ASEAN+3 Seminar on Developing Corporate Bond
Markets in Asia
Building a Favorable Regulatory
Environment for
Corporate Bond Market
- The Malaysian Experience
Loong Yeow Boon
Securities Commission, Malaysia
27 September 2007
(Shanghai, P.R. China)
Outline
• Importance of Favourable Regulatory
Environment
• Regulatory Framework Post Financial
Crisis
• Current State of Malaysian Corporate
Bond Market
• Continuous Enhancement of Regulatory
Environment
2
1997 Asian Financial Crisis Highlighted :
Outstanding amounts as a % of GDP
(1997)
•
Over-reliance of bank
loans for corporate
funding, even for longterm infrastructure
projects
•
Funding mismatches
were aggravated in
tight liquidity situation
•
Lack of well developed
bond market meant a
lack of alternative
avenue for funding
Percentage
150
100
50
0
Outstanding Bank Outstanding Bonds Equity Market
Loans
Capitalisation
3
Conducive Regulatory Framework is
the Missing Link
 Institutional investors sat on
sizeable funds
 Interest rates on downward trend
 Key intermediaries had been
established
 Market infrastructure was in place
 Issuers in need of funds
4
Fair, Efficient & Transparent for WellFunctioning Bond Market
Investors
Issuers
Conducive regulatory
framework that
ensures:
 Investors’
protection
 Fairness
 Expeditious issuance
process
 Market returns
 Liquidity
 Efficiency
 Lower funding cost
 Ability to borrow long
 Timely access to
relevant
information
 Transparency  Clear and consistent
rules
5
Outline
• Importance of Favourable Regulatory
Environment
• Regulatory Framework Post Financial
Crisis
• Current State of Malaysian Corporate
Bond Market
• Continuous Enhancement of Regulatory
Environment
6
Government’s Initiatives to Develop
Bond Market
Government’
s
Commitment
National Bond Market Committee
Bond market-specific
mandate :
1. Overall policy
direction for orderly
development
Critical factors
for successful
implementation
2. Study development
issues
3. Identify and
recommend
implementation
strategies
Inter-agency
membership to ease
implementation:
• Ministry of Finance
• Bank Negara
• Securities
Commission (SC)
• Economic Planning
Unit
• Bursa Malaysia
• Employees Provident
Fund
• Private sector
Proper Sequencing of Regulatory
Policies
The 5 Pillars
1.
2.
3.
4.
5.
Establish
reliable and
efficient
benchmark
yield curve
Introduce
efficient &
facilitative
issuance
process for
corporate
bonds
Widen
issuers and
investors
base
Improve
liquidity in
the
secondary
market
Facilitate
introduction of
risk
management
instruments
Priority actions
1. Designate M’sian Government Securities as benchmark bonds
2. Centralise approval of corporate bond market with the SC
8
Clear Delegation of Authorities
Ministry of Finance
•
Co-ordinate developmental efforts of Government agencies
(under the National Bond Market Committee)
Grant tax incentives – stamp duty exemption for primary and
secondary market transactions, withholding tax for non-residents,
real property gains tax for asset-backed securities and etc
•
Bank Negara Malaysia
Securities Commission
•
•
•
•
Manage public debt and
MGS issuance
Own and operate FAST,
RENTAS and BIDS
Regulate involvement of
financial institutions in bond
market
•
•
Sole approving authority for
corporate bond issuance
Regulates primary and
secondary bond market
activities
Supervises market
intermediaries such as rating
agencies and trustees
9
Main Thrust of Regulatory Regime
for Government Bond Market
• Introduction of auction calendar for Malaysian
Government Securities (MGS)
 Creation of benchmark yield curve with key tenures of 3, 5
and 10 years
 Provide reliable pricing guidance for corporate bond issues
• Review of principal dealers system
• Introduction of long-dated MGS and MGS futures
• Free up captive demand on MGS
10
Market-Driven Regulatory Framework
for Corporate Bond Market
• Centralise approval process for issuance of bonds with
the SC w.e.f 1 July 2000
• Introduce facilitative legal and regulatory framework:
(i) Provisions on investor protection
(ii) Fine and penalties on breaches and offences
• Adopt disclosure-based regulation:
(i) Approval upon full submission of documents to SC
(ii) Ensure adequate disclosure to investors
(iii) Monitor quality of disclosure
11
Facilitative approval process for corporate
bonds
Prior to 2000
Since 1 July 2000
Type of Submission
Merit-based
Disclosure-based
Time frame for
approval
1 to 3 months
14 & 28 working days for PDS & ABS
issues upon full submission
Utilisation of
proceeds
Subject to
regulator’s internal
criteria on
productive purposes
Must be fully
underwritten
Transparent NBMC negative list
(since been revoked)
BBB and P3/MARC3
No minimum investment grade
(mandatory rating is still required)
Underwriting
requirement
Minimum credit
rating requirement
Disclosure
requirements
-
Decided by issuer and adviser
• Stringent due diligence for
investor protection
• Posting of IM/TDs in SC’s website
• Regulatory actions on false and
misleading statement
12
SC’s Major Guidelines on Bond Market
On Issuance of bonds,
• Guidelines on the offering of private debt securities
• Guidelines on the offering of Islamic securities
• Guidelines on the offering of asset-backed securities
On investors protection,
• Guidelines on minimum contents requirements for
trust deeds
13
Clear Visions and Plans to Drive Development
Direction
from
NBMC
Securities Commission
Capital Market Master Plan (CMP)
152 recommendations, of which 17 for bond market
Objectives &
Strategic
Initiatives:
1. Fund-raising
centre
2. Investment mgt
industry
3. Market
institutions
4. Intermediaries
5. Regulatory
regime
6. Islamic capital
market centre
Phase 2
Phase 3
Phase 1
(2001-2003)
(2004-2005)
(2006-2010)
Strengthen
domestic
capacity
Gradual
liberalisation
of market
access
Enhance
international
positioning
Tax incentives to widen issuers’ base
• Stamp duty exemptions for bonds issues approved by
SC
• Tax deductions on expenses incurred in the issuance
of ABS and Islamic bonds
• Tax neutral framework for ABS and Islamic bond
transactions
• Real Property Gains Tax (RPGT) exemptions for
securitisation transaction
15
Tax incentives to widen investors’ base
Resident
•
Exemption of interest income received by
individuals, close end funds and unit trust funds
Non-resident
•
Blanket exemption from withholding tax for interest
income derived by non-residents, w.e.f 11 September
2004
16
Outline
• Importance of Favourable Regulatory
Environment
• Regulatory Framework Post Financial
Crisis
• Current State of Malaysian Corporate
Bond Market
• Continuous Enhancement of Regulatory
Environment
17
Robust Growth in Domestic Bond Market
As at end-June 2007,
Total bonds outstanding

