

Heightened Risk Awareness and Cost

Public debt crisisBuy Sell Back/Sell Buy Back

Secured but generally undocumented

Initial margin provision but no variation margin

Public debt crisis

Changes in eligibility of collateral

Excess collateral a common cause of concern

Coupon payment netted with the forward price

No substitution and no open trades

Enhanced Capital and Liquidity Standards

Basel III as a baseline

Strengthened and accelerated in parts of Asia

Repurchase Agreements (Repo)

Secured and documented

Initial and variation margin provisions

Liquidity ratios and non-cash collateral

Incoming OTC Derivatives Clearing Requirement

G20 commitmentInitial and variation margin provisions

Seller retains economic benefit of securities

Favorable capital treatment

G20 commitment

End user exemptions and third country issues

Domestic CCPs crowding APAC markets

2

Global Market Overview

Global Market Overview Dec 2010

Mature repo markets represent 60 - 70% of GDP

Government and corporate debt issuance accounts for over 60%

Asia repo market currently below 10% of GDP

Global Market Overview - Dec 2010

Americas Europe Asia Total Asia Ex

Outstanding ($Bn) $4,200 $7,700 $1,440 $13,340 $185

% of GDP 71.2% 63.6% 8.2% 37.5% 1.67%

Repo markets take 10 - 20 years to mature

Central Banks and Monetary Authorities integral to repo market developmentsOutstanding includes repos and reverse repo: Source Federal Reserve

Bank New York, International capital market Association; Amalgamation

of Asia Central Banks data

Total lendable assets $13Tn; 15% on loan

56% Cash Collateral

Securities Lending Market: Securities on loan- Dec 2010


Total Outstanding ($Bn) $1 068 $781 $110 $1 959 $38 56% Cash Collateral

Asia has 6% of total outstanding

Source: dataExplorers

Total Outstanding ($Bn) $1,068 $781 $110 $1,959 $38

Non Cash Collateral ($Bn) $286 $515 $69 $870 $21

% of Non Cash Collateral 27% 66% 63% 44% 54%

Total notional value of OTC Derivatives $601 Tn

78% f th k t i I t t R t t t d C dit D f lt S

Global Credit Exposure - Dec 2010


78% of the market is Interest Rate contracts and Credit Default Swaps

Only 70% of Credit Exposure is collateralized

Asia accounts for 9% of total outstanding contractsSource: Bank of International Settlement and ISDA Market Review of OTC

Derivative Bilateral Collateralization Practices

Total Credit Exposure ($Bn) $769 $2,139 $307 $3,215 $146

Collateralized Exposure ($Bn) $538 $1,497 $215 $2,251 $102

3

Key Aspects of Collateral Management ServicesKey Aspects of Collateral Management Services

The use of collateral to mitigate counterparty risk is only the beginning of effective collateral mananagement. Strong disciplines

in the following areas are crucial to ensuring the value of the collateral, initially and continuously, covers the respective credit andin the following areas are crucial to ensuring the value of the collateral, initially and continuously, covers the respective credit and

counterparty exposures:

Asset Servicing: Safekeeping and corporate actions maintenance

Eligibility Testing: Haircuts and concentration limits

Exposure Calculation: Variation between initial strike price and daily spot price

Dispute Resolution: Work with counterparties to solve trade discrepanciesDispute Resolution: Work with counterparties to solve trade discrepancies

Documentation: Collateral services agreements

Margin Calls: Co-ordination of request/delivery of additional collateral

Mark to Market: Daily Pricing and reference data update

Manufactured Income: Dividends and interest payments

Cash Reinvestment: Streamline sweeps and interest accrual and distribution

Recalls and Substitution: Simulataneous replacement of existing collateral with other qualified assets

Rehypothecation: Reuse of collateral

4

HKMA AGENCY REPO PROGRAM

5

HKMA Agency Repo Program

Objectives

Deliver a scalable, robust and efficient infrastructure to local and international institutions to:

Enhance local liq idit across c rrencies namel EUR HKD RMB and USDEnhance local liquidity across currencies namely EUR, HKD, RMB and USD

Advance the growth of the Hong Kong repo market

Facilitate the mobilization offshore securities to be used as collateral for Hong KongFacilitate the mobilization offshore securities to be used as collateral for Hong Kong

Promote repo trading between CMU members and International Broker / Dealers

Broaden collateral spectrum for local Buyers to include offshore securities

Partner with J.P. Morgan to provide experienced and professional infrastructural support

6

Collateral Management Services Agreement

Constructed and governed in accordance with Hong Kong law

Two bilateral agreements based on a single Programme Terms and Conditions

Signatories:

JPMorgan Chase Bank N A London Branch and Hong Kong Monetary Authority (as Agent)JPMorgan Chase Bank, N.A., London Branch and Hong Kong Monetary Authority (as Agent)

JPMorgan Chase Bank, N.A., London Branch and Seller

Participants only need to execute their respective agreements once to trade with other counterparties

Programme Terms and C diti

Seller CMSAHKMA CMSABuyer RAAConditions

7

Complete Legal Structure

Repo SellersRepo Buyers

Master Agreements1

(GMRA)

Dealer ABank -1

Repo Sellersp y

(CMU Members)

Repo Agent 2 (GMRA)

Bank - 2

HKMA

Dealer BAgreement2

(CMU Repo Agent)

Bilateral Collateral Management Services Agreement3

Bilateral Collateral Management Services Agreement4 (Seller)(plus Global Custody Agreement5)

J.P. Morgan

Tri-Party Collateral Agent

Note 1: Master Agreement (GMRA) to be executed by Repo Buyer (CMU member) and Repo Seller

Note 2: Repo Agent Agreement to be executed by Repo Seller and HKMA

Note 3: Bilateral Collateral Services Agreement to be executed by HKMA and J.P. Morgan

Note 4: Bilateral Collateral Services Agreement to be executed by Repo Seller and J.P. Morgan

8

Note 5: Global Custody Agreement executed to be by Repo Seller and J.P. Morgan

HKMA Repo Agency Program: Roles and Responsibilities

R B j i HKMA f ilit (R S ll j i

Repo Buyer and Repo Seller

Repo Buyer joins HKMA repo facility (Repo Seller joins

J.P. Morgan’s tri-party repo program if not already a member)

Buyer and Seller agree on repo trade;

Buyer and Seller send repo instructions directly to J P Morgan

Repo Buyer

CMU Member

Repo Seller

Brokers/Dealers

Buyer and Seller send repo instructions directly to J.P. Morgan

J P Morgan matches Buyer and Seller instructions

Depository and J.P. Morgan

HKMA J.P. Morgan matches Buyer and Seller instructions

J.P. Morgan performs collateral eligibility testing

J.P. Morgan values collateral and allocates to repo trade

J P Morgan

HKMA

Repo Agent

J.P. Morgan generates collateral reports for HKMA and SellerJ.P. Morgan

Collateral Agent

J.P. Morgan facilitates the use securities held at ICSD/CSD

J.P. Morgan performs :

D il MTM f ll t l

J.P. Morgan

CSD CSD ICSD CSD CSD Daily MTM of collateral,

Margin calls notification ,

Safekeeping and asset servicing

CSD

[NY FED]

