Developing Domestic Government Bond Market

Enhancing the depth and breadth of the Malaysian Government

Bond Market

Muhammad bin Ibrahim

muhd@bnm.gov.my
November 2009

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 Basis for Role of Bank Negara Malaysia in
developing the Malaysian Government Bond
Market

In its role as a banker & fiscal agent to the Government of

Malaysia, it is in BNM’s interest to develop the government bond
market in order to facilitate more efficient price discovery as well as
greater depth & breadth of the market to enhance the
Government’s financing options and ultimately reduce its cost of
finance in the long-run

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Developing Domestic Government Bond Market
¾Overview of Government Bond Market development stages
¾Where are we now ?
¾What constitutes a successful Government Bond Market
¾Enhancing the depth & breadth of the bond market
¾Types of instruments
¾Current and future initiatives
¾Regional Initiatives
¾Lesson Learnt

3
Overview of Malaysian Government Bond Market
Development Stages
1960s to 1980s 1990s
2000 >>
1959 – 1980 Opening Up : Post-crisis
Market efficiency :
Exclusive Market Pre-crisis Development
Depth and breadth
development stage stage

• Funding relied • Wider participants • Continue to issue • 2000-Established

much on external ie: pension fund, during fiscal auction calendar
borrowing & insurance surplus in 1993-
• 2005 – Lengthened
syndicated loans. companies & 1997 to meet
the yield curve by
Banks (impose market demand
• First issuance of introducing 20yr
statutory and maintain
Malaysian MGS
requirement) pricing for
Government
benchmarking • 2005 - Introduced
Securities (MGS) • 1986 – reformed
daily indicative
in 1959 to meet structure of MGS • Waiver for stamp
yield-to-maturity
pension fund to allow duty, tax
investment needs; secondary market exemption,
trading withholding tax
• MGS issued on a
basic structure and • 1989 - Introduce
not tradable PD system to
assist in primary
and secondary
markets
Developing Domestic Government Bond Market
¾Overview of Government Bond Market development stages
¾Where are we now ?
¾What constitutes a successful Government Bond Market
¾Enhancing the depth & breadth of the bond market
¾Types of instruments
¾Current and future initiatives
¾Regional Initiatives
¾Lesson Learnt

5
 Where are we now…
Government Bond market size relative to GDP Historical Government Bond Market size
relative to GDP
(%) USD (bil) (%)
60 100 50%
Dec 2000 June 2009
Government % GDP
50
80 40%

40
60 30%
30

40 20%
20

10 20 10%

0 0 0%
CN HK ID KR MY PH SG TH VN
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Size of Regional Government Bond Markets (ex Japan)

USD (bil)
• As at June 2009, the size of the
2000
Malaysian government bond market
1500 Dec 2000 June 2009 is 49% of GDP.

1000 • On average, the growth rate of the

Malaysian government bond market
500
is 13.5% per annum since 2000

0
CN HK ID KR MY PH SG TH VN

6
Malaysian Government Bond Market as percentage of GDP
has evolved to become largest in the ASEAN region
Size of Government Bond Market
(% of GDP) 2009
Singapore
(46.4%)
Significant increase in size over GDP:
Hong Kong
(17.6%)
Thailand (48%) • 2000 – USD 37.1 bil (39.6% of GDP)
Indonesia
(14.9%) • 2009 – USD 96.5 bil (49.0% of GDP)

Philippines
Malaysia (49%) (32.6%)

Vietnam
12.9%

Korea (51.6%)
China (43.6%)

Country Rank ASEAN Countries Size of Government Bond Market

(% of GDP)
1 Malaysia 49.0
2 Thailand 48.0
3 Singapore 46.4
4 Indonesia 14.9
5 Philippines 32.6 Source:
AsianBondsOnline, data
6 Vietnam 12.9 as at June-2009
Developing Domestic Government Bond Market
¾Overview of Government Bond Market development stages
¾Where are we now ?
¾What constitutes a successful Government Bond Market
¾Enhancing the depth & breadth of the bond market
¾Types of instruments
¾Current and future initiatives
¾Regional Initiatives
¾Lesson Learnt

