Building a Favorable Regulatory Environment for

Corporate Bond Market- The Malaysian ExperienceThe Malaysian Experience

Loong Yeow Boon

Securities Commission, Malaysia

27 September 2007

(Shanghai, P.R. China)

ASEAN+3 Seminar on Developing Corporate Bond Markets in Asia

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Outline

• Importance of Favourable Regulatory Environment

• Regulatory Framework Post Financial Crisis

• Current State of Malaysian Corporate Bond Market

• Continuous Enhancement of Regulatory Environment

3

1997 Asian Financial Crisis Highlighted :

• Over-reliance of bank loans for corporate funding, even for long-term infrastructure projects

• Funding mismatches were aggravated in tight liquidity situation

• Lack of well developed bond market meant a lack of alternative avenue for funding

0

50

100

150

Percen

tage

Outstanding BankLoans

Outstanding Bonds Equity MarketCapitalisation

Outstanding amounts as a % of GDP (1997)

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Conducive Regulatory Framework is the Missing Link

Institutional investors sat on sizeable funds

Interest rates on downward trend

Key intermediaries had been established

Market infrastructure was in place

Issuers in need of funds

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Fair, Efficient & Transparent for Well-Functioning Bond Market

Investors IssuersConducive regulatory framework that ensures:

Fairness

Efficiency

Transparency

Investors’ protection

Market returns Liquidity

Timely access to relevant information

Expeditious issuance process

Lower funding cost Ability to borrow long

Clear and consistent rules

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Outline

• Importance of Favourable Regulatory Environment

• Regulatory Framework Post Financial Crisis

• Current State of Malaysian Corporate Bond Market

• Continuous Enhancement of Regulatory Environment

Government’s

Commitment

National Bond Market Committee

Inter-agency membership to ease implementation:• Ministry of Finance• Bank Negara • Securities

Commission (SC)• Economic Planning

Unit• Bursa Malaysia• Employees Provident

Fund• Private sector

Bond market-specific mandate :

1. Overall policy direction for orderly development

2. Study development issues

3. Identify and recommend implementation strategies

Critical factors for successful

implementation

Government’s Initiatives to Develop Bond Market

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Proper Sequencing of Regulatory Policies

2.

Introduce efficient & facilitative issuance

process for corporate

bonds

3.

Widen issuers and

investors base

4.

Improve liquidity in

the secondary

market

1.

Establish reliable and

efficient benchmark yield curve

5.

Facilitate introduction of

risk management instruments

The 5 Pillars

Priority actions1. Designate M’sian Government Securities as benchmark bonds2. Centralise approval of corporate bond market with the SC

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Ministry of Finance• Co-ordinate developmental efforts of Government agencies (under the National Bond Market Committee)• Grant tax incentives – stamp duty exemption for primary and

secondary market transactions, withholding tax for non-residents, real property gains tax for asset-backed securities and etc

Ministry of Finance• Co-ordinate developmental efforts of Government agencies (under the National Bond Market Committee)• Grant tax incentives – stamp duty exemption for primary and

secondary market transactions, withholding tax for non-residents, real property gains tax for asset-backed securities and etc

Clear Delegation of Authorities

Bank Negara Malaysia

• Manage public debt and MGS issuance

• Own and operate FAST, RENTAS and BIDS

• Regulate involvement of financial institutions in bond market

Bank Negara Malaysia

• Manage public debt and MGS issuance

• Own and operate FAST, RENTAS and BIDS

• Regulate involvement of financial institutions in bond market

Securities Commission

• Sole approving authority for corporate bond issuance

• Regulates primary and secondary bond market activities

• Supervises market intermediaries such as rating agencies and trustees

Securities Commission

• Sole approving authority for corporate bond issuance

• Regulates primary and secondary bond market activities

• Supervises market intermediaries such as rating agencies and trustees

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Main Thrust of Regulatory Regimefor Government Bond Market

• Introduction of auction calendar for Malaysian Government Securities (MGS)

Creation of benchmark yield curve with key tenures of 3, 5 and 10 years

Provide reliable pricing guidance for corporate bond issues

• Review of principal dealers system

• Introduction of long-dated MGS and MGS futures

• Free up captive demand on MGS

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Market-Driven Regulatory Frameworkfor Corporate Bond Market

• Centralise approval process for issuance of bonds with the SC w.e.f 1 July 2000

• Introduce facilitative legal and regulatory framework:

(i) Provisions on investor protection(ii) Fine and penalties on breaches and

offences

• Adopt disclosure-based regulation: (i) Approval upon full submission of documents to SC (ii) Ensure adequate disclosure to investors (iii) Monitor quality of disclosure

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Facilitative approval process for corporate bonds

  Prior to 2000 Since 1 July 2000

Type of Submission Merit-based Disclosure-based

Time frame for approval

1 to 3 months 14 & 28 working days for PDS & ABS issues upon full submission

Utilisation of proceeds

Subject to regulator’s internal criteria on productive purposes

Transparent NBMC negative list (since been revoked)

Underwriting requirement

Must be fully underwritten

Decided by issuer and adviser

Minimum credit rating requirement

BBB and P3/MARC3 No minimum investment grade(mandatory rating is still required)

Disclosure requirements

- • Stringent due diligence for investor protection

• Posting of IM/TDs in SC’s website• Regulatory actions on false and

misleading statement

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SC’s Major Guidelines on Bond Market

On Issuance of bonds,

• Guidelines on the offering of private debt securities

• Guidelines on the offering of Islamic securities

• Guidelines on the offering of asset-backed securities

On investors protection,

• Guidelines on minimum contents requirements for trust deeds

Clear Visions and Plans to Drive Development

Securities CommissionDirection from

NBMC

Phase 3(2006-2010)

