Capacity Building for Capacity Building for Asian Bond Market Asian Bond Market DevelopmentDevelopment

November 4-6, 2005November 4-6, 2005

Shanghai, ChinaShanghai, China

Noritaka AkamatsuNoritaka Akamatsu

The World BankThe World Bank

AgendaAgenda

Macroeconomic backgrounds and objectivesMacroeconomic backgrounds and objectives

The current state of the markets in the The current state of the markets in the region.region.

Challenges and strategyChallenges and strategy

Capacity buildingCapacity building

Macroeconomic Macroeconomic backgroundsbackgrounds

High level of savings but with significant High level of savings but with significant variance among the economies.variance among the economies.– from 19.5% in the Philippines to 47.1% in from 19.5% in the Philippines to 47.1% in

Singapore.Singapore.

High level of investment needs particularly in High level of investment needs particularly in infrastructures to sustain the high growth.infrastructures to sustain the high growth.

Growing intra-regional trade in goods and Growing intra-regional trade in goods and services.services.– Growing theoretical possibility to mutually hold Growing theoretical possibility to mutually hold

regional currencies.regional currencies.– Possibility to use a basket of regional currencies??Possibility to use a basket of regional currencies??

Money and bond market as a place to Money and bond market as a place to manage regional currency exposures.manage regional currency exposures.

ObjectivesObjectives

Better utilize the regional savings for regional Better utilize the regional savings for regional development to reduce the risk of currency development to reduce the risk of currency and maturity mismatches.and maturity mismatches.

To do so,To do so,

develop the domestic debt markets to develop the domestic debt markets to mobilize long-term savings in domestic mobilize long-term savings in domestic currency to finance infrastructures and currency to finance infrastructures and businesses that generate returns in domestic businesses that generate returns in domestic currency; andcurrency; and

Enable cross border investment and trading Enable cross border investment and trading of the bonds to recycle the regional savings of the bonds to recycle the regional savings for regional investments.for regional investments.

The current state of the The current state of the region’s bond marketsregion’s bond markets

Disparity in the level of development of the Disparity in the level of development of the domestic markets and the institutional investor domestic markets and the institutional investor sectors.sectors.

Domestic debt is greater than external debt in Domestic debt is greater than external debt in mostmost countries.countries.

Domestic debt is mostly local currency Domestic debt is mostly local currency denominated.denominated.

Public debt securities dominate total fixed income Public debt securities dominate total fixed income markets in a few countries.markets in a few countries.

Fixed rate bonds dominate most markets, and Fixed rate bonds dominate most markets, and most are mid to long term maturities (an Asian most are mid to long term maturities (an Asian characteristic).characteristic).

Negligible cross border investment and trading of Negligible cross border investment and trading of local currency bonds.local currency bonds.

ChallengesChallenges

Further develop domestic debt market.Further develop domestic debt market.

Harmonize and standardize the domestic bond Harmonize and standardize the domestic bond markets in the region.markets in the region.

Policy coordination among member countries.Policy coordination among member countries.– Managed liberalization of capital account control.Managed liberalization of capital account control.– Mutual recognition of relevant laws and regulations.Mutual recognition of relevant laws and regulations.

Building a regional settlement network.Building a regional settlement network.

Building guarantee facilities for credit Building guarantee facilities for credit enhancement among regional members.enhancement among regional members.

Building an investor base.Building an investor base.

Strategy?Strategy?

Need to identify and sort out Need to identify and sort out intermediate intermediate objectivesobjectives..– Government debt, sub-sovereign debt and corporate Government debt, sub-sovereign debt and corporate

debt are different animals (e.g., trading, disclosure, debt are different animals (e.g., trading, disclosure, listing, credit rating, guarantee, etc.).listing, credit rating, guarantee, etc.).

– Markets for USD / Euro / Yen-denominated bonds and Markets for USD / Euro / Yen-denominated bonds and domestic currency-denominated ones are different.domestic currency-denominated ones are different.

