Description
Indian Debt market, government debt, corporate debt, primary market, secondary market, secondary market, US debt market, Asian debt market, malaysia debt market.
Financial Markets, Term-IV Group-3
Contents
?
Indian Debt Market
? Government Debt ? Corporate Debt
? Primary Market
? Secondary Market ? SEBI Regulations
? ?
US Debt Market Asian Debt Market
? Malaysia Debt Market
Debt Market 2
January 31, 2013
Financial Markets
Capital Market ? Market for Long Term ? Supply ? Individual savers ? Investments by Banks ? FI?s ? Mutual Funds ? Demand ? Companies ? FI?s ? Mutual Funds ? Guiding Principle Risk-Return trade off
January 31, 2013
Money Market
? ?
Market for Short Term Funds Assetsclose substitutes of money Supply
? Temporary surpluses of
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Companies, FI?s , Banks
?
Demand
? Temporary deficits of
Banks, FI & Companies
?
Guiding Principle: Parking in Riskless Assets Yield not so important
3
?
Debt Market
Indian Debt Market
?
Three main segments
? Government Securities
? Centre, State and State-sponsored
? Public Sector Units (PSU) Bonds
? Surrogates of sovereign paper
? Corporate Securities
? Commercial papers and bonds
? Short term paper issued by banks (CDs)
A large non-securitized, transaction based, short term segment - call and money market) ? Most government securities are not tax-free
?
January 31, 2013 Debt Market 4
Market Capitalization
NSE-WDM Segment as on 31 March,2008
January 31, 2013 Debt Market 5
Turnover
January 31, 2013
Debt Market
6
Government Debt
? ? ?
Very Large requirements of GOI every year RBI?s role : advise, issue management and registrar Forms :
? GP Notes, Stock Certficates, SGL & C-SGL Balances
?
Coupons:
? semi-annual, zero, floating
? ? ? ?
Indexed Bonds, floaters
Issue thro auctions : normal or price auctions
State Development Bonds (perceived Default Risk) RBI - OMO
Debt Market 7
January 31, 2013
Government Securities
? ?
Oldest and most dominant
Acts as benchmark for pricing corporate paper
?
Instruments
? Fixed coupon bonds (Dated Securities) ? Treasury Bills ? Floating rate bonds ? Zero coupon bonds
? Inflation index bonds
January 31, 2013 Debt Market 9
Government Securities Market
? ?
Sovereign debt - popular among banks and financial institutions Yields on G-Secs are therefore the risk-free interest rate - a benchmark
?
Govt „auctioned? ? reflects supply and demand of funds ? near perfect price discovery
?
Primary auctions of G-Secs apart from providing funds to the GOI set the yield curve in India
Debt Market 10
January 31, 2013
Government Securities Market
?
Secondary market which is very active reflects the supply and demand of funds and therefore the market perception of interest rates
Secondary market has large number of players - banks, PD?s , insurance companies, mutual funds Very active Trading
?
?
January 31, 2013
Debt Market
11
Characteristics of Government Securities
? ? ?
Good investments Good cash management instruments Very large volumes floating in the market
?
? ? ?
Good liquidity
Asset base for repos / reverse repos Quick and hassle free Investors :
? Banks , FI?s, PD?s , PF Trusts, Companies, HNIs
January 31, 2013
Debt Market
12
Why investment in G-Secs
Statutory Purposes ? Investment for regular return
?
? Banks,
Insurance Companies, Pension Funds, Provident Funds, Trusts, HNI?s
Cash Management ? Banks & FI?s, FII?s, Corporate ? Trading
?
? Pricing of G-Secs in the market
? Holding Period Return
? Riding the Yield Curve
? “Arbitrage” between short-term money market and long-
term G-Secs
January 31, 2013 Debt Market 13
Central G-Sec Market: Pre-Reform Period
?
Features
? Administered and Low Interest Rates
? High Statutory Liquidity Ratio (SLR) ? Automatic Monetization of Budget Deficit ? High Cash Reserve Ratio (CRR)
?
Impact
? Preemption of Financial Savings ? No possibility of Price Discovery ? Dormant Debt Market
January 31, 2013
Debt Market
14
PSU Bonds
?
Gradual withdrawal of support since „91
?
Mostly private-placement, occasional public issue
50% of outstanding PSU bonds are taxfree Banks, FIs and other corporate are major subscribers
?
?
January 31, 2013
Debt Market
15
Reforms in the Central G-Sec Market
Three Phases: ? First Phase (1992-95)
? Creation of Enabling Environment
? Elimination of Automatic Monetisation
? Introduction of Auctions ? SLR reduced
?
Second Phase (1995-2000)
? Institutional Development
? DvP
? Primary Dealer ? FIMMDA and PDAI
? Instrument Diversification
? Floating Rate Bonds
? Capital Indexed Bonds
January 31, 2013 Debt Market 16
Reforms in the Central G-Sec Market
?
Third Phase - Enhance Liquidity and Efficiency
? Indicative Auction Calendar ? Non-Competitive Bidding Facility ? Liquidity Adjustment Facility ? Repo and collateralised borrowing lending system ? Negotiated Dealing System (NDS), STP and CCP ? Interest Rate derivatives ? Market Stabilisation Scheme ? Foreign investment in local currency debt instruments ? Conversion of special securities into marketable debt
January 31, 2013
Debt Market
17
G-Secs (Central & State)
1600000 1400000 1200000
1000000
CENTRAL AND STATE GOVERNMENT SECURITIES (Rs cr)
800000
600000
400000
200000
0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 January 31, 2013 Debt Market 18
Ownership Pattern of Central GSecs
1991
1% 0% 0%
2007
RBI
0% 0% 5%
State Bank of India and Associates Nationalised Banks
1% 1%
9% 15%
14%
25%
Other Scheduled Commercial Banks LIC
11%
0% 0%
3%
6%
UTI NABARD
23% 16% 22%
Employees Provident Fund Scheme Coal Mines Provident Fund Scheme Primary dealers Others
15%
33%
January 31, 2013
Debt Market
19
G-Secs - Average Volume
500000.00 450000.00 400000.00
350000.00
300000.00
250000.00
200000.00
G-Secs - Average Volume (Rs cr)
150000.00
100000.00
50000.00
0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
January 31, 2013 Debt Market 20
Corporate Bond Market
Corporate Bond markets historically late to develop
? ? ? ?
Access to bank credit Access to external sources of finance Require well developed accounting legal and regulatory systems Rating agencies
?
?
Rigorous disclosure standards and effective governance of corporations
Payment and settlement systems
?
Secondary markets
Debt Market 21
January 31, 2013
Corporate bonds
?
Until 1992, interest rates on corporate securities was regulated and uniform across credit categories
?
After 1992, a variety of instruments seen
? Securitized products ? Corporate bond strips ? Floating rate instruments with floors and caps ? Embedded put and call options
?
Privately places; tenors of 1-12 years
Debt Market 22
January 31, 2013
Current Status
? ? ? ?
Many debt instruments privately placed and thus not listed on markets RBI regulates government securities
SEBI regulates corporate debt securities
NSE provides a trading platform for most debt instruments in India
January 31, 2013
Debt Market
23
Corporate Bonds – OTC Market
? ? ? ?
