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The Central Bank of Malaysia. Conference on Development of Indonesian Government Bond Market ... The Central Bank of Malaysia. Absence of Deep and Liquid ...

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Conference on development of indonesian government bond market jakarta indonesia july 25 26 2000 l.jpg

Conference on Development of Indonesian Government Bond MarketJakarta, Indonesia July 25 - 26, 2000

MALAYSIA’S EXPERIENCE IN DEVELOPING THE

GOVERNMENT BOND MARKET

Lillian Leong

Investment and Treasury Department

Bank Negara Malaysia


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Outline

  • Brief Historical Perspective

  • Overview of Malaysian Government Bond Market

  • Key Issues

    • Lack of Supply

    • Absence of Deep and Liquid Secondary Market

  • Measures Taken So Far

    • Market Liquidity

    • Market Infrastructure

  • Measures Going Ahead

    • Regulatory Framework

    • Inter-Agency Co-ordination


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Historical Perspective…….


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Legislation on Issuance of Government Securities

  • Issuance of MGS by the government is governed under theLoan (Local) Ordinance 1959

  • BNM acts as an agent to the Government under Section 30 (1) (s) of Central Bank Act, 1958 where,

  • “The bank (BNM) may undertake the issue and management of loans publicly issued -

  • (i) by the government;

  • (ii) by the government of any state;

  • (iii) by any public authority; or

  • (iv) with any approval of the MOF, by any corporation ”


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    A Little Bit of History…..

    • Malaysian Govt. Bond Market evolved at a slow pace from 1950s

    • Pace picked up in 1970s in line with government’s plan for economic diversification

    • Malaysian Govt. Bond issuance then was dictated by the need for development financing

    • Early 1980s, Government Bond Market expanded due to the recession following downturn in global economy


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    • From 1988-1997 gross MGS issued reduced from RM45.9 to RM39.7 billion due to the success of the government privatisation programme

    • Strong economic performance in 1990-1997 led to a decline in Government Bonds issuance


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    • Dilemma

    • With a fiscal surplus position, there was a dilemma between 2 objectives :

    • i) The need to issue MGS for bench- marking purposes to develop the domestic

    • bond market ; and

    • ii) The associated issuance cost despite a fiscal surplus position


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    Market Overview


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    Composition of Ringgit Bond Market

    1987

    1999


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    Holders of Malaysian Government Securities

    1987

    1999


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    Total Domestic Debt as % of GDP


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    Issues


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    Absence of Deep and Liquid Secondary Market

    • 1.“Captive” Market Created a “Holding” Bias

      • Legal and Mandatory Requirements for most institutions

        • EPF - 50% of its investible fund

        • Insurance Companies - 20% in low risk assets including MGS

        • Banking Institutions - 15 % of their EL to be invested in liquid asset including MGS


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    Absence of Deep and Liquid Secondary Market

    • 2. Lack of Market Makers due to :

      • Holding cost and lack of MGS issuance

      • The fear of being caught in a “short” situation

      • No mechanism to cover short position such as securities borrowing and lending programme


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    Measures Undertaken

    • 1. Market Liquidity

    • (a) MGS Issuance Process

      • Basis of pricing MGS primary issue : From coupon fixing to market-determined auction system

      • A system of principal dealers (PD) was introduced to promote a more active secondary market


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    Measures Undertaken

    • (b) Interest Rate Liberalisation

      • 1991 - Banking Institutions were allowed to determine their Based Lending Rate

      • Less distortion on interest rate structure and yields curves - facilitate more active secondary trading of MGS


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    Measures Undertaken

    • (c) New Liquidity Framework (NLF)

      • Reduces the captive holding of MGS and the Liquid Asset Ratio premium


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    Measures Undertaken

    • (d) Code of Conduct for Principals and Brokers in the wholesale Money and Forex Markets

    • To maintain high level of professionalism

    • To protect the credibility of oral contract


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    Measures Undertaken

    • (e) Announcement of MGS Auction Calendar

    • To enhance market transparency


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    Measures Undertaken

    • (f) Re-opening of MGS

    • To improve liquidity of the issue size


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    Measures Undertaken

    • 2. Market Infrastructure

      • (a) Clearing and Settlement System

        • Implementation of RTGS settlement system known as RENTAS

        • RENTAS is a real time electronic settlement and Delivery versus Payment system to further enhance efficiency and mitigate settlement risk


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    Measures Undertaken

    • (b) Automated Tendering System

      • Fully Automated System for Tendering (FAST) was introduced to replaced the manual process of tendering for MGS


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    Measures Undertaken

    • (c) Bond Information Dissemination System

    • Bond Information Dissemination System (BIDS) was introduced to provide market information on domestic bond market


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    Measures Going Ahead

    • 3. Regulatory Framework

      • (a) Establishment of National Bond Market Committee

        • 1999 - The formation was to focus on policy direction, to rationalise regulatory framework and to recommend appropriate implementation strategies

        • Three sub-committees were formed;

          • Product Institutional and Development Committee (PIDC)

          • Infrastructure and Operations Working Group (IOWG)

          • Legal and Regulatory Reforms Committee (LRCC)


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    Measures Going Ahead

    • (b) Centralisation of regulatory function for fund raising activities

      • July 2000 - Securities Commission (SC) made sole regulator for the securities market


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    Chronological Development of Bond Market

    1989

    1990

    1995

    • Principal Dealers System was introduced with main role to make market

    • Implementation of SPEEDS, a fully automated cash and securities settlement transactions

    • Code of Conduct and Market Practices for trading in Malaysian Securities Market was introduced

    • The setting up of first rating agency - RAM

    • The setting up of second rating agency - Malaysian Rating Corporation Bhd (MARC)


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    Chronological Development

    1996

    1997

    1999

    • Incorporation of Malaysian Institute of Bond Dealers to represent the interest participants in bond market

    • Implementation of FAST, a fully automated system of tendering for securities at the primary issue

    • Issuance of Khazanah Benchmark Bond to create a benchmark yield curve for the Ringgit Bond market

    • The setting up of the BIDS to promote awareness of the bond market to support primary and secondary trading

    • The formation of NBMC, to provide policy directionand to rationalise the regulatory framework for the development of bond market

    • The Capital Market Master Plan was initiated to chart the strategic positioning and future direction in the next ten years


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    Chronological Development

    1999

    2000

    • Code of Conduct and Market Practices for RENTAS was introduced to facilitate the conversion from SPEEDS to RENTAS (RTGS Settlement system)

    • The Government Securities Auction Calendar was announced to enhance market transparency

    • Re-opening MGS of the less liquid issue to build up the size in order to enhance market liquidity

    • Securities Commission become the sole regulator for the bond market in Malaysia


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    End of Presentation

    Thank You


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