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Conference on Development of Indonesian Government Bond Market
Jakarta, Indonesia
July 25 - 26, 2000
Lillian Leong
Investment and Treasury Department
Bank Negara Malaysia
MALAYSIA’S EXPERIENCE IN DEVELOPING THE
GOVERNMENT BOND MARKET
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Outline• Brief Historical Perspective
• Overview of Malaysian Government Bond Market
• Key Issues• Lack of Supply • Absence of Deep and Liquid Secondary Market
• Measures Taken So Far• Market Liquidity• Market Infrastructure
• Measures Going Ahead• Regulatory Framework• Inter-Agency Co-ordination
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Historical Perspective…….
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Legislation on Issuance of Government Securities
• Issuance of MGS by the government is governed
under the Loan (Local) Ordinance 1959
• BNM acts as an agent to the Government under
Section 30 (1) (s) of Central Bank Act, 1958 where, “The bank (BNM) may undertake the issue and management of loans publicly issued -
(i) by the government;(ii) by the government of any state;(iii) by any public authority; or(iv) with any approval of the MOF, by any corporation ”
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A Little Bit of History…..
• Malaysian Govt. Bond Market evolved at a slow
pace from 1950s
• Pace picked up in 1970s in line with
government’s plan for economic diversification
• Malaysian Govt. Bond issuance then was
dictated by the need for development financing
• Early 1980s, Government Bond Market expanded
due to the recession following downturn in global
economy
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• From 1988-1997 gross MGS issued reduced
from RM45.9 to RM39.7 billion due to the
success of the government privatisation
programme
• Strong economic performance in 1990-1997
led to a decline in Government Bonds
issuance
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Dilemma
With a fiscal surplus position, there was a dilemma between 2 objectives :
i) The need to issue MGS for bench- marking purposes to develop the domestic bond market ; and
ii) The associated issuance cost despite a fiscal surplus position
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Market Overview
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Other PDS1%
GII1% MGS
98%
MGS46%
Danamodal7%
Cagamas9%Khazanah
4% Danaharta6%
GII1%
Other PDS27%
Composition of Ringgit Bond Market
19991987
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Holders of Malaysian Government Securities
19991987
Insurance Co.2%
Banking Institutions
27%
Others14%
EPF57%
Insurance Co.8%
EPF66%
Others10%
Banking Institutions
16%
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Total Domestic Debt as % of GDP
58.8
54.5
50.5
44.4
40
35.1
31.2
27.3
31 31.3 31.9
0
10
20
30
40
50
60
70
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 June-00
Year
%
HEALTHY GOVERNMENT FINANCIAL POSITION DUE TO PROMOTION OF PRIVATISATION
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Issues
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Absence of Deep and Liquid Secondary Market
1.“Captive” Market Created a “Holding” Bias
• Legal and Mandatory Requirements for
most institutions
• EPF - 50% of its investible fund
• Insurance Companies - 20% in low
risk assets including MGS
• Banking Institutions - 15 % of their EL
to be invested in liquid asset including
MGS
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Absence of Deep and Liquid Secondary Market
2. Lack of Market Makers due to :
• Holding cost and lack of MGS issuance
• The fear of being caught in a “short”
situation
• No mechanism to cover short position
such as securities borrowing and lending
programme
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Measures Undertaken
1. Market Liquidity
(a) MGS Issuance Process
• Basis of pricing MGS primary issue : From
coupon fixing to market-determined auction
system
• A system of principal dealers (PD) was
introduced to promote a more active secondary
market
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Measures Undertaken
(b) Interest Rate Liberalisation
• 1991 - Banking Institutions were allowed to
determine their Based Lending Rate
• Less distortion on interest rate structure
and yields curves - facilitate more active
secondary trading of MGS
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Measures Undertaken
(c) New Liquidity Framework (NLF)
Reduces the captive holding of MGS and the
Liquid Asset Ratio premium
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Measures Undertaken
(d) Code of Conduct for Principals and Brokers in the wholesale Money and Forex
Markets
• To maintain high level of professionalism
• To protect the credibility of oral contract
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Measures Undertaken
(e) Announcement of MGS Auction Calendar
To enhance market transparency
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Measures Undertaken
(f) Re-opening of MGS
To improve liquidity of the issue size
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Measures Undertaken
2. Market Infrastructure
(a) Clearing and Settlement System
• Implementation of RTGS settlement system
known as RENTAS
• RENTAS is a real time electronic settlement
and Delivery versus Payment system to further
enhance efficiency and mitigate settlement risk
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Measures Undertaken
(b) Automated Tendering System
Fully Automated System for Tendering (FAST)
was introduced to replaced the manual process
of tendering for MGS
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Measures Undertaken
(c) Bond Information Dissemination System
Bond Information Dissemination System (BIDS)
was introduced to provide market information on
domestic bond market
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Measures Going Ahead
3. Regulatory Framework
(a) Establishment of National Bond Market Committee
• 1999 - The formation was to focus on policy
direction, to rationalise regulatory framework and to
recommend appropriate implementation strategies
• Three sub-committees were formed;
– Product Institutional and Development Committee (PIDC)
– Infrastructure and Operations Working Group (IOWG)
–Legal and Regulatory Reforms Committee (LRCC)
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Measures Going Ahead
(b) Centralisation of regulatory function for
fund raising activities
July 2000 - Securities Commission (SC)
made sole regulator for the securities
market
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• Principal Dealers System was introduced with main role
to make market
• Implementation of SPEEDS, a fully automated cash and
securities settlement transactions
• Code of Conduct and Market Practices for trading in
Malaysian Securities Market was introduced
• The setting up of first rating agency - RAM
• The setting up of second rating agency - Malaysian Rating
Corporation Bhd (MARC)
Chronological Development of Bond Market
1989
1990
1995
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Chronological Development
1996
1997
1999
• Incorporation of Malaysian Institute of Bond Dealers to
represent the interest participants in bond market
• Implementation of FAST, a fully automated system of
tendering for securities at the primary issue
• Issuance of Khazanah Benchmark Bond to create a
benchmark yield curve for the Ringgit Bond market
• The setting up of the BIDS to promote awareness of the
bond market to support primary and secondary trading
• The formation of NBMC, to provide policy directionand
to rationalise the regulatory framework for the
development of bond market
• The Capital Market Master Plan was initiated to chart
the strategic positioning and future direction in the next
ten years
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Chronological Development
1999
2000
• Code of Conduct and Market Practices for RENTAS was
introduced to facilitate the conversion from SPEEDS to
RENTAS (RTGS Settlement system)
• The Government Securities Auction Calendar was
announced to enhance market transparency
• Re-opening MGS of the less liquid issue to build up the
size in order to enhance market liquidity
• Securities Commission become the sole regulator for
the bond market in Malaysia
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End of Presentation
Thank You