OTC as well as exchange based All trades need to be reported to a trading platform
Participants have a choice of platform
Existing exchanges can be used to provide trading platform
?
Only brokers have access to trading platform of exchanges
Debt Market 24
January 31, 2013
Reforms in Corporate Bond Market
? ? ?
Four Rating agencies operating in India De-materialisation and electronic transfer of securities
Initial focus – reform of private placement market by encouraging rating of issues
Further reforms needed:
? Appointment of a High Powered Committee
?
January 31, 2013
Debt Market
25
Committee recommendations
? ? ? ?
?
? ?
?
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Enhance the issuer base and investor base including measures to bring in retail investors Listing of primary issues and creation of a centralized database of primary issues Electronic trading system Comprehensive automated trade reporting system Safe and efficient clearing and settlement standards Repo in corporate bonds Promote credit enhancement Specialized debt funds to fund infrastructure projects Development of a municipal bond market
Debt Market 26
January 31, 2013
Corporate Debt Market - Volume
Increase in Trading Volume: CAGR from 2007-2010 = 105%
80000.00
70000.00
60000.00
50000.00
40000.00
30000.00
Trading in Corporate Bonds (Rs. In cr)
20000.00
10000.00
0.00
January 31, 2013
Debt Market
27
Corporate Debt – Private Placement CAGR from 2007-2010 = 259% Increase in Volume:
35000.00 30000.00
25000.00
20000.00
Private placement of Corporate Bonds (Rs in cr)
15000.00
10000.00
5000.00
0.00
January 31, 2013
Debt Market
28
Participants
Predominantly wholesale markets ? Investors
?
? Banks, Fis ? Mutual Funds ? Provident funds and Pension Funds
? Insurance companies
? Investment Companies & Individuals
? Corporates
?
Many of the above also act as issuers
Debt Market 29
January 31, 2013
Participants
?
Most debt privately placed via auctions
?
In some segments (such as G-Secs) primary dealers act as market makers
Secondary deals via telephones through negotiations Government and RBI State governments, municipalities and local bodies FIIs, Charitable institutions, Public Sector FIs
Debt Market 30
?
? ?
?
January 31, 2013
Products
January 31, 2013
Debt Market
31
Products
January 31, 2013
Debt Market
32
New Developments
?
Floating Rate Bonds and Inflation-Indexed Bonds
?
?
STRIPS
Corporate Bonds
? Bond Insurance Institutions ? Institutional Investors: Credit Enhancers ? Securitised paper to be traded on exchanges ? Municipal Bonds, Mortgage Backed Securities, General
Securitised Paper
? ?
External debt management policy Pension reforms
Debt Market 33
January 31, 2013
Primary Market - Bond Issue
?
Public Issue
? Regulated by SEBI
? Rigorous procedure
? Full disclosures ? Rigorous procedure – minimum net worth , minimum
rating, prospectus, public offer
? Through a registered merchant banker
?
Private Placement
? Not regulated till last year ? New norms but not so rigorous – minimum rating and
certain amount of disclosures
January 31, 2013 Debt Market 35
G-Secs: Primary Issuance Process
? ?
RBI announces auction of G-Sec through a press notification and invites bids Sealed bids opened at appointed time and allotment is based on the cut-off price decided by the RBI Two choices of auctions
? Discriminatory Pricing (French)
? Uniform Pricing (Dutch)
?
January 31, 2013
Debt Market
36
Secondary Markets
?
NSE-WDM provides formal trading platform
? NEAT (National Exchange for Automated Trading) ? Fully automated, screen based ? Order driven (matches best buy and sell orders on a
price/time priority)
?
Central G-Secs and Treasury bills are held as dematerialized entities in the Subsidiary General Ledger (“SGL”) of the RBI Participants need to have account with SGL and a current account with RBI
Debt Market 37
?
January 31, 2013
Secondary Markets
? ? ?
Public Debt Office oversees settlement of transactions through the SGL Since 1995, settlements are on Delivery versus payment (DvP) basis After creation of CCIL, most trades are settled through CCIL with settlement guarantee Funds and Securities netted for settlement through CCIL
Debt Market 38
?
January 31, 2013
Retail Debt Market
?
RDM on NSE introduced January 16, 2003
? RBI and SEBI introduced trading in G-Secs for
retail investors
? ?
RDM trading takes place in the existing Capital Market segment of the exchange RETDEBT Market facility on NEAT system of Capital Markets Segment used to enter transactions in RDM session. Trading holidays and market timings mimic Equities Segment
Debt Market 41
?
January 31, 2013
RDM trade parameters
?
Trading in RDM under Rolling Settlement
? Each day is one period ? Trades in a day are netted before settlement
Settlement is on T+2 basis ? National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency
?
January 31, 2013 Debt Market 42
Initiatives - To enhance liquidity &
efficiency
? ? ? ?
Introduction of repo/reverse repo operations in government securities to manage short term liquidity mismatches
Operationalization of Negotiated Dealing system (NDS)
Establishment of Clearing Corporation of India Ltd. (CCIL) for efficient and guaranteed settlement Introduction of G-Secs in stock exchanges
?
Introduction of Real time Gross Settlement System (RTGS) which addresses settlement risk and facilitates liquidity management
Adoption of a modified Delivery-versus-Payment mode of settlement which provides for net settlement of both funds and securities legs Announcement of an indicative auction calendar for Treasury Bills and Dated Securities
Debt Market 43
?
?
January 31, 2013
NDS: Functional Scope
? ?
Give/receive quotes Place calls and negotiations
?
Setup preferred counterparty list and exposure limits
Dissemination of information
? Last traded prices, volume, yield curves, etc
?
?
Interface with securities settlement system
?
Preserves anonymity of participants
Debt Market 44
January 31, 2013
NDS-OM
? ?
?
? ?
?
Screen-based anonymous order matching system Integrated with NDS Operational since August 1, 2005 Accessible via RBIs INFINET network Supports trading in all Central Government Dated Securities and State Government Securities in T+1 settlement type Cheaper, Faster, more transparent than telephone based markets with benefits like STP
Debt Market 45
January 31, 2013
SEBI Regulations
?
For issuance of security, the issuer has to:
? Chose between exchanges if applied to more than one ? Obtain in-principle approval for listing ? Obtain credit rating from agency reg. with SEBI ? Enter in an agreement with a depository reg. with SEBI
for dematerialization of securities
? Appoint one or more merchant bankers reg. with SEBI
and at least one lead banker
? Appoint one or more debenture trustees
?
Issue can not provide loan or acquire shares of any person part of the same group or under same management
Debt Market 46
January 31, 2013
SEBI Regulations
? ?
No issue without draft of offer document filed Draft has to be made public for a period of SEVEN days
?
Draft clearly specifies names and contact particulars of compliance officer of lead merchant banker, issuer postal address, email address, telephone and fax numbers
All comments suitably addressed A copy of final and draft offers forwarded to SEBI Prior to filing with Registrar of Companies, furnish due diligence certificate to SEBI
Debt Market 47
? ? ?
January 31, 2013
SEBI Regulations
Issue can be fixed priced or determined via book-building ? Issuer may decide and disclose minimum subscription
?
? In event of non-receipt all moneys refunded
?
Issuer of security to public has to apply for listing with one or more recognized exchanges
? In terms of sub-section (1) of section 73 of
the Companies Act, 1956
January 31, 2013 Debt Market 48
SEBI Regulations
?
