chapter v swot of capital markets in the asean+3 region

TABLE OF CONTENTS

CHAPTER I…………………………………………………………………………………………….......8

1.1 Background ……………………………………………………………………………………………..8

CHAPTER II………………………………………………………………………………………………10

2.1. The Background of ASEAN Establishment…………………………………………………………..10

2.2. Economic Development in ASEAN + 3……………………………………………………………...17

2.2.1. Financial Sector Cooperation……………………………………………………………....17

2.2.2. ASEAN+3 Finance Cooperation………………………………...…………………………19

2.3. Financial Market Development in ASEAN + 3………………………………………………………21

2.4. Capital Market Development in ASEAN……………………………………………………………..24

CHAPTER III……………………………………………………………………………………………..27

3.1. Overview of Asian Capital Market Capitalization……………………………………………………27

3.1.1. Brunei Darussalam…………………………………………………………………………27

3.1.2. Cambodia…………………………………………………………………………………..35

3.1.3. Indonesia…………………………………………………………………………………...44

3.1.3.1. Regulatory Framework of Indonesian Capital Markets………………………………….44

3.1.4. Lao PDR …………………………………………………………………………………..51

3.1.5. Malaysia……………………………………………………………………………………59

3.1.6. Myanmar …………………………………………………………………………………..68

3.1.7. Philippines…………………………………………………………………………………70

3.1.8. Singapore…………………………………………………………………………………..80

3.1.9. Thailand……………………………………………………………………………………86

3.1.10. Vietnam …………………………………………………………………………………..98

3.1.11. People’s Republic of China…………………………………………………………......105

3.1.12. Japan……………………………………………………………………………………110

3.1.13. South Korea……………………………………………………………………………..131

CHAPTER IV 136

4.1 BRUNEI DARUSSALAM…………………………………………………………………………..136

4.1.1 CAPITAL MARKET PRODUCTS…………………………………………………….136

4.1.2 FINANCIAL MARKETS PRODUCTS OTHER THAN CAPITAL MARKETS…….138

4.1.3 SECURITIES LENDING & REPO…………………………………………………….140

4.2 CAMBODIA…………………………………………………………………………………….140


4.3 INDONESIA…………………………………………………………………………………….142


4.4 LAO PDR………………………………………………………………………………………..144



4.5 MALAYSIA…………………………………………………………………………………….153


4.5.2 OTHER STOCK MARKET PRODUCTS……………………………………………..155

4.5.3 BOND MARKETS……………………………………………………………………..156


4.5.5 DERIVATIVES MARKETS…………………………………………………………...161

4.6 PHILLIPINES…………………………………………………………………………………...162

4.6.1 FINANCIAL MARKET PRODUCTS…………………………………………………162


4.7 SINGAPORE……………………………………………………………………………………168


4.7.2 MONEY MARKETS…………………………………………………………………...169

4.7.3 DERIVATIVES MARKETS…………………………………………………………...169

4.8 THAILAND……………………………………………………………………………………..172



4.9 VIETNAM………………………………………………………………………………………187

4.9.1 BOND MARKETS……………………………………………………………………..187


4.10 JAPAN…………………………………………………………………………………………..191



4.11 REPUBLIC OF KOREA………………………………………………………………………..203


4.11.2 KRX DERIVATIVES PRODUCTS……………………………………………………209

4.11.3 BOND MARKET………………………………………………………………………209

CHAPTER V……………………………………………………………………………..………………210

SWOT OF CAPITAL MARKETS IN THE ASEAN+3 REGION ……………………………………...210

5.1 Countries’ Capital Markets SWOT…………………………………………………………………..210

5.2 Final Conclusion - SWOT in the ASEAN+3 Capital Markets………………………………………214

LIST OF FIGURE

Figure 2.1. ASEAN Countries GDP Growth Constant Price, 1998–Q3/2013 (yoy, %) 11

Figure 2.2. China, Japan & South Korea GDP Growth Constant Price, 1998–Q3/2013(yoy, %) 13

Figure 2.3. ASEAN Annual Inflation (CPI) Rate, 2000 – 2013* (yoy, %) 14

Figure 2.4. China, Japan, South Korea Annual Inflation (CPI) Rate, 2000 – 2013* (yoy, %) 15

Figure 2.5. Financial Assets in ASEAN+3 Countries, 1997 – 2012 (% of GDP) 22

Figure 2.6. Bank Assets, Stock Market Capitalization, and Bond Market Capitalization in ASEAN+3 Countries, 1997 and 2012 (% of GDP) ......... 23

Figure 3.1. Diagram of Information Disclosure37

Figure 3.2. Organizational Chart of Cambodia Securities Exchange 39

Figure 3.3. The CSX’s Board of Directors ... 39

Figure 3.4. CSX’s Listing Procedures .......... 41

Figure 3.5. CSX’s Order Execution .............. 42

Figure 3.6. Financial Supervisory Infrastructure in Indonesia 45

Figure 3.7. Indonesian Capital Market Structure 49

Figure 3.8. Organizational Chart of The Bank Lao PDR 55

Figure 3.9. Trading Flow of LSX ................. 57

Figure 3.10. Clearing Houses Organization .. 58

Figure 3.11. Financial Supervisory Infrastructure in Malaysia 61

Figure 3.12. Organization of Malaysia‘s Ministry of Finance 64

Figure 3.13. Organizational Structure of CBM71

Figure 3.14. Organizational Structure of SEC73

Figure 3.15. SGX’s Rulebooks ..................... 83

Figure 3.16. Financial Supervisory Infrastructure in Singapore 84

Figure 3.17. Organizational Structure of SEC92

Figure 3.18. The Works of Thailand’s Clearing House 96

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Figure 3.19. Vietnam Market Regulatory Structure 101