CSD

[DTCC]

ICSD

[e.g. Euroclear]

CSD

[MyClear]

CSD

[Other]

9

Repo Trade Flow

HKMA

RepoBuyer

1 Buyer and Seller negotiate terms of the repo tradeRepoSeller

Generate

Collateral Repots

HK RTGS HK RTGS

7

J.P. Morgan

B d i Seller sends repo trade

Seller’s

Longbox

HKMA_Buyer Collateral

4 Buyer wires cash

to J.P. Morgan

3

J.P. Morgan wires cash

to Seller6

Buyer enters repo trade into

J.P. Morgan web interface

5

Seller sends repo trade

instructions and delivers securities

to J.P. Morgan

(…matches repo instructions and allocates collateral ;

then wire cash to Seller)

LongboxCollateral Acct Allocation23

10

Cash (Closing Leg)

Cash (Opening Leg)

Collateral Allocation Process

Accommodates a wide array of Security Types

ABS/MBS Government bondsCertificates of depositABS/MBS

ADRs/GDRs

Convertible bonds

Corporate bonds

Government bonds

Government guaranteed

Supranational bonds

Warrants

Certificates of deposit

Exchange Traded Funds (ETFs)

Equities

Eurobonds

Seller 1

Longbox

HKMA_Buyer 1

Collateral

AllocationHKMA_Buyer 2

HKMA Buyer 3HKMA_Buyer 3

Instrument type

Index

Issue rating

Quality of underlying Issuer

Subordinated debt

Coupon rate

Eurobonds

Days to maturity

Concentration limits (by value or % on all above criteria)

On issue

On collateral type

On issuer

Allows a broad range of Eligibility Criteria

Market

Issue

Issuer

y y

Minimum price

Index of non-rated bonds

Margins or Haircut

By liquidity (multiple of the average daily trading volume)

Pre-agreed value factors (margin or haircut) are applied to the

collateral value prior to concentration limits

11

Key Features of J.P. Morgan Support

Access to Local and International Securities Depositories

Mobilize collateral holdings at ICSDs (Euroclear, etc) and CSDs (RBA, DTCC, NY FED, etc)

Access to regional and international institutions, both buyers and sellers

Segregation of collateral accountsp

Collateral Independent vendors pricing ,ratings and reference data

Valuation and Margin Calls

Intraday optimization “runs” and start of day and end of day

Expeditious margin call notification

Automated collateral substitution and re-optimization

Recall collateral over record date in advance of corporate action events

Manage payment of the manufactured income directly to the Repo Seller

Automatic Substitution and Record Date Recall Manage payment of the manufactured income directly to the Repo Seller

O li ll t l t it

Record Date Recall

Technology & Reporting

Online collateral management monitor

Daily holdings and valuation reports

SWIFT and S-FTP connectivity for messaging; machine-readable data extracts

12

J P Morgan Collateral Management: Markets and CurrenciesJ.P. Morgan Collateral Management: Markets and Currencies

23 x 5 Systems Global Coverage with Operations and Client Service Model that ‘Follows the Sun’

New York

Sales & Relationship

London


Bournemouth

Client-facing OperationsTaipei

Client Servicep

Management

Client Service

Technology

Operations

Implementation

Product Management

p

Management

Client Service

Technology

Operations

Implementation

Product Management

g pClient Service

Technology

Tokyo

Sales & Relationshipg g

Manila

Cli t f i O ti


Management

Client Service

Hong Kong

Sales & Relationship Management

Client-facing Operations

Client Service

Implementation

Product Management

TechnologyHong Kong Dollar (HKO)

United States Dollar (USD)

Euro (EUR)

Singapore


Management

Client Service

Implementation

Product ManagementD l

British Pound (GBP)

Australian Dollar (AUD)

New Zealand Dollar (NZD)

Japanese Yen (JPY)

Canadian Dollar (CAD)

Danish Krone (DKK)

Sydney

Client- facing Operations

Sales & Relationship Management

P d t M t

g

TechnologyDelaware

Client-facing

Operations

Danish Krone (DKK)

Swedish Krone (SEK)

South African Rand (ZAR)

Swiss Franc (CHF)

Norwegian Krone (NOK)

Turkish Lira (TRY)

13

Product Management

Operations

TechnologyMarkets

This document has been prepared for the purpose of providing general information in summary form about the subject matters top p p p p g g y jreaders selected by J.P. Morgan. This document is for discussion purposes only and is incomplete without reference to, and shouldbe viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. This document reflects J.P. Morgan’s understandingof the subject matter as at the time of preparation and is subject to change without notice. J.P. Morgan makes no representation asto the legal, regulatory, accounting or tax implications of the matters referred to in this document and neither J.P. Morgan nor any ofits officers will accept any liability in relation to the accuracy or completeness of the information contained in this document.

Readers shall take independent legal, regulatory, accounting, tax and other professional advice, as appropriate. This document shallnot be used for any other purpose or disclosed to another person without prior written consent of J.P. Morgan.

All services are subject to applicable laws/regulations and service terms.

J.P. Morgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide.Securities syndicated loan arranging financial advisory and other investment banking activities are performed by a combination ofSecurities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination ofJ.P. Morgan Securities Inc., J.P. Morgan plc, J.P. Morgan Securities Ltd. and the appropriately licensed subsidiaries of JPMorganChase & Co. in Asia-Pacific, and lending, derivatives and other commercial banking activities are performed by JPMorgan ChaseBank, N.A. J.P. Morgan deal team members may be employees of any of the foregoing entities.

This presentation does not constitute a commitment by any J.P. Morgan entity to underwrite, subscribe for or place any securities orto extend or arrange credit or to provide any other services.

14

g p y

®

Asian Bond Market ForumCLS Currency Program Update

9 February 2012

Lynn Mathews

® CLS and the CLS Logo are registered trademarks of CLS UK Intermediate Holdings Ltd © 2011 CLS UK Intermediate Holdings Ltd.

www.cls-group.com

Agenda

» The global FX market – recent developments

» CLS and its role in FX risk mitigation

B fit f ti i ti i CLS» Benefits of participating in CLS

» Central Banks

» Settlement Members

» Managing other risks in FX» Managing other risks in FX

» Third party and fund participation

» CLS strategy for Asia gy

» Questions

2

The Global FX Market – Recent Developments

3

Introduction

» An effective and safe FX settlement market supports efficient capital allocation which contributes to economic developmentallocation which contributes to economic development

» CLS’ core mission is to mitigate settlement risk in the global FX market

» The unique payment vs payment settlement system connects local and global» The unique payment vs. payment settlement system connects local and global markets

» Safe and sound FX market supports international commerce and global economic activity

Th iti ti f ttl t i k i t d ith FX h l l k t» The mitigation of settlement risk associated with FX enhances local market financial stability

» CLS Board, management and its regulators support expanding the number» CLS Board, management and its regulators support expanding the number of currencies eligible to be settled in CLS