Issuer may list its debt securities issued on private placement basis on an exchange:
? Issuer issued such securities in compliance
with provisions of Companies Act, 1956
? Credit rating obtained from agency reg. with
SEBI
? Securities in dematerialized form ? Disclosures made under Regulation 21 of the
Issue and Listing of Debt Securities Regulation, 2008
January 31, 2013 Debt Market 49
SEBI Regulations
?
Continuous Listing Requirements:
? Issuers making public issue of privately placed securities
should comply with conditions of listing
? Rating obtained by issuer have to be periodically reviewed ? Any change in rating should be promptly disseminated to
investors and prospective investors
? Issuer, debenture trustees and stock exchanges should
disseminate all information regarding securities including compliance reports
? Debenture trustee should issue press release in event:
? Default by issuer to pay interest on debt securities or
redemption amount
? Failure to create a charge on the assets ? Revision of rating assigned to securities
January 31, 2013 Debt Market 50
SEBI Regulations
?
Securities issued to public or privately placed which are listed and traded in an exchange are cleared and settled subject to conditions specified by SEBI
?
Incase of OTC trades, such trades should to reported on an exchange having a nation wide trading terminal or other such platform
SEBI may specify conditions for reporting of trades on exchanges or other platforms
Debt Market 51
?
January 31, 2013
Overview
?
Type of Issuer
? The federal government and its agencies ? Municipal governments ? Corporations (domestic and foreign)
?
Term to Maturity
? This is the number of years over which the issuer has
promised to meet the conditions of the obligation
? Short term – maturity of between 1 and 5 years ? Intermediate-term – maturity of between 5 and 12 years ? Long-term – maturity of more than 12 years
January 31, 2013 Debt Market 53
US Bond Market
?
Outstanding US debt:
? $ 31.2 trillion (as per BIS)
? $ 34.3 trillion (as per SIFMA)
?
Average daily trading volume: $ 882 billion
? Between broker-dealers and large institutions ? Largely, decentralized, OTC market
?
Mortgage backed securities accounted for about $ 9.2 trillion in 2009
Debt Market 54
January 31, 2013
NYSE Bonds trading platform
?
NYSE is the largest centralized bond market
? Represents mostly corporate bonds
NYSE migrated from Automated Bond System (ABS) to the NYSE Bonds trading system in 2007 ? NYSE Bonds order book displays cumulative bids and offers, displaying full depth of book ? Ability to readily obtain transparent pricing and trading information
?
January 31, 2013 Debt Market 55
NYSE Bonds trading platform
? ?
Orders matched on a strict price-time priority Two daily bond auctions
? Opening bond Auction at 04:00 a.m. ET, and ? Core Bond Auction at 09:30 a.m. ET
?
All transactions on the system are locked in trade and reported with accrued interest to DTCC All trade settled in three day settlement NYSE bond accessible by eligible NYSE members and sponsored non-members
Debt Market 56
? ?
January 31, 2013
Indices
?
Merrill Lynch Domestic Master
? Created December 31, 1975
? Rebalanced last calendar day of month ? Follows USD denominated investment grade Public
Corporate and Domestic debt
? Excludes Asset-backed securities, tax-exempt
municipal debt, 144A?s and any bong without a fixed coupon schedule
? Excludes US treasuries less than $1 billion
outstanding, $150 million for others and less than one year remaining time to maturity
January 31, 2013 Debt Market 57
Indices
?
Salomon Broad Investment Grade Index
? Also known as Salomon BIG or Citigroup BIG
? BIG includes treasuries, agency debt,
corporate, non-corporate credit, mortgage backed securities and asset backed securities
? Excludes municipal or commercial mortgage
backed securities, inflation linked bonds
? Limited to investment grade securities; no
high-yield debt or emerging market debt
January 31, 2013
Debt Market
58
Indices
?
Barclays Capital Aggregate Bond index
? Previously, Lehman Aggregate Bond Index ? Market capitalization-weighted index ? Intermediate term index
? Average maturity: 4.5 7 years (as of Dec 31,
2009)
? Most US traded investment grade bonds are
represented
? Excludes municipal bonds and TIPS
January 31, 2013 Debt Market 59
Instruments
?
Marketable securities
? Treasury bonds, notes, bills, TIPS and
STRIPS
?
Non-marketable securities
? Zero-percent certificate of indebtedness
? Government account series
? U.S. Savings bonds ? Series EE, HH, I
January 31, 2013
Debt Market
60
How Treasury Auctions Work?
? ? ? ?
Offers 4 types of securities with varying maturities There are three steps to an auction: announcement of the auction, bidding, and issuance of the purchased securities.
January 31, 2013
Debt Market
61
Announcement
The auction announcement details:
? ? ? ?
Amount of the security being offered Auction date Issue date Maturity date
?
?
Terms and conditions of the offering
Noncompetitive and competitive bidding close times
?
Other pertinent information
Debt Market 62
January 31, 2013
Bidding
?
When participating in an auction, there are two bidding options - competitive and noncompetitive:
? Competitive bidding is limited to 35% of the issue amount for
each bidder, and a bidder specifies the rate or yield that is acceptable.
? Noncompetitive bidding is limited to purchases of $5 million
for U.S. Treasury bills, notes, bonds, and TIPS. With a noncompetitive bid, a bidder agrees to accept the rate or yield determined at auction.
? ?
Bidding limits apply cumulatively to all methods that are used for bidding in a single auction. For institutional investors, please note that Legacy Treasury Direct allows noncompetitive bidding only and does not offer 30-year bonds, 30-year TIPS, 7-year notes, 4-week bills, or Cash Management bills.
Debt Market 63
January 31, 2013
Issuance
?
?
?
Treasury bills are issued at a discount from face value and are paid at their par (face amount) at maturity The purchase price is listed on the auction results press release and is expressed as a price per hundred dollars Treasury notes, bonds, and TIPS are issued with a stated interest rate applied to the par amount and have semiannual interest payments
? For TIPS, the interest payments and the final payment
at maturity are based on the inflation-adjusted principal value of the security
? In some cases, the purchaser may have to pay
accrued interest.
January 31, 2013 Debt Market 64
Debt Financing in Asia
Market Overview:
?
The Asian bond market can be broken down into two segments:
? The regional bond market concentrated in
USD-denominated debt instruments
? Local currency bond markets
January 31, 2013
Debt Market
65
Why Asia Doesn?t Have Big Bond Markets?
Historical reason of information disclosure and contracting environment gave a strong comparative advantage to banking sector and governments ? Banks were a convenient vehicle for advancing their industrial policies ? Structural characteristics of geographical endowment limited by minimum efficient scale with liquidity ? Legal tradition for investor protection ? Infrastructure of prudential supervision and regulation ? Macroeconomic policy of controls on capital flows furthermore rob liquidity, currency risk limit the local currency securities, interest rate volatility make it unattractive to hold long-term
?
January 31, 2013 Debt Market 66
ACD initiative regarding development of Asian Bond Market
?
ACD bond initiative:
? To provide support to regional bond market in Asia
? To check outward flows and to create an avenue for
investment by Central institutional/retail investors
?
Banks
as
well
as
Challenges faced by ABF floated so far by EMEAP group:
? ? ? ? ? ?