Figure 3.20. Clearing House’s Flow ........... 104

Figure 3.21. Financial Supervisory Infrastructure in 107

Figure 3.22. Secondary Market Trading Activity Has Grown Rapidly 109

Figure 3.23. Financial Supervisory Infrastructure in Japan 129

Figure 3.24. Money Classification by BOJ . 130

Figure 3.25. Tokyo Stock Exchange Trading Network System 132

Figure 3.26. Financial Supervisory Infrastructure in Republic of Korea 134

Figure 3.27. Services Performed by KSD ... 137

Figure 4.4. General Framework of Repo Transaction in Japan 204

Figure 4.5. The Domination of CDS in Japan’s Credit Derivatives Contracts 205

Table 4.5. Current State of ETF Market in Korea 206

Table 4.6. Price Multipliers for Product Indices in KRX 208

Figure 4.6. Settlement Flow Chart Procedures in ETF Products 209

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LIST OF TABLES

Table 2.1. ASEAN+3 Stock Market Index Growth, 2009-2013 (yoy, %) 15

Table 2.2. ASEAN+3 Exchange Rate Growth to US$, 2009-2013 (yoy, %) 16

Table 2.3. Strategic Components of ACFM Implementation Plan for Integrating Capital Markets 25

Table 2.4. Bond Market Capitalization in ASEAN+3 Countries, 1997 – 2013 (% of GDP) 26

Table 3.1. Market Capitalization to GDP Ratio27

Table 3.2: Capital Market Types of Licenses, Capital Requirements and Fees 28

Tabel 3.3:Capital Market Types of Licenses, Capital Requirements and Fees 28

Table 3.4. Financial Supervisory Infrastructure in Cambodia 38

Table 3.5 Financial Supervisory Infrastructure in Lao PDR 52

Table 3.5. Protection Provided by PIDM ...... 66

Table 3.6. Top 20 Daily Active Stocks’ Market Statistic 67

Table 3.7. Regulators of Thailand ................. 89

Table 4.1. Outstanding Balance of Stocks, Sovereign Bonds, Corporate Bonds in Brunei Darussalam Capital Market (2009 – Nov 2013) ............. 139

Figure 4.1. Sample of Indonesia Stock in Indonesia Stock Exchange Website 145

Figure 4.2. Bonds Market Flow in Lao PDR150

Table 4.2. Government Institutions Securities Role in Philippines 167

Table 4.3. Derivatives Market Product with Interest Rate in SGX 174

Table 4.4. Equity Indices in SGX ............... 174

Table 4.5. Dividend Indices in SGX ........... 175

Figure 4.3. Securities Market Infrastructure in Thailand 181

Table 4.3. Differences between Bilateral Repo Market and Existing Repo Market 183

Table 4.4. List of Stock Listing in Japan Stock Exchange 194

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CHAPTER I

1.1. Background Despite uncertainty in the global economy and financial markets, the ASEAN+3

economies have been recovering from the global financial crisis, and posting steady growth in 2012. Resilience of the regional economy has been underpinned by robust domestic demand, effective financial intermediation by healthy banking systems, and appropriate macroeconomic policies. However, remaining risks may still be prevalent. Policy uncertainty, private deleveraging, fiscal drag, and impaired credit intermediation continue to weigh on global growth prospects. Continuing global liquidity infusion could potentially induce excessive risk-taking and leverage, credit expansion, and asset bubble, meaning that the ASEAN+3 region shall remain vigilant of the unintended negative side effects stemming from an extended period of global monetary easing on the region as well as on the risk of global financial markets sentiment that could amplify volatility in capital flows and adversely affect regional financial stability.

To enhance the integration of the ASEAN+3 markets and strengthen the regional

financial stability, the Chiang Mai Initiative (CMI) was established by the ASEAN+3 Finance Ministers Meeting (AFMM+3) in 2000 as a network of bilateral currency swap arrangements. The initiative purports to: (1) address short-term liquidity difficulties in the region and (2) supplement the existing international financial arrangements. In 2004, the AFMM+3 agreed to establish a more advanced framework for liquidity support that focused on the multilaterization of CMI (CMIM). In the 16th AFMM in New Delhi in May 2013, the ASEAN+3 members agreed to further strengthen the CMIM as part of the regional financial safety net and promote the issuance and facilitating demand of local currency denominated bonds (Asian Bond Market Initiative).

Moreover, to support the implementation of the CMIM, an independent regional

monitoring and surveillance unit, i.e., the ASEAN+3 Macroeconomic Research Office (AMRO), was established in Singapore in April 2011. Subsequently, to enhance the effectiveness of the ASEAN+3 financial co-operations, the economies concurred to transform the AMRO to be an international organization. This would enable AMRO to conduct objective surveillance as a credible, independent international organization, contributing further to the regional financial stability and strengthening the CMIM.

This study proposes to analyse the recent development of capital markets

infrastructure and its policy implications in the ASEAN+3, and provide recommendations on how to enhance capital markets integration and financial stability in the region. The completion of this study is expected to offer recommended steps and policies as to how the capital markets infrastructure in the region can be expanded such that the ASEAN+3 members would be able to strengthen the regional financial safety net as well as to contribute to sustainable economic growth and integration in the region.