Need to develop a roadmap.Need to develop a roadmap.– Domestic market development is a necessary but not Domestic market development is a necessary but not

sufficient condition for regional integration.sufficient condition for regional integration.– Identify intermediate objectives that can be achieved Identify intermediate objectives that can be achieved

through the domestic market development and those through the domestic market development and those that are required for regional integration.that are required for regional integration.

– Need leadership at the regional as well as national Need leadership at the regional as well as national levels. levels.

Capacity building – 1Capacity building – 1Domestic public debt Domestic public debt marketmarket Emerging markets:Emerging markets:

– Enhance the government treasury and debt Enhance the government treasury and debt management to build benchmarks.management to build benchmarks.

Emerged markets:Emerged markets:– Build sub-national debt market with a sound Build sub-national debt market with a sound

contingent liability management framework and contingent liability management framework and capacity at the central government level.capacity at the central government level.

MOF or public debt management office need MOF or public debt management office need to build the capacity.to build the capacity.

Capacity building – 2Capacity building – 2Harmonization & Harmonization & standardizationstandardization Taxation of capital income and financial Taxation of capital income and financial

transactions should be rationalized and reasonably transactions should be rationalized and reasonably standardized not to distort the flow of funds.standardized not to distort the flow of funds.– Avoid imposing withholding tax on foreign investors Avoid imposing withholding tax on foreign investors

whose income is taxed again in their home countries.whose income is taxed again in their home countries.

Accrual and market value-based accounting Accrual and market value-based accounting should be the basis of prudential rules and risk should be the basis of prudential rules and risk management.management.

Accounting and tax rules should support Accounting and tax rules should support securitization and asset backed securities (ABSs).securitization and asset backed securities (ABSs).– Off-balance sheet transactions and “true sale” of assets Off-balance sheet transactions and “true sale” of assets

particularly in economies with a Civil Code legal tradition.particularly in economies with a Civil Code legal tradition.

Tax and accounting authorities need to work with Tax and accounting authorities need to work with the securities regulator and market participants.the securities regulator and market participants.

Harmonization & Harmonization & standardizationstandardizationRegulationRegulation Regulations should avoid inadvertently Regulations should avoid inadvertently

imposing unnecessary inflexibility or imposing unnecessary inflexibility or irrational restrictions or on investment in and irrational restrictions or on investment in and trading of bonds.trading of bonds.– Investment and prudential regulations for Investment and prudential regulations for

insurance and pension funds.insurance and pension funds.– Review rules regarding the investment in bonds Review rules regarding the investment in bonds

denominated in local currencies of the region.denominated in local currencies of the region.

Insurance and pension regulators need to Insurance and pension regulators need to work on the insurance companies, pension work on the insurance companies, pension funds and asset managers as well as their funds and asset managers as well as their counterparts in the region.counterparts in the region.

Harmonization & Harmonization & standardizationstandardizationTransaction standardsTransaction standards

Transaction conventions should be standardized in Transaction conventions should be standardized in line with international practice (i.e., BMA-ISMA line with international practice (i.e., BMA-ISMA standards). E.g.,standards). E.g.,– quoting convention, yield calculation method, trading units, quoting convention, yield calculation method, trading units,

trade agreement format, settlement cycles, settlement trade agreement format, settlement cycles, settlement instruction format, master repo agreement, etc.instruction format, master repo agreement, etc.

Trade association or SRO of market participants Trade association or SRO of market participants needs to work on this and coordinates with their needs to work on this and coordinates with their counterparts in the region.counterparts in the region.

Capacity building – 3Capacity building – 3Policy coordination Policy coordination Capital accounts of member countries need to Capital accounts of member countries need to

be liberalized to allow money to flow be liberalized to allow money to flow reasonably freely across the border but with reasonably freely across the border but with due regard to countries with structural due regard to countries with structural weaknesses in the balance of payments.weaknesses in the balance of payments.

Hong Kong, Korea, Singapore, Indonesia and Hong Kong, Korea, Singapore, Indonesia and Japan have no capital account controls Japan have no capital account controls regarding cross border bond investment and regarding cross border bond investment and trading. Other economies in the region have trading. Other economies in the region have some restrictions particularly regarding some restrictions particularly regarding outbound investment.outbound investment.

