Asean+3 bond market handbook 5: Initiatives

EMERGING MARKETS ASEAN + 3 BOND HANDBOOK

Chapter 5: Initiatives

Over the last 10 years, numerous initiatives have been launched to try to bring together the region’s local currency bond markets. “There are quite a number of forums addressing this issue,” says Dato’ Lee Kok Kwan at CIMB. “They fit together quite well and they are raising a lot of awareness.”

Perhaps the most well-known is the ADB-backed Asian Bond Market Initiative (ABMI), launched following the meeting of Asean + 3 ministers in 2003, initially to help to foster the growth of individual and regional bond markets, but increasingly – and in particular since a new roadmap was agreed in 2008 – to build integration between them. It is linked to the ADB’s broader work on regional integration.

Current areas of focus include promoting more issuance in local currency bonds, facilitating demand, improving the regulatory framework, and related infrastructure. So, for example, it is currently looking at a wide range of technical issues, such as settlement mechanisms, harmonization of rules, and even messaging formats, in addition to its focus on liquidity development.

The ABMI also hosts the Asian Bond Market Forum, to bring in the private sector to work together with regional authorities to build local bond markets. It’s also the source of the Asiabondsonline and Asian Bond Monitor initiatives, which seek to increase available information and transparency. “ABO aims to be a one stop clearing house that provides data and analysis on local currency bonds in the region, as well as information on the economic and legal environments for key stakeholders,” says Sabyasachi Mitra at the ADB. Originally a twice-yearly publication, Asia Bond Monitor went quarterly on the back of increased demand for information during the global financial crisis.

Subhead: The Asia Bond Funds

Another important initiative is the series of Asian Bond Funds launched by the Executives’ Meeting of East Asia-Pacific Central Banks (EMEAP). EMEAP includes the central banks of 11 economies, including most of the Asean+3 nations.

The first fund was announced in 2003, initially as a US$1 billion fund to invest in a basket of US dollar denominated bonds issued by Asian sovereign and quasi-sovereign issuers. The second, and more relevant to regional integration, was announced in December 2004 and implemented the following year; with US$2 billion in funding, it comprised a pan-Asian bond index fund and eight single-market funds, this time all in Asian local currencies. This was something of a visionary product: EMEAP called it “a new asset class in Asia,” representing an easy and efficient way for regional and international investors to get diversified exposure to Asian bond markets. And it created some regulatory breakthroughs in its own right, becoming, for example, the first foreign institutional investor to be granted access to China’s interbank bond market.

Tetango refers to those funds as “really a way of mobilizing Asian savings for use in the Asian region,” and “a kind of spark plug. ABF 1 and 2 were started by the central banks, but we now have participation from the private sector too.”

There is now much discussion about what an ABF 3 might look like. “The suggestion is that ABF 3 should be funded by ABF2 or ABF1 – a lot of those bonds are deep in the money anyway – where ABF3 should focus on investing cross-border in the primary and secondary local currency corporate and government bonds,” says Lee. “ABF3 should do so purely from a private sector perspective, with no preferential treatment, so that it can identify all the real private sector impediments to issuing and investing cross border.”

“ABF 2 has done its job very well, but that job – buying local currency bonds – is done and dusted,” says Lee. “The market’s come a long way. The next big jump is into cross-border issuances and cross border investing. That should be its macro objective.”

Another idea is an ASean +3 MTN program. “I think that would be interesting,” says Thomas Meow at CIMB. “Of course regional regulators will be concerned that the program will mean people can shop around and arbitrage regulations in the region. But we think that if it is on the basis to allow domestic issuers, having issued bonds domestically, to sell them to other Asean +3 countries, that will allow some of the mutual recognition issues and other impediments such as withholding tax to be worked out. That would be another good test case, in addition to ABF 3, to address issuer problems.” The program, Meow says, “is at the talking level at this point in time.”

The ACMF

There are several other initiatives too. Khun Thirachai at the Thai SEC is the chairman of the Asean Capital Markets Forum, made up of regulators from 10 Asean jurisdictions and formed in 2004, originally to harmonize rules and regulations and later to debate strategic issues on integration of the region’s capital markets.

