Executive Summary
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Executive Summary
The vision of an Asian regional bond market, with harmonized rules
and regulations, arose from the emerging need to develop domestic
bond markets to help finance large infrastructure requirements
in many Asian countries. Although this was apparent to Asian
governments, regulators, and multilateral institutions in the early
1990s, the markets grew moderately until the Asian financial crisis
in 1997 highlighted the utility of the bond market in managing
financial risks and dealing with the volatility of capital flows. The
Asian bond market accelerated as a result, in different forms and to
a different extent in each economy.
It has become clear that these individual, diverse markets
can all benefit from regional-level cooperation to provide further
security and stability, through such initiatives as establishing
regional-level supervisory and guarantee agencies, a regional
clearing and settlement system, mobilizing regional resources
through Asian bond funds, and harmonizing bond market rules
and regulations.
The First Asian Bond Fund of US$1.0 billion was successfully
launched in July 2003. The Fund was subscribed by the central
banks of the eight regional economies covered in this study as
well as by Japan, Australia, and New Zealand, which together
form the Executives’ Meeting of East Asia-Pacific Central Banks
(EMEAP). A second Bond Fund of about US$2 billion is under
active consideration by EMEAP. Substantial work on the market
infrastructure for an Asian bond market has also been carried out
through the ASEAN+ 3 initiatives.
This study, one of several related activities by the Asian
Development Bank (ADB), provides an outline of the development
of bond markets in East Asian economies—People’s Republic of
China (PRC); Hong Kong, China; Indonesia; Republic of Korea;
Malaysia; Philippines; Singapore; and Thailand. It addresses the
issues involved in harmonization of their bond market rules and
regulations, and makes recommendations on the next steps toward
building a regional bond market.
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xii Harmonization of Bond Market Rules and Regulations
In 1994, the overall size of the emerging East Asian bond market
was about US$338 billion and by the end of 2002 exceeded US$1.1
trillion, more than half the total for emerging markets. The East
Asian market achieved this preeminent position without much
support, and even as the region’s economic and financial sectors
endured a series of difficulties during the 1990s. In the early 1990s,
commercial banks dominated the financial scene, and bond
markets, although seen by many Asian governments as a means to
support their infrastructure funding needs, were under-appreciated
by the region’s policymakers, issuers, and investors.
In July 1995, the World Bank published a major study on
regional bond markets that highlighted the need for policymakers,
regulators, and major players to promote greater bond market
development, and to catalyze possible initiatives on a regional scale.
Although domestic markets were small in absolute and relative
terms, their growth had begun to increase noticeably, and they
seemed ideally suited to serving as vehicles to intermediate between
the region’s capital consumers and providers. To foster their
development, policy initiatives at the time exemplified a “build and
then it will come” approach, and focused on building the necessary
market infrastructure and developing the appropriate set of legal
and regulatory frameworks.
Emerging East Asian bond markets actually grew rapidly during
1996–2002, but for reasons different from those envisaged just a
few years earlier. Large infrastructure financing to support rapid
growth in the region did not materialize. However, no event in recent
history affected bond markets more than the Asian financial crisis
that followed the devaluation of the Thai baht in July 1997. As
contagion swept the region, bond markets provided a surprising
utility and have prospered since the onset of the crisis. The role of
domestic bond markets became widely appreciated post crisis, and
the broadening and deepening of domestic markets has become a
mantra for countries throughout the region. As a result, bond
markets across Asia have grown, but in different ways in different
countries. Varied initiatives by individual countries, ranging from
developing a benchmark yield curve to fostering a robust
securitization market, could serve as possible examples of how to
further develop fixed-income markets in the region.
The bond market in East Asian economies is diverse and can
be divided into three groups. Hong Kong, China; and Singapore,
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Executive Summary
xiii
as the premier financial centers, have well-developed bond markets.
Republic of Korea, Malaysia, and Thailand have robust bond markets
but will need to carry out additional reforms to deepen their bond
markets. The bond markets of PRC, Indonesia, and Philippines are
at different stages of development and need further reforms.
Malaysia and the Republic of Korea have the largest bond markets
as a percentage of the gross domestic product (GDP). The presence
of a large institutional investor base in Malaysia is the key for the
development of its bond market. In the Republic of Korea, the asset-
backed securities market has made a major contribution to the
development of a domestic bond market. The smallest bond
markets relative to the GDP in 2002 were in Indonesia (32.3% of
GDP) and the Philippines (28.4%). The PRC experienced rapid
growth in its bond market during 2002, but the latter was only one
fifth the size of the banking system.
East Asian bond markets have good growth potential compared
with those in such countries as the United States. The recovery of
East Asia and the massive accumulation of foreign exchange reserves
(exceeding US$1 trillion) combined with historically low interest
rates in the US will provide further stimulus to the development of
Asian bond markets.
Seven areas are identified here that need to be harmonized to
foster development of regional bond markets:
• Legal and regulatory framework
• Rating agencies
• Trading platforms
• Clearing and settlement
• Accounting and auditing standards
• Taxation
• Foreign exchange regulations
Given the different regulatory regimes and stages of debt market
development, harmonizing regulatory regimes will take a long time.
However, all eight countries are members of the International
Organization of Securities Commissions (IOSCO) and subscribe to
the IOSCO Objectives and Principles of Securities Regulations. Most
Asia Pacific Economic Cooperation (APEC) countries have adopted
a disclosure-based regulatory model and it is recommended that
the others adopt this model as soon as feasible.