Capital market development in the ASEAN+3 region is varied. For instance, the gap

of market capitalization to GDP ratio across countries in the region is relatively wide (i.e., Singapore’s market cap to GDP in 2012 was 151%, Thailand 47%, whereas Laos 8%). Differences are also observed for securities traded in the capital markets. While government bonds are mostly traded in Indonesia and Malaysia, corporate bonds are more dominant in South Korea and Malaysia. Furthermore, equity indices in the region also document different

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movements during the period between January 1 and June 26, 2013. Nikkei 225 increased by 23.46% and VNINDEX experienced a positive growth of 14.45%. On the other hand, KOSPI and SSEA declined during the period by 10.69% and 10.01%, respectively. Accordingly, those differences in general signify a distant level of capital markets infrastructure.

Our proposed activities would address four major issues as follows: (1) overview the

recent development in capital markets infrastructure in the ASEAN+3 region; (2) research capital market products in the region; (3) carry out surveys and focus group discussion; (4) provide a SWOT analysis and its implications, and policy recommendations as to how to enhance capital markets integration to foster the regional financial market stability.

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CHAPTER II OVERVIEW

2.1. The Background of ASEAN Establishment Security and Politics were the main backgrounds behind the ASEAN establishment.

The strategic locations of ASEAN states made the region become a zone of “fighting-for-influence” between the East and West bloc during the Cold War. Even with the Bangkok Declaration – one of the ASEAN’s objectives is to accelerate the economics – in reality, the development tend to orientate toward strategic and political causes. Several issues, such as the Confrontation (Indonesia-Malaysia) that ended in 1966; and the Vietnam War, that was the war East versus West, had encouraged the South East Asian Nations to unite by forming the ASEAN. Moreover, the ideological and military competition make the ASEAN leader aware of the necessity of strong cooperation, to suppress the suspicious attitude among them that may lead to the arm conflict. In such situation, the leaders realize that a cooperation to develop economy is within their must-do-list. (Oratmangun, 2010).

Although the economy acceleration has been in the Bangkok Declaration since the

beginning, yet the actual economy cooperation started not as early as 1976 – the agreement of Preferential Trading Arrangement (PTA) and it was official in February 24, 1977. Later, the PTA developed into Free Trade Area (FTA) through the agreement of ASEAN Free Trade Area (AFTA) January 19, 1992. Subsequently, on the ASEAN High Summit Meeting held in Kuala Lumpur on December 1997, the ASEAN leaders decided to transform ASEAN into a stable and high competitive zone with equal economic growth and decreasing poverty. (ASEAN’s Vision 2020)

Next, the economy cooperation developed to create ASEAN Economic Community

(AEC) or to be exact, at the ASEAN Summit in Bali October 2003. On the Summit, the ASEAN leaders declared that AEC is the aim of regional economic integration (Bali Concord II) in 2020. The major characteristics of AEC are: (a) single market and production basis, (b) highly competitive economic zone, (c) equal economy development region, (d) integration of the region with the global economy. As the single market and production basis, AEC has five fundamental elements: (a) free flow of goods; (b) free flow of services; (c) free flow of investment; (d) freer flow of capital; and (e) free flow of skilled labor (ASEAN Sec., 2008).

As the final quarter year 2013 concluded, economic growth of Association of South

East Asian Naional (ASEAN) member nations show lower than expected. Economic growth of key economics in the region has yet to show remarkable stability of overall economic growth. Indonesia, the Philippines and Thailand are the key countries in the region which registered lower economic growth in Q3/2013 than in Q2/2012 (year-on-year basis). In the meantime Malaysia, Singapore and Vietnam are the key countries in the region which succeeded in achieving higher economic growth in Q3/2013 than in the previous quarter. Countries that registered significantly lower economic growth in Q3/201 than in Q2/2013 included Thailand (2,2% to 1,3%), followed by the Philippines (7,5% to 7,0%) and Indonesia (5,8% to 5,6%). In the meantime, key countries in the region that registered improvement in economic growth wew Singapore (3,8% to 5,1%), Malaysia (4,4% to 5,0%) and Vietnam (5,0% to 5,5%).

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As one of global economy engine, South East Asia countries comprises in Association of South East Asian Nation (ASEAN) shows a rate of growth which yet met their full potential by only record growth averaging just 5% in the past decade. Despite the global unstability, this region still have challenges to creating enough jobs for absorbing domestic growing labor forces while providing infrastructure to boost economic productivity. For instance The Philippines, Malaysia, Vietnam, Indonesia, Myanmar and Cambodia are among the countries with positive working population growth rates and declining dependency ratios. These emerging challenges should immediately tackle by ASEAN member countries because if it will not well-manage, it will create another setback for economic growth in the near future.

Although this region yet met their full potential on economy, this region has become a

refugee places by foreign investors from the continuing after-effects of the global financial crisis.This conditions should take into precautious since this condition potentially lead to the emerge of hot money that will detoriate the stability of financial system in the region. During 2013 almost 114 Million US$ of abundant investments are inflow through this region compare to People Rep. of China which recorded 121 Million US$ of investments along 2013.

During 2013, The Philippines impress not only ASEAN but also Asia at-large with

their respectively recorded growth averaging 7%, becoming the best performance among all Asian countries after earlier in this year; this country for the first time attained its investment-grade credit rating following Indonesia region’s first trillion-dollar economy which achieved it in late 2011. While Philippines began to challenge India as the top destination for offshore services, Malaysia and Thailand keep maintaining their momentum in manufacturing booming. One of the most prominent caused that largely attribute to the Philippine growth is because it does not rely heavily on export-import activities which neighbourhood countries damaged quite severly because of that dominantly affected their national economies from the instabilitation in global economic environment. Philippines is one of the few economies in ASEAN region that registered economic growth, which is attribute by the high national investment and government expenditure, which is stark contrast with other economies that rely on export-import activities.