One of the main achievements of the ACMF to date is the launch of the Asean and Plus Standards Scheme, endorsed at an Asean Finance Ministers meeting in 2009, which seeks to set capital market disclosure standards for cross-border offerings of securities. This came about because one challenge Thirachai encountered early on was that, when compared to international practice set by IOSCO, many Asean countries had still higher requirements for disclosure. “It came as a surprise to me,” he says. “I explained it as probably due to the fact that a lot of countries felt their investors were not as well educated as in more sophisticated markets – so they put on more requirements for disclosure, and for timeliness of reporting: far more than necessary.”

Issuers who make multi-jurisdiction offerings that require registration of statements within Asean can use a set of common disclosure standards – the Asean standards – plus whatever additional requirements are made by an individual jurisdiction – the plus standards. “It means we grow with international standards, but also accept the fact that some companies would still need the pluses,” Thirachai says. “Over the last year and a half we have been able to negotiate to reduce these additions, but more work will need to be done. It’s quite difficult because in some of these countries you have to amend the laws.”

The other main ACMF initiative has been its implementation plan. This is a roadmap to implement the capital markets elements of the Asean Economic Community Blueprint 2015, which aims to establish Asean as a single market and production base with free flow of goods, services, investments and capital. Approved in 2008, the plan established a group of capital markets experts, such as DBS CEO Piyush Gupta and former Philippine finance secretary (and current Credit Suisse executive) Jose Isidro Camacho, to make the plan practical for the private sector. It also involves the ADB on technical assistance, and input from various finance ministries and central banks. It aims to create an enabling environment for regional integration through a harmonization and mutual recognition framework; create market infrastructure and regionally focused products and intermediaries; and strengthen the implementation process. It involves three phases between 2009 and 2015; 2011 marked the start of the second phase. Initially, the focus was intended to be on establishing bilateral arrangements, with a focus on non-retail investors, while later initiatives will by multilateral and focus on retail investors.

Thirachai describes is as “a roadmap where all the pieces are moved across the board.”

An example of a bilateral – or, in this case, trilateral – agreement is the Pan-Asian CSD (central securities depository) alliance, forged by a task force of the HKMA with Euroclear and Bank Negara in Malaysia. This task force, which has produced a detailed white paper, focuses on what you might call the back-end infrastructure of integration. “The objective is to improve the post-trade processing infrastructure to facilitate cross-border bond market development,” says Li at the HKMA. A pilot platform should be launched between the three groups in mid-2011, and aims to give local investors more choices to access foreign markets, increase the flexibility for local issuers to raise funds, promote local securities to foreign investors and increase bond market activity.

“Taking a Malaysian investor as an example, it is not easy for him to invest in Hong Kong’s bond market if there is no coordination between the payment and securities settlement system in both economies,” says Li. Under the new system, that investor can trade and settle any debt securities lodged with Hong Kong’s Central Moneymarkets Unit, which in turn is linked with Hong Kong’s currency RTGS systems so payment and securities settlement can be done simultaneously, reducing risk.

Numerous countries including Indonesia, the Philippines, Korea, Japan and mainland China have expressed interest. “I am confident that more countries will join the pilot platform once they see the real benefits,” says Li. Possible next phases including corporate action servicing and cross-border collateral management, both of which are cumbersome and need greater automation.

There are also other initiatives in the region. The Monetary Authority of Singapore, for example, chairs the ASEAN Working Committee of Capital Market Development. This came up with a structured bond market development scorecard to identify critical impediments to a more integrated capital market. MAS is also a member of the ACMF, and within that leads the workgroup studying mutual recognition of issuance prospectuses. It also chairs Task Force 2 of the Asian Bond Markets Initiative, to promote demand for local currency bonds. “There is scope to encourage greater cross-border bond issuance, partly through the adoption of internationally-accepted issuance documentation standards,” a spokesperson says.

All these initiatives are clearly positive, but there is clear recognition that the private sector must get involved in a meaningful way for them to succeed. “Those initiatives will have to continue: they are the formal route to getting resolution of a lot of issues,” says Clifford Lee at DBS. “But the real driver must be the market.”