4

The Global FX market - recent developments

» Significant evolution in trading is taking place

» 20% overall growth in global FX (Apr 2007 Apr 2010)1 to US$4 trillion per day» 20% overall growth in global FX (Apr 2007–Apr 2010)1 to US$4 trillion per day

» Automated trading with increasingly sophisticated trading platforms deployed

» Trading volumes are growing faster than values

» Growth from retail prime brokerge Algo-trading and developing currencies» Growth from retail, prime brokerge, Algo-trading and developing currencies

» Market composition is changing:

» Trading with investment firms has grown substantially and is now larger than» Trading with investment firms has grown substantially and is now larger than interbank transactions: 48% versus 39%1

» 65% of all FX transactions are cross-border1

» Continuing Asian growth and growth in intra-Asian trade shifting market demand, particularly growth in offshore clearing of RMB

1Bank for International Settlements Triennial Central Bank Foreign exchange and derivatives market activity in April 2010 (1 September 2010) (BIS)

5

1Bank for International Settlements Triennial Central Bank — Foreign exchange and derivatives market activity in April 2010 (1 September 2010) (BIS)

Response to the financial crisis - regulatory initiatives

» Main impact for FX – mandated FX derivatives clearing and trade repository

Structural reforms underway – particularly derivatives markets and increased capital requirements under Basel III

» Main impact for FX mandated FX derivatives clearing and trade repository reporting

» A number of jurisdictions in Asia are at various stages in plans to establish l i hclearing houses

» Dodd-Frank legislation in the US and proposed OTC derivatives and market infrastructures from the European Commissioninfrastructures from the European Commission

» Proposed new principles for financial market infrastructures (CPSS, IOSCO) and corresponding efforts by the Financial Stability Board

» Regulatory focus on the need for “safe settlement”

66

Implications for CLS

» Compliance with new and expanded regulatory standards

» Continued support for a growing FX market

R l f CLS i t f ttl t f l d FX» Role of CLS in support of settlement of cleared FX

» Retaining leadership role in global FX market, delivering value in risk mitigation servicesmitigation services

7

CLS and FX risk mitigation

8

FX requires cash payments

» FX is the only asset class where cash delivery occurs on both sides of the transactiontransaction

» FX trades settle through full trade value with currency payments executed in two different jurisdictions that may be in different time zonestwo different jurisdictions that may be in different time zones

» Failure by one party to settle its side of the transaction may result in a chain reaction of cross defaults

» With the current FX market in excess of US$4 trillion per day - total settlement risk is systemically important

9

FX settlement risk

» Settlement or “Herstatt” Risk named after the failure of a small German bank –Bankhaus Herstatt – in 1974 is the loss of principal arising from the failure of oneBankhaus Herstatt in 1974 is the loss of principal arising from the failure of one counterparty to settle its side of the trade

» 1996: CPSS-sponsored “Allsopp” report published, identified the absolute values of settlement risk

» 1998: major banks form “G20” project group. This led to the creation of CLS as a company and the CLS Bank settlement service

» 2008: CPSS settlement survey reported good progress by banking industry on iti ti ttl t i k b t i di t “ t d ”mitigating settlement risk but indicates “more to do”

» March 2011: the Basel Committee on Banking Supervision (BCBS) and the Committee on Payment and Settlement Systems (CPSS) established a joint working group to revise the supervisory guidance for managing settlement risk in FX transactionse se t e supe so y gu da ce o a ag g sett e e t s t a sact o s

» CLS Bank is recognised as an important Financial Market Infrastructure and observes the Core Principles for Systemically Important Payment Systems

10

CLS Bank

» An Edge Act corporation bank based in New York chartered under section 25A of the United States Federal Reserve Act25A of the United States Federal Reserve Act

» Regulated by the Federal Reserve Bank of New York and an Oversight Committee composed of 22 central banks whose 17 currencies are settled inCommittee composed of 22 central banks whose 17 currencies are settled in CLS

» CLS has been granted unique direct access to local RTGS systems in each g q ycurrency it settles. This is means settlement across the Member accounts at CLS Bank are direct

1111

How CLS works within the trade life cycle

1212

Who is involved - the CLS Ecosystem

» CLSFX market

» Central banks

» 17 RTGS systemsSettlement Members

» Settlement Members

» 61 in 23 jurisdictions

CLS

Central banks

» Third parties – indirect participants

» Over 14,000 banks, investment firms, major corporations, funds

banks

» Settlement instructions received from 86 countries

Source: CLS settlement data

13

Source: CLS settlement data

Regulatory oversight

» Regulated and supervised by Federal Reserve Bank of New York

» Overseen by CLS Oversight Committee - formal arrangement established by 22 central banks whose 17 currencies are settled in CLS22 central banks whose 17 currencies are settled in CLS

14

Benefits of participating in CLS

15

Benefits of participating – local jurisdictions

In addition to settlement risk mitigation, participation in CLS delivers:

» Enhanced financial stability in local market

R d d i t d li idit i d t FX fl th h l l RTGS» Reduced intra day liquidity required to process FX flows through local RTGS system

» Local visibility of the FX market» Local visibility of the FX market

» Higher and globally consistent standards

1616

Benefits of participating - Settlement Members

In addition to settlement risk mitigation, participation in CLS delivers:

» Liquidity efficiencies reduced by 96% on average through multilateral netting

» Increased trading capacityg p y

» Operational efficiencies through full automation of post trade services

» Joining a unique market infrastructure driving collaboration on new services

» Generate revenue and strengthen relationships by providing access to the settlement service to customers (third parties)settlement service to customers (third parties)

1717

CLS role in managing other risks in FX

Liquidity risk

» Daily funding requirements are minimised by multilateral netting in CLS» Daily funding requirements are minimised by multilateral netting in CLS

Credit risk

» Counterparty credit risk is covered through collateral arrangements or clearing» Counterparty credit risk is covered through collateral arrangements or clearing for specified derivatives

Operational risk

» Common global market standards have significantly improved operational performance / straight through processing

» CLS standards take operational performance to the next level

Legal risk

» Standard legal framework and operating rules

18

Participation – third party access

Settlement Members - third party service providers:

» C ff CLS ttl t t th i t t f th i l i» Can offer CLS settlement to their customers as part of their clearing, settlement and correspondent banking services

Settlement Members who offer CLS services to customers:Settlement Members who offer CLS services to customers:

» Face the market on behalf of the third party (accept credit risk)

» Handle all instructions and funding on behalf of third parties

Fund FX available through CLS-enabled custodians and broker banks serve:

» Investment fund managers, hedge funds, pension funds, overlay funds, third party custodiansparty custodians

19

Participation – investment managers and funds

20

Benefits for funds — summary

Risk reduction Operational efficiencies

Settlement risk mitigation Increased straight through processing

Reduced payment risk Operational certainty

Reduced operational risk Best-in-class cash forecasting

Risk reduction assists trading accessReal time reporting on the settlement status of tradesof trades

Best execution compliance Reduced use of funds

Fund participation in CLS has grown by over 50% over the last two years

21

CLS strategy and outlook

2222

CLS vision and strategy

Dedication to core mission

» Enhance financial stability through reduction of FX settlement risk globally

Short to medium term strategy (one to three years)