But yet all these achievements becoming in jeopardy since many financial institutions

and experts predict that the fate of this regional economy over the next couple of years depends more on events in global economics system (such as Eurozone Crisis or United States and Japan quantitatives easing plan) than effected by the decision of local government and local central banks. Consequntly, persistence of a weak global economy and attendant uncertainty means that economies of such countries cannot avoid such effect both directly and otherwise.

Figure 2.1. ASEAN Countries GDP Growth Constant Price, 1998–Q3/2013 (yoy, %)

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Source: IMF, CEIC (2013)

Regarding regional economic stability, Indonesia becoming a prominent figure in

ASEAN relating to its size of economy which if this country have major economy correction it then will impact to the region at-large. Relating to that issue, the problems of Indonesia trade deficits and declining amount of central bank reserves should take into serious consideration for the sake of regional economy healthiness especially regarding wait-and-see act of foreign investors regarding the upcoming Indonesia National Election that will be held in April 2014.

Although Malaysia and The Philippines also having emerge threat regarding investor

confidence in their economy, but Vietnam in particular need special attention because it having major problems in banking sector debt market. Even the potential impact will not affect regional as the whole, since Vietnam only account about 6% of ASEAN GDP but this potential problems of financial vulnerability should take into lesson by Vietnam neighbour countries. In order to meet the requirement by the ASEAN Economic Community and to boost their productivity and avoding bust in economy, along 2013 lead by Thailand and Malaysia then followed by Indonesia and Philippines are expense a huge of investment for the new infrastructure as the part of strategy by the downfall of the exports.

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Figure 2.2. China, Japan & South Korea GDP Growth Constant Price, 1998–Q3/2013(yoy, %)

Source: IMF, CEIC (2013)

It is not only ASEAN region which have pesimitic prediction regarding their economy

futures. China economy as the world’s second largers economy recorded performance in 2013 as the slowest pace expansion on economy ever recorded in 14 years. This economy downturn partially affected by the declining of manufacturing sectors and also the correction of the business sentiment indicators. This manufacturing sectors declining are directly influence by the global economy weakening after the eurozone crisis followed by the correction on the Japan and United States growth rate which affected the trade activities from China to that respective destination. Response this condition, China Government wants to reduce the economy’s reliance on investment and exports while expanding household consumption which now account only around 35% of the whole China economy.

In Japan, after recording a confident growth in the first half year of 2013 economy

seems to shows the signs of weakening but fortunately it is limitedly saved by the “Abenomics” policy which entitled by the bold monetary and fiscal push to stimulate the economy of Japan. One of the main reasons for the recent slowdown in Japan economy was a drop in net exports. Since Japan close its nuclear reactor after the Fukushima nuclear disaster in 2011, Japan energy imports have soared then hurting its balance of trade. In maintaining their economy momentum the Government of Japan is planning increasing in Japan’s sales tax in 2014.

Despite the slow recorded of growth in China and Japan, South Korea gaining

confident growth offsetting the weaking economy influence of China and Japan in the region. In 2013 economic growth in South Korea is mostly derived from the front-loaded government spending which achieved by allocating 72% of current fiscal year spending in the first half of national budget periode while in the other hand external impact also occurs with the well achievement in exports rate. Beside national growth that are empowered by the public sector, the private sector also contributing positively for South Korea economic

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performace such as the profit that recorded by main company in South Korea: Samsung Electronics and Posco.

Since Japanese Yen showing sign of detoriating in currency value compare to US$

and Japan also one of the prominent export destination from South Korea, South Korea government are looking the way out to create policy that will protected their most vulnerable exporters while in the same time expanding the program of cheap loans for small businesses so that they will keep the momentum of growth despite the uncertainty of bilateral trade balances with Japan in near future.

Figure 2.3. ASEAN Annual Inflation (CPI) Rate, 2000 – 2013* (yoy, %)

Source: Bloomberg (2014) Note: 2013 = Indonesia, Malaysia, The Phillipines, Singapore, Thailand, Vietnam recorded as December 2013 (YoY). Brunei Darussalam, Cambodia, Lao PDR, Myanmar recorded as November 2013 (YoY)

Inflation level in ASEAN member nations is a major factor that has hampered

economic growth and improvement in the welfare of the region from attaining its optimum potential. In 2013 Indonesia registered the highest inflation rate in the region, which puts it in the same league as Lao PDR and Vietnam. Inflation as one of the indicators of welfare creation in a given country shows that in contrast with countries in the region which have to large extent been able to maintain inflation of below 3%, Indonesia, Lao PDR and Vietnam have not followed suit in reducing inflationary spiral in their economies. To make matters worse, Indonesia faces the prospect of an even high inflation level considering that fact that prices of goods in general will experience an increase as the yar comes to a close and still have it limited impacts in the several early months in the next fiscal year. Inflationary pressure is largely due to the fact that realized economics growth rate continues to fall short of optimal capacity. Doubtless, inflationary pressure will have adverse effect on preparations of ASEAN member nations to welcome the coming into force of ASEAN Economic Community in 2015.

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The positive growth that occurs in the regions economy which followed by the emerging working age population demography resulted into the rapid increasing rate of household consumption. This massive inclining of consumption especially from the imported products resulted by the higher pressure of inflation to the economy. Although China, Japan and South Korea show their achievement to well managed the impacts of inflation but ASEAN member countries show incapabilities to maintaining their economic defence against inflation.

Figure 2.4. China, Japan, South Korea Annual Inflation (CPI) Rate, 2000 – 2013* (yoy, %)

Source: Bloomberg (2014) Note: 2013 = recorded as December 2013 (YoY).

