Title: An Overview of Corporate Bond Markets and Policy Issues
1An Overview of Corporate Bond Markets and
Policy Issues
- S. Ghon Rhee
- K. J. Luke Distinguished Professor of Finance
- Executive Director
- Asia-Pacific Financial Markets Research Center
- University of Hawaii
-
- Workshop on Developing Corporate Bond Market in
APEC Economies - August 6-8, 2004
- Shanghai, China
-
- Asia-Pacific Financial Markets Research Center,
University of Hawaii
2Bonds Outstanding in 2002
-
(in US Billion)
Asia-Pacific Financial Markets Research Center,
University of Hawaii
3East Asian Bond Markets
Outstanding Domestic Bonds (in US Billion)
Asia-Pacific Financial Markets Research Center,
University of Hawaii
4Financial Sector Profile 2002
Asia-Pacific Financial Markets Research Center,
University of Hawaii
5Two Major Questions on Bond Market Development
- 1. Why are bond markets so small in Asia?
- 2. Why hasn't the secondary market developed in
economies with large primary market? - OECD Workshop on Debt Securities Markets in the
Dynamic Asian Economies, September 8, 1992 in
Hong Kong - Rhee, 1993, Fixed Income Securities Markets in
- Six Dynamic Asian Economies
- Asia-Pacific Financial Markets Research Center,
University of Hawaii
6Five Underlying Reasons (I)
- 1. Controlled or administered interest rates
- Low effective yields without reflecting current
market conditions - Reliance on captive demanders
- Illiquid secondary market
- 2. Dominance of banking sector over capital
markets - Heavy reliance of bank short-term loans by
private corporations - Requirement for collateralization or guarantees
by financial institutions for corporate bond
issues -
- Asia-Pacific Financial Markets Research Center,
University of Hawaii
7Five Underlying Reasons (II)
- 3. Limited supply of long- and short-term fixed
income securities - Statutory restrictions
- Government regulations
- Banking sectors resistance
- Poor credit ratings of issuers
- 4. Limited Institutional Investor Base Lack of
Individual Investors Participation - 5. Under-developed market infrastructure
- Asia-Pacific Financial Markets Research Center,
University of Hawaii
8Six Major Impediments in Developing Bond
Markets
- 1. Lack of Benchmark Yield Curves
- 2. Limited Supply of Quality Bond Instruments
- 3. Captive Nature of the Primary Markets
- 4. Small Investor Base
- 5. Fragmented Regulatory Structure
- 6. Inadequate Market Infrastructure
- Complacency Prevailed!
- ADB High-Level Policy Dialogue on East Asian
Financial Crisis, March 1999 - Rhee, 2000, Rising to Asias Challenge Enhanced
Role of Capital Markets
Asia-Pacific Financial Markets Research Center,
University of Hawaii
9Lack of Benchmark Yield Curves (I)
- Operational Reasons for Government Bond Issues
- 1. To Finance Fiscal Deficits
- 2. To Sterilize Large Capital Inflows
- 3. To Provide benchmark yield curves
- Concentration of new issues in limited standard
maturities enables their use as benchmarks - Spreading few benchmark issues across a range of
maturities leads to a benchmark yield curve
Asia-Pacific Financial Markets Research Center,
University of Hawaii
10A Recent Success Story of Korea Liquidity
Increase in Benchmark Bond Issues
- Introduction of the Fungible Issue and Reopening
Systems - Benchmark-designated Bond Issues have identical
maturities and coupon rates - By adopting the reopening system, Korea expanded
the size of bond issues of the same maturities.