» Focus on strengthening the operational performance and capacity of the core settlement system

» Expand the core settlement service to include more participants new» Expand the core settlement service to include more participants, new currencies and additional settlement sessions

23

Strategic priorities

» Regulatory considerations

» Infrastructure to deliver a robust, safe and efficient settlement service

St t i i iti ti t t CLS’ i i» Strategic initiatives to support CLS’ core mission:

» Same day settlement

S t f ttl t f l d FX» Support for settlement of cleared FX

» Greater participation

» Expansion of currencies

24

Strategic initiatives

Same day settlement

» N th A i ft i f USD/CAD fi t t i di» North American afternoon session for USD/CAD as first step in expanding payment versus payment settlement for same day trades

Support for settlement of cleared FXSupport for settlement of cleared FX

» Cleared trades still need to be settled so settlement risk is not reintroduced

» CLS will collaborate with central counterparties and the market to address» CLS will collaborate with central counterparties and the market to address the challenges of settlement for cleared FX products once the model is defined

Greater participation

» Increase the number of Settlement Members and third parties

25

Strategic initiatives

Currency program

» Currency expansion is one of CLS’ strategic priorities

Gl b l h i d ti d t h d» Global comprehensive education and outreach program underway

» Expanding Asian focus in 2012

26

CLS strategy for Asia

» CLS welcomes interest in participation in CLS settlement from all jurisdictions

» CLS’ focus on Asia has increased and our Asian strategy is evolving

» CLS currency expansion is a combined public and private sector initiative, a y p p p ,collaboration CLS welcomes and is experienced in developing

» We are targeting more structured engagement, potentially as an Asian currency forum, in Singapore in July 2012

» We welcome proactive engagement with your colleagues and the broader A i k t t t dd i ttl t i k iti tiAsian market to support addressing settlement risk mitigation

27

Questions

28

Valuation and Price Discovery: R l d I t iRole and Importance in Emerging Bond Markets

7th Meeting of the7 Meeting of the

ASEAN+3 Bond Market Forum

8-9 February 2012y

Hong Kong

©Copyright BOND PRICING AGENCY MALAYSIA SDN.BHD - All rights reserved.

Agenda

11 Importance of Bond ValuationImportance of Bond Valuation

22 Bond Valuation Approaches in PracticeBond Valuation Approaches in Practice22

33

Bond Valuation Approaches in PracticeBond Valuation Approaches in Practice

Bond Valuation for Reporting RequirementsBond Valuation for Reporting Requirements

44 Efficient Price Discovery: Impact on Primary and Secondary MarketEfficient Price Discovery: Impact on Primary and Secondary Market

©Copyright BOND PRICING AGENCY MALAYSIA SDN.BHD (FORMERLY BONDWEB MALAYSIA SDN BHD). - All rights reserved.©Copyright BOND PRICING AGENCY MALAYSIA SDN.BHD PAGE 2

Agenda



33





Importance of Bond Valuation

Valuation and Price Discovery are a fundamental component of bond marketsValuation and Price Discovery are a fundamental component of bond markets

RegulatoryFramework

Investor BaseIssuers

TradingInfrastructure Trustees

a e o

BOND MARKETLegal / Syariah

FrameworkSettlement

InfrastructureInfrastructure

RatingsCustodians

VALUATION /PRICE DISCOVERY INFRASTRUCTURE


INFRASTRUCTURE


The Inherent Nature of Bond Markets

Illiquidity is a GIVEN

Realistically, liquidity can only be achieved up to an extent in any bond market

Only a small percentage of issues are traded, mostly in Government bonds. Liquidity decreases for: Lower credits, private placements and complex structures, p p p

Result: Difficulty in price discovery for trading, investing,

reporting and issuance.reporting and issuance.

Therefore, some kind of valuation framework is a necessity



All bond market stakeholders need a source of valuationAll bond market stakeholders need a source of valuation

WHO NEEDS VALUATION

SELL SIDE ISSUERSBUY SIDE REGULATORSOTHER STAKE

HOLDERS

VALUATION DATA FORMARKET SURVEILLANCE

DATA AND VALUATIONS FOR FINANCIAL

REPORTING, DECISION MAKING AND RISK MANAGEMENT

PRICE DISCOVERY FOR NEW ISSUERS

ACADEMIA, PUBLIC,MEDIA, WATCHDOGS


Key benefits in emerging markets include:


y g g

Revitalises the Secondary Market

The existence of proper valuation may revitalize the bond market by facilitating price discovery for secondary market tradingThe a ailabilit of reliable mark to market prices can pro ide

yfor Bonds

Facilitates Price Di f

The availability of reliable mark-to-market prices can provide alternatives to traditional hold-to-maturity strategies.

From an origination and underwriting perspective, primary level pricing becomes challenging especially for lower creditsR li bl l ti d t i l i d t b dDiscovery for

Primary Market

Reliable valuation data on previously issued corporate bonds can promote new issues by functioning as benchmarks for primary level price discovery

Valuation transparency will spur the evolution of the bond market by Promotes New Product Development

encouraging the development of more advanced pricing methodologiesWhen such methodologies are established, it will encourage more

bond offerings (local and cross border) and more active trading of these products in the secondary market.

Improves the Soundness of Financial Institutions

Reliable valuations will assist in financial institutions' compliance to international accounting standards (IAS, IFRS) and BIS capital requirements.

Effectiveness of risk management will be further enhanced as the valuation process will be consistent and not arbitrary


valuation process will be consistent and not arbitrary


Regulated Self Regulatory and Independent valuation providersRegulated, Self-Regulatory and Independent valuation providers

Europe

Mexico

Malaysia

Korea

Regulated BPA

Thailand

ChinaUSA

u ope

Japan

yg

Indonesia - Indonesia Bond Pricing Agency

Korea - Korea Asset Pricing (KAP), KIS Pricing, Inc , NICE P i i S i I

Indonesia

Australia

Pricing Services, Inc

Malaysia - Bond Pricing Agency Malaysia Sdn Bhd

Mexico - Two price vendors under the purview of Banco De Mexico

SRO Structure

Thailand – Thailand Bond Market Association

Japan – Japan Securities Dealer

Independent

Information Vendors –Bloomberg, Reuters

Valuation specialists – IDC, M kit


the purview of Banco De MexicoAssociation Markit

Different frameworks suitable for different markets


BPAAdvantage: Directly regulated independent valuationDisad antages Significant start p cost req ires market acceptance

SRO / Regulator

Disadvantages: Significant start up cost , requires market acceptance, adequate regulatory framework and market maturity

Advantage: Market credibility as all market participants are stakeholdersSRO / Regulator

Driven

Independent

Disadvantages: Requires established SRO framework, difficulties in commercial viability, difficulty in reaching consensus view

Independent Valuers/Information Vendors

Advantages: global recognition, relatively low costDisadvantages: Global providers may be less specialised/focussed on

emerging markets, “one size fits all”

Market Quote Aggregation

Advantages: Lowest cost, good for liquid instrumentsDisadvantages: Poor coverage, low granularity, risk of moral hazard


