Malaysian Bond

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The Malaysian Bond Market

- Challenges and Opportunities in2003 and Beyond

The Malaysian Bond MarketThe Malaysian Bond Market

-- Challenges and Opportunities inChallenges and Opportunities in2003 and Beyond2003 and Beyond

Securities CommissionSecurities Commission

16 April 200316 April 2003


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Outline

Overview of the bond marketOverview of the bond market

Developmental framework for domesticDevelopmental framework for domestic

bond marketbond market

Regulatory efforts undertaken to developRegulatory efforts undertaken to develop

the bond marketthe bond market

Revised PDS and ABS GuidelinesRevised PDS and ABS Guidelines

Moving forwardMoving forward


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Malaysias bond market grew

by 19.4% over the last 6 years

to reach RM272.6 billion as at

end-2002

PDS grew at the faster rate of

18.9% as compared to 13.3%

for MGS during the same

period, underpinned by the

strong demand on the higher-

yield fixed income securities

This amount represents 81%of GDP in 2002 which makes

Malaysia one of the largest

domestic bond markets in

this region (ex-Japan)0

50

100

150

200

250

300

1997 1998 1999 2000 2001 2002

MGS

PDS

Quasi-Govt Bonds

Source : BNM Annual ReportSource : BNM Annual ReportSource : BNM Annual Report

RM billionRM billionRM billion

Overview of Malaysian bond market


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Regional comparison for domestic bond market(as a percentage of GDP at end-2000)


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Financing for private sector

1998

67%

25%

8%

Private DebtSecurities

Equity market

Bank loans

2002

51%

19%

30%

PDS emerged as the largest

source of private sector

financing in the aftermath of the

1997 financial crisis

In 2002 it provided RM36.2

billion or 51% of total gross

domestic funds raised by the

private sector compared to 67%

in 1998

This reduction in 2002 was

largely due to the active IPO

market last year

Going forward, PDS will remain

as a dominant and competitive

source of financingSource : BNM Annual ReportSource : BNM Annual ReportSource : BNM Annual Report


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Approval of PDS issues by the SC

Total PDS issues approved by the SC (July 2000 - December 2002)

0

20

40

60

80

100

120

140

160

Jul - Dec 00 Jan - Dec 01 Jan-Dec 02

Year

No.ofis

sues

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

RMm

illion

Conventional (No.) Islamic (No.)

Conventional (RM Million) Islamic (RM Million)


0

20

40

60

80

100

120

140

160


Year

No.ofissues

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

RMm

illion



Total PDS approvals from July

2000 to end-2002 have

displayed an increasing trend

Since 1 July 2000, the SC has

approved 308 PDS proposals

under the PDS and ABS

Guidelines, with a total

approved issuance limit ofRM112.84 billion

In 2002, the SC approved 171

PDS proposals, including 7

ABS proposals, whichamounted to RM56.0 billion.

34 of these approvals were

IPDS issues valued at RM17.6

billion or 31% of the total

approved size of PDS issues


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Approval of PDS issues by the SC (contd.)


0

20

40

60

80

100

120

140

160


Year

No.ofissues

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

RMm

illion




0

20

40

60

80

100

120

140

160


Year

No.ofiss

ues

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

RMm

illion



A significant amount of bonds

approved by the SC is rated A

and above. Out of the total 169rated PDS proposals approved

by the SC thus far, only 28

proposals (mostly debt

restructuring scheme) are

initially rated at BBB andbelow

54% of value of approved PDS

proposals thus far have

maturity periods of more than

7 years


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Converging credit spreads

-40

-30

-20

-10

0

10

20

30

40

AAA AA A BBB

Spread

(bp)