MOFs and Central Banks in the region need to MOFs and Central Banks in the region need to coordinate.coordinate.

Capacity building – 4Capacity building – 4Cross-border Cross-border settlementsettlement

Cross-border investment and trading occurs only Cross-border investment and trading occurs only within a framework where settlement is “possible,” within a framework where settlement is “possible,” “efficient” and “secure.”“efficient” and “secure.”

In a multi-jurisdictional environment, a In a multi-jurisdictional environment, a mutually agreeable legal basis is needed to mutually agreeable legal basis is needed to ensure ownership of securities held in custody ensure ownership of securities held in custody in a third country and its transfer.in a third country and its transfer.

In a multi-currency environment, a mechanism and In a multi-currency environment, a mechanism and an institution may be needed to support settlement in an institution may be needed to support settlement in different currencies and cross-border DVP.different currencies and cross-border DVP.– Is a CLS Bank needed to support Asian currencies for Is a CLS Bank needed to support Asian currencies for

continuous linked settlement?continuous linked settlement?

Cross border settlementCross border settlement

Custody arrangementsCustody arrangements– Direct access to local CSD, use of local custodian, Direct access to local CSD, use of local custodian,

CSD network, ICSD, global custodianCSD network, ICSD, global custodian

Central bank vs. private CSDCentral bank vs. private CSD– Central banks can network but cannot realistically Central banks can network but cannot realistically

compete for consolidation in the foreseeable future.compete for consolidation in the foreseeable future.– Private CSDs can compete for consolidation but may Private CSDs can compete for consolidation but may

take time to materialize. Governance and access are take time to materialize. Governance and access are critical.critical.

– ICSD (e.g., Euroclear, Clearsteam, etc.) would come ICSD (e.g., Euroclear, Clearsteam, etc.) would come only when there is sufficient business.only when there is sufficient business.

Domestic custody arrangements need to be Domestic custody arrangements need to be consolidated. Central banks, CSDs and global consolidated. Central banks, CSDs and global custodians need to cooperate and compete.custodians need to cooperate and compete.

An incentive?An incentive?

Regional central banks can mutually agree to Regional central banks can mutually agree to accept highly creditworthy (sovereign?) bonds accept highly creditworthy (sovereign?) bonds denominated in regional currencies as collateral denominated in regional currencies as collateral for intra-day overdraft facilities of RTGS systems.for intra-day overdraft facilities of RTGS systems.

• RTGS has become a standard which requires RTGS has become a standard which requires intra-day liquidity.intra-day liquidity.

• Enhance collateral value of regional bondsEnhance collateral value of regional bonds

• Need sound prudential rules (e.g., mark-to-Need sound prudential rules (e.g., mark-to-market?, haircuts?)market?, haircuts?)

Capacity building – 5Capacity building – 5Non-government debtNon-government debt

Local government and other sub-national debt is Local government and other sub-national debt is critical to finance infrastructure investment.critical to finance infrastructure investment.

Implicit and explicit guarantees by the central Implicit and explicit guarantees by the central government create a challenge for sovereign risk government create a challenge for sovereign risk management.management.– Regulation should demand adequate disclosure and credit Regulation should demand adequate disclosure and credit

rating to ensure market discipline for the issuers.rating to ensure market discipline for the issuers.

– The central government should build an adequate capacity to The central government should build an adequate capacity to control, monitor and manage contingent liabilities.control, monitor and manage contingent liabilities.

Implicitness of the guarantee should be made Implicitness of the guarantee should be made reasonably clear in relevant law and regulation to reasonably clear in relevant law and regulation to investors across the region.investors across the region.

Non-government debtNon-government debt

There should be commonly acceptable rules for public There should be commonly acceptable rules for public offering across the region.offering across the region.– Corporate bonds offered publicly in one economy should be Corporate bonds offered publicly in one economy should be

considered to be publicly offered in the region.considered to be publicly offered in the region.– Economies in the region should strive to give mutual Economies in the region should strive to give mutual

recognition to requirements and standards for public offering recognition to requirements and standards for public offering and issue registration.and issue registration.