Table 2.1. ASEAN+3 Stock Market Index Growth, 2009-2013 (yoy, %)

COUNTRIES 2009 2010 2011 2012 2013 ASEAN

Brunei Darussalam no stock exchange Cambodia no stock exchange -17.74 Indonesia 87.9 46.9 3.0 13.3 0.25 Lao PDR no stock exchange 35.1 3.86 Malaysia 45.0 19.5 0.8 10.3 10.54 Myanmar no stock exchange The Philippines 60.3 55.7 1.9 21.1 62.30 Singapore 64.5 10.1 -17.1 19.7 0.24 Thailand 66.1 39.2 -0.9 35.9 -11.58 Viet Nam 56.6 -2.8 -20.9 7.7 23.06

ASEAN+3 People’s Rep. of China 79.98 -14.31 -21.68 3.17 -6.75

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Japan 19.04 -3.01 -17.34 22.94 56.72 Republic of Korea 49.65 21.88 -10.98 9.38 0.72

Source: Bloomberg (2014)

The growths which happen in regional stock market is showed as the optimism for South East Asia economic prospectus through the eyes of foreign investors. But yet, the foreign capital that influx into the region is kind of short promising assets which can be withdrawn anytime by the investors especially foreigner whose hold majority of securities, debt and other financial products of ASEAN member countries.

The flood of foreign capital inflow then resulted to the rapid growth in real estate

prices, increasing domestic consumption and accumulating household debt or in other word the emerging threat of asset bubbles. Although the foreign investment flows in the region mostly are hot money but many experts say that it wills not fleeing in the near future since it doesn’t really have anywhere more attractive to go in the current economic climate. Experts also believe the the potential impact if the hot money suddenly withdrawn by the investors will not impact severely like the previous Asia’s regional crisis since regional governments are better organized now and they already have the foreign exchange reserves which act a a buffer against potentially currency collapses.

Table 2.2. ASEAN+3 Exchange Rate Growth to US$, 2009-2013 (yoy, %)

COUNTRIES 2009 2010 2011 2012 2013 ASEAN

Brunei Darussalam 4.17 7.97 0.00 4.72 -2.48 Cambodia -2.21 0.81 0.30 1.76 -0.33 Indonesia 14.00 5.79 0.36 -8.72 -26.92 Lao PDR -0.05 3.53 0.56 1.77 -2.07 Malaysia 0.59 9.17 -3.26 4.42 -8.58

Myanmar 0.32 0.16 0.48 -

13360.00* -14.93 The Philippines 1.44 5.73 0.09 7.05 -9.03 Singapore 3.45 8.57 -0.78 5.43 -3.28 Thailand 4.52 9.32 -6.26 4.25 -7.96 Viet Nam 6.70 -5.71 -7.97 2.05 -2.36

ASEAN+3 People’s Rep. of China -0.29 3.22 4.69 1.11 2.89 Japan -2.49 12.30 4.70 -10.70 -22.07 Republic of Korea 7.33 2.08 -2.51 10.15 -1.56

Source: Bloomberg (2014) *= During this year, Myanmar having currency adjustment

As the results of the recession in the West and China’s ongoing economic

readjustment, South East Asia has been exporting less and market wekness reduces the value of the commodities it sells. Even South-South trade which usually becoming the buffer from the developed countries trade demand declining now also begun to cool-down with Brazil and other major developing countries now experiencing slowdown of their own.

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The declining in the trade of balance on the most countries in the region then turn into

the weakening of regional currency compare to United States Dollar (US$). This pressure in regional currency potentially to be further since the Federal Reserve of US and Bank of Japan plan to having quantitative easing program which potentially cause the destabilizing impact that will left South East Asia currencies and stock market becoming vulnerable.

Weakening performance of limited capital market and mostly money markets in

ASEAN member countries which was evident then remains unabated in the close of the fiscal year in 2013. In general capital markets in some key economics in the region have shown signs of improvement, which indirectly signals improvement on investor confidence in the performance economies of ASEAN member countries. However, during the the last quarter in 2013, the pace of improvement in the capital market was slower than expected. That may indirectly imply that not all investors are convinced about better prospects of ASEAN member economies. Apparently, improvement in the performance of capital markets has not spilled over into money markets, a fact that is attested by significant depreciation of nearly all currencies in the region. The depreciation of exchange rates in ASEAN region, especially lead by Indonesia and Myanmar which are the two countries that have experienced depreciation of exchange rates of their currencies above 10% compared with the exchange rates of their currencies at the beginning of the year 2013.

2.2. Economic Development in ASEAN + 3

2.2.1. Financial Sector Cooperation One of the main components of the free flow services within the AEC is the

liberalization of finance sector. Thus, it needs a finance sector cooperation in order to achieve finance sector integration that in accordance with the AEC design. The AEC blue print (ASEAN Sec., 2008) implies that Liberalization measures of the financial services sector should allow members to ensure orderly financial sector development and maintenance of financial and socio-economic stability.

There are two principles in doing so. First, the Liberalization is through ASEAN

minus X formula where countries that are ready to liberalize can proceed first and be joined by others later. Second, the liberalization process should take place with due respect for national policy objectives and the level of economic and financial sector development of the individual members. Technically, the liberalize restrictions in sub-sectors or modes as identified by each member country by 2015; and liberalize restrictions in the remaining sub-sectors or modes, which are not identified under “pre-agreed flexibilities”, by 2020.