8
 What constitutes a successful Government Bond Market…
• Standard • Minimum bid
international requirement to
conventions ensure 100%
(ie: price Widely subscription for
calculation, Successful
practiced government
act/act) Principal issuances
global
Dealership
conventions
• Standard forms • Principal dealers as
of instruments market makers to
(ie: cashflows, Successful
Successful provide two way
coupons etc) Government
Government prices
Bond
Bond Market
Market • Liberalised
restrictions imposed
• Pension Fund on non-residents to
minimum Wide invest in MGS/GII
Mandatory
investment investor
Statutory • Withholding tax
requirements base
Requirements exemption for non-
• Bank’s liquid Conducive resident
asset regulatory
requirements • Allow international
framework clearability via global
• Insurance custodian institutions
companies • Easily accessible financial
minimum assets • Inclusion of MGS
market guidelines & code of into Citigroup’s
requirements conduct WGBI to attract
• Efficient infrastructure investors

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Developing Domestic Government Bond Market
¾Overview of Government Bond Market development stages
¾Where are we now ?
¾What constitutes a successful Government Bond Market
¾Enhancing the depth & breadth of the bond market
¾Types of instruments
¾Current and future initiatives
¾Regional Initiatives
¾Lesson Learnt

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Efforts focused on enhancing the depth and breadth of the
bond market
Efficient
benchmark
yield curve

Introduce risk Efficient

management Deep & issuance
instruments Liquid Bond process
Market

Improve liquidity in Broaden issuer &

the secondary investor base
market

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Developing an efficient benchmark yield curve…

• Ensure continuous supply of benchmark

papers through :

9 Regular issuance of 3, 5 ,10 years

benchmark

9 Re-opening of exiting stocks

9 Switch auction to replace off-the-run

stocks with new benchmark stock

• Publish the Government bonds auction

calendar

• Lengthened maturity to 20 yrs

• Publish daily Malaysian Government

Securities (MGS) Yield-To-Maturity via Fully
Automated System for Tendering (FAST)
website

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Developed Fully Automated System for Issuing/Tendering
(FAST) website for efficient issuance process…
• FAST was developed in 1996 as a
centralised issuing platform for all
competitively auctioned ringgit bonds

• A medium of information dissemination

concerning the domestic bond market

www.fast.bnm.gov.my
Objectives :
• To improve overall efficiency of the
tendering procedures
• To reduce errors and delays arising from
manual handling of tenders
• To promote standardisation in bidding and
processing of tenders
• To ensure the integrity and confidentiality
of bidding and tender information.

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Efforts to widen issuer and investor base…

Encourage participation • No restriction for foreign investors to participate in the domestic

of foreign bond market
issuers /investors
• No withholding tax on non-resident interest income
• Supranationals and multinational corporations are allowed to issue
ringgit denominated securities.
• Allow international clearability of domestic bonds
• Ensure MGS issuances to be included in Citibank’s World
Government Bond Index (WGBI) to attract global investors

Encourage retail • Setting up of bond funds by unit trust companies

participation • Issuance of Sukuk Simpanan Rakyat amounting to RM5 billion in
2009

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Improving secondary market liquidity…

Ensure a liquid Government Bond Market… Introduced Institutional Securities

Custodian Programme (ISCAP) to
address captive holding in
government bond market…
• Principal dealers as market makers to provide
two way prices Institutional
Lenders / FIs
• Allow short-selling through the introduction of
Regulated Short-Selling Framework
Borrow Guarantee
• Introduced Securities Borrowing and Lending securities
Programme (SBL)

• Introduced switch auction to replace off-the-run

issuances with benchmark issuances
Securities
• Relax the minimum investment requirements for lending fees
Pension Fund (EPF) and insurance companies

• Established ISCAP to promote SBL and repo

activities and Sukuk BNM Ijarah (SBNMI) Lend securities Funds
via repo

Interbank
Institutions

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Development of risk management instruments…
• Allowed market players to hedge adverse interest rate movements
Interest Rate Swap using IRS
• Fixing at 11 am on every business day on Reuters and Bloomberg
page for transparency

• Introduced by the Malaysian Derivatives Exchange (MDEX)

MGS Futures • 5-year MGS futures contract was introduced in March 2002,
followed by the 3 and 10-year MGS futures contracts in October
2003

• Exchange traded product (MDEX). Contract maturity dates are

KLIBOR Futures March, June, September and December using KLIBOR as the
reference rate.