There should be commonly acceptable rules for credit There should be commonly acceptable rules for credit rating across the region.rating across the region.– Economies in the region should strive to give mutual Economies in the region should strive to give mutual

recognition to credit rating offered by local credit rating recognition to credit rating offered by local credit rating agencies as well as international ones. agencies as well as international ones.

– Local credit rating agencies should strive to enhance their Local credit rating agencies should strive to enhance their quality and standards to compete with international CRAs. quality and standards to compete with international CRAs.

Capacity building – 6Capacity building – 6Investor baseInvestor base Economies differ in the level of development Economies differ in the level of development

of institutional investor base.of institutional investor base.– Singapore, Hong Kong, Korea, Malaysia have a Singapore, Hong Kong, Korea, Malaysia have a

large institutional investor base while others’ are large institutional investor base while others’ are still small.still small.

– Pension and provident funds need to be developed Pension and provident funds need to be developed in line with welfare policy objectives.in line with welfare policy objectives.

– Mandatory insurance for auto, housing, etc.Mandatory insurance for auto, housing, etc.

Consider ways to enable participation of Consider ways to enable participation of individuals in the bond market.individuals in the bond market.– Investment / mutual fundsInvestment / mutual funds– Smaller denomination bondsSmaller denomination bonds– Bank branch network and internet for distribution Bank branch network and internet for distribution

and possible trading.and possible trading.

Credit rating and Credit rating and guaranteeguarantee

Is there a need of a regional credit rating agency??Is there a need of a regional credit rating agency??– Ownership, governance, commercial viability, competition, Ownership, governance, commercial viability, competition,

lines of business and sources of income, etc.lines of business and sources of income, etc.

– Promote mergers among local CRAs??Promote mergers among local CRAs??

Credit guarantee based on a commonly acceptable Credit guarantee based on a commonly acceptable standards would be useful (e.g.., asset backed standards would be useful (e.g.., asset backed securities)securities)– Create a regional credit guarantee company like Asia Create a regional credit guarantee company like Asia

Limited?Limited?

– If so, need to ensure commercial viability with sufficient If so, need to ensure commercial viability with sufficient capital and sufficient business volume.capital and sufficient business volume.

Asset-backed securities Asset-backed securities (ABSs)(ABSs)

An APEC initiative.An APEC initiative.

Disparity in the level of development among markets.Disparity in the level of development among markets.

A lot of complex issues in the domestic market where A lot of complex issues in the domestic market where further development is necessary.further development is necessary.– Legal (e.g., bankruptcy-remote STP, company vs. trust, etc.),Legal (e.g., bankruptcy-remote STP, company vs. trust, etc.),– Regulatory (e.g., prudential rules for the settlor, public Regulatory (e.g., prudential rules for the settlor, public

offering, trading, etc.),offering, trading, etc.),– Accounting,Accounting,– Taxation (e.g., neutrality on transfer of assets),Taxation (e.g., neutrality on transfer of assets),– Market infrastructure (e.g., asset registration systems.), etc.Market infrastructure (e.g., asset registration systems.), etc.

Credit guarantee based on a commonly acceptable Credit guarantee based on a commonly acceptable standards may be useful for acceptance across the standards may be useful for acceptance across the region.region.

ConclusionsConclusions

A complex set of complex tasks.A complex set of complex tasks.

Need a strong commitment and high level Need a strong commitment and high level leadership both at the domestic and regional levels leadership both at the domestic and regional levels to push the agenda forward.to push the agenda forward.

Existing regional initiatives:Existing regional initiatives:– ASEAN + 3ASEAN + 3

Currency swap arrangement among regional central Currency swap arrangement among regional central banksbanks

TAs for domestic market development.TAs for domestic market development.– Asia Bond Fund (USD-denominated bonds).Asia Bond Fund (USD-denominated bonds).– APEC securitization and ABS market initiativeAPEC securitization and ABS market initiative– Asia Bond Corporation (ABC)Asia Bond Corporation (ABC)

Enough, too little or too much?Enough, too little or too much?