The background of the special cooperation in finance sector was the ASEAN financial

crisis of 1997/ 1998. The 1997/98 crisis was the milestone for the ASEAN in realizing the importance of special cooperation in financial sector. The annual ASEAN Finance Ministers Meeting (AFMM) is the body that accommodates the financial cooperation. The AFMM is assisted by two other structures: the ASEAN Finance and Central Bank Deputies Meeting (AFDM) and the ASEAN Directors General on Customs Meeting (Customs DG). The first AFMM was held in 1997.

The Meeting provided several importance things regarding financial cooperation in

ASEAN level. They are:

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(1) The Ministers signed the Ministerial Understanding on ASEAN Cooperation in Finance which provides a framework to enhance cooperation within their existing institutional arrangement in several areas of finance which include banking and finance; financial and capital markets; customs matters; insurance matters; taxation and human resouce development in the area of finance; (2) The Ministers reaffirmed their commitment to liberalise further their financial services sector as part of the deregulation and liberalisation process in their respective economies; (3) The Ministers noted that ASEAN Swap Arrangement (ASA) is due to expire in August 1 997 and agreed that it should be reviewed as the global financial environment has changed dramatically since its establishment in 1 977; and (4) The Ministers recognised the need to enhance the international attractiveness of ASEAN capital markets and agreed to work together to jointly promote the regional capital market.

Those decisions give significance influences to the capital market development in

ASEAN today. One of the AFMM important decisions is the agreement of Roadmap for Monetary

and Financial Integration of ASEAN (RIA-Fin). Endorsed by the AFMM in Manila in 2003, RIA-Fin consists of steps, timelines and indicators of activities in four areas: (a) Capital Market Development, (b) Liberalisation of Financial Services, (c) Capital Account Liberalisation and (d) ASEAN Currency Cooperation, with the ultimate goal of greater economic integration in ASEAN by 2015.

Capital Market Development is intended to build capacity and is to lay the long-term

infrastructure for development of ASEAN capital markets, with a long-term goal of achieving cross-border collaboration between the various capital markets in ASEAN. One of key achievements is the adoption of a proposed “Medium-Term Strategic Framework (MTSF)” to guide the work of the Working Committee on Capital Market Development and to align capital market development to the ASEAN Economic Community (AEC) Blueprint. Meanwhile, the Financial Services Liberalization is intended to achieve free flow of financial services by 2015. Liberalisation is carried out based on a positive list approach modality, where Member States will prepare an indicative list of financial services sub-sectors and modes for liberalisation. Similarly, the Capital Account Liberalisation is proposed to achieve freer flow of capital by 2015. Member States agreed to take stock of current status of, and prepare, and implement national work programmes for capital account liberalisation. Finally, the ASEAN Currency Cooperation is to explore ways that could further facilitate intra-regional trade and investment and economic integration, including through some forms of currency arrangements

The next progress of finance sector is mostly on achieving a stable, efficient and

resilient financial system in the region – so that ASEAN financial sector may have a better shock resistance against the other region crisis. In addition, it is also consistent to secure the economy growth. The 14th AFMM 2010, Ministers agreed to remain vigilant against the uncertainties in major advanced economies and committed to maintain growth momentum in order to achieve a stable, efficient and resilient financial system in the region.

According to the AEC framework, in order to achieve ASEAN financial integration,

one of the milestones, is to have effective surveillance in the region (Bank Indonesia, 2007). Hence, ASEAN has established the ASEAN Surveillance Process (ASP). The ASP started in 1999 as a mechanism for peer review and exchange of views among the senior officials (central bank and finance) and Finance Ministers on recent economic developments and

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policy issues in ASEAN. Since then, it has evolved into an important mechanism in ASEAN on regional economic monitoring and surveillance.

Such mechanism within the ASP is meant to prevent the crisis both at national and

regional scale. If the symptoms of the crisis emerge, then ASEAN states will work together overcome it, so that the crisis will not extend or continue to happen. As said before, the 1997/98 crisis has given so many lessons to the ASEAN members; hence, they intensify their work as a team for tackling financial crisis ever since.

The main achievement regarding ASP is the creation of Macroeconomic and Finance

Surveillance Office (MFSO) that falls under ASEAN Secretariat. The MFSO will be responsible for implementing surveillance in ASEAN and monitoring regional economic integration initiatives such as financial integration. It became effective in 2011.

2.2.2. ASEAN+3 Finance Cooperation The process of ASEAN plus Three (APT), which is ASEAN with Japan, South Korea

and China, began in 1997. Within the process, the cooperation has broadened and deepened, and the most important part is the cooperation in finance sector. A Second Joint Statement on East Asia Cooperation and the APT Cooperation Work Plan (2007-2017) were adopted at the 11th APT Summit in 2007 in Singapore. They provided strategic guidance for the future direction of APT cooperation. The Guidelines to implemen the Second Joint Statement on East Asia Cooperation and the APT Cooperation Work Plan (2007-2017) were endorsed at the 13th APT Directors-General Meeting on 2009 in Seoul.

In finance and monetary cooperation, the focus continues to be on the implementation

of the Chiang Mai Initiative Multilateralisation (CMIM) and the Asian Bond Market Initiative (ABMI). The CMIM is supported by the APT Macroeconomic Research Office (AMRO) in Singapore, which commenced its operations in 2011.

