Asian Bond Markets Initiative

Group of Experts (GoE) Report

for Task Force 4

April 2010

(Revised July 2010)

Asian Development Bank

The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), its Board of Directors, or the governments they represents. ADB does not guarantee the accuracy of the data included int his paper and accepts no responsibility for any consequences of their use. Terminology used mat not necessarily be consistent with ADB official terms. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel: +63 2 643 4444 Fax: +63 2 636 2183 GoE website: http://asean3goe.adb.org 2010 Asian Development Bank

GoE Final Report - Preface Page 2 of 4

Preface

The Group of Experts on Cross-border Bond Transactions and Settlement Issues (GoE) was established in 2008 by the Asian Bond Markets Initiative (ABMI). While pursuing the overarching goal of developing regional bond markets in ASEAN+3, ABMI has been deliberating how to improve the cross-border bond settlement infrastructure and produced various policy reports, including Minimizing Foreign Exchange Settlement Risk in the ASEAN+3 Region (ADB TA Report 6338). This report put forward for consideration three options for a regional settlement intermediary (RSI) and suggested organizing a group of market experts for further investigation of these options. In late 2007 the ABMI decided to form the GoE and each ASEAN+3 country was invited to nominate one or two institutions to represent its own local market. Two missions were given to the GoE: 1) to evaluate the feasibility, particularly the business case, of selected RSI options and 2) to identify the barriers to cross-border bond transactions and settlement in the region.

In April 2008 the GoE national members held the first meeting in Kuala Lumpur,

Malaysia. The national members elected Republic of Korea, represented by the Korea Securities Depository, as chair. They decided to invite international players in the settlement industry, mainly ICSDs and global custodians, to join the GoE. A number of global custodians, based on their presence in the region, were invited to join, together with two ICSDs (Clearstream and Euroclear) as international members. The ADB, secretariat to the ABMI, was also invited and agreed to join the GoE, providing secretariat and technical supports. The institutions participating in the GoE were as follows.

National Members International Members

People's Republic of China China Government Securities Depository Trust and Clearing Monetary Authority of Hong Kong, China (HKMA)

Asian Development Bank Citibank CLS Group

Indonesia Indonesia Clearing Guarantee Corporation (KPEI) Indonesian Central Securities Depository (KSEI)

Clearstream Euroclear Bank J.P. Morgan Mizuho Corporate Bank

Japan Japan Securities Depository Center Merrill Lynch Japan Securities

Standard Chartered Bank S.W.I.F.T.

Republic of Korea Korea Securities Depository

Lao PDR Bank of the LAO P.D.R. and Securities Market Establishment Committee

Malaysia CIMB Investment Bank Deutsche Bank, Malaysia

Philippines Deutsche Bank AG, Manila Philippine Securities Settlement Corporation

GoE Final Report - Preface Page 3 of 4

GoE Final Report - Preface Page 4 of 4

Singapore Singapore Exchange United Overseas Bank

Thailand Thailand Securities Depository Bangkok Bank

Viet Nam Viet Nam Securities Depository

In July 2008, the GoE held its second meeting in Seoul, attended by the international as well as the national members. Two working groups, the RSI group and the Barrier group, were formed. Since then, until the end of 2009, GoE met every quarter to consider and approve discussion materials produced by the two working groups. The RSI group was responsible for evaluating the feasibility of RSI options while the Barrier group worked on identifying barriers to cross-border transactions and settlement in the region. To provide background information, the RSI group also attempted to estimate cross-border bond settlement costs in ASEAN+3.

The interim results of GoE activities were made public in June 2009 at the Asian Bond Clearing and Settlement Conference 2009 held in Hong Kong, China which was supported by the Monetary Authority of Hong Kong, China (HKMA). The estimated cross-border bond transaction costs and the identified barriers were reported at the conference. Also, the operational specification of the RSI options and the implications of the RSI options on cross-border transaction costs and risks were presented. Overall feedback obtained through the conference confirmed that the methodology used by the GoE was reasonable, and that the interim results were plausible.

The final results of the GoE work are presented in this report. PART I contains the result of the estimation of cross-border transaction costs in ASEAN+3. PART II discusses the results of the feasibility study of the RSI options and presents recommendations for the next step. Finally, PART III presents the list of major barriers to cross-border bond transactions and settlement and a set of recommendations to address them. Although the three parts are interrelated, each covers a topic independent enough to be discussed separately. Thus, each part carries its own introduction and summary. Also policy recommendations are formulated separately for the RSI and the barrier study and contained in PART II and PART III.

Though there existed a conceptual division between the two groups, all the GoE members were requested to participate and were willing to contribute equally to the two working groups. Therefore, this report should be regarded as the result of the concerted efforts of all the GoE members. The contributions of KSD and JASDEC, the leader of the RSI and the Barrier group respectively, are gratefully acknowledged. Also the secretariat and technical support provided by ADB, and mediated by Mr Satoru Yamadera, is gratefully acknowledged. Finally, it should be noted that no part of the report represents the official views of any institution which participated as a GoE member. April 2010

ABMI Group of Experts Final report

Part I

Estimation of Cross-Border Bond Transaction Costs in ASEAN+3

April 2010

Group of Experts (GoE)

ii

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Table of Contents

Acknowledgement ......................................................................................................- 1 - I. Introduction .....................................................................................................- 2 - II. Methodology....................................................................................................- 2 -

A. Top-Down vs. Bottom-Up Approach..........................................................- 2 -

B. Definition of Transaction Costs..................................................................- 3 -

C. Identification of the Prevailing Cross-Border Bond Transaction Channel..- 4 -

D. Definition of Custodian Fees .....................................................................- 5 -

E. Data Collection Procedure.........................................................................- 6 -

III. Results of the Survey......................................................................................- 6 -

A. Raw Data...................................................................................................- 6 -

B. Key Findings..............................................................................................- 9 -

IV. Possible Explanations for the Findings ............................................................- 13 -

A. Technology of the Custodian Industry: Economy of Scale ......................- 13 -

B. Operational Efficiency of a National Market ............................................- 15 -

C. Competition .............................................................................................- 17 -

D. Country-specific Regulation.....................................................................- 18 -

E. Lack of Regional Policy Coordination......................................................- 18 -

IV. References ...........................................................................................................- 19 -

Acknowledgements The generosity of those custodian banks which provided their fee schedules for

this study is gratefully acknowledged. Respecting the confidential nature of the data, we do not disclose their identities.

1

I. Introduction 1. The purpose of this study is:1) to survey cross-border bond transaction costs in ASEAN+3 countries; 2) to compare these costs to those prevailing in other regions; and 3) to identify possible causes for the current situation. As part of its task of formulating recommendations to improve the efficiency of cross-border bond transactions and the settlement-related environment in the ASEAN+3 region, the Group of Experts (GoE) decided to examine transaction costs as one of the initial steps. Transaction costs are one measure of market efficiency. Therefore, analyzing the level of transaction costs in the region, in comparison to more developed markets, provides a way to assess the efficiency of current cross-border transaction and settlement arrangements in the region.

2. The EU experience illustrates the importance of assessing transaction costs as a tool for forming a public consensus on how to improve market environm