Creating an Efficient Asian Bond Market

Presented by

Rafael ConsingHead of Debt Finance, South East Asia

Session III - Creating Asian Bond Markets: Necessity and Roadmap15th PECC General MeetingBrunei Darussalam

1 September 2003

2

Introduction

The Asian Bid – proves Asian demand exists and that work is needed on the supply side

An Asian bond market already exists – Asian sub-sector of the International market

Asia’s local currency markets - what needs to be done to develop them into a regional market? Re-visiting the prerequisites of an efficient bond market

– Government Sponsorship

– Issuer Base

– Investor Base

– Legal and documentation framework

3

The Asian Bid

Asian Foreign Currency Reserves (US$ bn)1996-2002

Source: HSBC

715.1 736.2 789.5939.8

1067.31187.7

1425.3

0

200

400

600

800

1000

1200

1400

1600

1996 1997 1998 1999 2000 2001 2002

Growing foreign exchange reserves and excess liquidity in the banking sector has resulted in the emergence of the Asian Bid

But has the Asian Bid resulted in an Asian bond market?

4

Asian Bond Market Already Exists

Asia (56%)

Europe (16%)

US (27%)

Distribution of fixed rate US$ Asian (ex-Japan) Issues in 2003 ytd

Source: HSBC, as at August 1st, 2003

Arguably an Asian Bond Market already exists, through the Asian sub-sector of the international bond market

90

95

100

105

110

115

120

Jan-

02

Feb-

02

Mar

-02

Apr-0

2

May

-02

Jun-

02

Jul-0

2

Aug-

02

Sep-

02

Oct

-02

Nov

-02

Dec

-02

Jan-

03

Inde

x

JP Morgan Emerging Markes Bond Index + HSBC Asian Dollar Bond Index

Lehman US High Grade Corporate Bond Index

Asian Bonds: An Asset Class of Their OwnADBI, EMBI and US Corporate Bond Index

5

The Asian International Bond Market

Asian InvestorsAsian Issuers

Internationally Recognised Credit Rating Adoption of International Law

Liquidity

Standardisation of Documentation SEC Registered / 144A / Reg S Eurobond

Tax Neutral

Accepted Clearing System (DTC / Euroclear)

Eurobonds

Global Bonds

6

Asian G3 Bond Market – Improving the Foundations

Network of dealers

Commitment to issuance of annual

benchmarks

Link with international clearing houses

Encourage development of derivatives markets

Commitment to transparency

Introduction of new products / structures

Establishment ofIntermediaries

Creation ofBenchmarks

Clearing and SettlementProcedures

Hedging Availability

CreditAwareness

Full range ofdebt structures

7

What about Asia’s domestic markets?

Asia’s domestic markets are too diverse to be considered a ‘Regional’ market

Clear need to direct development away from divergence and towards convergence

Domestic bond market growth driven by liquidity and government initiatives

Source: Thomson Financial & HSBCG3 ex-JPAU, incl. Samurai & Yankee; Local Currency ex-JPAU, incl. CDs

0102030405060708090

100

1996 1997 1998 1999 2000 2001 2002 2003e

US

$ b

illi

on

s

G3 Local

Asian Debt Issuance - G3 Versus Local

8

Asian Regional Market – Revisiting the Prerequisites

EfficientDomestic

Bond Market

Prerequisites Foundations Result

Issuer Base

GovernmentSponsorship

Investor Base

Legal / Documentation

Framework

Establishment ofIntermediaries

Creation ofBenchmarks

Clearing and SettlementProcedures

Hedging Availability

CreditAwareness

Full range ofdebt structures

9

Critical Issues for Consideration -Government Sponsorship

Unequivocal government support

Governments to prove the viability of the market,

– Regulators

– Issuers

– Investors

Decisions of the authorities required to create an environment friendly to the development of a regional market

Government influence on each of the building blocks through changes to existing laws and regulations and the creation of new ones

Issuer Base

GovernmentSponsorship

Investor Base

Legal / Documentation

Framework

10

Critical Issues for Consideration -Issuer Base

Expansion of the issuer base a key deliverable

– Diversified issuer base delivers more investment options to the investor base

Regulations to encourage issuance from broad range of issuers

– Foreign issuers can fill a gap in the credit curve where local entities are absent

– Removal of barriers and creation of incentives to encourage issuance

Governments have the ability to influence the behavior of both domestic and foreign issuers

Issuer Base

GovernmentSponsorship

Investor Base

Legal / Documentation

Framework

11

Critical Issues for Consideration -Investor Base

Extension of the Investor Base another key deliverable

– Investor base no longer confined to the domestic market

– Potential to greatly increase market liquidity as well as diversify the investor base by sector

Government agencies should be encouraged to broaden their investment criteria to include local currencies

While outside funds are desirable, lessons learned from the financial crisis not to be ignored

Once again, Governments have control over the accessibility to their domestic markets

Issuer Base

GovernmentSponsorship

Investor Base

Legal / Documentation

Framework

12

Critical Issues for Consideration -Regulatory Framework

Develop domestic markets towards common standards with the ultimate goal of a common market

Best international market practice (IPMA) covering market conventions such as disclosure and new issue procedures

– Delivers greater confidence in the marketplace

– Consistent with the considerable work that has gone into developing the domestic markets

While a common regulator may not be feasible, a mutually accepted ‘court of arbitration’ should be established with a final say of disputes

Issuer Base

GovernmentSponsorship

Investor Base

Legal / Documentation

Framework

13

Conclusion

The Asian Bid – proves Asian demand exists

An Asian G3 bond is a sub-sector of the International bond market

Asia’s local currency markets need to converge, before a true regional market can develop