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xiv Harmonization of Bond Market Rules and Regulations
It is quite clear that it will take a considerable time for all
the eight countries to adopt a common regulatory system and
implement requisite regulatory reforms in individual countries.
Some of these countries also operate on different legal systems and
this will add complexity. Securities laws in many countries are also
closely linked to several other laws including commercial codes,
tax laws, and exchange controls.
A thematic approach toward the harmonization of regulatory
frameworks would involve setting up a high-level APEC task force
or working group representing the securities market regulators in
each of the eight countries. In addition, a “committee of wise men”
should be established to provide guidance for the working group.
The use of the committee of wise men has been very successful in
the integration of the European Community.
An interim measure would be to adopt a uniform bond
registration requirement that approximates one that is already used
in economies with well-developed financial markets, such as
Singapore; Hong Kong, China; and Malaysia. This would accelerate
development of regional bond markets. Specifically, it would mean
that the countries can adopt a unified registration format for bond
issuance that would specify (i) listing requirements, (ii) disclosure
requirements, (iii) accounting standards, (iv) rating requirements,
(v) places of trading, and (vi) clearing and settlement platforms
aimed primarily for domestic bond issuance and trading, but
which could accommodate cross-country issuance and trading in a
limited manner when policymakers decided to do so. The uniform
registration form could be based on IOSCO principles so that it
would be easier to enforce.
Because the economies of at least three countries (Hong Kong,
China; Malaysia; and Singapore) already meet international
standards and have trading platforms, implementation of both
domestic and regional bond market developments could proceed
quickly once a decision is made by the authorities.
The study concludes that there is merit in creating a regional
credit rating agency to complement the existing international and
local rating agencies. A regional credit rating agency could play a
lead role in developing local rating agencies and be a standard setter.
Such an agency would have a clear mandate to operate within the
Asian region.
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The basic argument for setting up such a regional entity is similar
to that for regional multilateral banks. The regional rating agency
would be able to allocate its resources to rate small and medium
companies that may be of less interest to the international rating
agencies. The regional credit rating agency would also complement
national rating agencies. Its priority areas would be corporate bonds
and small and medium companies as well as structured finance.
It is appreciated that building such an agency would take
time and talent. However, such talent already exists in the Asian
region and the agency should be able to attract such talent. An
alternative to creating a regional credit rating agency is strengthening
institutional capacity of national rating agencies to rate foreign-
currency-denominated debt instruments.
Government and corporate bonds in most of the countries
studied are traded over the counter. However, the Republic of Korea
and Malaysia have elaborate electronic trading platforms that can
be used for the trading of Asian bonds at the regional level: Korea
Stock Exchange, Labuan International Financial Exchange, and
Bond-in-Asia. A comprehensive study of the existing regional trading
platforms should be carried out to assess their comparative
efficiency. As an alternative, an agreement on uniform over-the-
counter trading rules should be sought among APEC countries to
increase regional trading of Asian bonds.
Taxation for fixed-income securities in the eight countries varies.
Singapore has the most generous tax regime for its bond market
and it covers the issuers, market intermediaries (approved bond
intermediaries), and investors. Hong Kong China’s tax regime for
bond trading and investment is also attractive. The Republic of
Korea, Philippines, and Thailand need to carry out reforms in this
area to foster development of the domestic and regional bond
market. The Philippines’s present tax system (20% final withholding
tax) discourages the issuance of corporate bonds. There is more
incentive for the corporate sector to issue short-term notes.
Given the fiscal implication and different levels of political
commitment toward developing bond markets, the total har-
monization of taxation between the eight countries may be the most
difficult endeavor. Tax regulations, which need to be addressed both
at the country and regional level, should be consistent with the tax
treatment of global bonds issued by Asian countries in the
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xvi Harmonization of Bond Market Rules and Regulations
international markets. It is recommended that an APEC task force
on taxation be set up to review taxation on bond markets within
these countries to create a level playing field.
Hong Kong, China; Republic of Korea; and Singapore have
no exchange controls as far as bond investment and trading are
concerned. The Philippines has also liberalized exchange controls
for bond market investment. Malaysia maintains capital control.
Exchange regulations regarding bond market investment and
trading should be reviewed to enable efficient and cost effective
investment in regional bonds. A committee under EMEAP, a
cooperative organization of central banks and monetary authorities
in the East Asia and Pacific region, should be set up to review the
exchange regulations with a view to creating a level playing field
for regional bond trading. Given the different stages of economic
development, it is appreciated that it may not be possible to create
a level playing field for all investors in the short run. However, a
step-by-step approach should be considered. For example,
institutional investors in APEC countries might be allowed to invest
in Asian bonds within a specified limit that can be reviewed from
time to time.
Almost all of the countries except the PRC and Philippines have
fairly advanced clearing and settlement systems. Hong Kong, China;
Singapore; and Malaysia have adopted scripless trading and real
time gross settlements using a delivery-versus-payment system on
a transaction-by-transaction basis.
Although there are some differences in clearing and settlement
systems, harmonizing them across the region would probably be
the easiest step. Most of the changes are within the control of
decision makers and would not require legislative changes. There
are also other established clearing and settlement systems, such as
Euroclear and CEDEL, that can be used as a regional hub for setting
up and for clearing and settlement at the regional level. It is
recommended that an APEC task force on clearing and settlement
be set up to recommend ways to standardize these systems and to
link them through one or more hubs.
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