Widening investors base Enhancing market liquidity, Raising price transparency, Improving market infrastructure. Removal of cross-border impediments. Credit ratings
Debt Market 67
January 31, 2013
Further Developments
? To structure it on two layered structure with Senior
and subordinated structure where Senior segment may hold AAA rated securities and subordinated segment may have less than AAA rated securities. ? These segments will remain subject to rebalancing. ? This is one of the solution for moving forward and making all ACD members part of ACD initiative.
January 31, 2013
Debt Market
68
Domestic Debt Securities by Type of Issuer
January 31, 2013
Debt Market
69
International Debt Securities by Type of Issuer
January 31, 2013
Debt Market
70
Trading
?
?
?
The Luxembourg Stock Exchange is a major international listing center for international bonds Some information vendors such as Bloomberg and Reuters, and Internet portals such as Bondweb, offer bond trading platforms specializing in physical issues. These cater to all classes of USD securities and can include Asian sovereign and corporate issues The Singapore Exchange (SGX) is an affiliate of CME with fungible interest rate contracts. The SGX is the principal USD futures trading center in the Asia-Pacific region
Debt Market 71
January 31, 2013
Bond Index
The increasing need to monitor Asian USD bond portfolios led Asian financial services and institutions to create their own performance indices ? One such index is HSBC's Asian US Dollar Bond Index (ADBI), comprising 76 USD denominated issues spread over eight markets, exclusive of Japanese debt securities.
?
January 31, 2013 Debt Market 74
Instruments- Government Bonds
Malaysian Government Securities (MGS) ? Malaysian Treasury Bills (MTB) ? Government Investment Issues (GII) ? Bank Negara Monetary Notes (BNMN) ? Sukuk BNM Issues (SBNMI) ? Merdeka savings bonds
?
Instruments-Government Bonds
?
Khazanah bonds
There are five types of Cagamas issues:
? ? ? ? ? ?
Cagamas fixed-rate bonds Cagamas floating-rate bonds Cagamas notes Sanadat Mudharabah Cagamas Sanadat Cagamas Khazanah bonds
Instruments corporate bonds
? ? ? ?
?
? ? ? ? ?
The types of corporate bonds issued on the Malaysian capital market are classified as: straight Convertible bonds with warrants floating rate zero coupon mortgage bonds Islamic bonds secured and unsecured bonds guaranteed bonds
Govt Bonds Issue Mechanism
?
Tender Dates
? Bank Negara Malaysia will invite tenders ? Auction details are normally announced 2 weeks
prior to auction date
? ?
?
?
Submission of Bids All government debt securities are offered to Principal Dealers (PDs) via competitive auction For Government Investment Issues (GIIs), competitive bids are submitted by Islamic banks and PDs with Skim Perbankan Islam (SPI) operations. Investors can apply to dealers to bid on their behalf.
Govt Bonds Issue Mechanism
?
Application Procedures
? Interested investors through Principal Dealers
(PDs), who charge varying fees for their services. ? Bids submitted must be in amounts that are multiples of MYR1 million.
?
Award Mechanism/Confirmation
? Allotments go initially to PD accounts. Then PDs
distribute client bids with the dealers advising customers of bid results. ? General tender results are published by Bank Negara Malaysia
Govt Bonds Issue Mechanism
?
Settlement
? Principal Dealers' securities accounts are
credited with the new bonds, while their cash accounts are debited for the price of the securities purchased. ? Principal Dealers have various procedures for settlement with clients. Normally, they debit a client's deposit account while crediting the client?s securities account.
Corporate Bonds Issue Mechanism
?
Tender Dates
? Forthcoming tenders for the other forms of
corporate and Islamic bonds are posted at least three business days before the tender date.
?
Ratings
? Corporate Bonds must be rated by either the
Rating Agency Malaysia (RAM) or the Malaysian Rating Corporation (MARC). ? External ratings are no longer a requirement, but are subject to investor demand.
Corporate Bonds Issue Mechanism
?
Award Mechanism/Confirmation
? Allotments go initially to PD accounts. Then
PDs distribute client bids with the dealers advising customers of bid results. ? General tender results are published by Bank Negara Malaysia ? Tender results for Islamic bonds are also published by Bank Negara Malaysia
Corporate Bonds Issue Mechanism
?
Settlement
? Principal Dealers' securities accounts are
credited with the new bonds, while their cash accounts are debited for the price of the securities purchased. ? Principal Dealers have various procedures for settlement with clients. Normally, they debit a client's deposit account while crediting the client?s securities account.
Participants- Issuers
Government Corporate
Participants
Supranational
Foreign Borrowers
Investors Profile- Government Bonds
Participants- investors
Investors
Asset Pooling Industries
General Investors
Pension Funds
Insurance Companies
Asset Management Companies
Participants-Rating Agencies
Rating Agency Malaysia Malaysian Rating Corporation
Rating Agencies
Size of Bond Market in USD
Size of Bond Market in % of GDP
Issuance Volume of Bond Market in USD
Trading Volume
Regulatary Framework Post Financial Crisis
?
? ?
?
• •
Introduction of auction calendar for Malaysian Government Securities (MGS) ? Creation of benchmark yield curve with key tenures of 3, 5 and 10 years ? Provide reliable pricing guidance for corporate bond issues Review of principal dealers system Introduction of long-dated MGS and MGS futures Free up captive demand on MGS Centralise approval process for issuance of bonds with the SC w.e.f 1 July 2000 Introduce facilitative legal and regulatory framework: ? Provisions on investor protection ? Fine and penalties on breaches and offences Adopt disclosure-based regulation: ? Approval upon full submission of documents to SC ? Ensure adequate disclosure to investors ? Monitor quality of disclosure
•
Developmental agenda post 97? crisis
Establishing a robust and Efficient Bond Market The 5 Pillars
1. Establish reliable and efficient benchmark yield curve
2. Introduce efficient & facilitative issuance process for corporate bonds
3. Widen issuers and investors base
4.
5. Facilitate introduction of risk management instruments
Improve liquidity in the secondary market
Developmental agenda post 97? crisis
1
Benchmark yield curve
Introduction of auction calendar for Malaysian Government Securities (MGS) Review of principal dealers system Introduction of MGS15 and MGS20
2
Issuance process
PDS and ABS Guidelines Structured Products Guidelines Islamic Securities Guidelines
3
Issuers & investors
Broadening of investors base for OTC market since July 2000 Facilitative framework for Ringgit & nonRinggit bonds issued by MDBs, MFIs, foreign govts, quasi-govt agencies & MNCs
4
Liquidity
5
Hedging instruments
Introduction of 3, 5 and 10 years MGS Futures
Non-FIs allowed to conduct repo Guidelines on Securities Borrowing and Lending Programme Introduction of online Institutional Securities Custodian Program (ISCAP) Witholding tax exemption
Reforms
?
?
Tax incentives to widen issuers’ base
Establishment of Bond Pricing Agencies
? Enhance price transparency and discovery
?
Greater regulatory oversight over credit rating agencies
? Enhance investor protection and investor
confidence
?
?
Enhance investor protection system in the secondary bond market
Electronic Information dissemination System
Debt Market 96
January 31, 2013
January 31, 2013
Debt Market
102
doc_369471582.pptx
Indian Debt market, government debt, corporate debt, primary market, secondary market, secondary market, US debt market, Asian debt market, malaysia debt market.