Agenda



33



44 Efficient Price Discovery : Impact on Primary and Secondary MarketEfficient Price Discovery : Impact on Primary and Secondary Market


Bond Valuation Approaches in Practice

Current industry practice and the assumptionsCurrent industry practice and the assumptions

YTM Matrix /YTM Matrix / Yi ld d t i d b ti ll b dYTM Matrix / Curve PricingYTM Matrix / Curve Pricing

IndividualIndividual

Yield Curve Quote AggregationYield curves determined by aggregation, all bonds

marked to the curve

Individual Quotation Approach


Price Quote Aggregation Bond price quotes aggregated from banks/brokers

Model Approach(Mark to Model)Model Approach(Mark to Model)

Theoretical Bond prices derived by mathematical models

Hybrid ApproachHybrid ApproachMulti dimensional A combination of the three



Current industry practice and the assumptions

YTM Matrix /YTM Matrix /1y 2y 3y …


YTM Matrix / Curve PricingYTM Matrix / Curve Pricing


Quoted Bonds

Marking to market

AAA 3 4 5 …

AA 3.5 4.5 … …

A … … … …

BBB … … … …Individual Quotation Approach


Assumptions:

1 Market Liquidity / Efficiency


1.Market Liquidity / EfficiencyContributed quotations are assumed to be an unbiased market

representation.Market is liquid without seasonal effects.

2.Homogeneity

Hybrid ApproachHybrid Approach

2.HomogeneityBonds belonging to the same segment are assumed identical.




YTM Matrix /YTM Matrix /




Traded BondsQuoted Bonds

Map

Map

Marking to market



Assumptions:

1 Market Liquidity / Efficiency


1.Market Liquidity / EfficiencyContributed quotations are assumed to be an unbiased market

representation.Selective group of contributors monitor individual bond value on an on-

going basis.Individual bonds are assumed to be liquid, where the value of individual


Individual bonds are assumed to be liquid, where the value of individual bonds are observable.


Comparison of quotes provided by aggregation methods


Comparison of quotes provided by aggregation methods

Dealing / Indicative Quotes Aggregated Yield Curves

Features Not all bonds are quoted, governments most common

None or few quotes in bear market

Granularity of yield curves may be insufficient

Possibility of manipulation of yield curveNone or few quotes in bear market conditions

Prices may be “shaded”

One way prices and wide spreads are

Possibility of manipulation of yield curve quotes by contributors

Timeliness – may not be updated daily

Fails to consider individual issuesOne way prices and wide spreads are common

Fails to consider individual issues (homogeneity assumption)

Origin of quotes Market making banks and interdealer Market making banksOrigin of quotes Market making banks and interdealer brokers

Market making banks

Timeliness As and when available / End of Day Varies (daily up to fortnightly)




YTM Matrix /YTM Matrix / Financial DataA

n

A

n




Financial DataInterest Rate DataAsset ValueAsset VolatilityRecover RateRisk Free RateCurve Rate

Liquidity ModelCredit Scoring ModelTerm Structure Model

n

a

l

y

t

i

c

n

a

l

y

t

i

c

Marking to market



Assumptions:

1 Model is always Right

s s


1.Model is always RightComputerised mathematical model generates price.Underlying information is accurate and timely.Minimal human intervention.





YTM Matrix /YTM Matrix /

Quoted Bonds




Traded Bonds

Calibrating Implied

Risk Premium From Market

DataPre and Post Data

Marking to market

Liquidity risk model

Credit risk model

Term structure model



Assumptions:

Pool


1.Market Liquidity / EfficiencyMarket is not liquid, trade frequency is low. Still, trade prices (if properly

monitored) can provide information for pricing.

2. Non HomogeneityM th ti l d l d t id k t i


Mathematical model does not provide market price.Mathematical model provides the framework to derive the risk

premium/spread in the market. Selective group of contributors monitor individual bond value on an on-going basis.



Snapshot of inputs for a market relevant valuation approachSnapshot of inputs for a market relevant valuation approach

Client feedbackprocess

Newissues

Benchmark curves

Marketinteraction

Accurate terms& conditions

process

interaction

Financial Mathematics

YTM matrix/curve pricing

& conditions

VALUATION PROCESS

Ratingupdates

Creditrisk

analysis

PROCESS

Accurate posttrade data

Live pre trade quotes

Relativepricing



Market relevance of Valuations vs Trades

The objective to is to achieved an unbiased, normal distribution of evaluated prices compared to market trading

Market relevance of Valuations vs Trades

Interim Pricing Performance : Marked to Market against trade spread on spot, Oct 2011 to Dec 2011


Agenda



33



44 Efficient Price Discovery : Impact on Primary and Secondary MarketEfficient Price Discovery : Impact on Primary and Secondary Market


Bond Valuation for Reporting Requirements

Compliance for long term market credibility competitiveness and viabilityCompliance for long term market credibility, competitiveness and viability

Financial Reporting Risk Management

VALUATION

Decision Making Investor protectiong p


Accounting standards governing valuation of fixed income instruments


Accounting standards governing valuation of fixed income instruments

IFRS13: “Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”

IFRS13: “Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”

The Need

To measure the fair value of financial instruments specifically Fixed Incomeinstruments, specifically Fixed Income instruments to meet the stipulations of

IFRS 13/7/139



IFRS 13 on FV measurement: The fair value hierarchy

Level 1 inputs

Unadjusted quoted prices in active markets (traded levels and binding quotes from

For all the Input Levels, some kind of valuation mechanism needs to exist

IFRS 13 on FV measurement: The fair value hierarchy

Level 3 inputs

Least observable

(Lowest priority)

(traded levels and binding quotes from

brokers).

Level 2 inputs

Inputs (other than quoted prices included inputswithin Level 1) that are observable for the asset or liability, either directly or indirectly

(peers pricing).

Level 3 inputsLevel 2 inputs

p

Inputs for the asset or liability that are not based on observable market data

(inputs used for distressed assets and ABS).

“A valuation technique would be expected to

Level 1 inputsMost observable

(Highest priority)

A valuation technique would be expected to

arrive at a realistic estimate of the fair value if:

….it reasonably reflects how the market prices

the instrument….and the inputs…represent

market expectations and risk-return factors”

inherent in the instrument”


inherent in the instrument


Valuation data is a key input into many processes

Risk Management Decision Making Investor Protection

Valuation data is a key input into many processes

Valuation data needs

Trading limits/stop loss monitoring

Asset/Liability Matching Standardisation of NAV reportingdata needs monitoring

VaR/Vols calculations

Portfolio risk modelling

Funding Requirements

Basel compliance

reporting

Accurate reflection of fund performance

Portfolio risk modellingand monitoring

Single customer exposure

Management reporting

Regulatory reporting

Published financial statements

Regulatory Reportingexposure

Regulatory reportingCreation of Indices

Regulatory Reporting


A valuation framework is necessary to meet these needs


A valuation framework is necessary to meet these needs

Legacy Practice

Value financial instruments based on historical cost, amortised cost and last trade due to

The Solution

Valuation data that is fit to meet financial limited or no fair value data, therefore unable to

realise the actual value of the financial instruments.

reporting standards, portfolio valuation and risk management requirements

Fair Fair


valuevalue

Agenda



33





Efficient Price Discovery: Primary and Secondary Markets

Malaysia as a case study

Ever growing issuance and trading volumes demanded appropriate valuation and price discovery infrastructureappropriate valuation and price discovery infrastructure

Malaysia adopted a BPA framework in 2006

Initially targeted at mutual funds, the BPA now supports a wide range of market stakeholders.



