One of the key planks of the Asian Bond Markets Initiative (ABMI) launched several years ago by Asean+3 finance ministers (those of the 10 Asean states plus Japan, China and South Korea) was to establish a regional clearing and settlement organization for bond trading. ADB officials who provide technical assistance to the Asean+3 group say that it is almost impossible to over-estimate the importance of establishing such a mechanism.
Asia does not have any clearing organization of the type that exists in Europe and the US, and because of this, investors in Asian bonds are exposed to potentially huge financial losses when dealing, Masato Miyachi, senior adviser in the ADB’s office of regional economic integration in Manila, tells Emerging Markets. This has to change if Asian bonds markets are to emerge as a major investment class, he says.
Market practitioners agree, judging from the response to an ADB conference held in Singapore last month on Asian bond clearing and settlement mechanisms. “We thought we were just going to have working-level people and discuss technical impediments, but it turned out that we had very high-profile participants,” notes Chiemi-Jamie Kaneko, a capital markets specialist at the ADB. “It was a great combination of market and public-sector participation”.
One of the big problems of not having a regional clearing and settlement system is the time difference between Asian financial markets and those of the US or Europe, says Kaneko. “Bond investors have to rely on Euroclear or other systems, and naturally there is a problem of money exposure. This is a big issue,” she says.
“For example, even if a Japanese investor wants to settle a US Treasury bond deal with a counterpart in, say, Korea, both will have to wait until New York time [to settle], even though the two participants are both in Asia, because unfortunately Asia is ahead of everyone else in time. Even one day’s time difference represents a funding cost, and as volumes rise, this is big.”
Asian investors “cannot get the confirmation and settlement money for a transaction even if it is US dollars, because the formalities have to be done in New York, whereas in the US or Europe, payment of money and also settlement are instantaneous. Another issue is that most bond purchasers rely on global custody arrangements, and the cost is expensive.” This too has “started to become an issue” with investors, she says.
The Singapore conference – the first of its kind in Asia – was held following an earlier meeting of Asean+3 officials in Pattaya, Thailand, where there was “general agreement” that Asia needs its own bond clearing and settlement systems, Kaneko tells Emerging Markets. Market responses from the Singapore meeting are being fed back to the Asean+3 group, in time to influence initiatives to be announced in Kyoto.
“Most fixed income asset managers welcome any initiative to improve clearing and settlement for cross-border transactions in Asia, particularly with reference to reducing cost and the time taken to clear foreign exchange settlement risks,” managing director Jim Turnbull Triarii Advisors tells Emerging Markets.
Cross-border trading of bonds in Asia and by Asian investors has been modest to date compared to the volume of dealing with more advanced markets. “But we foresee it growing in the future, so we want to take action now,” adds the ADB’s Miyachi. “Trying to set up something once trading becomes big may be too late.” —A.R.