Financial Markets, Term-IV Group-3
Contents
?
Indian Debt Market
? Government Debt ? Corporate Debt
? Primary Market
? Secondary Market ? SEBI Regulations
? ?
US Debt Market Asian Debt Market
? Malaysia Debt Market
Debt Market 2
January 31, 2013
Financial Markets
Capital Market ? Market for Long Term ? Supply ? Individual savers ? Investments by Banks ? FI?s ? Mutual Funds ? Demand ? Companies ? FI?s ? Mutual Funds ? Guiding Principle Risk-Return trade off
January 31, 2013
Money Market
? ?
Market for Short Term Funds Assetsclose substitutes of money Supply
? Temporary surpluses of
?
Companies, FI?s , Banks
?
Demand
? Temporary deficits of
Banks, FI & Companies
?
Guiding Principle: Parking in Riskless Assets Yield not so important
3
?
Debt Market
Indian Debt Market
?
Three main segments
? Government Securities
? Centre, State and State-sponsored
? Public Sector Units (PSU) Bonds
? Surrogates of sovereign paper
? Corporate Securities
? Commercial papers and bonds
? Short term paper issued by banks (CDs)
A large non-securitized, transaction based, short term segment - call and money market) ? Most government securities are not tax-free
?
January 31, 2013 Debt Market 4
Market Capitalization
NSE-WDM Segment as on 31 March,2008
January 31, 2013 Debt Market 5
Turnover
January 31, 2013
Debt Market
6
Government Debt
? ? ?
Very Large requirements of GOI every year RBI?s role : advise, issue management and registrar Forms :
? GP Notes, Stock Certficates, SGL & C-SGL Balances
?
Coupons:
? semi-annual, zero, floating
? ? ? ?
Indexed Bonds, floaters
Issue thro auctions : normal or price auctions
State Development Bonds (perceived Default Risk) RBI - OMO
Debt Market 7
January 31, 2013
Government Securities
? ?
Oldest and most dominant
Acts as benchmark for pricing corporate paper
?
Instruments
? Fixed coupon bonds (Dated Securities) ? Treasury Bills ? Floating rate bonds ? Zero coupon bonds
? Inflation index bonds
January 31, 2013 Debt Market 9
Government Securities Market
? ?
Sovereign debt - popular among banks and financial institutions Yields on G-Secs are therefore the risk-free interest rate - a benchmark
?
Govt „auctioned? ? reflects supply and demand of funds ? near perfect price discovery
?
Primary auctions of G-Secs apart from providing funds to the GOI set the yield curve in India
Debt Market 10
January 31, 2013
Government Securities Market
?
Secondary market which is very active reflects the supply and demand of funds and therefore the market perception of interest rates
Secondary market has large number of players - banks, PD?s , insurance companies, mutual funds Very active Trading
?
?
January 31, 2013
Debt Market
11
Characteristics of Government Securities
? ? ?
Good investments Good cash management instruments Very large volumes floating in the market
?
? ? ?
Good liquidity
Asset base for repos / reverse repos Quick and hassle free Investors :
? Banks , FI?s, PD?s , PF Trusts, Companies, HNIs
January 31, 2013
Debt Market
12
Why investment in G-Secs
Statutory Purposes ? Investment for regular return
?
? Banks,
Insurance Companies, Pension Funds, Provident Funds, Trusts, HNI?s
Cash Management ? Banks & FI?s, FII?s, Corporate ? Trading
?
? Pricing of G-Secs in the market
? Holding Period Return
? Riding the Yield Curve
? “Arbitrage” between short-term money market and long-
term G-Secs
January 31, 2013 Debt Market 13
Central G-Sec Market: Pre-Reform Period
?
Features
? Administered and Low Interest Rates
? High Statutory Liquidity Ratio (SLR) ? Automatic Monetization of Budget Deficit ? High Cash Reserve Ratio (CRR)
?
Impact
? Preemption of Financial Savings ? No possibility of Price Discovery ? Dormant Debt Market
January 31, 2013
Debt Market
14
PSU Bonds
?
Gradual withdrawal of support since „91
?
Mostly private-placement, occasional public issue
50% of outstanding PSU bonds are taxfree Banks, FIs and other corporate are major subscribers
?
?
January 31, 2013
Debt Market
15
Reforms in the Central G-Sec Market
Three Phases: ? First Phase (1992-95)
? Creation of Enabling Environment
? Elimination of Automatic Monetisation
? Introduction of Auctions ? SLR reduced
?
Second Phase (1995-2000)
? Institutional Development
? DvP
? Primary Dealer ? FIMMDA and PDAI
? Instrument Diversification
? Floating Rate Bonds
? Capital Indexed Bonds
January 31, 2013 Debt Market 16
Reforms in the Central G-Sec Market
?
Third Phase - Enhance Liquidity and Efficiency
? Indicative Auction Calendar ? Non-Competitive Bidding Facility ? Liquidity Adjustment Facility ? Repo and collateralised borrowing lending system ? Negotiated Dealing System (NDS), STP and CCP ? Interest Rate derivatives ? Market Stabilisation Scheme ? Foreign investment in local currency debt instruments ? Conversion of special securities into marketable debt
January 31, 2013
Debt Market
17
G-Secs (Central & State)
1600000 1400000 1200000
1000000
CENTRAL AND STATE GOVERNMENT SECURITIES (Rs cr)
800000
600000
400000
200000
0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 January 31, 2013 Debt Market 18
Ownership Pattern of Central GSecs
1991
1% 0% 0%
2007
RBI
0% 0% 5%
State Bank of India and Associates Nationalised Banks
1% 1%
9% 15%
14%
25%
Other Scheduled Commercial Banks LIC
11%
0% 0%
3%
6%
UTI NABARD
23% 16% 22%
Employees Provident Fund Scheme Coal Mines Provident Fund Scheme Primary dealers Others
15%
33%
January 31, 2013
Debt Market
19
G-Secs - Average Volume
500000.00 450000.00 400000.00
350000.00
300000.00
250000.00
200000.00
G-Secs - Average Volume (Rs cr)
150000.00
100000.00
50000.00
0.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
January 31, 2013 Debt Market 20
Corporate Bond Market
Corporate Bond markets historically late to develop
? ? ? ?
Access to bank credit Access to external sources of finance Require well developed accounting legal and regulatory systems Rating agencies
?
?
Rigorous disclosure standards and effective governance of corporations
Payment and settlement systems
?
Secondary markets
Debt Market 21
January 31, 2013
Corporate bonds
?
Until 1992, interest rates on corporate securities was regulated and uniform across credit categories
?
After 1992, a variety of instruments seen
? Securitized products ? Corporate bond strips ? Floating rate instruments with floors and caps ? Embedded put and call options
?
Privately places; tenors of 1-12 years
Debt Market 22
January 31, 2013
Current Status
? ? ? ?
Many debt instruments privately placed and thus not listed on markets RBI regulates government securities
SEBI regulates corporate debt securities
NSE provides a trading platform for most debt instruments in India
January 31, 2013
Debt Market
23
Corporate Bonds – OTC Market
? ? ? ?
