ASEAN+3 DOMESTIC BOND MARKETS ROUNDTABLE: The Road Ahead

The evolution of local currency bond markets over the last decade has been one of the success stories of the Asian capital market.

Nevertheless, much needs to be done from a regulatory, infrastructural and educational standpoint if Asia is to realize the potential of its fixed income markets by promoting increased growth, diversity and liquidity in its local currency bond markets. Much also needs to be done if Asia is to develop dynamic cross-border investment among institutions and private investors within the region.

To discuss the opportunities and challenges that lie ahead for local currency bond markets in ASEAN+3, influential representatives from a number of the region’s regulatory authorities, banks and industry bodies gathered at the CIMB/Emerging Markets Roundtable in Manila on May 2 2012.

Participants in the ASEAN+3 Domestic Bond Markets Roundtable, sponsored by CIMB were:

Dato’ Muhammad bin Ibrahim, Deputy Governor, Bank Negara Malaysia (BNM)
Diwa Guinigundo, Deputy Governor, Bangko Sentral ng Pilipinas (BSP)
Professor Iwan Azis, Head of Regional Integration, Asian Development Bank (ADB)
Chalee Chantanayingyong, Deputy Secretary-General, SEC Thailand
Esmond Lee, Executive Director, Hong Kong Monetary Authority (HKMA)
Dr Bandid Nijathaworn, Chairman, Thai Bond Market Association
Kamarudin Hashim, Senior General Manager, Malaysia Securities Commission
Dato’ Lee Kok Kwan, Deputy Group CEO, CIMB Group
Kiyoshi Nishimura, Chief Executive Officer, Credit Guarantee & Investment Facility (CGIF)
Santiago Dumlao Jr, Secretary General, Association of Credit Rating Agencies in Asia (ACRAA)


EM: Growth in the ASEAN+3 local currency bond markets has been impressive. Outstanding issue volumes have risen by more than 300% since 2000, with government bonds having attracted considerable inflows from overseas investors. What have been the main drivers of this growth, and how significant has the development of the market been in a regional context?

Azis, ADB: If we look at the last 10 years there has been good news in the sense that the region has removed one of the main features that existed at the time of the crisis of 1997. This was the double mismatch of currencies and maturities. One of the causes of the 1997 crisis was over-investment in the region financed by borrowing in foreign currency on a short-term and unhedged basis.

One of the ways authorities in the region responded was by promoting long-term financing mechanisms that were not subject to this mismatch, one of which was through the Asian Bond Market Initiative (ABMI) launched by ASEAN+3.

The region is still largely bank-dependent, but by 2011 the share of financing sourced through the bond market was more than 30% compared with less than 20% 10 years ago. So there has definitely been an improvement.

What is even more encouraging is that in the last five years, the fastest growing sector is corporate bonds, underpinned by increased demand from pension funds, insurance companies and other contractual savings institutions (CSIs).

So overall the trend is positive. However, although individual countries’ bond markets have been doing well over the last 10 years, the regional bond markets – meaning cross-border bond holdings across ASEAN+3 countries – have yet to develop as strongly. Based on 2010 data, which is the latest we have, cross-border holdings of ASEAN+3 bonds is still only around 8% or 9%. In other words more than 90% of bonds issued by ASEAN+3 borrowers are either held outside the region or in their own country. So ASEAN investors have mainly either a local or global bias, but not a regional bias.

Over the last four years we’ve noticed a trend of increased cross-border holdings in the region. The big question is: is this a structural or a cyclical trend? My personal opinion is that what we are seeing is a structural trend. Why? Because in trade we are clearly seeing a structural change. Over the last five years trade between Asia and the G2 – the Eurozone and the US – has been declining sharply, whereas intra-Asian trade as well as trade between Asia and other emerging countries has been increasing. I think we will see a similar pattern developing in finance, including bond trading.

Guinigundo, BSP: I share the view that the trend we’re seeing is more structural than cyclical. The growth in intra-ASEAN+3 trade has indeed expanded very significantly in the last ten years. Moreover, a number of non-trade intra-Asean+3 factors are motivating the growth of the regional bond markets. Both portfolio and foreign direct investments, for example, have been growing within the region. In the case of the Philippines, most of these investments are now coming from Thailand, Singapore, Malaysia and Hong Kong.

The structural trend is also being driven by the reforms governments are introducing to encourage the deepening of capital markets and promoting the development of key market infrastructure. Without government support for private sector initiatives in areas such as payment and settlements it will be very difficult to sustain the development of local currency bond markets. International financial institutions such as the IFC and the ADB have also been instrumental in providing an additional push to the development of the capital markets.

