Regional Cooperation in Developing Asian Bond Market

1
Regional Cooperation in Developing Asian Bond
Market

• Mr. Masato Miyachi, Senior Advisor
• Office of Regional Economic Integration
• Asian Development Bank
• 25 September 2007
• Shanghai, PRC

2
Outline

• Why Asian Bond Market Development
• Emerging Regionalism
• Regional Cooperation Initiatives in Developing
  Asian Bond Market
• EMEAP
• ABMI
• APEC
• ADC
• ADBs role in regional bond market development

3
Why Asian Bond Market Development?

• Asian bond markets can
• Reduce the double mismatch problem (currency and
  maturity)
• Reduce over-dependence on bank borrowing and
  diversifying financial risks
• Provide alternative sources of financing private
  and public investment.
• Provide alternative mode of wealth holdings for
  Asian households

4
Emerging Regionalism
Then Now
Asian savings invested abroad and channeled back to region Use savings for productive investment within the region
Bank centered financial intermediation Capital market development part. bond market
Financial sector dev. more focused on national efforts Enhance regional cooperation
5
Policy Initiatives for Efficient Regional Bond
Market

• Remove policy distortions that affect efficient
  allocation of savings
• Enhance market infrastructure
• Establish bench-mark yield curves
• Strengthen regulation and supervision of
  financial sector international accounting
  disclosure standards

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Regional Initiatives Bond Market Development

• Executives Meeting of East Asia-Pacific Central
  Banks (EMEAP)
• ASEAN3 Asian Bond Market Initiative (ABMI)
• Asia Pacific Economic Cooperation (APEC)
• Asia-Cooperation Dialogue

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Regional Initiatives Bond Market Development

• Executives Meeting of East Asia-Pacific Central
  Banks (EMEAP)
• Strengthen demand side of bond market development
• Establish Asian Bond Fund (ABF1 and ABF2)

8
Regional Initiatives Bond Market Development

• ASEAN3 Finance Ministers Meeting
• Strengthen supply side of bond market development
• Asian Bond Market Initiative (ABMI)

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Regional Initiatives Bond Market Development

• Asia Pacific Economic Cooperation (APEC) Finance
  Ministers Meeting
• Study measures to promote regional bond market
  development
• Study securitization, credit guarantee mechanisms
  and new instruments

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Regional Initiatives Bond Market Development

• Asia-Cooperation Dialogue
• Improve public awareness of the various
  initiatives
• Secure political support

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ADBs Regional Cooperation Integration Strategy
(RCI)

• ADB charter mandates the bank to play an active
  role in regional cooperation in the
  Asia-Pacific.
• ADB Regional Cooperation Policy adopted in 1994
  
• Regional cooperation is a relevant means for
  economic and social development
• Support to regional cooperation is a longstanding
  responsibility of the Bank
• RCI strategy established in July 2006.

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Rationale and Imperatives for RCI

• Emerging Trends in Regional Economic Integration
  
• Globalization and interconnectivity
• The Asian financial crisis revealed the high
  degree of financial integration in East Asia and
  created initial conditions for greater monetary
  and financial cooperation among the ASEAN and
  ASEAN3 countries.

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Logic of RCI

• Market-driven economic integration requires
  cooperation
• Regional cooperation can accelerate regional
  integration
• RCI provides greater opportunities to unlock
  Asia-Pacifics vast economic potentials, and
  significantly contributes to economic growth,
  development and poverty reduction.

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ADBs Mission and the Role of RCI
FOUR PILLARS OF RCI

Regional Subregional Economic Cooperation
OVERACHING MISSION/ OBJECTIVE POVERTY REDUCTION
Trade and Investment Cooperation and
Integration
Regional Cooperation and Integration
Individual Country Programs
Monetary Financial Cooperation Integration
Pro-Poor Sustainable Economic Growth
Inclusive Social Development
Good Governance
Regional Public Goods
CORE AREAS OF INTERVENTION
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The RCI strategy has four pillars

• Regional and
• Sub-regional
• Economic
• Cooperation
• Cross-border
• Infrastructure
• Physical Connectivity
• Hardware and
• Software

• Monetary and
• Financial
• Cooperation and
• Integration
• Financial market
• development and
• integration
• Regional
• macroeconomic
• and financial
• stability
• Exchange Rates

• Trade and
• Investment
• Cooperation and
• Integration
• Trade and
• investment expansion
• Regional trade
• arrangements
• Regulatory coordination

• Regional
• Public Goods
• Clean energy and
• environmental
• protection
• Communicable
• disease control and
• natural disaster response
• Good governance
• for transnational
• crime prevention (Human
• and drug trafficking
• money laundering, and
• corruption)

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• Pillar 3 Monetary and Financial Cooperation and
  Integration
• Interdependence of financial markets
• Regional financial stability is key to global
  financial stability
• Advanced initiatives on policy dialogue, reserve
  pooling (Chiang Mai Initiative) and regional bond
  market development (Asian Bond Market Initiative)
• Importance of exchange rate stability

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• RCI Strategy Promote open regionalism
• ADB approach to RCI will be a multi-track,
  multi-speed approach.
• Different regions and subregions would embrace
  RCI at different paces.
• Even within a region or a subregion, the pace of
  progress would be different on different
  aspects of RCI and across countries.