Primary Market : Steady growth since the Asian Crisis of 1997

80

RM 'Bil

Primary Market : Steady growth since the Asian Crisis of 1997

60

70

Ever growing issuances underscored the need for an efficient price discovery and

40

50 valuation process, assisted by the creation of the BPA in 2006

20

30

0

10

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

E it M k t D bt M k t (PDS) S S BNMBNM


Equity Market Debt Market (PDS) Source : Source : BNMBNM


Primary Market: Multiple industry sectors requires granularity in yield curves

RM 'Bil

6ABS

Primary Market: Multiple industry sectors requires granularity in yield curves

40

11

7

129Corporate

ABS

58% f t t di iti

60

8

8

7

Financial

Corp Guaranteed58% of outstanding securities are conventional bondsMGS dominates outstanding Government securitiesHighest percentage of s k k

18

75

58

32

Quasi-Gov't

BNM

Highest percentage of sukuk from Corporate PDS

S BPA M l iS BPA M l i

280

18

112Gov't

Sukuk Bonds


Source : BPA MalaysiaSource : BPA MalaysiaSu u o ds


Increasingly complex structures requires robust financial engineering knowledge

Bond Structures

Di t B d C ll bl St i B d

Islamic Concepts

Al B i Bith Ajil Ij h

Increasingly complex structures requires robust financial engineering knowledge

Discount BondConvertible Discount BondCallable Discount BondCallable Convertible Discount BondBullet BondCallable Bullet BondFi d R t B d

Callable Stepping BondCallable Convertible Stepping BondStepping Amortising BondCallable Stepping Amortising BondFloating Rate NoteFloating Rate ABSFl ti R t MBS

Al Bai Bithaman AjilAl Qardhul HasanAl-WakalahBai' At-TawarruqBai DaynBai-Al-EinahBi I tith

IjarahIstisnaMudharabahMurabahahMusyarakah

Fixed Rate BondFixed Rate ABSFixed Rate MBSBond with WarrantsConvertible BondExchangeable BondC ll bl B d

Floating Rate MBSFloating Convertible BondFloating Exchangeable BondFloating Callable BondFloating Callable ABSFloating Callable MBSFl i C ll bl C ibl B d

Bi Istithmar

CombinationIjarah & MusyarakahIjarah, Istisna', Mudharabah, Murabahah,

Callable BondCallable ABSCallable MBSCallable Convertible BondCallable Exchangeable BondAmortising Bond

Floating Callable Convertible BondFloating Callable Exchangeable BondFloating Amortising NoteStepping FRN

j , , , ,MusyarakahIstisna' & MudharabahIstisna' & MurabahahMudharabah & MusyarakahMurabahah & Bai Al DaynMudharabah & Murabahah

Fixed Rate Amortising ABS BondCallable Amortising BondStepping FRBConvertible Stepping BondExchangeable Stepping Bond

Bai Dayn & MurabahahMurabahah & MusyarakahBai Dayn,MurabahahAl-Bai', Al-Wakalah, Bai Bithaman Ajil & IjarahAl-Wakalah, Bi Istithmar


Case study: Primary level price discovery


Coupon Rate Traded Yield BNM Rate

2003 2009

Coupon Rate Traded Yield BNM Rate

Case study: Primary level price discovery

4.5

4

4.5

4

22/04/2009 21/05/2009 22/05/2009

3.5

17/04/2003 18/04/2003 21/04/2003 08/05/2003

Coupon Rate 4.25%

Traded Yield After 1 Month 3.90%

Issue Amount RM 150 Mil

Annual Excess Coupon

PaymentRM 525,000

Coupon Rate 4.38%

Traded Yield After 1 Month 4.39%

Issue Amount RM 100 Mil

Annual Coupon Saving RM 10,000Payment

Total Excess Coupon Payment RM 2,625,000 Total Excess Coupon Saving RM 50,000

Efficient price discovery managed to narrow the borrowing spread by matching the Actual Market Cost (traded yield) and the Issuer Cost (the coupon rate at the primary level)Di t B fit L t f f di f i


Direct Benefit: Lower cost of funding for issuers


Secondary Market: Increased number of market participants and cross border flows

1,800

RM 'Bil

Secondary Market: Increased number of market participants and cross border flowsrequires valuations for trading reference and marked-to-market

1,400

1,600

2006 I t d ti f B d P i i

2011 Secondary market volumeRM 1.7 Trillion

800

1,000

1,2002006: Introduction of Bond Pricing Agency

400

600

800

0

200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

S BPA M l iS BPA M l i


Source : BPA MalaysiaSource : BPA Malaysia

The Malaysian experience in the bond valuation perspective


The Malaysian experience in the bond valuation perspective

Observed trends:Observed trends:

Increasing demand for reliable and market relevant valuation data at local and global level

Requests for technology transfer to other developing markets to develop their ownmarkets to develop their own valuation infrastructure

Global valuation providers and information vendors seeking out premium bond data for redistribution


Takeaway: Benefits of valuation infrastructure in emerging bond markets

Conclusion

y g g

Revitalises the Secondary Market for Bondsy

F ilit t P i Di f P i M k t T dFacilitates Price Discovery for Primary Market Towards anAttractive,

Viable,Sustainable

Promotes New Product Development

Sustainableand Robust

Bond Market

Improves the Soundness of Financial Institutions


THANK YOUTHANK YOU


No 17-8 & 19-8 , The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur, MalaysiaTel: +603 2772 0889 Fax: +603 2772 0808 Email : [email protected]

Oth I f SF1 d SF2Oth I f SF1 d SF2Other Issues of SF1 and SF2 Other Issues of SF1 and SF2

-- Updates on the Phase 1 ABMF Report Updates on the Phase 1 ABMF Report ––

ADB SecretariatADB SecretariatADB SecretariatADB Secretariat

77thth ABMF MeetingABMF MeetingggHong Kong, 8Hong Kong, 8--9 Feb 20129 Feb 2012

Discussion during the Beijing meetingDiscussion during the Beijing meeting

Three options were suggested for considerationThree options were suggested for consideration

Option 1 : By ADB secretariat

Option 2 : By ABMF members

Option 3 : By ad hoc teamOption 3 : By ad-hoc team

Following aspects were discussed and sharedFollowing aspects were discussed and shared

Close relationship with phase 2 activities

Updates as an official output of ABMF

Interest and involvement of ABMF members regulatoryInterest and involvement of ABMF members, regulatory authorities and policy makers is important

Need of utilizing various sources rather than single source

Combination of option 2 and option 3 might be desirableCombination of option 2 and option 3 might be desirable