The Chiang Mai Initiative (CMI) was established by the ASEAN Plus Three Finance

Ministers Meeting (AFMM+3) in 2000. The primary agreement in the CMI 200 is a network of bilateral currency swap arrangements to: (a) address short-term liquidity difficulties in the region and (b) supplement the existing international financial arrangements. In detail, the CMI 2000 consisted of the ministers’ announcement of their intention to cooperate in four principals (Rana, 2002):

a) An expanded ASEAN Swap Arrangement that would include all ASEAN countries and a network of bilateral swap and repurchase agreement facilities among ASEAN countries, China, Japan, and Korea. b) Use of the ASEAN+3 framework to promote the exchange of consistent and timely data and information on capital flows. c) Establishment of a regional financing arrangement to supplement existing international facilities. d) Establishment of an appropriate mechanism (early warning system) that could enhance the ability to provide sufficient and timely financial stability in the East Asian region.

The CMI has two phases. In 2004, the AFMM+3 agreed to have a more advanced framework for liquidity support that focuses on the multilaterisation of CMI (CMIM).

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After CMI, on August 2003, ASEAN+3 proposed an initiative to expand Asian bond

market, known as the Asian Bond Market Initiative (ABMI). ABMI is an initiative to enhance the cooperation, under ASEAN+3 scheme, with two objectives: to (a) develop local-currency denominated bond markets, and (b) develop more accessible and well-functioning regional bond markets both for issuers and investors. In term of economy, the ABMI outcomes (Arifin, 2007) are: (a) Developing an efficient and liquid share market that can sustain the use of savings for investments in Asia; (b) Supporting the efforts to overcome the issues related to currency mismatch and maturity mismatch.

The ABMI activities focus on two objectives: (a) Enhancing the market access

through the expansion of obligation groups; (b) Enhancing the share market infrastructure in Asia. In order to achieve the objectives, ABMI has four working groups, which cover:

(1) New securitized debt instruments that focus on the bond security, by which it makes the bond selling easily; (2) Credit guarantee and investment mechanisms that focus on scrutinizing the; (3) Foreign exchange transactions and settlement issue that focus on the issues related to minimize risk of obligation transaction between the countries. (4) Rating system that focuses on enhancing the law and regulations harmonization of the creditor institutions within the member states so that their judgments upon the obligations are available for access as well as for comparison.

Following the new ABMI Roadmap endorsed by the 11th ASEAN+3 Finance

Ministers Meeting (AFMM+3) in Madrid in May 2008, the four ABMI Working Groups have evolved into Task Forces addressing the four key areas namely: (a). promoting key issuance of local currency-denominated bonds; (b) facilitating the demand of local currency-denominated bonds; (c) improving regulatory framework; and (d) improving related infrastructure for the bond markets. The Technical Assistance Coordination Team (TACT) has provided technical assistance in bond markets to interested members. One of the key initiatives under the ABMI framework is the establishment of the Credit Guarantee and Investment Facility (CGIF) aimed at supporting the issuance of local currency-denominated bonds in the region.

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2.3. Financial Market Development in ASEAN + 3 At the ASEAN Finance Ministers Meeting (AFMM) in Manila in 2003, ASEAN

countries committed themselves to build stronger integrated financial markets to achieve the goals of ASEAN Economic Community by endorsing the Roadmap for Monetary and Financial Integration of ASEAN (RIA-Fin) which consist of :

1) Capital market development This involves building capacity and construction long term infrastructure for ASEAN capital market development. This will require cross border collaboration between various capital market in ASEAN, as well as the development of the implementation plan for an integrated capital market to enhance market access, linkages, and liquidity.

2) Liberalization of financial services This involves progressive liberalization of financial services by 2015. This must be implemented across the board except for certain sub sectors and transactions where pre agreed flexibilities will be determined. The main sectors and areas for regulatory liberalization include entry and licensing, supervision, restrictions on risk management procedures, and transparency

3) Capital account liberalization This involves the removal of capital controls and restrictions to facilitate freer flow of capital by 2015. This includes the elimination of restrictions on current account transactions, foreign direct investments, and portfolio flows.

4) ASEAN currency cooperation This intended to explore ways that could further facilitate intra regional trade and investment and economic integration, including through some forms of currency arrangements. As preconditions for closer currency cooperation, efforts would be made toward maintaining appropriate macroeconomic policies and foster greater macroeconomic convergence.

The roadmap requires ASEAN members to sign onto opening up under mode 1 (cross border supply), mode 2 (consumption abroad), mode 3 (commercial presence)1, and mode 4 (movement of natural persons)2. However ASEAN countries are at very different stages of financial development and have adopted different pathways to both financial and economic development. As a result, all ASEAN countries, excluding Singapore, have fallen behind the liberalization goals in terms of foreign equity participation (Chia 2013). Domestic restrictions on equity and landholdings, and licensing requirements continue to pose significant barriers to intra regional investment in service. Since the AEC does not reach into behind the border issues, these bariers tend to persist in the foreseeable future.

The integration of ASEAN financial market is expected to increase the effectiveness of financial intermediation in the entire region. Hence, ASEAN countries engaging within

1 For mode 3, the allowed foreign equity should be not less than 52% by 2008, and 70% by 2010 for the 4 priority service sectors; not less than 49% by 2008, 51% by 2010, and 70% by 2013 for logistics services; and not less than 49% by 2008, 51% by 2010 and 70% by 2015 for other services sectors. For mode 3, the parameters of liberalization for national treatment limitations, and limitations in the horizontal commitments for each round are set by 2009 and schedule commitments according to agreed parameters. 2 For mode 4, MRAs or MRA frameworks for professional qualifications have been completed in architecture, accountancy, surveying, engineering, medical practitioners, dental practitioners, and nursing. Other MRAs for professional services are to be identified and negotiations completed by 2015.