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Office of Regional Economic Integration (OREI)

• Established in 2005
• Serves as ADBs focal point for RCI activities
• Assists ADB in pursuing an open and
  outward-looking regionalism in Asia and the
  Pacific.

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OREIs Principles

• Client-orientation
• Relevance, responsiveness and result orientation.
• Complementarity

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RCI Approach

• RCI adopts a multi-track, multi-speed approach.
• Different regions and sub-regions would embrace
  RCI at different paces.
• Even within a region or a sub-region, the pace of
  progress would be different on different
  aspects of RCI and across countries.

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OREIs Key Functions

• Promote regional economic policy dialogue
• Support capacity building and institutional
• strengthening
• Conduct research on RCI
• Serve as knowledge and information center on RCI
• Develop partnerships with global stakeholders
• Acts a focal point for regional bond market
  development for the bank
• Support other ADB departments

22
ADBs Role in Regional Bond Market Development

• Stimulating market activities by issuing prime
  name credit papers.
• Providing technical and research assistance to
  the Working Groups (WG) and the Focal Group of
  the ABMI
• Promoting transparency/information disseminaion

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ADB LCY Bonds

• ADB papers in local currency
• Samurai bonds in the 70s
• Recently issued local currency bonds in Malaysia
  (2006), Thailand (2005), PRC (2005) and the
  Philippines (2006
• ADB medium term notes (MTN)

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ASEAN3 Asian Bond Market Initiative (ABMI)

• Initiative endorsed by the ASEAN3 Finance
  Ministers Meeting in August 2003 in Manila,
  Philippines.
• ABMI aims to develop efficient and liquid bond
  markets in the ASEAN3 Region.
• Participation of countries in the initiatives is
  on a voluntary basis.

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ABMI Focal Areas

• Facilitate access to market via wider variety of
  bond issues in Asia
• Enhance market infrastructure for bonds

Market Infrastructure

• Information Dissemination
• Settlements
• Policy Dialogues among members

• Guarantee Mechanism
• New Bond Products
• Credit Rating Systems

• Legal and Institutional
• Infrastructure

Investors Domestic Regional International Institu
tional Retail
Issuers Asian Governments Government Financial
Inst. Multilateral Development Banks Government
Agencies Private Companies
Financial Products Bonds Asset Backed
Securities Local Currency Denominated
Bonds Possibly Currency Basket Bonds
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ABMI Focal Areas

• Facilitate access to market via wider variety of
  bond issues in Asia
• Enhance market infrastructure for bonds

Working Group 1 New Securitized Debt Instruments Working Group 2 Credit Guarantee and Investment Mechanisms Working Group 3 FOREX Transactions Settlement Issues Working Group 4 Rating Systems
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Working Group 1 New securitized debt instruments

• Study on The ASEAN3 Regional Multi Currency
  Bond (Phase I) was completed in September 2005.
  Regional governments need to encourage trading in
  regional currency bonds and derivatives to have
  more flexibility in managing their currency
  trends and interest rates The study recommends
• Early but gradual lifting of holding and transfer
  regulations for both local and foreign currency
  securities
• Improvements in monitoring programs and shift to
  risk-based rather than quantitative regulation of
  financial prudence for institutional investors
• More active development of risk-management tools
• Complete liberalization of domestic links with
  global custodial systems

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Working Group 1 New securitized debt
instruments (2)

• Phase 2 Study on The ASEAN3 Regional Basket
  Currency Bonds (RBCB) to be completed by the 3rd
  Quarter of 2007.
• The study covers
• Merits and impediments of RBCB including
  efficiency frontier
• Market assessment and market view of RBCB
• Scope and limitations of RBCB, potential issuers
  and investors
• Recommended RBCB products
• Recommendations to ASEAN3 governments for
  enabling environment for RBCB products

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Working Group 1 New securitized debt
instruments (3)