Need to be practical considering resource limitation

Basic approachBasic approach

C id bi ti f ti 2 & ti 3C id bi ti f ti 2 & ti 3Consider combination of option 2 & option 3Consider combination of option 2 & option 3

Produce updates as official output of ABMF in Produce updates as official output of ABMF in i di l b i l ii di l b i l i llperiodical basis : annual or semiperiodical basis : annual or semi--annualannual

Close cooperation among ABMF members, ADB Close cooperation among ABMF members, ADB p g ,p g ,secretariat and adsecretariat and ad--hoc updating team throughout hoc updating team throughout the updating processthe updating process

3

Procedure for the updatingProcedure for the updating

Collecting Information/DataCollecting Information/Data

Revising/Updating

Confirmation by ABMF member

Publishing (ABMF Web)

4

g ( )


(Step 1) Providing/collecting information and data(Step 1) Providing/collecting information and data(Step 1) Providing/collecting information and data(Step 1) Providing/collecting information and data

ABMF members by themselves

ADB secretariat teamADB secretariat team

Utilizing existing professional network (e.g. SMPG) could be beneficial

Who will coordinate and collect?

(Step 2) Revising and updating the reports(Step 2) Revising and updating the reports

ABMF members can directly do it

ADB secretariat team and ad-hoc team can also do it

Again, who will coordinate?

5

g ,


(St 3) R i d fi ti b ABMF b(St 3) R i d fi ti b ABMF b(Step 3) Review and confirmation by ABMF members(Step 3) Review and confirmation by ABMF members

This is necessary to make it official ABMF output

Need to think about who will facilitate the procedureNeed to think about who will facilitate the procedure for the consultation with ABMF members

(Step 4) Publication of updated reports(Step 4) Publication of updated reports(Step 4) Publication of updated reports(Step 4) Publication of updated reports

Basically ADB ABMF website (official)

For convenience of users we can think of additional sitesFor convenience of users, we can think of additional sites (mirror site/ linked to official site)

6

AdAd--hoc updating teamhoc updating team

T ffi i tl d t th tT ffi i tl d t th tTo efficiently update the reportsTo efficiently update the reports

To include multilateral networks and involvements To include multilateral networks and involvements

Establish under ABMF on voluntary basisEstablish under ABMF on voluntary basis

Participation (Tentative)Participation (Tentative)

ADB secretariat team

SWIFT ( to utilize SMPG network and other resources)

Other experts appropriate and availableOther experts appropriate and available

Provide key support for Step 1 and Step 2)Provide key support for Step 1 and Step 2)

F ilit ti i f ti ll ti f i

7

Facilitating information collection from various sources

Directly and indirectly revising and updating the reports

Updating procedure and responsibilityUpdating procedure and responsibility

Collecting Updating Team (ADB S t i t SWIFT & Oth )

gInformation/Data (ADB Secretariat, SWIFT, & Others)

- Support collecting info/date- Support revising/updating- Facilitate ABMF member confirmation

Revising/UpdatingFacilitate ABMF member confirmation

Confirmation by ABMF member

ABMF members

- Provide inputs for Info/data- Provide revision/update


- Confirm the revision/update

ADB Secretariat

8

ADB Secretariat

Mirror system (Optional, ex: SWIFT)

R t f F db kR t f F db kRequest for FeedbackRequest for Feedback

Members and experts are invited to provide their Members and experts are invited to provide their feedback on the proposed optionsfeedback on the proposed options

llQuestions welcomeQuestions welcome

Many thanks!Many thanks!

ADB SecretariatADB Secretariat

9

Supplementary slidesSupplementary slides: Options proposed during the Beijing Meeting: Options proposed during the Beijing Meeting

10

Option 1: By ADB secretariatOption 1: By ADB secretariat

Collecting Information/Data

Inputs from ABMF member & and others

Revising/Updating

Consultation with

ADB Secretariat team

Review by ti Consultation with

ABMF memberrespective member

11


Option 2: By ABMF membersOption 2: By ABMF members


Inputs from ADB Secretariat, ABMF members, & others

Revising/UpdatingRespective ABMF

member

Review and Confirm

member


ADB Secretariat team

12

(ABMF Web)

Option 3: By adOption 3: By ad--hoc teamhoc team


Inputs from ADB Secretariat, ABMF members, & Others

Revising/Updating Market Practice Updating

Consultation with

p gTeam(MPUT)

* Voluntary basis* SWIFT and othersReview by

ti Consultation with ABMF member

respective member

13


Publishing in mirror system (Optional, ex: SWIFT)

WORK PLAN FOR PHASE 2WORK PLAN FOR PHASE 2

AADB S t i t tDB S t i t tAADB Secretariat teamDB Secretariat team

77thth ABMF MeetingABMF MeetingggHong Kong, China, 8Hong Kong, China, 8--9 Feb 20129 Feb 2012

* Contents of the presentation could be changed subject to the members’* Contents of the presentation could be changed subject to the members’ Contents of the presentation could be changed subject to the members Contents of the presentation could be changed subject to the members

discussion during the meetingdiscussion during the meeting

Finalizing phase 1 & Starting phase 2Finalizing phase 1 & Starting phase 2

6 ABMF meetings during Sep 2010 ~ Dec 20116 ABMF meetings during Sep 2010 ~ Dec 2011

Publication of the report : By the end of Mar 2012Publication of the report : By the end of Mar 2012

Final confirmation by members: by 24 Feb 2012 with minimum one week of review time for each market guides

Internal procedure of ADB: during Mar 2012

Starting phase 2 : 7Starting phase 2 : 7thth meeting in Hong Kongmeeting in Hong Kong

Cl ifi d SF1 d SF2 ti iti /f / t t f h 2Clarified SF1 and SF2 activities/focus/output of phase 2

Finalized phase 2 membership

Agreed activities for Phase 2Agreed activities for Phase 2

<SF1><SF1>

Target : Target : professional markets or exempted professional markets or exempted markets which waives fullmarkets which waives full--disclosure requirement disclosure requirement (QIB market)(QIB market)(QIB market)(QIB market)

Output : Regionally standardized bond issuance Output : Regionally standardized bond issuance program :program : Asian MultiAsian Multi--Currency Bond IssuanceCurrency Bond Issuanceprogram : program : Asian MultiAsian Multi--Currency Bond Issuance Currency Bond Issuance Program (AMBIP)Program (AMBIP)

Approach: Mutual recognition amongApproach: Mutual recognition amongApproach: Mutual recognition among Approach: Mutual recognition among participating jurisdictionsparticipating jurisdictions

MultiMulti--lateral regional initiative based on bilateral networkinglateral regional initiative based on bilateral networking


<SF1><SF1>

Areas of discussion(1) : Areas of discussion(1) : mainly related to mainly related to laws laws and regulationsand regulations and SRO rulesand SRO rules

Recognize professional investor / sophisticated investor / Recognize professional investor / sophisticated investor / accredited investor / QIB etc.accredited investor / QIB etc.

mutually recognize exempted market conditions including private mutually recognize exempted market conditions including private l tl tplacementplacement

standardize disclosure level of informationstandardize disclosure level of information / disclosure rules/ disclosure rules