Enhance international positioning

Phase 1 (2001-2003)

Strengthen domestic capacity

Phase 2(2004-2005)

Gradual liberalisation

of market access

Capital Market Master Plan (CMP)152 recommendations, of which 17 for bond market

Objectives & Strategic Initiatives:

1. Fund-raising centre

2. Investment mgt industry

3. Market institutions

4. Intermediaries5. Regulatory

regime6. Islamic capital

market centre

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Tax incentives to widen issuers’ base

• Stamp duty exemptions for bonds issues Stamp duty exemptions for bonds issues approved by SC

• Tax deductions on expenses incurred in the issuance of ABS and Islamic bonds

• Tax neutral framework for ABS and Islamic bond transactions

• Real Property Gains Tax (RPGT) exemptions for Real Property Gains Tax (RPGT) exemptions for securitisation transaction

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Tax incentives to widen investors’ base

Non-residentNon-resident

• Blanket exemption from withholding tax for interest income derived by non-residents, w.e.f 11 September 2004

ResidentResident

• Exemption of interest income received by individuals, close end funds and unit trust funds

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Outline

• Importance of Favourable Regulatory Environment

• Regulatory Framework Post Financial Crisis

• Current State of Malaysian Corporate Bond Market

• Continuous Enhancement of Regulatory Environment

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Robust Growth in Domestic Bond Market

As at end-June 2007,

Outstanding size including short-term instruments amounted to USD150 billion

Local currency bond market as a % of GDP is currently 2nd largest in Asia (ex. Japan)

Sukuk comprised 34% of outstanding bonds

Malaysia has the largest Sukuk market in the world

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2136

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43

51

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54

55

59

57

61

0

20

40

60

80

100

120

USD

billi

on

1997 2002 2003 2004 2005 2006

Total bonds outstanding

Government Corporate

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Sustainable Corporate Bond Issues

Corporate bonds as a % of total corporate financing increased to 57.8% in 2006 (21.2% in 1998)

Represents a significant source of long-term financing for private sector

Contributed to addressing maturity mismatches in private sector financing

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Growing Liquidity In Secondary Market

Liquidity has increased significantly since 1997, and relatively high by regional standards

Government efforts to enhance investors base, including withholding tax exemption to attract foreign investment

Inclusion in major bond indices (e.g. Citibank WGBI)

Source : ADB

Average annual turnover ratio(as at end-2006)

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Outline

• Importance of Favourable Regulatory Environment

• Regulatory Framework Post Financial Crisis

• Current State of Malaysian Corporate Bond Market

• Continuous Enhancement of Regulatory Environment

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Our Aims as Significant Centre for Origination and Investment for Bonds

» Eligible Foreign Issuers of Ringgit-denominated bonds:• Multilaterals• Sovereigns• Quasi-sovereigns• MNCs

» Deemed approval for AAA-rated issuers, except MNCs

» Facilitative foreign exchange rules

» Malaysia as International Islamic Financial Centre (MIFC)

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International Issuers of Ringgit-denominated Bonds

Issuers

ADB IFC IBRD ADB KfW

Size RM400 m RM500 m RM760 m RM3.8 b RM2.5 b

TypeFixed

Rate Bonds

Islamic Bonds

Islamic Bonds

Medium Term Notes

Fixed Rate /MTN

Tenor 5 yrs 3 yrs 5 yrs 15 yrs programme

7 yrs/10 yrs

programmes

Rating AAA AAA AAA AAA AAA

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Facilitative Regulatory Framework for acilitative Regulatory Framework for Foreign-currencies BondsForeign-currencies Bonds

» Eligible Issuers:• Multilaterals• Sovereigns• Quasi-sovereigns (domestic and foreign)• MNCs (domestic and foreign)

» International documentation is acceptable

» Deemed approval for min A-rated issues

» Withholding tax exemption if structured as sukuk issue

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Establishment of bond pricing agencies

• Guidelines on the Registration of Bond Pricing Agencies (January 2006)

• A bond bond pricing agency contributes to market liquidity by:

Providing independent and objective fair value for bonds

Adopting a systematic valuation approach which incorporates specific pricing methodologies, relevant market data and robust market feedback

Facilitating daily mark-to-market valuation of bond portfoliosFacilitating daily mark-to-market valuation of bond portfolios, , especially unit trust schemesespecially unit trust schemes

Enhance price transparency and discovery

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Greater regulatory oversight over credit rating agencies

• Practice Note on Recognition of Credit Rating Agencies (January 2006)

Incorporates IOSCO’s Code of Conduct Fundamentals for Credit Rating Agencies

• The recognition system seeks to ensure that CRAs:

Exercise high standards of professionalism and due diligence in rating and monitoring corporate bonds

provide adequate and timely dissemination of rating information

Enhance investor protection and investor confidence

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Initiatives in the pipeline

Introduction of electronic information dissemination and trading system by early 2008

• Real-time dissemination of pre and post-trade info

• Enhance efficiency in trade execution

• Improve price transparency and discovery

• Facilitate market surveillance

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Building favourable regulatory environment requires:

• Bold decisions by policy makers, taking into account prevailing market conditions Market must be fair, efficient and transparent Proper sequencing holds the key

• Robust market consultation process

• Constant review of policy decisions as market changes and develops

Conclusion

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For further information on Malaysian Bond Market …

Please visit following websites:

http://www.sc.com.my (Securities Commission Malaysia)http://www.bnm.gov.my (Bank Negara Malaysia)https://fast.bnm.gov.my/fastweb (Fully Automated System for Issuing/Tendering)http://rmbond.bnm.gov.my (Ringgit Bond Market)

Or contact me at ybloong@seccom.com.my