5Y 7Y 10Y

Net Change in Spreads Over Comparable MGS in 2002

Credit spreads for PDS over the

MGS continue to converge in 2002,

except for AAA-rated PDS

The tightening of these credit

spreads reflects gradual shift by

domestic investors to PDS that are

rated below AAA

However, on an overall basis, the

pace of tightening in credit spreads

for PDS has decelerated as

compared to those recorded in the

last few years

A small tightening of credit spreads

over US Treasury is also observed

in first quarter of 2003 for

Malaysian sovereign bonds that arecurrently rated BBB+/Baa2


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Outline









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SCs developmental framework for domesticbond market

Developer

Facilitator

SC

involvem

ent

Catalyst

Introducing efficient and

facilitative issuance process

Establishing reliable and efficient

benchmark yield curve Widening the issuers and

investors base

Improving liquidity in the

secondary market Facilitating the introduction of risk

management instruments

Hi

Market involvement HiLow


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Outline








ff


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Introducingefficient andfacilitative

issuanceprocess

Establishingreliable and

efficient

benchmarkyield curve

Widening

issuers and

investors

base

Improving

liquidity in the

secondary

market

Facilitating

introduction

of risk

managementinstruments

Introduction of

auctioncalendar forMGS

Review ofprincipal

dealers system

Broadening of

investors baseunder theSchedule 2 and 3of SCA for OTCmarket

UBs are allowedto trade in OTCmarket

ABS is

introducedtogether with taxneutralframework

Release of PDS

and ABSGuidelines(revised on 30March 2003)

Release of

AssetSecuritisationReport

Introduction of

shelf regulationscheme

Introduction of

5 years MGSFutures

Non-financial

institutions areallowed to enter

into repo

transactions

SecuritiesBorrowing and

Lending

Programme is

introduced via

the RENTAS

system


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Thrusts towards revision of PDS & ABS

Guidelines

To make the issuance process more cost effective

and practical for issuers

To provide greater issuance flexibility & time-to-market

To rationalise and enhance information disclosure

SC aims to continuously review itsrequirements to be more facilitative of marketneeds


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Key Changes to PDS and ABS Guidelines

Facilitative requirements for debt programmes 7 year restriction removed for scripless stand-alone

MTN programmes 2 year period given for first draw-down instead of 6 mths

New disclosure requirements at each draw-down to aidinvestors

Clarity and flexibility to issuers Minimum level of subscription is not required if utilisation

is for working capital

Flexibility to issuers to adjust to market conditions byallowing for some types of information to be indicative,e.g. modes of issue

Some Syariah concepts and principles are furtherclarified


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Key Changes to PDS and ABS Guidelines

More streamlined issuance process

Overlaps with Issues Guidelines are clarified and there

is convergence of documents required under bothguidelines

Information required to be submitted is streamlined (e.g.

term sheets, declarations, removal of summarised ratingreports for ABS submissions)

For ABS, greater clarity in revised definitions for credit

enhancement, circumstances where originators may re-

purchase assets and circumstances where an SPV canbe dissolved


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Outline








F d l i h b d k dF t d l t i th b d k t d


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Future development in the bond market andFuture development in the bond market and

regulatory challengesregulatory challenges

The SC is seeing greater product innovation inbond market to meet new demands of issuers and

investors: Structured productswhere existing bonds and/or equity instruments are

repackaged as new investment product

ABSwhere non-typical structure e.g. synthetic securitisation

and wholesale securitisation may be introduced

Islamic securities

where principles such as ijarah and mudharabah maybe employed

The SC will engage the industry soon to create an

appropriate regulatory framework thataccommodates these new instruments

F t d l t i th b d k t dF t d l t i th b d k t d


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Future development in the bond market andFuture development in the bond market and

regulatory challengesregulatory challenges

There will be introduction of bond tradingportals that would allow bonds to be traded

electronically Benefits of price discovery and greater liquidity for the

bond market

There are issues in linkages with existing bond marketinfrastructure, ensuring investors protection andresolving overlapping legal provisions that governthese portals

The SC is working closely with BNM to developan efficient and facilitative regulatoryframework governing these trading portals


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Thank youhank you

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