Finally, initiatives such as the CGIF send a positive signal to both issuers and investors and in the process, provide additional motivation for the development of the capital markets. So I believe this is something that needs to stay on the agenda of the public sector for many years to come.

Chalee, SEC Thailand: Local currency markets in the emerging East Asian region, including ASEAN, have indeed seen significant growth in recent years. There have been several important factors driving this growth, including a shift in capital flows due to the European debt crisis, making ASEAN bond markets a safe haven, and the strong economic fundamentals and growth prospects in the region.

Additionally, ASEAN bond markets offer attractive yields compared to developed markets. For example, the yield on 10 year US government bonds was approximately 2% in 2011, compared with about 5% for Indonesia and the Philippines and around 3% for Thailand. This certainly further enhanced the attractiveness of investment in ASEAN bond markets.

EM: Before we move on to the key infrastructural and regulatory developments, let’s look at some of the success stories in terms of promoting regional local currency bond markets, one of which has been the sukuk market in Malaysia. Dato Ibrahim, to what extent has the sukuk sector been a driver of increased capital market integration in the region?

Ibrahim, BNM: The sukuk market has developed very well. Total outstanding issuance has now reached US$160bn, and one of its key success factors is that it has been used by many types of issuer. As well as governments, it has been used by multilateral institutions, agencies and corporations. It has been popular because it is both innovative and competitive from a cost perspective.

In 1997 we had suffered from the mismatch problem that Professor Iwan mentioned. So we worked on changing the regulatory framework to encourage the development of the bond market. The result is that today, roughly one third of funding in Malaysia comes from the bond market, one third from the banking system and another third from the equity market.

Our bond market has become an important source of funding and is able to meet the needs of the country. About half of bond market issuance is by the government and half by the corporate sector, so corporations are an important driver of the growth of the market.

EM: Hong Kong’s renminbi market has been another regional success story, hasn’t it?

Lee, HKMA: The development of the RMB market in Hong Kong has been fascinating. Foreign currency bonds broadly constitute 30%, or HK$414bn ($53bn equivalent), of the Hong Kong bond market, underpinned by a huge expansion of the RMB portfolio since 2007. The total outstanding value of RMB debt securities lodged in Hong Kong with the Central Moneymarkets Unit (CMU), the bond clearing and settlement system operated by the HKMA, amounted to RMB266bn ($42bn) at the end of Q1 2012. The annual issuance of RMB securities lodged with the CMU amounted to RMB172bn ($27bn) in 2011.

One-third, or HK$140bn equivalent, of foreign currency bonds issued in Hong Kong, and 5%, or HK$51bn, of local currency bonds are now held by foreign investors through ICSDs such as Euroclear.

In the RMB market there has been a broad mix of issuers, including the Chinese government, as well as banks and corporates from China and Hong Kong.

About a third of the investors in these bonds are from overseas. So I agree that this process of intra-regional investment is mirroring the rise in intra-Asian trade flows. It is also a reflection of the increased use of local currencies to settle international trade which is one of the drivers of growth in the RMB market in Hong Kong. This is why the HKMA, together with Bank Negara Malaysia and Euroclear, launched a Pilot Programme in 2012 for cross-border issuance investment and settlement of debt securities.

The Pilot Platform leverages on existing systems and linkages and offers a wide range of services to global and domestic investors. So it has a number of benefits. Improved securities information will allow investors to obtain information on domestic and international securities from a centralised database, and the visibility of Asian domestic bonds for prospective international investors will be enhanced.

Additionally, the platform will provide a single point of entry for financial institutions to access international and domestic securities through their local CSDs. Cross-border access for local and foreign investors will also be improved, allowing them to invest in more than 300,000 bond issues through their existing accounts with the HKMA’s CMU, BNM’s RENTAS and Euroclear. The issuance of local bonds in foreign currencies will also be facilitated by DvP [delivery versus payment] through linkages to the foreign currency payment systems on the Pilot Programme.

As the first add-on service to the Pilot Programme, the cross-border and cross-currency collateral management services will enable financial institutions to make use of securities in one of the partner systems as collateral to conduct secured borrowing in the local currency of another partner economy. This will greatly enhance financial institutions’ access to local currency liquidity, and hence help to maintain financial stability.