OTC as well as exchange based All trades need to be reported to a trading platform
Participants have a choice of platform
Existing exchanges can be used to provide trading platform
?
Only brokers have access to trading platform of exchanges
Debt Market 24
January 31, 2013
Reforms in Corporate Bond Market
? ? ?
Four Rating agencies operating in India De-materialisation and electronic transfer of securities
Initial focus – reform of private placement market by encouraging rating of issues
Further reforms needed:
? Appointment of a High Powered Committee
?
January 31, 2013
Debt Market
25
Committee recommendations
? ? ? ?
?
? ?
?
?
Enhance the issuer base and investor base including measures to bring in retail investors Listing of primary issues and creation of a centralized database of primary issues Electronic trading system Comprehensive automated trade reporting system Safe and efficient clearing and settlement standards Repo in corporate bonds Promote credit enhancement Specialized debt funds to fund infrastructure projects Development of a municipal bond market
Debt Market 26
January 31, 2013
Corporate Debt Market - Volume
Increase in Trading Volume: CAGR from 2007-2010 = 105%
80000.00
70000.00
60000.00
50000.00
40000.00
30000.00
Trading in Corporate Bonds (Rs. In cr)
20000.00
10000.00
0.00
January 31, 2013
Debt Market
27
Corporate Debt – Private Placement CAGR from 2007-2010 = 259% Increase in Volume:
35000.00 30000.00
25000.00
20000.00
Private placement of Corporate Bonds (Rs in cr)
15000.00
10000.00
5000.00
0.00
January 31, 2013
Debt Market
28
Participants
Predominantly wholesale markets ? Investors
?
? Banks, Fis ? Mutual Funds ? Provident funds and Pension Funds
? Insurance companies
? Investment Companies & Individuals
? Corporates
?
Many of the above also act as issuers
Debt Market 29
January 31, 2013
Participants
?
Most debt privately placed via auctions
?
In some segments (such as G-Secs) primary dealers act as market makers
Secondary deals via telephones through negotiations Government and RBI State governments, municipalities and local bodies FIIs, Charitable institutions, Public Sector FIs
Debt Market 30
?
? ?
?
January 31, 2013
Products
January 31, 2013
Debt Market
31
Products
January 31, 2013
Debt Market
32
New Developments
?
Floating Rate Bonds and Inflation-Indexed Bonds
?
?
STRIPS
Corporate Bonds
? Bond Insurance Institutions ? Institutional Investors: Credit Enhancers ? Securitised paper to be traded on exchanges ? Municipal Bonds, Mortgage Backed Securities, General
Securitised Paper
? ?
External debt management policy Pension reforms
Debt Market 33
January 31, 2013
Primary Market - Bond Issue
?
Public Issue
? Regulated by SEBI
? Rigorous procedure
? Full disclosures ? Rigorous procedure – minimum net worth , minimum
rating, prospectus, public offer
? Through a registered merchant banker
?
Private Placement
? Not regulated till last year ? New norms but not so rigorous – minimum rating and
certain amount of disclosures
January 31, 2013 Debt Market 35
G-Secs: Primary Issuance Process
? ?
RBI announces auction of G-Sec through a press notification and invites bids Sealed bids opened at appointed time and allotment is based on the cut-off price decided by the RBI Two choices of auctions
? Discriminatory Pricing (French)
? Uniform Pricing (Dutch)
?
January 31, 2013
Debt Market
36
Secondary Markets
?
NSE-WDM provides formal trading platform
? NEAT (National Exchange for Automated Trading) ? Fully automated, screen based ? Order driven (matches best buy and sell orders on a
price/time priority)
?
Central G-Secs and Treasury bills are held as dematerialized entities in the Subsidiary General Ledger (“SGL”) of the RBI Participants need to have account with SGL and a current account with RBI
Debt Market 37
?
January 31, 2013
Secondary Markets
? ? ?
Public Debt Office oversees settlement of transactions through the SGL Since 1995, settlements are on Delivery versus payment (DvP) basis After creation of CCIL, most trades are settled through CCIL with settlement guarantee Funds and Securities netted for settlement through CCIL
Debt Market 38
?
January 31, 2013
Retail Debt Market
?
RDM on NSE introduced January 16, 2003
? RBI and SEBI introduced trading in G-Secs for
retail investors
? ?
RDM trading takes place in the existing Capital Market segment of the exchange RETDEBT Market facility on NEAT system of Capital Markets Segment used to enter transactions in RDM session. Trading holidays and market timings mimic Equities Segment
Debt Market 41
?
January 31, 2013
RDM trade parameters
?
Trading in RDM under Rolling Settlement
? Each day is one period ? Trades in a day are netted before settlement
Settlement is on T+2 basis ? National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency
?
January 31, 2013 Debt Market 42
Initiatives - To enhance liquidity &
efficiency
? ? ? ?
Introduction of repo/reverse repo operations in government securities to manage short term liquidity mismatches
Operationalization of Negotiated Dealing system (NDS)
Establishment of Clearing Corporation of India Ltd. (CCIL) for efficient and guaranteed settlement Introduction of G-Secs in stock exchanges
?
Introduction of Real time Gross Settlement System (RTGS) which addresses settlement risk and facilitates liquidity management
Adoption of a modified Delivery-versus-Payment mode of settlement which provides for net settlement of both funds and securities legs Announcement of an indicative auction calendar for Treasury Bills and Dated Securities
Debt Market 43
?
?
January 31, 2013
NDS: Functional Scope
? ?
Give/receive quotes Place calls and negotiations
?
Setup preferred counterparty list and exposure limits
Dissemination of information
? Last traded prices, volume, yield curves, etc
?
?
Interface with securities settlement system
?
Preserves anonymity of participants
Debt Market 44
January 31, 2013
NDS-OM
? ?
?
? ?
?
Screen-based anonymous order matching system Integrated with NDS Operational since August 1, 2005 Accessible via RBIs INFINET network Supports trading in all Central Government Dated Securities and State Government Securities in T+1 settlement type Cheaper, Faster, more transparent than telephone based markets with benefits like STP
Debt Market 45
January 31, 2013
SEBI Regulations
?
For issuance of security, the issuer has to:
? Chose between exchanges if applied to more than one ? Obtain in-principle approval for listing ? Obtain credit rating from agency reg. with SEBI ? Enter in an agreement with a depository reg. with SEBI
for dematerialization of securities
? Appoint one or more merchant bankers reg. with SEBI
and at least one lead banker
? Appoint one or more debenture trustees
?
Issue can not provide loan or acquire shares of any person part of the same group or under same management
Debt Market 46
January 31, 2013
SEBI Regulations
? ?
No issue without draft of offer document filed Draft has to be made public for a period of SEVEN days
?
Draft clearly specifies names and contact particulars of compliance officer of lead merchant banker, issuer postal address, email address, telephone and fax numbers
All comments suitably addressed A copy of final and draft offers forwarded to SEBI Prior to filing with Registrar of Companies, furnish due diligence certificate to SEBI
Debt Market 47
? ? ?
January 31, 2013
SEBI Regulations
Issue can be fixed priced or determined via book-building ? Issuer may decide and disclose minimum subscription
?
? In event of non-receipt all moneys refunded
?
Issuer of security to public has to apply for listing with one or more recognized exchanges
? In terms of sub-section (1) of section 73 of
the Companies Act, 1956
January 31, 2013 Debt Market 48
SEBI Regulations
?
