The

The Malaysian
Malaysian Bond
Bond Market
Market
-- Challenges
Challenges and
and Opportunities
Opportunities in
in
2003
2003 and
and Beyond
Beyond

Securities Commission
16 April 2003
 Outline

™ Overview of the bond market

™ Developmental framework for domestic
bond market
™ Regulatory efforts undertaken to develop
the bond market
™Revised PDS and ABS Guidelines

™ Moving forward
Overview of Malaysian bond market

RM
RM billion
billion • Malaysia’s bond market grew
300 by 19.4% over the last 6 years
MGS to reach RM272.6 billion as at
250 end-2002
PDS
• PDS grew at the faster rate of
200 Quasi-Govt Bonds 18.9% as compared to 13.3%
for MGS during the same
150 period, underpinned by the
strong demand on the higher-
yield fixed income securities
100
• This amount represents 81%
of GDP in 2002 which makes
50
Malaysia one of the largest
domestic bond markets in
0 this region (ex-Japan)
1997 1998 1999 2000 2001 2002

Source
Source :: BNM
BNM Annual
Annual Report
Report
3
Regional comparison for domestic bond market
(as a percentage of GDP at end-2000)

4
Financing for private sector

1998 • PDS emerged as the largest

source of private sector
financing in the aftermath of the
25%
Private Debt 1997 financial crisis
Securities
Equity market • In 2002 it provided RM36.2
billion or 51% of total gross
8%
67% Bank loans domestic funds raised by the
private sector compared to 67%
in 1998
2002
• This reduction in 2002 was
30% largely due to the active IPO
market last year
• Going forward, PDS will remain
51% as a dominant and competitive
source of financing
19%
Source
Source :: BNM
BNM Annual
Annual Report
Report
5
 Approval of PDS issues by the SC

Total
• Total PDS approvals from July
TotalPDS
PDS issues
issues approved
approved by
by the
the SC
SC (July
(July 2000
2000 --December
December2002)
2002)
2000 to end-2002 have
displayed an increasing trend
160
160 45,000
45,000
140
140 40,000
40,000 • Since 1 July 2000, the SC has
35,000
35,000
approved 308 PDS proposals
120
120
30,000
under the PDS and ABS
30,000
issues
of issues

100
100 Guidelines, with a total

million
RM million
25,000
25,000
80
80 approved issuance limit of
20,000
No. of

20,000 RM112.84 billion

RM
60
No.

60
15,000
15,000
40
40
• In 2002, the SC approved 171
10,000
10,000
PDS proposals, including 7
20
20 5,000
5,000 ABS proposals, which
00 -- amounted to RM56.0 billion.
Jul
Jul --Dec
Dec 00
00 Jan
Jan--Dec
Dec 01
01 Jan-Dec
Jan-Dec 02
02 34 of these approvals were
Year
Year IPDS issues valued at RM17.6
Conventional
Conventional (No.)
(No.) Islamic
Islamic (No.)
(No.) billion or 31% of the total
Conventional
Conventional (RM
(RM Million)
Million) Islamic
Islamic (RM
(RM Million)
Million)
approved size of PDS issues

6
 Approval of PDS issues by the SC (contd.)

Total
• A significant amount of bonds
TotalPDS
PDS issues
issues approved
approved by
by the
the SC
SC (July
(July 2000
2000 --December
December2002)
2002)
approved by the SC is rated A
and above. Out of the total 169
160
160 45,000
45,000
rated PDS proposals approved
140 40,000
40,000
140 by the SC thus far, only 28
35,000
35,000 proposals (mostly debt
120
120
30,000
30,000 restructuring scheme) are
issues
of issues

100
100

million
RM million
25,000
25,000 initially rated at BBB and
80
80
20,000 below
No. of

20,000

RM
60
No.