As a second add-on service, by 2012 a corporate action platform will be introduced to support automation and standardisation of processing of functions such as interest payments and redemptions as well as mergers and call offers.

EM: Let’s move on to ratings. How accurately do ratings from the international agencies reflect credit quality in the region?

Lee, CIMB: The development of each individual local currency bond market in the ASEAN+3 region is independent of international ratings. The big difference between ASEAN+3 and the rest of the global economy is that the savings rate in this region is very high at 20% to 50% of GDP annually, where domestic demand is sufficient to meet issuance supply. ASEAN+3 has come a long way since the 1997 crisis and has recognised that reliance on foreign currency funding is toxic for both the sovereign and its corporates. In developing their local currency bond markets, ASEAN+3 countries have utilised local credit ratings agencies.

In a more macro context, although ASEAN+3 today accounts for a large share of the global savings pool and is still expanding, the majority of ASEAN+3 cross-border investments are outside the region, mostly in western markets and in the lowest-yielding instruments such as US Treasuries. Overseas funds perhaps indirectly funded by ASEAN+3 money are in turn invested in ASEAN+3 charging higher credits spreads because our international ratings are lower.

So the next step in the development of ASEAN+3 bond markets should be to facilitate greater cross-border investments and issuances within the region. But today, the investment and credit committees of most ASEAN+3 pension funds, central banks, mutual funds or commercial banks rely heavily on international credit ratings to govern their non-domestic investment and lending activities.

But if you look at ASEAN+3 government or corporate bonds denominated in their local currencies, none of them are rated internationally.

Guinigundo, BSP: There are many indications that the market is always ahead of the ratings agencies as far as assessing the creditworthiness of both governments and corporates. Credit rating agencies appear to rely on backward-looking indicators. This is why in many cases you have countries that are sub-investment grade enjoying very tight spreads. For example, we believe the Philippines is two or three notches under-rated than what is suggested by our current ratings. But at the same time, we enjoy very tight spreads both in the CDS and the cash bond markets.

So there is some scope for us to leverage on our existing credit ratings agencies in the region which might have better on the ground competency and establish a Pan-Asian methodology. This should provide some comfort that a credit ratings agency in one country will be issuing the same signal as one in another. In short, some form of mutual recognition should be explored. I think that may be necessary, if only to provide symmetry of information in favour of investors in local currency bond markets.

Lee, HKMA: A number of the RMB bonds issued in Hong Kong are unrated, but have still attracted investment from overseas.

Bandid, Thai Bond Market Association: I agree that growth in the regional bond market has been quite impressive, but one point that maybe has not been mentioned is the ability of the market to remain resilient at a time of crisis. So as well as providing an alternative funding source the bond market has also become a pillar of stability at a time of stress in international markets.

Coming back to the ratings agencies, we need a more standardised regional framework so that all our markets are treated with the same methodology. That would reduce the ratings gap between Western and ASEAN markets and make it more attractive for foreign investors to come into our markets.

Dumlao, ACRAA: To me, the real problem is that there isn’t enough supply of good local currency corporate bonds in our region. In emerging markets, there continues to be a reliance on bank borrowings. The corporate borrower has no particular taste for the procedures, the disclosures, the regulators’ requirements, and the whole slew of paperwork attending the issuance of bonds. The corporate borrower is only interested in raising the funds he needs, the simpler and the faster, the better. He is not interested in developing the capital market.

It is in this situation that the intervention and initiatives of the investment banker, financial advisor or underwriter are most needed. More often than not, it will not be the prospective corporate borrower himself who will initiate the origination of a bond issue; it will be his investment banker. The investment banker is the expert in financial intermediation, who knows the intricacies of originating and packaging an issue, who knows the market and how to sell to the market. He is the underwriter who can guide the inexperienced borrower through the whole process of bond issuance, and continue to advise the borrower after the issue. In other words, we need more CIMBs that initiate and encourage the origination of domestic bond issues.

But we clearly need investment grade ratings to attract investors. And here there must be a way of differentiating the good issuers from the bad, and the better from the best. There must be a way of differentiating credit risks to satisfy a range of risk appetites.

Credit ratings are a necessary accompaniment to bond issues, and most regulatory authorities require a credit rating for a bond issue. So the implicit corresponding requirement is that credit ratings should be subject to appropriate regulation since they provide investment information of public interest and for public use.

EM: How can agencies encourage more integration and cross-border investment?