Issuer may list its debt securities issued on private placement basis on an exchange:
? Issuer issued such securities in compliance
with provisions of Companies Act, 1956
? Credit rating obtained from agency reg. with
SEBI
? Securities in dematerialized form ? Disclosures made under Regulation 21 of the
Issue and Listing of Debt Securities Regulation, 2008
January 31, 2013 Debt Market 49
SEBI Regulations
?
Continuous Listing Requirements:
? Issuers making public issue of privately placed securities
should comply with conditions of listing
? Rating obtained by issuer have to be periodically reviewed ? Any change in rating should be promptly disseminated to
investors and prospective investors
? Issuer, debenture trustees and stock exchanges should
disseminate all information regarding securities including compliance reports
? Debenture trustee should issue press release in event:
? Default by issuer to pay interest on debt securities or
redemption amount
? Failure to create a charge on the assets ? Revision of rating assigned to securities
January 31, 2013 Debt Market 50
SEBI Regulations
?
Securities issued to public or privately placed which are listed and traded in an exchange are cleared and settled subject to conditions specified by SEBI
?
Incase of OTC trades, such trades should to reported on an exchange having a nation wide trading terminal or other such platform
SEBI may specify conditions for reporting of trades on exchanges or other platforms
Debt Market 51
?
January 31, 2013
Overview
?
Type of Issuer
? The federal government and its agencies ? Municipal governments ? Corporations (domestic and foreign)
?
Term to Maturity
? This is the number of years over which the issuer has
promised to meet the conditions of the obligation
? Short term – maturity of between 1 and 5 years ? Intermediate-term – maturity of between 5 and 12 years ? Long-term – maturity of more than 12 years
January 31, 2013 Debt Market 53
US Bond Market
?
Outstanding US debt:
? $ 31.2 trillion (as per BIS)
? $ 34.3 trillion (as per SIFMA)
?
Average daily trading volume: $ 882 billion
? Between broker-dealers and large institutions ? Largely, decentralized, OTC market
?
Mortgage backed securities accounted for about $ 9.2 trillion in 2009
Debt Market 54
January 31, 2013
NYSE Bonds trading platform
?
NYSE is the largest centralized bond market
? Represents mostly corporate bonds
NYSE migrated from Automated Bond System (ABS) to the NYSE Bonds trading system in 2007 ? NYSE Bonds order book displays cumulative bids and offers, displaying full depth of book ? Ability to readily obtain transparent pricing and trading information
?
January 31, 2013 Debt Market 55
NYSE Bonds trading platform
? ?
Orders matched on a strict price-time priority Two daily bond auctions
? Opening bond Auction at 04:00 a.m. ET, and ? Core Bond Auction at 09:30 a.m. ET
?
All transactions on the system are locked in trade and reported with accrued interest to DTCC All trade settled in three day settlement NYSE bond accessible by eligible NYSE members and sponsored non-members
Debt Market 56
? ?
January 31, 2013
Indices
?
Merrill Lynch Domestic Master
? Created December 31, 1975
? Rebalanced last calendar day of month ? Follows USD denominated investment grade Public
Corporate and Domestic debt
? Excludes Asset-backed securities, tax-exempt
municipal debt, 144A?s and any bong without a fixed coupon schedule
? Excludes US treasuries less than $1 billion
outstanding, $150 million for others and less than one year remaining time to maturity
January 31, 2013 Debt Market 57
Indices
?
Salomon Broad Investment Grade Index
? Also known as Salomon BIG or Citigroup BIG
? BIG includes treasuries, agency debt,
corporate, non-corporate credit, mortgage backed securities and asset backed securities
? Excludes municipal or commercial mortgage
backed securities, inflation linked bonds
? Limited to investment grade securities; no
high-yield debt or emerging market debt
January 31, 2013
Debt Market
58
Indices
?
Barclays Capital Aggregate Bond index
? Previously, Lehman Aggregate Bond Index ? Market capitalization-weighted index ? Intermediate term index
? Average maturity: 4.5 7 years (as of Dec 31,
2009)
? Most US traded investment grade bonds are
represented
? Excludes municipal bonds and TIPS
January 31, 2013 Debt Market 59
Instruments
?
Marketable securities
? Treasury bonds, notes, bills, TIPS and
STRIPS
?
Non-marketable securities
? Zero-percent certificate of indebtedness
? Government account series
? U.S. Savings bonds ? Series EE, HH, I
January 31, 2013
Debt Market
60
How Treasury Auctions Work?
? ? ? ?
Offers 4 types of securities with varying maturities There are three steps to an auction: announcement of the auction, bidding, and issuance of the purchased securities.
January 31, 2013
Debt Market
61
Announcement
The auction announcement details:
? ? ? ?
Amount of the security being offered Auction date Issue date Maturity date
?
?
Terms and conditions of the offering
Noncompetitive and competitive bidding close times
?
Other pertinent information
Debt Market 62
January 31, 2013
Bidding
?
When participating in an auction, there are two bidding options - competitive and noncompetitive:
? Competitive bidding is limited to 35% of the issue amount for
each bidder, and a bidder specifies the rate or yield that is acceptable.
? Noncompetitive bidding is limited to purchases of $5 million
for U.S. Treasury bills, notes, bonds, and TIPS. With a noncompetitive bid, a bidder agrees to accept the rate or yield determined at auction.
? ?
Bidding limits apply cumulatively to all methods that are used for bidding in a single auction. For institutional investors, please note that Legacy Treasury Direct allows noncompetitive bidding only and does not offer 30-year bonds, 30-year TIPS, 7-year notes, 4-week bills, or Cash Management bills.
Debt Market 63
January 31, 2013
Issuance
?
?
?
Treasury bills are issued at a discount from face value and are paid at their par (face amount) at maturity The purchase price is listed on the auction results press release and is expressed as a price per hundred dollars Treasury notes, bonds, and TIPS are issued with a stated interest rate applied to the par amount and have semiannual interest payments
? For TIPS, the interest payments and the final payment
at maturity are based on the inflation-adjusted principal value of the security
? In some cases, the purchaser may have to pay
accrued interest.
January 31, 2013 Debt Market 64
Debt Financing in Asia
Market Overview:
?
The Asian bond market can be broken down into two segments:
? The regional bond market concentrated in
USD-denominated debt instruments
? Local currency bond markets
January 31, 2013
Debt Market
65
Why Asia Doesn?t Have Big Bond Markets?
Historical reason of information disclosure and contracting environment gave a strong comparative advantage to banking sector and governments ? Banks were a convenient vehicle for advancing their industrial policies ? Structural characteristics of geographical endowment limited by minimum efficient scale with liquidity ? Legal tradition for investor protection ? Infrastructure of prudential supervision and regulation ? Macroeconomic policy of controls on capital flows furthermore rob liquidity, currency risk limit the local currency securities, interest rate volatility make it unattractive to hold long-term
?
January 31, 2013 Debt Market 66
ACD initiative regarding development of Asian Bond Market
?
ACD bond initiative:
? To provide support to regional bond market in Asia
? To check outward flows and to create an avenue for
investment by Central institutional/retail investors
?
Banks
as
well
as
Challenges faced by ABF floated so far by EMEAP group:
? ? ? ? ? ?
