Interbank Dealer Broker - IDBInterbank Dealer Broker - IDB

David RogersDavid RogersJuly 25-26, 2000

Jakarta, Indonesia

Forces underlying bond growthForces underlying bond growth

Local demandLocal demand High savings rate Predictable cash flows Asset/Liability Matching Bonds provide the right risk profile

Foreign DemandForeign Demand Attractive yields Improved Sovereign risk outlook Policy Liberalisation Portfolio diversification

Supply FactorsSupply Factors

Increase in Government borrowing

Need for benchmark yield curves

Falling interest rates/tighter spreads

Exchange rate stability

Increased market liquidity/interest

Maturity mismatch between loans and investments

Long-term infrastructure needs

Development of a Government Development of a Government Bond MarketBond Market

Primary MarketsPrimary Markets/Market Makers/Market Makers

Developing ProcessDeveloping Process

Development of a Government Development of a Government Bond MarketBond Market

Primary markets/ Market MakerPrimary markets/ Market Maker Essential in building deep liquid

markets

Expertise Expertise Distribution Pricing Market Making

Development of a Government Development of a Government Bond MarketBond Market

BenchmarksBenchmarksPrimary MarketsPrimary Markets/Market Makers/Market Makers

Developing ProcessDeveloping Process

Development of a Government Development of a Government Bond MarketBond Market

Benchmarks Benchmarks definition : reference securities with

exact dates, issued in a wide range of maturities with adequate size for the market to trade in.

Development of a Government Development of a Government Bond MarketBond Market

BenchmarksBenchmarks Repurchase Repurchase AgreementsAgreements

Primary MarketsPrimary Markets/Market Makers/Market Makers

Developing ProcessDeveloping Process

Development of a Government Development of a Government Bond MarketBond Market

Benefits of REPO’sBenefits of REPO’s Ability to service customer flow

Liquidity

Investment alternative for investors

Financing positions at a lower cost

Arbitrage [cash (vs) futures]

Development of a Government Development of a Government Bond MarketBond Market

BenchmarksBenchmarks Repurchase Repurchase AgreementsAgreements

Secondary Secondary MarketsMarkets

Primary MarketsPrimary Markets/Market Makers/Market Makers

Developing ProcessDeveloping Process

Development of a Government Development of a Government Bond MarketBond Market

Secondary MarketsSecondary Markets Liquidity - Are there enough players

participating in the market to show competitive prices?

Depth - Are there adequate issues placed into the market? Do 2-way prices still exist after the first or second week of the original issue date?

Transparency - Who has a clear picture of what an issue is really worth at any given time?

Development of a Government Development of a Government Bond MarketBond Market

BenchmarksBenchmarks Repurchase Repurchase AgreementsAgreements

Secondary Secondary MarketsMarkets

Inter-Bank Inter-Bank DealersDealers

Primary MarketsPrimary Markets/Market Makers/Market Makers

Developing ProcessDeveloping Process

Development of a Government Bond Development of a Government Bond MarketMarket

Role of Inter-Dealer BrokerRole of Inter-Dealer Broker

Brings the various market makers together Disseminates to the market via telephone,

screen or a combination of the two Facilitates the development of the secondary

market Liquidity Depth Transparency Earns commission for arranging trades at

pre-agreed fees

IDB vs Market Marker IDB vs Market Marker

IDBsIDBs No positions in the market. Bi-partisan, independent role Best efforts, best execution For a pre-agreed commission

Market Maker Market Maker Willing to support or participate in

market by giving two way prices Takes positions Trades for a spread

Markets without an IDBMarkets without an IDB

Yes, they can and do exist…Yes, they can and do exist… Without an IDB in the market it may at

times be difficult to execute trades

Finding out the value of securities could be difficult

IDBs’ help offshore investors to understand the limitations of a market. Help with liquidity and execution

Development of a Government Development of a Government Bond MarketBond Market

BenchmarksBenchmarks Repurchase Repurchase AgreementsAgreements

Secondary Secondary MarketsMarkets

Inter-Bank Inter-Bank DealersDealers

Clearing and Clearing and SettlementSettlement

Primary MarketsPrimary Markets/Market Makers/Market Makers

Developing ProcessDeveloping Process

Development of a Government Development of a Government Bond MarketBond Market

Clearing / Settlement SystemClearing / Settlement System Securities - usually issued and held in

scriptless form/computer format

Transfers placed over a wire system, such as money transfers

Central Bank/Govt entity usually provides electronic book-entry format system

These systems contribute to liquidity, and settle securities quickly and effectively

Development of a Government Development of a Government Bond MarketBond Market

BenchmarksBenchmarks Repurchase Repurchase AgreementsAgreements

Secondary Secondary MarketsMarkets

Inter-Bank Inter-Bank DealersDealers

Clearing and Clearing and SettlementSettlement RegulationsRegulations

Primary MarketsPrimary Markets/Market Makers/Market Makers

Developing ProcessDeveloping Process

Development of a Government Development of a Government Bond MarketBond Market

Market RegulationMarket Regulation Creating a framework conducive for

dealers/brokers A committee comprised of dealers, IDBs,

and regulatory groups to deal with any trading situations by general consensus

US - National Association of Securities Dealers, (NASD) a division of the Securities Exchange Commission (SEC)

UK - (SFC) Securities & Futures Commission regulates market

Regional Bond MarketsRegional Bond Markets

Hong KongHong Kong US$14bn outstanding/ Daily turnover

US$2.0 bn 100+ Recognized Dealers 29 market-makers / two-way prices Govt auction/can trade via CMU with links

to Euroclear and Cedel 7 IDBs [5 international/ 2 local] Screens + name-give-up on completion Small repo market

Regional Bond MarketsRegional Bond Markets

Hong KongHong Kong promote efficiency, integrity, and

development of the financial system

promote development of the local debt market through improving market infrastructure and promote issuance of high quality debt instrument

Development of a Government Development of a Government Bond MarketBond Market

BenchmarksBenchmarks Repurchase Repurchase AgreementsAgreements

Secondary Secondary MarketsMarkets

Inter-Bank Inter-Bank DealersDealers

Clearing and Clearing and SettlementSettlement RegulationsRegulations

Primary MarketsPrimary Markets/Market Makers/Market Makers

An Effective Government Bond MarketAn Effective Government Bond Market

Developing ProcessDeveloping Process

Prebon Yamane GroupPrebon Yamane Group

No substitute for knowing the market No substitute for knowing the market Foreign exchange, money markets,

derivatives, securities (fixed-income and equities), energy and emerging markets

Brokers transactions exceeding US$55 trillion annually - world-wide client base

31 international offices, 10 in Asia New Products and Regional specialist Leader in fixed income, illiquid debt,

credit and debt derivatives