Dumlao, ACRAA: From the perspective of the credit rating industry, of which I am a part, when we talk about promoting cross-border issuance and investment – assuming that the continuing supply of local currency bonds is there – I identify two specific preconditions. The first is a mutual recognition by regulatory authorities of credit ratings assigned by DCRAs in other local jurisdictions. The second is an acceptable comparability of credit ratings assigned by DCRAs to the local currency bond issues in their respective jurisdictions.

Credit ratings, which are the accepted indicator of investment grade quality of local currency bond issues, should be made acceptable for use in other jurisdictions based on mutual recognition agreements between and among national regulatory authorities. This recognition is not a guarantee of correctness or accuracy of credit opinions. It will simply mean that the agency assigning the rating is a duly accredited DCRA in the regulator’s jurisdiction and is in compliance with all the rules and regulations to act as such. It will also mean that the agency is in compliance with a set of minimum best practices prescribed for DCRAs as regards rating methodologies, integrity of the ratings process, and observance of the Code of Conduct prescribed by IOSCO and ACRAA.

Although mutual recognition along these lines will be a big step towards promoting local currency bond issues originated in another jurisdiction, this alone will not be enough. A necessary parallel step is to make DCRAs’ ratings comparable across different jurisdictions. We are talking here about harmonization to make the credit ratings of different DCRAs more useful for application in all other jurisdictions in the Asian region.

In support of this ratings harmonization effort, ACRAA is now conducting a study entitled “Mapping National Scale Ratings Across Sovereigns in Asia”, the objective of which is to establish ratings comparability measures across different jurisdictions in Asia. With this information, investors will be better able to evaluate the predictive value of a credit rating assigned by one DCRA compared to another in a different jurisdiction.

In particular, the study results may also be useful to guarantee institutions like the CGIF, which will presumably use DCRA ratings to determine which debt issues to guarantee. The guarantees issued by CGIF are expected to improve the ratings of local currency bonds, which in turn should enhance supply. All these separate efforts are connected to the overall objective of developing the market for cross-border investment in local currency bonds.

EM: Nishimura-san, CGIF has sent out a press release this morning saying that it is now ready to begin its guarantee operations. How will this initiative encourage more cross-border issuance and investment in the ASEAN+3 region?

Nishimura, CGIF: In spite of the strong growth of local currency bond markets in the region, many investment grade companies continue to find it difficult to access local bond markets. CGIF aims to help these companies secure longer term financing, reduce their dependency on short-term foreign currency borrowing, and address currency and maturity mismatches. By tapping into Asia’s savings, local currency bond issuance will promote financial stability and spur economic growth in the region.

In its initial phase, CGIF will focus its deal-origination efforts on the five Focus countries, which are Indonesia, Malaysia, the Philippines, Singapore and Thailand. These countries provide the best opportunity for CGIF to perform its mandate to promote the deepening of local currency corporate bond markets and to support their evolution into more mature markets.

Currently, there is a relatively high level of liquidity in the local currency loan and bond markets in most of the Focus countries. This has made it easier for some creditworthy companies to get better pricing and tenors from the debt markets.

Nonetheless, CGIF has identified a number of areas where its guarantees will play an important role, even for investment grade companies. For example, investors and lenders continue to be cautious about issues with mid to long-term maturities, with bond tenors longer than five or seven years generally still reserved for selected issuers. CGIF guarantees will help creditworthy companies to extend their tenors to 10 years, which would be difficult for them to achieve on a standalone basis.

Cross-border issuance is another area where CGIF guarantees will help increase volumes. CGIF has determined that a number of ASEAN+3 corporations are keen on raising funds in mature markets such as Malaysia and Singapore, or to access local capital markets in regional countries where they have overseas operations. CGIF guarantees will be especially useful to companies that are constrained by a ceiling on the sovereign rating of their home country, and to those that are not well-known to investors in the market where they intend to issue.

CGIF guarantees will also be helpful to mid-investment grade issuers. Bonds in each market have a so-called “rating cliff”, i.e. a credit rating floor – which differs from one market to the next – below which investor appetite for bonds is absent. For example, in Malaysia, investment grade issuers rated below AA- find it difficult to raise funds, while in Indonesia institutional investors do not invest in bonds rated below single-A.

Some companies choose to keep their credit ratings private, either because they make it impossible for them to access bond markets or because they are dissatisfied with their ratings. CGIF can help such mid-investment grade companies overcome the practical rating floor in their relevant market.

Hashim, Malaysia Securities Commission: Credit guarantee mechanisms like CGIF (or even bank guarantees) provide an opportunity for investors to invest in lower credits without actually being exposed to the credit risk of the issuer.