• Create continuous flow of activities in the bond market

Regulated
Short-selling • Accelerate price corrections in overvalued securities
• Facilitate hedging of interest rate risks
• Promote activity in the repo and securities borrowing and lending
market

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Developing Domestic Government Bond Market
¾Overview of Government Bond Market development stages
¾Where are we now ?
¾What constitutes a successful Government Bond Market
¾Enhancing the depth & breadth of the bond market
¾Types of instruments
¾Current and future initiatives
¾Regional Initiatives
¾Lesson Learnt

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Types of instruments available
Malaysian Government
Securities (MGS)
• Interest bearing long-term
bonds issued by the
Government of Malaysia to
raise funds from the domestic
capital market for development
expenditure.
Malaysian Treasury Bills
Government
(MTB)
Bond Market
• Short-term securities issued by
the Government of Malaysia for
working capital.
Callable MGS
• The introduction of callable
MGS provides additional
flexibility for the Government
to manage its cashflow
• Serves as a benchmark for
private debt issuers to price
off their callable securities.
Government Investment Issues
(GII)
• long-term non-interest bearing
Government securities
• Issued based on Islamic principles
by the Government of Malaysia.
Malaysian Islamic Treasury Bills
(MiTB)
• Short-term non-interest bearing
securities issued by the
Government of Malaysia for
working capital.
Retail Government Bond
• Sukuk Simpanan Rakyat
amounting to RM5 billion was
issued in 2009.
• Provides the flexibility for early
redemption before the maturity
date.
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Developing Domestic Government Bond Market
¾Overview of Government Bond Market development stages
¾Where are we now ?
¾What constitutes a successful Government Bond Market
¾Enhancing the depth & breadth of the bond market
¾Types of instruments
¾Current and future initiatives
¾Regional Initiatives
¾Lesson Learnt

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Current and future initiatives…

Dialogue between • Quarterly meetings – participation by BNM, SC, Heads of

Regulators and Treasury of Banking Institutions and Insurance companies
Market Players
• Half-yearly meeting with Principal Dealers – to discuss issues in
relation to PDs performance, obligations and privileges.
• Regular focus group discussions to resolve existing
impediments and develop new products.

• Development of Bond info hub website in 2007 as a one-stop

Promotional efforts information center for the Malaysian bond market
• Published the Malaysian Government Securities guide book
• BNM conducts bi-annual market consultation ,dialogues and
road shows with market participants.

Product developments • Tradable retail government bonds

in the pipeline • Re-opening of Islamic government bonds

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Developing Domestic Government Bond Market
¾Overview of Government Bond Market development stages
¾Where are we now ?
¾What constitutes a successful Government Bond Market
¾Enhancing the depth & breadth of the bond market
¾Types of instruments
¾Current and future initiatives
¾Regional Initiatives
¾Lesson Learnt

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Malaysia also supportive of regional initiatives to broaden
and deepen domestic and regional bond markets
• Participation in Asian Bond Fund (ABF) Initiative under auspices of EMEAP group of central
banks
• ABF1 launched in 2003 aimed at channeling portion of official reserves in EMEAP countries
into region
• Mechanism to diversify investments
• Enhance returns
• ABF2 launched in 2005 to promote domestic currency bond markets
• New asset class of bonds with multi-currencies in a basket
• ABF Malaysia Bond Index Fund sub-fund under ABF2 has been listed on Bursa
Malaysia
• Greater recognition from foreign investors
• Foreign investor holdings in government bonds market account for 7.60% of total
outstanding bonds (2001: 0.3%)
• Inclusion in major bond indices eg. JP Morgan, World Government Bond Index

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Developing Domestic Government Bond Market
¾Overview of Government Bond Market development stages
¾Where are we now ?
¾What constitutes a successful Government Bond Market
¾Enhancing the depth & breadth of the bond market
¾Types of instruments
¾Current and future initiatives
¾Regional Initiatives
¾Lesson Learnt

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Lessons learnt…

• Close coordination with the government i.e: Ministry of Finance

• Conduct regular meetings with market participants on issues related to the development of the
domestic bond market

• Industry briefing and educational process are necessary pre-requisites

• Communication strategy is key

• A successful Principal Dealer system is key to ensure efficiency of the bond market

• Conducive regulatory framework is fundamental in ensuring continued growth in the bond

market

• A wide investor base important to enhance liquidity

• Invest in Information Technology (IT) developments.

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For more information on the Malaysian bond market…

• http://www.bnm.gov.my - Bank Negara Malaysia

• https://www.fast.bnm.gov.my - Fully Automated System For
Issuing/Tendering
• http://bondinfo.bnm.gov.my - Bond Info Hub
• http://iimm.bnm.gov.my - Islamic Money Market
• http:// www.sc.com.my - Securities Commission Malaysia
• http://www.bursamalaysia.com - Bursa Malaysia

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Thank You

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