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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

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

slide2

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
slide4

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 ”
slide5

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
slide6

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
slide7

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
slide13

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
slide14

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
slide15

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
slide16

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
slide17

Measures Undertaken

  • (c) New Liquidity Framework (NLF)
    • Reduces the captive holding of MGS and the Liquid Asset Ratio premium
slide18

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
slide19

Measures Undertaken

  • (e) Announcement of MGS Auction Calendar
  • To enhance market transparency
slide20

Measures Undertaken

  • (f) Re-opening of MGS
  • To improve liquidity of the issue size
slide21

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
slide22

Measures Undertaken

  • (b) Automated Tendering System
    • Fully Automated System for Tendering (FAST) was introduced to replaced the manual process of tendering for MGS
slide23

Measures Undertaken

  • (c) Bond Information Dissemination System
  • Bond Information Dissemination System (BIDS) was introduced to provide market information on domestic bond market
slide24

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)
slide25

Measures Going Ahead

  • (b) Centralisation of regulatory function for fund raising activities
    • July 2000 - Securities Commission (SC) made sole regulator for the securities market
slide26

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)
slide27

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
slide28

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