On the issuer side, one of the options that companies could consider is using asset-backed securities. Here, we are not talking about asset-backed securitisation in its extreme form like we saw during the financial crisis in the US, but real asset-backed securities where the better assets of a company can be taken out and securitised. This would allow companies to access the market via securitisation, get good pricing, and be exposed to the issuance process, exposure they would never get the chance of gaining otherwise.

On the issue of the credit ratings agencies, one of the new principles of IOSCO’s Objectives and Principles of Securities Regulation requires ratings agencies to be supervised if their ratings are to be used for regulatory purposes. In this case, CRAs need to be registered and licensed and be subject to examination by regulators. As this principle also applies to foreign CRAs, it would certainly help in promoting cross-border activities.

Lee, CIMB: The rules and regulations governing issuance aren’t that different from one country to the next. But getting regulatory approval is critical. Without it, you can’t issue on a cross-border basis and market the sovereign or the corporate credit in the rest of the ASEAN+3 markets. Today, if an ASEAN+3 credit issues in Reg S but in US dollars, approval across the region is usually immediate. But in local currency it is not. As a result, there is very little familiarity of ASEAN+3 sovereigns and corporate credits in the region amongst ASEAN+3 institutional investors as the growth in the markets since 1997/98 has been in the local currency bond markets.

On the investing side it’s a similar problem. Typically today, we don’t have mutual recognition of domestic credit ratings agencies even with proven track records of rating migration and default data where investment and credit committees only recognise international ratings to govern their non-domestic investment activities.

During the ASEAN+3 Bond Market Forum in 2011, as a longer term solution, it was proposed that ASEAN+3 develops a New International Credit Rating Agency (NICRA) focusing first and foremost on global sovereign ratings as they determine global capital allocation by country. As the savings pool in ASEAN+3 is already very large and still growing, it makes sense for ASEAN+3 to have its own international rating agency as opposed to relying on Western agencies to govern our investment activities. Collectively, it makes significant risk/return sense as even a 0.01% increase in returns on a portfolio of US$6tr results in additional investment income of US$60m annually.

On the subject of international ratings, look at the sovereign rating of Thailand as an example. Thailand’s total foreign currency debt is $10.5bn, or 0.4% of GDP, which is underpinned by FX reserves in excess of $169bn, a collateral cover of more than 1,600%. For its main source of funding, which is local currency baht sovereign bonds, Thailand’s self-sufficiency is so strong and its reliance on foreign investors so minimal that it can afford to put in place a 15% withholding tax to discourage foreign investors from buying baht-denominated sovereign bonds. That is the credit strength of the Thai sovereign’s balance sheet today.

In terms of its fiscal deficit, trade and capital account, Thailand is in much stronger shape today than most higher rated Western sovereigns. As a result, shouldn’t its sovereign credit rating be comparable to those of France or the UK if it is based purely on the probability of default?

On bank credit ratings, which are mostly capped by the ratings of the sovereign, let’s take Bangkok Bank, the largest commercial bank in Thailand, as an example. The bank’s credit rating today is BBB+ and it has a leverage ratio of about 10 times equity. Let’s contrast Bangkok Bank with the large French banks, which have leverage ratios 200% to 300% greater and yet are rated multiple notches higher. Are Thai mortgages six times riskier than French mortgages to justify such a large disparity in ratings, especially when every dollar of capital of Bangkok Bank supports two to three times fewer loans, bonds and derivatives? Can they be justified when Bangkok Bank has minimal dependence on wholesale borrowing and is funded mostly by customer deposits which Basel so desires?

Market prices in both the cash bond and CDS markets certainly don’t agree with international ratings, which they have long since discounted. In these markets, Malaysia, Indonesia, Thailand and others all trade at levels that imply that their credit ratings are as strong as, if not stronger than the sovereigns such as France and Italy, which are rated much higher.

Nishimura, CGIF: There’s a lot of criticism of the international ratings agencies but a lot of market players still need to rely on them partly because their ratings are backed by a large pool of empirical default data. The problem we have with local ratings agencies is that they still do not have sufficient default data backing their ratings and have not yet standardised their default data among themselves. So comparisons are difficult, although ACRAA is working hard on how to harmonize the definition and methodology of how we measure default.

It is also important that we increase the size of the sample of reported default data backing agencies’ ratings scales which can be then be a useful measurement of the probability of default. For that, we need a lot more companies to have a ratings track record.