Investor protectionInvestor protection

pa ticipants code of cond ctpa ticipants code of cond ctparticipants code of conductparticipants code of conduct

type of securities suitabletype of securities suitable


<SF1><SF1>

Areas of discussion(2) : Areas of discussion(2) : mainly related to market mainly related to market practices and function of each domestic SROpractices and function of each domestic SRO

standardize the related documentation in offering circulars, etc.standardize the related documentation in offering circulars, etc.

standardize new issue underwriting proceduresstandardize new issue underwriting procedures

standardize the rules and practice for secondary market makingstandardize the rules and practice for secondary market makingp y gp y g

synchronize the concept of eligible issuerssynchronize the concept of eligible issuers

For efficient discussion,For efficient discussion,For efficient discussion,For efficient discussion,

Invite Invite regulatory bodies and policy makers regulatory bodies and policy makers to SF1to SF1

Form Form working group on AMBIP working group on AMBIP on voluntary basis to provide on voluntary basis to provide inputs on areas of discussion to SF1 and to discuss other issuesinputs on areas of discussion to SF1 and to discuss other issuesinputs on areas of discussion to SF1 and to discuss other issues.inputs on areas of discussion to SF1 and to discuss other issues.


<SF2><SF2>

Continue Continue identification of transaction flows, identification of transaction flows, messaging and market practicesmessaging and market practices. .

DVP flows and procedure for corporate bondsDVP flows and procedure for corporate bonds

Interest payment and redemption of government bondsInterest payment and redemption of government bonds

Interest payment and redemption of corporate bondsInterest payment and redemption of corporate bondsp y p pp y p p

ISO 20022 ISO 20022 FitFit--andand--gap analysisgap analysis

Propose a roadmap and policy recommendationsPropose a roadmap and policy recommendationsPropose a roadmap and policy recommendations Propose a roadmap and policy recommendations to standardize and harmonize transaction flowsto standardize and harmonize transaction flows

Information sharing : LEI data collectionInformation sharing : LEI data collectionInformation sharing : LEI, data collection, …Information sharing : LEI, data collection, …

Schedule for 2012Schedule for 2012

MidMid--Feb ~ EarlyFeb ~ Early--Apr 2012: Apr 2012: OffOff--meeting activities for meeting activities for phase2phase2 and preparation of 8and preparation of 8thth ABMF meetingABMF meetingpp p pp p gg

Consultation with regulatory bodies and policy Consultation with regulatory bodies and policy makers makers on joining ABMF meetings (ADB on joining ABMF meetings (ADB secretariat team)secretariat team)secretariat team)secretariat team)

Working group on AMBIP Working group on AMBIP (KOFIA and others)(KOFIA and others)

Preparing Preparing Survey questions for phase 2 Survey questions for phase 2 (ADB (ADB secretariat team)secretariat team)

• (SF1) a survey to identify differences in bond• (SF1) a survey to identify differences in bond issuance program.

• (SF2) a survey to identify transaction procedures for b d i d t ti (i t tbond issuance and corporate actions (interest payment and redemption)


2 Mar 2012 : 2 Mar 2012 : ABMI TF3 meeting ABMI TF3 meeting ((SiemSiem Reap, KH)Reap, KH)

First reporting First reporting of phase 2 progress and planof phase 2 progress and plan

2828--29 Mar 2012 : 29 Mar 2012 : AFDM+3 (AFDM+3 (Phnom Penh, KH)Phnom Penh, KH)

Progress reporting on ABMI (ABMF)Progress reporting on ABMI (ABMF)

Apr 2012 : Apr 2012 : Public conference to disseminate phase 1Public conference to disseminate phase 1reports and phase 2 plan (optional)reports and phase 2 plan (optional)reports and phase 2 plan (optional)reports and phase 2 plan (optional)

Date/Venue/Format : TBCDate/Venue/Format : TBC


17~18 Apr 2012 : 817~18 Apr 2012 : 8thth ABMF meeting, Manila, PHABMF meeting, Manila, PH

Clarifying remaining phase 2 issues & plansClarifying remaining phase 2 issues & plans

Discuss and approve SF1 and SF2 survey ti f h 2questions for phase 2

Joint conference with ACRAA on credit rating in the regionthe region

22--3 May 2012 : 3 May 2012 : AFDM+3 and AFMM+3AFDM+3 and AFMM+3 (Manila, PH)(Manila, PH)

Progress reporting on ABMI (ABMF)Progress reporting on ABMI (ABMF)


3 May 2012 :3 May 2012 : ABMI 10ABMI 10thth anniversary seminaranniversary seminar3 May 2012 : 3 May 2012 : ABMI 10ABMI 10 anniversary seminar anniversary seminar (Manila, PH)(Manila, PH)

May ~ Jun 2012 :May ~ Jun 2012 : Conducting the surveysConducting the surveysMay ~ Jun 2012 : May ~ Jun 2012 : Conducting the surveysConducting the surveys

Jul ~ Aug 2012 : Jul ~ Aug 2012 : Country visitsCountry visits

Consider proposals to be included in the first draft

For SF1, drafting a proposal for a common issuance program

For SF2, proposal on messaging standard harmonization


Sep 2Sep 2012 : 9012 : 9thth ABMF meetingABMF meeting

Discussion on the proposals

Additional survey, if necessary

Oct 2012 : Oct 2012 : 22ndnd reporting to ABMI TF3reporting to ABMI TF3

Nov 2012 :Nov 2012 : AFDM+3AFDM+3Nov 2012 : Nov 2012 : AFDM+3AFDM+3

Dec 2012 : 10Dec 2012 : 10thth ABMF meetingABMF meeting

Preparing and discussing the draft report


Feb 2013 : 11Feb 2013 : 11thth ABMF meetingABMF meeting

Approving the draft report to ABMI TF3

Mar 2013 :Mar 2013 : 33rdrd reporting to ABMI TF3reporting to ABMI TF3Mar 2013 : Mar 2013 : 33rdrd reporting to ABMI TF3reporting to ABMI TF3

Apr 2013 : 12Apr 2013 : 12thth ABMF meetingABMF meeting

Finalizing the report to AFDM+3

A 2013 S b itti th t t AFDM 3A 2013 S b itti th t t AFDM 3Apr 2013 : Submitting the report to AFDM+3Apr 2013 : Submitting the report to AFDM+3

May 2013 : Recommendations approved by AFMM+3May 2013 : Recommendations approved by AFMM+3May 2013 : Recommendations approved by AFMM 3May 2013 : Recommendations approved by AFMM 3


Jun or Jul 2013 : 13Jun or Jul 2013 : 13thth ABMF meetingABMF meetingJun or Jul 2013 : 13Jun or Jul 2013 : 13 ABMF meetingABMF meeting

Discussion on pilot issues

Publication of the reportPublication of the report

Q 2013 1Q 2013 1 thth ii4Q 2013 : 144Q 2013 : 14thth ABMF meetingABMF meeting

Work plan for phase 3

Thank youThank youyy

Comments are welcomeComments are welcome

ADB S t i t TADB S t i t TADB Secretariat TeamADB Secretariat Team