Widening investors base Enhancing market liquidity, Raising price transparency, Improving market infrastructure. Removal of cross-border impediments. Credit ratings
Debt Market 67
January 31, 2013
Further Developments
? To structure it on two layered structure with Senior
and subordinated structure where Senior segment may hold AAA rated securities and subordinated segment may have less than AAA rated securities. ? These segments will remain subject to rebalancing. ? This is one of the solution for moving forward and making all ACD members part of ACD initiative.
January 31, 2013
Debt Market
68
Domestic Debt Securities by Type of Issuer
January 31, 2013
Debt Market
69
International Debt Securities by Type of Issuer
January 31, 2013
Debt Market
70
Trading
?
?
?
The Luxembourg Stock Exchange is a major international listing center for international bonds Some information vendors such as Bloomberg and Reuters, and Internet portals such as Bondweb, offer bond trading platforms specializing in physical issues. These cater to all classes of USD securities and can include Asian sovereign and corporate issues The Singapore Exchange (SGX) is an affiliate of CME with fungible interest rate contracts. The SGX is the principal USD futures trading center in the Asia-Pacific region
Debt Market 71
January 31, 2013
Bond Index
The increasing need to monitor Asian USD bond portfolios led Asian financial services and institutions to create their own performance indices ? One such index is HSBC's Asian US Dollar Bond Index (ADBI), comprising 76 USD denominated issues spread over eight markets, exclusive of Japanese debt securities.
?
January 31, 2013 Debt Market 74
Instruments- Government Bonds
Malaysian Government Securities (MGS) ? Malaysian Treasury Bills (MTB) ? Government Investment Issues (GII) ? Bank Negara Monetary Notes (BNMN) ? Sukuk BNM Issues (SBNMI) ? Merdeka savings bonds
?
Instruments-Government Bonds
?
Khazanah bonds
There are five types of Cagamas issues:
? ? ? ? ? ?
Cagamas fixed-rate bonds Cagamas floating-rate bonds Cagamas notes Sanadat Mudharabah Cagamas Sanadat Cagamas Khazanah bonds
Instruments corporate bonds
? ? ? ?
?
? ? ? ? ?
The types of corporate bonds issued on the Malaysian capital market are classified as: straight Convertible bonds with warrants floating rate zero coupon mortgage bonds Islamic bonds secured and unsecured bonds guaranteed bonds
Govt Bonds Issue Mechanism
?
Tender Dates
? Bank Negara Malaysia will invite tenders ? Auction details are normally announced 2 weeks
prior to auction date
? ?
?
?
Submission of Bids All government debt securities are offered to Principal Dealers (PDs) via competitive auction For Government Investment Issues (GIIs), competitive bids are submitted by Islamic banks and PDs with Skim Perbankan Islam (SPI) operations. Investors can apply to dealers to bid on their behalf.
Govt Bonds Issue Mechanism
?
Application Procedures
? Interested investors through Principal Dealers
(PDs), who charge varying fees for their services. ? Bids submitted must be in amounts that are multiples of MYR1 million.
?
Award Mechanism/Confirmation
? Allotments go initially to PD accounts. Then PDs
distribute client bids with the dealers advising customers of bid results. ? General tender results are published by Bank Negara Malaysia
Govt Bonds Issue Mechanism
?
Settlement
? Principal Dealers' securities accounts are
credited with the new bonds, while their cash accounts are debited for the price of the securities purchased. ? Principal Dealers have various procedures for settlement with clients. Normally, they debit a client's deposit account while crediting the client?s securities account.
Corporate Bonds Issue Mechanism
?
Tender Dates
? Forthcoming tenders for the other forms of
corporate and Islamic bonds are posted at least three business days before the tender date.
?
Ratings
? Corporate Bonds must be rated by either the
Rating Agency Malaysia (RAM) or the Malaysian Rating Corporation (MARC). ? External ratings are no longer a requirement, but are subject to investor demand.
Corporate Bonds Issue Mechanism
?
Award Mechanism/Confirmation
? Allotments go initially to PD accounts. Then
PDs distribute client bids with the dealers advising customers of bid results. ? General tender results are published by Bank Negara Malaysia ? Tender results for Islamic bonds are also published by Bank Negara Malaysia
Corporate Bonds Issue Mechanism
?
Settlement
? Principal Dealers' securities accounts are
credited with the new bonds, while their cash accounts are debited for the price of the securities purchased. ? Principal Dealers have various procedures for settlement with clients. Normally, they debit a client's deposit account while crediting the client?s securities account.
Participants- Issuers
Government Corporate
Participants
Supranational
Foreign Borrowers
Investors Profile- Government Bonds
Participants- investors
Investors
Asset Pooling Industries
General Investors
Pension Funds
Insurance Companies
Asset Management Companies
Participants-Rating Agencies
Rating Agency Malaysia Malaysian Rating Corporation
Rating Agencies
Size of Bond Market in USD
Size of Bond Market in % of GDP
Issuance Volume of Bond Market in USD
Trading Volume
Regulatary Framework Post Financial Crisis
?
? ?
?
• •
Introduction of auction calendar for Malaysian Government Securities (MGS) ? Creation of benchmark yield curve with key tenures of 3, 5 and 10 years ? Provide reliable pricing guidance for corporate bond issues Review of principal dealers system Introduction of long-dated MGS and MGS futures Free up captive demand on MGS Centralise approval process for issuance of bonds with the SC w.e.f 1 July 2000 Introduce facilitative legal and regulatory framework: ? Provisions on investor protection ? Fine and penalties on breaches and offences Adopt disclosure-based regulation: ? Approval upon full submission of documents to SC ? Ensure adequate disclosure to investors ? Monitor quality of disclosure
•
Developmental agenda post 97? crisis
Establishing a robust and Efficient Bond Market The 5 Pillars
1. Establish reliable and efficient benchmark yield curve
2. Introduce efficient & facilitative issuance process for corporate bonds
3. Widen issuers and investors base
4.
5. Facilitate introduction of risk management instruments
Improve liquidity in the secondary market
Developmental agenda post 97? crisis
1
Benchmark yield curve
Introduction of auction calendar for Malaysian Government Securities (MGS) Review of principal dealers system Introduction of MGS15 and MGS20
2
Issuance process
PDS and ABS Guidelines Structured Products Guidelines Islamic Securities Guidelines
3
Issuers & investors
Broadening of investors base for OTC market since July 2000 Facilitative framework for Ringgit & nonRinggit bonds issued by MDBs, MFIs, foreign govts, quasi-govt agencies & MNCs
4
Liquidity
5
Hedging instruments
Introduction of 3, 5 and 10 years MGS Futures
Non-FIs allowed to conduct repo Guidelines on Securities Borrowing and Lending Programme Introduction of online Institutional Securities Custodian Program (ISCAP) Witholding tax exemption
Reforms
?
?
Tax incentives to widen issuers’ base
Establishment of Bond Pricing Agencies
? Enhance price transparency and discovery
?
Greater regulatory oversight over credit rating agencies
? Enhance investor protection and investor
confidence
?
?
Enhance investor protection system in the secondary bond market
Electronic Information dissemination System
Debt Market 96
January 31, 2013
January 31, 2013
Debt Market
102
doc_369471582.pptx