Dumlao, ACRAA: This is one reason why we decided to undertake our study on defaults. We have just started to put together a base of physical data on defaults which will help to show the predictive value of a rating. But the fact that there is a CGIF forces us to accelerate the study of the meaning of all this data. We can help each other to make good use of the empirical data that is available, some of which is very new, while some goes back five or seven years.

Guinigundo, BSP: The sovereign rating itself is very important because it serves as a ceiling for the corporates. We should therefore strive to rectify credit rating slippages. For example, Hong Kong made a representation to the credit ratings agencies and they succeeded in achieving a triple A status. The Philippines is also doing the same because we firmly believe we are incorrectly rated. We have to make sure that the methodologies used by the international ratings agencies are consistent and based on the fundamentals.

Secondly, within the region itself I think we should try to achieve some commonalities in terms of mutual recognition, in terms of methodologies and in terms of the numbers and letters that we use to rate corporates, for example. If we don’t, we’ll find ourselves in the same situation in five years time that we are in today, talking about lack of information symmetry between the international ratings agencies and the region’s actual economic fundamentals.

Ibrahim, BNM: The issue was raised earlier about why a private sector borrower should go to the bond market instead of the banks for funding. In Malaysia the experience we’ve observed has been that as long as the price discovery mechanism is efficient, the corporate sector can make an informed decision. If the bond market is more attractive, surely borrowers won’t go to the bank market. So an efficient pricing mechanism is extremely important.

The discussion about ratings agencies is a perennial issue. As long as we are overly dependent on international ratings agencies we will face obstacles in developing our domestic financial markets. So we need to look at this from a fresh perspective. For domestic corporates, the use of domestic ratings should be a priority rather than using international ratings. I don’t think we’ll be able to resolve the obstacles we faced arising from the use of international ratings in developing our domestic market. We need to find a new solution.

Lee, CIMB: I agree. From a regulatory perspective we need to give the private sector more freedom to invest cross-border, and not rely on international ratings. I think the investment and credit committees of fund managers, pension funds, central banks and commercial banks should place more recognition on the region’s credit ratings agencies. The central banks have already begun this process, and we see cross-border investment in government bonds gaining a lot of momentum. Local currency government bond markets in ASEAN+3 are a very desirable asset class at the moment because of its currency outlook and positive interest rate differentials as GDP growth, economic and credit fundamentals are in good shape. The next step is for the private sector to follow the central banks’ lead and invest cross-border in local currency.

Guinigundo, BSP: From the regulatory side you can’t completely do away with a credit rating in the light of Basel principles, especially when the investor is a bank. Capital charges will have to be imposed depending on the credit rating of the bond.

EM: What other initiatives are being undertaken to encourage more integration within the region’s capital market? What new projects are entities like the ABMF (Asian Bond Market Forum) and the ACMF (ASEAN Capital Market Forum) working on to promote more cross-border activity? For example, what would it take to create an Asian equivalent of a fund passporting mechanism, such as the UCITS model that has been so successful in Europe?

Guinigundo, BSP: Mutual recognition is intended to aid the bond markets by giving investors more choice, and giving issuers deeper markets without higher issuing costs. Passporting of financial services allows companies that are authorized to provide financial services in one jurisdiction to provide them in another without the need for authorization in this second jurisdiction. In an EU context, passporting can be implemented by establishing a branch or providing cross-border services.

In the ASEAN region, the ASEAN Capital Market Forum (ACMF), a forum of securities regulators in ASEAN, was established in 2004, to focus on harmonization and mutual recognition of rules and regulations before shifting towards more strategic issues to achieve greater integration of the region’s capital markets.

In order to promote the development of an integrated capital market, which is one of the objectives of the AEC Blueprint, the ACMF drafted an Implementation Plan which serves as roadmap for ASEAN member countries to achieve capital market integration. This spans a three-phased approach from 2009 to 2015, each with key milestones and components – facilitating cross border securities offerings, reduction of restrictions on capital flows and infrastructure integration.

This bottom-up approach of the ACMF is to harmonize regulations one by one, step by step or mutually recognize regulations among member countries. The ASEAN and Plus Standards Scheme were developed by the ASEAN ACMF to facilitate cross–border offerings of securities within the ASEAN region. The Scheme enhances the attractiveness of ASEAN as a combined capital market for fund-raising, as well as underlines the combined ASEAN securities as an attractive asset class by raising the disclosure standards among ASEAN members to international level.