Asia-Pacific Financial Markets Research Center,
University of Hawaii
11The Effect of the Reopening System in Korea
3.5 times greater
Asia-Pacific Financial Markets Research Center,
University of Hawaii
12Lack of Benchmark Yield Curves (II) Chinas
Example
- a. Deposit interest rates are serving as
benchmark - b. MOF sets a range of bidding spreads at the
primary market auction - c. Why very little differences are observed
between savings bonds and book-entry bond
yields? - Savings Bonds Syndicated Underwriting
- Book-Entry Bonds
- Uniform Price Auction Method
Asia-Pacific Financial Markets Research Center,
University of Hawaii
13Fragmented Regulatory Structure (I)
- Malaysia in Pre-Crisis Period
- Bank Negara vs. Securities Commission
- China at Present Fragmented Regulatory
Structure of Government Bond Markets - a. Dual Supervisory Structure of
Primary Market - T-Bonds and E-Bonds MOF
- F-Bonds PBOC
- b. Dual Supervisory Structure of Secondary
Market - Inter-Bank Market PBOC
- Over-the-Counter (OTC) Market PBOC
- Exchange Market CSRC
-
Asia-Pacific Financial Markets Research Center,
University of Hawaii
14Fragmented Regulatory Structure (II)
- Consolidated Regulatory Agencies
- Thailand, Korea, Taiwan, Singapore
- Indonesia at Present
- Financial Services Authority (or Otoritas Jasa
Keuangan, OJK) under plan to replace Capital
Market Supervisory Agency (BAPEPAM) -
Asia-Pacific Financial Markets Research Center,
University of Hawaii
15Expansion of Investor Base (I)
- Key Groups of Investors
- Banks, Insurance Companies, Public and Private
Pension Funds, Mutual Funds - International Investors
- Individual Investors
- A diversified and heterogeneous investor base
promotes liquidity and stabilizes market demand - a. Insurance Companies and Pension Funds are
demanders of long-term, low risk bond
instruments - b. Mutual Funds are demanders of short-term bond
instruments -
Asia-Pacific Financial Markets Research Center,
University of Hawaii
16Expansion of Investor Base (II)
- Policy Measures for Developing a Broader-Based
Market focus on - Moving bond instruments out of bank asset
portfolios - Direct access to retail and/or foreign investors
- Structural reform of pension and retirement funds
- Reform or creation of mutual funds (especially
bond funds) - Diverse Types of Bond Instruments
-
-
Asia-Pacific Financial Markets Research Center,
University of Hawaii
17Fixed-Income Securities in the US Market (as of
March 2004)
Unit US Billion
- Municipal Bonds 1,943.3 ( 8.62)
- Treasury Securities 3,720.9 (16.51)
- Mortgage-Backed Securities 5,344.0
(23.72) - Corporate Bonds 4,542.7 (20.16)
- Federal Agency Bonds 2,654.0 (11.78)
- Money Market 2,588.0 (11.49)
- Asset-Backed Securities 1,758.5 (7.76)
- Total 22,531.4 (100.00)
- includes Commercial Papers, Bankers
Acceptances, and large Certificates of Deposits
Source US Bond Market Association
Asia-Pacific Financial Markets Research Center,
University of Hawaii
18Fixed-Income Securities in Thailand (as of
December 2003)
Unit US Billion
- Municipal Bonds none ( 0.00)
- Treasury Securities 21.73 (45.87)
- Mortgage-Backed Securities none (
0.00) - Corporate Bonds 9.43 (19.91)
- Government Agency Bonds 6.06 (12.79)
- Money Market n.a. (n.a.)
- Asset-Backed Securities none ( 0.00)
- Total 47.37 (100.00)
-
-
Asia-Pacific Financial Markets Research Center,
University of Hawaii
19Fixed-Income Securities in Korea (as of December
2003)
Unit US Billion
- Municipal Bonds 8.28 ( 1.40)
- Treasury Securities 121.43 (20.52)
- Mortgage-Backed Securities n.a. (
n.a.) - Corporate Bonds 168.03 (28.31)
- Government Agency Bonds 295.43 (49.78)
- Money Market n.a. (n.a.)