Outstanding size
including short-term
instruments amounted
to USD150 billion

Local currency bond
market as a % of GDP
is currently 2nd largest
in Asia (ex. Japan)

Sukuk comprised 34%
of outstanding bonds

Malaysia has the
largest Sukuk market
in the world
120
USD billion
100
80
51
20
61
44
60
40
54
59
21
20
36
43
50
2002
2003
2004
55
57
0
1997
Government Corporate
2005
2006
18
Sustainable Corporate Bond Issues

Corporate bonds as a %
of total corporate
financing increased to
57.8% in 2006 (21.2% in
1998)

Represents a significant
source of long-term
financing for private
sector

Contributed to
addressing maturity
mismatches in private
sector financing
19
Growing Liquidity In Secondary Market

Liquidity has
increased significantly
since 1997, and
relatively high by
regional standards

Government efforts to
enhance investors
base, including
withholding tax
exemption to attract
foreign investment

Inclusion in major
bond indices (e.g.
Citibank WGBI)
Average annual turnover ratio
(as at end-2006)
Source : ADB
20
Outline
• Importance of Favourable Regulatory
Environment
• Regulatory Framework Post Financial
Crisis
• Current State of Malaysian Corporate
Bond Market
• Continuous Enhancement of Regulatory
Environment
21
Our Aims as Significant Centre for
Origination and Investment for Bonds
» Eligible Foreign Issuers of Ringgit-denominated bonds:
• Multilaterals
• Sovereigns
• Quasi-sovereigns
• MNCs
» Deemed approval for AAA-rated issuers, except MNCs
» Facilitative foreign exchange rules
» Malaysia as International Islamic Financial Centre (MIFC)
22
International Issuers of Ringgitdenominated Bonds
Issuers
ADB
IFC
IBRD
ADB
KfW
Size
RM400 m
RM500 m
RM760 m
RM3.8 b
RM2.5 b
Type
Fixed Rate
Bonds
Islamic
Bonds
Islamic
Bonds
Medium
Term
Notes
Fixed Rate
/MTN
Tenor
Rating
5 yrs
AAA
3 yrs
AAA
5 yrs
AAA
15 yrs
programme
AAA
7 yrs/
10 yrs
programmes
AAA
23
Facilitative Regulatory Framework for
Foreign-currencies Bonds
» Eligible Issuers:
• Multilaterals
• Sovereigns
• Quasi-sovereigns (domestic and foreign)
• MNCs (domestic and foreign)
» International documentation is acceptable
» Deemed approval for min A-rated issues
» Withholding tax exemption if structured as sukuk issue
24
Establishment of bond pricing agencies
• Guidelines on the Registration of Bond Pricing Agencies
(January 2006)
• A bond bond pricing agency contributes to market liquidity by:

Providing independent and objective fair value for bonds

Adopting a systematic valuation approach which incorporates
specific pricing methodologies, relevant market data and
robust market feedback

Facilitating daily mark-to-market valuation of bond portfolios,
especially unit trust schemes
Enhance price transparency and discovery
25
Greater regulatory oversight over credit
rating agencies
• Practice Note on Recognition of Credit Rating Agencies
(January 2006)
 Incorporates IOSCO’s Code of Conduct Fundamentals for
Credit Rating Agencies
• The recognition system seeks to ensure that CRAs:

Exercise high standards of professionalism and due diligence
in rating and monitoring corporate bonds

provide adequate and timely dissemination of rating
information
Enhance investor protection and investor confidence
26
Initiatives in the pipeline
Introduction of electronic information dissemination
and trading system by early 2008
•
Real-time dissemination of pre and post-trade info
•
Enhance efficiency in trade execution
•
Improve price transparency and discovery
•
Facilitate market surveillance
27
Conclusion
Building favourable regulatory environment requires:
• Bold decisions by policy makers, taking into
account prevailing market conditions
 Market must be fair, efficient and transparent
 Proper sequencing holds the key
• Robust market consultation process
• Constant review of policy decisions as market
changes and develops
28
For further information on Malaysian Bond Market …
Please visit following websites:
http://www.sc.com.my (Securities Commission Malaysia)
http://www.bnm.gov.my (Bank Negara Malaysia)
https://fast.bnm.gov.my/fastweb (Fully Automated System for
Issuing/Tendering)
http://rmbond.bnm.gov.my (Ringgit Bond Market)
Or contact me at [email protected]
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