Chalee, SEC Thailand: Currently, there is no mutual recognition regime for the approval of multinational bond offerings. However, the ASEAN Debt Disclosure Standard, adopted by Singapore, Malaysia and Thailand, is now in place, which should reduce issuers’ disclosure costs and also alleviate the burden of having to comply with multiple disclosure requirements. The Standard is now being finalised and should be submitted for endorsement during the coming meeting – in other words, by the end of the second quarter of 2012.

There is no mutual recognition regime in place for non-retail investors, either, but we already apply a light-touched regime to accommodate issuers.

The aim of the ABMF is to facilitate cross-border bond issuance and investment by having an Asian Multi-Currency Bond Issuance Programme (AMBIP) with regional standardisation of documentation and to create an integrated intra-regional professional market under the mutual recognition approach. This means allowing for the cross-border offering of bonds without the requirement to be reauthorized by host regulators.

On passporting, ACMF is already considering a mutual recognition scheme for cross-border offerings of collective investment schemes (CIS) to the general public, ie CIS authorised by a member country that can be sold in other participating member countries without the need for reauthorisation by host regulators.

Under this scheme, CIS must be set up in ASEAN countries and issued and managed only by regulated CIS operators in ASEAN countries. Examples of pre-conditions to be met by home and host regulators are that they are signatories to IOSCO MMOU Appendix A and are recognised as having “broadly implemented” the relevant IOSCO principles. They must also have observed the skin-in-the-game requirement, meaning that some portions must be offered in the home country. A number of requirements will also need to be met on the CIS operator, trustee/custodian, offering process and product restrictions, while disclosure will be subject to the host country’s requirement. The timeframe is that ACMF currently plans to launch the MR CIS framework by the end of 2012.

As to cross-border offerings to non-retail investors, CIS comparable to NR products available in the host country will be offered via local intermediaries. Launch is scheduled for the first half of 2012.

Bandid, Thai Bond Market Association: All these initiatives should help reduce transaction costs and support a greater flow of cross-border investment. Also, intra-regional financing flows can help stabilize financial markets in the region, safeguarding them from volatility and the reversal of capital flows.

However, intra-regional cross-border investment should benefit from mutual recognition of market standards between countries in the region, perhaps beginning with a group of countries with similarly mature bond markets.

EM: Dr Bandid said earlier that efficient bond markets have a role to play in underpinning stability across the broader financial system. Would others like to comment on this?

Nishimura, CGIF: Liquid sovereign benchmarks are important pricing components and make a key contribution to the efficient mobilisation of capital. The side-effects of inflows on the stability of the currency will need to be managed appropriately.

Chalee, SEC Thailand: Since the Bank of Thailand does not currently impose any limit on the amount that foreign investors can invest in Thai local currency bonds, significant cash inflows from abroad can give rise to FX fluctuations. However, such inflows would also increase liquidity in the bond market. So we have to strike the right balance between currency stability and the need to maintain liquid sovereign benchmarks. Most foreign investment in the Thai market is in the highly liquid five and 10 year government bonds. Overseas investors buying in other maturities tend to hold the bonds to maturity.

Lee, HKMA: One of the important usage of bonds in developed markets, besides their role as a trading and investment vehicle, is that they serve as collateral for bank to bank lending. In the case of this region, when many of the foreign banks first came to Asia some years ago, they made use of their strong credit ratings to borrow on an uncollateralised basis. That turned out to be disastrous in times of stress when liquidity can dry up very easily in the unsecured lending market.

More recently they have been using currency swaps, swapping US dollars for local Asian currencies. Again, this can be problematic when US dollar liquidity is in short supply in times of market stress. So increasingly I think banks will make use of securities as collateral for interbank lending. That could create a sort of cross-border, cross-currency system of collateral management, because foreign banks may need to mobilise securities in various parts of the world to serve as collateral. So we’re looking at adding collateral management to our Pilot Programme as an add-on service. This is important because at times of stress this form of collateralised lending and borrowing is less susceptible to a sudden drying up of liquidity than uncollateralised lending and borrowing. Besides creating a means for borrowers to raise money, bonds are also conducive to financial stability by allowing banks to borrow from each other on a secured basis.

EM: Looking ahead, if each of you had a wish-list of things that could be done to promote accelerated integration of the region’s local current bond markets, what would be at the top of the list?

Ibrahim, BNM: If we can link our payment system this will encourage inter-regional transactions by creating the infrastructure to incentivise trading, settlement and custody between regional markets. We should also encourage countries to settle more of their trade in domestic currencies, because that would create more of an incentive for people to invest cross-border.