- Total 593.52 (100.00)
- 75 of Corporate Bonds are Asset-backed
securitites - Includes Monetary Stabilization Bonds,
National Housing Bonds, Foreign Exchange
Stabilization Bonds, Subway Construction Bonds,
Industrial Financial Debentures, Financial
Bonds, KAMCO Bonds -
Source MOFE, Korea (2004)
Asia-Pacific Financial Markets Research Center,
University of Hawaii
20Building Bond Market Infrastructure
- 1. Competitive Auction System among Primary
Dealers for Government Bond Issuance - 2. Hedging Instruments for Interest Rate Risk
- 3. Credit Rating Culture
- 4. Clearing and Settlement System
- 5. Over-the-counter Market Trading System
- 6. Inter-Dealer Broker System
Asia-Pacific Financial Markets Research Center,
University of Hawaii
21Issuing Techniques ofGovernment Bonds
- Fixed Price Public Subscriptions
- Underwriter consortium utilized
- Private Placements
- In the absence of well-functioning secondary
markets - Tap Issues
- Sold directly into the secondary market through
branch network of banks or securities companies - Auctions
- Multiple price auction vs. Uniform Price Auction
Asia-Pacific Financial Markets Research Center,
University of Hawaii
22Multiple- vs. Uniform-Price Auction Method
- Multiple-price auction method
- a. Successful bidders pay the prices they bid
- ... winners curse
- b. Bidders tend to shade their bids below the
maximum that they are actually willing to pay - Uniform-price auction method
- a. All successful bidders pay the same price for
a given security - b. Hence, some successful bidders may pay a lower
price than they actually bid. -
Asia-Pacific Financial Markets Research Center,
University of Hawaii
23Issuing Techniques ofamong OECD Members
- Uniform Price Auction
- Finland, Italy, Netherlands, Norway, and
Switzerland, UK, US - Multiple Price Auction
- Australia, Austria, Canada, Japan, Sweden, UK
- Tap Issue
- US, UK, Germany, Canada, and most of OECD
members, but not Japan
Asia-Pacific Financial Markets Research Center,
University of Hawaii
24Asia-Pacific Financial Markets Research Center,
University of Hawaii
25Hedging Instruments for Interest Rate Risk
- A. Most Asian economies are trading bond futures
(for long-term interest rate hedging) and
short-term interest rate futures - B. Exceptions
- China, Indonesia, Philippines, and Thailand
-
- Asia-Pacific Financial Markets Research Center,
University of Hawaii
26Bond Rating Culture Regional Bond Rating
Agencies
- Number of Domestic Adoption of IAS
Statements - Country Credit Rating Agencies by Stock
Exchanges - Australia Open to Global CRAs Yes
- China 6 No
- Hong Kong SAR Open to Global CRAs Yes
- Indonesia 2 No
- Japan 3 Open to Global CRAs Yes
- Korea 4 Yes
- Malaysia 2 Yes
- Philippines 1 No
- Singapore Open to Global CRAs Yes
- Taipei,China 1 Yes
- Thailand 2 Yes
- Viet Nam To be established
No -
-
Asia-Pacific Financial Markets Research Center,
University of Hawaii
27Clearing and Settlement
- Government Bonds Corporate Bonds
- Australia Reserve Bank Information Financial
Transactions Recording and - and Transfer System Clearance System
- China Government Securities SDC
- Depository Trust Clearing Co.
- (for Inter-bank market)
- Securities Depository and
- Clearing Co. Ltd. (SDC)
- (for Exchange Market)
- Hong Kong Central MoneyMarkets Unit Central
Clearing Settlement System - Japan BOJ Financial Network Japan Securities
Depository Center - System (BOJ-NET)
- Japanese Government Bond
- Clearing Corp.
-
- Singapore Government Book-Entry System Debt
Securities CS System -
Asia-Pacific Financial Markets Research Center,
University of Hawaii
28Bond Trading Systems Order- vs. Quote-Driven
Trading
- Pre-trading negotiations and personal
relationships among bond dealers are critically
important - Automated trading system cannot offer these
relationship - Korea Stock Exchanges Experience
- Thai Bond Dealing Centers Role
- A bond exchange, an inter-dealer broker, or a
center for compiling bond price information?
Asia-Pacific Financial Markets Research Center,
University of Hawaii
29Korea Stock Exchanges Experience
- Korea Stock Exchange (March 1999) introduced an
inter-dealer broker system for government bonds
trading. - Trading Volume ( billion) OTC KSE
-
- 1999 167 234
- 2000 170 20
- Lesson Individual negotiations on OTC market
cannot be replaced by impersonal auction
system -
-
Asia-Pacific Financial Markets Research Center,
University of Hawaii
30Role of Inter-Dealer Brokers
- Brings market makers together
- Disseminates trading information to the market
- Promote secondary market liquidity, depth,
transparency - Earns commission for arranging trades at
pre-agreed fees - Unlike market makers, no positions are taken by
IDBs - Adopted by Most East Asian Economies
- (Singapore, Hong Kong, Thailand, Korea)
Asia-Pacific Financial Markets Research Center,
University of Hawaii
31Looking Forward What Do We Need in Asia?
- Promotion of Asset-Backed Securities
- Development of Mortgage-Backed Securities
- Establishment of Credit Guarantee and Enhancement
Programs for Small- and Medium-Size Enterprises - Financial Autonomy for Municipal Government
Development of Municipal Bond Markets - Promotion of Creditor Right and Streamline
Corporate Bankruptcy Proceedings - Legal Framework for Bond Borrowing and Lending to
Promote REPO Markets
Asia-Pacific Financial Markets Research Center,
University of Hawaii
32Thank You!For Further References,Please visit
http//www2.hawaii.edu/rheesg
- Asia-Pacific Financial Markets Research Center,
University of Hawaii