• New Study on
• (i) Exploring New Debt Instruments for
  Infrastructure Financing
• (ii) Promotion of Securitization of Loan Credits
  and Receivables
• (iii) Promotion of Asian Medium Term Note
  Programme will start from 3rd quarter 2007.
• Next step
• Investing in Asian Bonds Conference 2007
• Co-hosts MOF, Thailand, MOF, Japan
• Date/Venue 2nd November 2007, in Tokyo
• Language English and Japanese (with
  simultaneous interpretation)
• Audience maximum 500 pax

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Working Group 2 Regional Guarantee Mechanism

• Study on ASEAN3 Guarantee and Investment
  Mechanisms (Phase 1) commenced in December 2003
  and draft completed in February 2006.
• A Phase 2 study was started in January 2007 and
  draft interim report to be completed by September
  2007. The 3 options of Credit Guarantee and
  Investment Mechanisms will be narrowed down to 1
  by the Deputys Meeting in November 2007

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Working Group 2 Regional Guarantee Mechanism

• Phase 2 study will be done in two parts (Part A
  and Part B)
• Phase 2-A will thoroughly assess the three
  options identified in the previous study, Phase 1
• Phase 2-B will create a business model and plan
  that will include operational and investment
  policy, product mix, demand prospects, financial
  projections and analysis, capital structure, and
  draft implementation plan.

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Working Group 3 Foreign Exchange Transactions
and Settlement Issues

• Completed Phase 1 Bond Market Settlement and
  Emerging Linkages in Selected ASEAN3 Countries
  June 2005.
• Phase 2 Study on Minimizing Foreign Exchange
  Settlement Risk in the ASEAN3 Region is being
  finalized and expected to be completed in 3rd
  quarter 2007.
• The Study
• - Reviews various risks especially FX settlement
  risks in cross border clearing and settlement
  systems.
• - Presents options including assessment of each
  option to reduce FX settlement risks arising from
  cross-border bond transactions.

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Working Group 3 Foreign Exchange Transactions
and Settlement Issues

• ADB organized the Asia Bond Clearing and
  Settlement Conference 2007 in April 2007 in
  Singapore.
• 20 speakers and 150 participants from 16
  countries of the region, Europe and US
• Discussed the future direction for bond clearing
  and settlement in the region and setting up a
  group of experts to move this initiative further

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Working Group 4 Rating Agencies

• Facilitation of policy discussion and provision
  of technical expertise for enhancing credibility
  and visibility of domestic credit rating agencies
  (DCRAs)
• New technical assistance to start January 2007
  will
• Enhance technical competency and institutional
  capacity of selected DCRAs in Asia
• Monitor and report on status of regulatory
  frameworks for DCRA operations in selected
  countries
• Enhance comparability and harmonization of credit
  rating standards among DCRAs in the region

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Ad Hoc Support Team for Focal Group (ASTFG)

• Study on European experience on Eurobond market
  development to identify the issues and basic
  requisites for the establishment of the Asian
  Bond Norms and Standards. Draft was completed in
  March 2006.
• New Study on ASEAN3 Harmonizing and
  Standardizing Asian Bond Conventions and Norms
  has been approved for funding. Study to start 1st
  quarter of 2007.

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Improving transparency/information
dissemination

• Asian Bonds Online Website
• (http//asianbondsonline.adb.org)
• Launched on May 15, 2004, a one-stop information
  site on ASEAN3 bond markets.
• Completed studies of working groups can be
  downloaded from this site.
• 2,000 visitor sessions per day (average Q1 2007).
• Asian Bond Monitor
• A Bi-annual (April and November) publication (5
  issues published).
• Latest publication April 2007 issue downloadable
  at ABO

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Asian Bonds Online

• What makes Asian Bonds Online unique?
• Free Access
• offers free access to leading bond market
  indicators comparable across the ASEAN3
  economies.
• Updated Government Policies and Regulations
• provides information on current market
  activities, the legal and regulatory frameworks
  of each market and monitors government policies
  and initiatives affecting the industry. The flow
  and structure of the information are provided
  uniformly for each market.  
• How to Buy Bonds
• is the only website providing investors the
  step-by-step mechanics of buying and trading
  government and corporate debt securities covering
  the entire ASEAN3 economies.
• Asian Bond Glossary
• provides the Asian Bonds Glossary  as a tool to
  understand terms and acronyms unique to the
  region, or to specific East Asian bond markets.
  Definitions of Islamic sharia principles are
  included for Brunei Darussalam, Indonesia, and
  Malaysia.

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Thank you

• For More Information
• Mr. Masato Miyachi, Senior Advisor
• Office of Regional Economic Integration (OREI)
• Mmiyachi_at_adb.org
• 63-2-632-6832