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     FrontPage Edition: Sun 5 November 2006

Challenges for the Asia Bond Market


Keynote Address by Mr Heng Swee Keat Managing Director of the Monetary Authority of Singapore at The EMTA Forum

An Excerpt

Challenges for the Asia Bond Market
Have we therefore succeeded in building a vibrant Asian bond market? Not yet. It would be more accurate to characterize the Asian bond market as still a work in progress.
While we have come a long way, and some countries have gone further than others, much remains to be done. Allow me to suggest the improvements we need to work on, under two broad themes - liquidity and accessibility.
Liquidity. The level of market liquidity varies from country to country. For government bonds, the bid-ask spread ranges from 2-3 basis points for Korea and Singapore, to 4-8 basis points for Malaysia and Thailand, to more than 10 basis points in Indonesia.
The level of liquidity is much better than most emerging markets in Latin America and Eastern Europe. But compared to the developed markets, where bid-ask spreads are generally below 1 basis point, there is still room for improvement.
To some extent, liquidity depends on the size of the market. Hence, as the Asian bond market continues to grow, liquidity will gradually improve.
But size alone is not enough. We need other measures to improve liquidity.
First, we need to improve price transparency. Greater price transparency will draw in more participants, encourage more trading and ultimately lead to a deeper market.
For this reason, many Asian countries have or are considering moving their bond markets to multilateral platforms, which can broadcast both pre- and post-trade prices in a timely way.
In Singapore, the Singapore Government Securities e-platform which was launched in July last year was very well-received.
Within a couple of months, the level of foreign participation in the market almost tripled, from about 5% to 13%.
Since then, Thailand has also launched an electronic platform; Indonesia and Malaysia are in the midst of building theirs; and Korea and Hong Kong have announced that they are studying plans for a platform.
Second, there should be the ability to short-sell. Admittedly, some regulators are still wary of the whole notion of short-selling. In our view, a market that has both long and short positions is deeper, and ultimately more stable, than one where everyone is long.
Short-selling will also encourage relative value plays between securities as well as between markets, thereby leading to more efficient pricings. Even in markets which permit short-selling, more can be done to facilitate the borrowing of securities to deliver.
Third, an active derivatives market will lend liquidity to the cash bond market. This could be in the form of futures, as in Korea and India or in swaps, as in Hong Kong and Singapore.
Fourth, broadening the investor base will help deepen liquidity. A more diverse pool of investors mean that we are more likely to find buyers and sellers at each price level, thereby deepening the market.
Most Asian markets are still dominated by local investors, comprising mostly banks, insurance companies and pension funds. Anecdotal evidence suggests that on average, non-resident investors hold less than 5% of Asian bonds.
How do we bring in more foreign participation? This brings me to the second broad theme of improvement - accessibility.
After the financial crisis, most Asian economies lifted restrictions on foreign participation in their bond markets.
Currently, only China and India maintain limits on foreign holdings, but even then, the authorities are gradually loosening these limits.
But I believe we need to go much further - beyond removing barriers to foreign participation, we should be actively facilitating foreign participation, and integrating our markets into the global system.
There are several ways we can facilitate these developments.
First, in clearing and settlement. Asia does not have a single point of access like Euroclear for Europe and DTCC for the US. So an investor seeking to hold a portfolio of Asian bonds will have to set up individual accounts in each of the Asian countries, with different tax forms and different disclosure requirements, often running into minute details. Some streamlining will certainly be helpful.
We should also be removing withholding tax. Apart from Singapore, most markets still charge some form of profit or withholding tax.
To facilitate investment in corporate bonds, the existence of good credit rating agencies are important.
International rating agencies have a fairly low level of penetration, focusing mainly on large companies that issue in the cross-border market.
There is room for greater access for international rating agencies, while local rating agencies need to be more transparent in their rating methodology to gain credibility and acceptance amongst global investors.

Full Text of Speech

Source: News Release 1 Nov 2006

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