60
15,000
15,000
40
40 10,000
10,000
• 54% of value of approved PDS
20
20 5,000
5,000 proposals thus far have
00 -- maturity periods of more than
Jul
Jul --Dec
Dec 00
00 Jan
Jan--Dec
Dec 01
01 Jan-Dec
Jan-Dec 02
02 7 years
Year
Year
Conventional
Conventional (No.)
(No.) Islamic
Islamic (No.)
(No.)
Conventional
Conventional (RM
(RM Million)
Million) Islamic
Islamic (RM
(RM Million)
Million)

7
Converging credit spreads
Net Change in Spreads Over Comparable MGS in 2002
• Credit spreads for PDS over the 40

30 5Y 7Y 10Y
MGS continue to converge in 2002,
20
except for AAA-rated PDS
10

Spread (bp)
• The tightening of these credit 0
AAA AA A BBB
spreads reflects gradual shift by -10

domestic investors to PDS that are -20

rated below AAA -30

-40
• 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 are
currently rated BBB+/Baa2
8
 Outline

™ Overview of the bond market

™ Developmental framework for domestic
bond market
™ Regulatory efforts undertaken to develop
the bond market
™Revised PDS and ABS Guidelines

™ Moving forward
SC’s developmental framework for domestic
bond market
• Introducing efficient and
Hi facilitative issuance process
• Establishing reliable and efficient
benchmark yield curve
Developer • Widening the issuers and
investors base
SC involvement

• Improving liquidity in the

secondary market
• Facilitating the introduction of risk
management instruments

Catalyst

Facilitator
Low Market involvement Hi
10
 Outline

™ Overview of the bond market

™ Developmental framework for domestic
bond market
™ Regulatory efforts undertaken to develop
the bond market
™Revised PDS and ABS Guidelines

™ Moving forward
Regulatory efforts undertaken to develop
the bond market

Introducing Establishing Widening Improving Facilitating

efficient and reliable and issuers and liquidity in the introduction
facilitative efficient investors secondary of risk
issuance benchmark base market management
process yield curve
instruments

Release of PDS Introduction of Broadening of Non-financial Introduction of

and ABS auction investors base institutions are 5 years MGS
Guidelines calendar for under the allowed to enter Futures
(revised on 30 MGS Schedule 2 and 3 into repo
March 2003) of SCA for OTC
transactions
Review of market
Release of principal Securities
Asset dealers system UBs are allowed
to trade in OTC Borrowing and
Securitisation
market Lending
Report
Programme is
ABS is introduced via
Introduction of the RENTAS
shelf regulation introduced
together with tax system
scheme
neutral
framework 12
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 its

requirements to be more facilitative of market
needs

13
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 aid
investors

• 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 by
allowing for some types of information to be indicative,
e.g. modes of issue
– Some Syariah concepts and principles are further
clarified
14
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 both
guidelines
– Information required to be submitted is streamlined (e.g.
term sheets, declarations, removal of summarised rating
reports 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 can
be dissolved

15
 Outline

™ Overview of the bond market

™ Developmental framework for domestic
bond market
™ Regulatory efforts undertaken to develop
the bond market
™Revised PDS and ABS Guidelines

™ Moving forward
Future development in the bond market and
regulatory challenges
• The SC is seeing greater product innovation in
bond market to meet new demands of issuers and
investors:
™ Structured products
9 where existing bonds and/or equity instruments are
repackaged as new investment product
™ ABS
9 where non-typical structure e.g. synthetic securitisation
and wholesale securitisation may be introduced
™ Islamic securities
9 where principles such as ijarah and mudharabah may
be employed

• The SC will engage the industry soon to create an

appropriate regulatory framework that
accommodates these new instruments
17
Future development in the bond market and
regulatory challenges …

• There will be introduction of bond trading

portals 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 market
infrastructure, ensuring investors protection and
resolving overlapping legal provisions that govern
these portals

• The SC is working closely with BNM to develop

an efficient and facilitative regulatory
framework governing these trading portals

18
Thank you