Guinigundo, BSP: In some jurisdictions banking regulatory and foreign exchange systems need to be modified to allow financial innovations to take place.

I also agree that market infrastructure improvements will be critical, for example, payment and settlement. Regional co-operation will also be crucial if only to achieve common goals in expanding the investor base, options and protection. Initiatives on credit ratings will also have to be undertaken within the framework of mutual co-operation. If all this is achieved, they will be very important steps in the right direction.

Chalee, SEC Thailand: First, I would like to see more openness on the part of central banks regarding inflows and outflows. Second, I would like to see a pan-Asian or regional credit ratings agency.

Lee, HKMA: With the rising importance of Asian currencies in cross-border trade and settlement, increasingly I think we may see Asian financial institutions make more use of Asian bonds to raise US dollar funding to finance their global operations rather than the other way round, which was the case in the past. We also hope that more economies in Asia join the Pilot Platform.

Hashim, Malaysia Securities Commission: An important trend will be that investors will continue to diversify their investment portfolios. I also think issuers will continue to diversify their funding sources, which will mean that the pressure to issue on a cross-border basis intensifies.

If I were to choose three priorities going forward, they would be a facilitative framework for issuance as well as investment; standardisation of practices in terms of offering, documentation etc; and the establishment of a pan-Asian credit ratings agency.

Dumlao, ACRAA: I’d like to comment on how valuable it is to have roundtable discussions like this one. I’m encouraged that governments throughout the region are now engaged in a continuous dialogue with the private sector. I hope that this constructive partnership is encouraged to grow further.

Nishimura, CGIF: We hope we’ll see the first transaction with a CGIF guarantee in the second half of this year. Then we want to build up a strong track record in the first few years of our operation, which will show that this regional effort can promote cross-border issuance in a tangible way.

Bandid, Thai Bond Market Association: We’d like to see the development of a dependable source of finance for the region, together with cost-effectiveness and improved access, not just for corporations but also for retail investors.

On the issue of cost effectiveness, the regulator could do more to reduce the basic fixed costs that are too high for individual markets to bear by creating economies of scale through a common settlement platform, for example. The role of the regulator should be to keep things simple and focus on the big infrastructure that would help to facilitate more cross-border issuance.

In terms of inclusiveness, we’ve been focusing in this discussion mainly on accessing funds from the big institutional investors by leveraging the regional potential and reducing the barriers to cross-border investment flows. But we need to do more to open the market to smaller operators, both on the issuer and on the investor side. SMEs are at the heart of the region’s economy, so we need to ask how we set about ensuring they have access to a dependable source of funding aside from going to their banks.

This may mean we have to think twice about regulation of ratings. In Thailand we’re thinking about creating a high yield market where no rating will be required. This will open up new opportunities for investors to mobilise funds. Regulators are more comfortable with ratings because it makes them feel more secure, but if investors are capable of analysing the risks involved, this would open up huge opportunities not just for big corporations but for smaller entrepreneurs.

Banks don’t use credit ratings because they are comfortable with their own internal ratings procedures. If investors and regulators can also get away from the mantra of needing ratings, we would have a simplified process that would open up the bond market to many more borrowers.

Lee, CIMB: From the perspective of the private sector, cross-border issuance and investing will continue to develop rapidly in tandem with the exponential growth in the region’s real trade supported by the continued growth in the region’s savings pool, stronger currency and GDP outlook.

On the issuance side, we would hope to see more mutual recognition and reciprocal regulatory approval, making cross-border issuance and marketing easier.

On the investing side, we hope to see greater cross-border local currency investment activities in the region despite the lack of international credit ratings.

Azis, ADB: I’ve been encouraged by what I’ve heard today, but we need to remember that we’re not operating within a vacuum. The Asian bond market is affected by – and also sometimes affects – what is going on elsewhere in the world. It is also affected by macro policy which is made in response to what is happening at the global level. As the current Eurozone crisis is prolonged, a macro policy response is expected, and this will have some effect on the bond market. On the other hand, if the growth of the bond market can be maintained due to regulatory improvements, strong fundamentals and capital inflows, the region’s fiscal and balance of payment accounts as well as other macro indicators may be affected.

I think we all agree that liquidity is of paramount importance and one of the most important liquidity providers are foreign investors. They are attracted in part because of their expectations of an appreciation in the foreign exchange rate, which is also a product of central banks’ macro policy.