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People’s Republic of China, Japan, and the Republic of Korea (ASEAN+3) launched several initiatives for financial cooperation, including the CMIM (a foreign exchange liquidity support mechanism) and AMRO (surveillance agency). By 2030, the CMIM and AMRO may well have evolved toward an Asian monetary fund.

Furthermore, in analyzing the financial market development in ASEAN+3 countries,

the study employed the ratio of total financial assets in relations to GDP. The results show that there is a vastly differs of financial systems in ASEAN+3 countries. Figure 5 indicates ASEAN+3 financial market with the total assets composition between 1997 and 2012, according to data on bank asstes per GDP, stock market capitalization per GDP, and bond capitalization to GDP. In term of total financial assets to GDP ratio in 2012, Japan has the highest percentage of financial structures as the fraction of GDP compare to the other ASEAN+3 member, accounted for 463.27%, followed by Republic of Korea (383.69%), Singapore (373.61%), and Malaysia (335.80%). In contrast, the financial development of Brunei Darussalam, Lao PDR, Myanmar and Cambodia are minimal.

Figure 2.5. Financial Assets in ASEAN+3 Countries, 1997 – 2012 (% of GDP)

0

100

200

300

400

500

600

1997 1998 2000 2005 2008 2009 2010 2011 2012

Brunei Darussalam Cambodia People's Republic of China IndonesiaJapan Republic of Korea Lao PDR MalaysiaMyanmar Philippines Singapore Thailand

Source: International Monetary Fund, World Bank, Asian Bond Online, CEIC (2013)

Moreover, before the Asian financial crisis, financial landscape in ASEAN countries had been characterised as bank dominated. However, ASEAN banking market has shown little progress toward integration. Although most of the members have taken steps to open up their banking industry, cross border banking and the cross border penetration of ASEAN based banks within ASEAN have been slow to develop. In fact, until 2010 not a single ASEAN based commercial banks had either a branch or subsidiary in all ASEAN member states.

Related to the ratio of bank assets to GDP in 1997, among the ASEAN+3 countries,

the largest is observed for Japan (231.40%) followed by Thailand (159.26%), Malaysia (145.94%), and Singapore (107.82%); meanwhile the smallest ratios are for Myanmar (9.19%), Lao PDR (13.17%), and Vietnam (18.88%). However in 2012 the banking sector assets in relation to GDP have been decreasing for several of the ASEAN+3 members, including Japan (188.95%), followed by Malaysia (125.08%), and Thailand (121.43%), Philippines (46.25%), and Indonesia (33.05%). It is apparent that financial deepening differs vastly among ASEAN+3 economies.

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Figure 6 further shows that countries with larger stocks of financial assets tend to

have better developed capital markets. In Korea, Japan, Singapore and Malaysia, the value of stock and bond market capitalization is greater than the balance of bank assets. The low financial accumulation of Brunei Darussalam, Cambodia, Lao PDR, and Myanmar is in large part of a reflection of the absence of well established capital market.

Figure 2.6. Bank Assets, Stock Market Capitalization, and Bond Market Capitalization in ASEAN+3 Countries, 1997 and 2012 (% of GDP)

1997 2012

050

100150200250300350400450

BANK ASSETS STOCK MARKET CAPITALIZATIONBOND MARKET CAPITALIZATION

050

100150200250300350400450500

BANK ASSETS STOCK MARKET CAPITALIZATION BOND MARKET CAPITALIZATION

Source: International Monetary Fund, World Bank, Asian Bond Online, CEIC (2013)

In brief, Singapore, Malaysia, Thailand, China, Japan, and Korea were categorized as advanced financial structures according to data on bond per GDP, stock market capitalization per GDP, and bank assets per GDP. Meanwhile, Philippines, Indonesia, and Vietnam have medium development of the financial system. It can be said that those countries have a complete financial structure (banks, stock and bond markets) but at a low level and characterized by bank dominance. Additionally, Brunei Darussalam, Lao PDR, Myanmar, and Cambodia have low development of the financial system.

Thus, the task ahead is thus clear. Most of ASEAN+3 countries still have a long way

to go in deepening the financial sectors and developing capital markets. Given the wide variety within ASEAN+3 countries, the issues they faced are also wider, particularly in fulfilling financial integration within the region. For instance, in enhancing financial market development within ASEAN+3, some countries make banking system development in priority, while others continuing to deepend their capital markets. In time, countries in the first group can catch up by emulating the more developed ones in the second group, by strengthening inclusive access to banking and lending vehicles such as microfinance and innovations that cater to better finance for small and medium enterprises. For more established markets, the task is not so straightforward. As market deepen and widen, working toward synergizing ASEAN+3 markets may make sense.

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2.4. Capital Market Development in ASEAN

ASEAN countries have been engaging within the People’s Republic of China, Japan, and the Republic of Korea under ASEAN+3 to promote capital market development with the ultimate goal of better recycling regional savings into regional investments. It also supports long term financing through initiatives such as the Asian Bond Fund (ABF), the Asian Bond Markets Initiative (ABMI), and the Credit Guarantee Investment Facility (CGIF).

In November 2007, leaders of ASEAN countries agreed on the ASEAN Economic

Community Blueprint. One component of this blueprint is a proposal to develop an integrated capital market in the ASEAN region. The argument is that intraregional financial integration is still behind increases in trade (Asian Development Bank, 2012).

ASEAN capital market authorities have piloted initiatives to support the establishment

of an integrated capital market. In early 2008, ASEAN finance ministers met in Viet Nam to discuss the capital market integration plan. They proposed to develop an implementation plan for promoting an integrated capital market to achieve the objectives of the AEC Blueprint 2015. The implementation plan was approved at the 13th ASEAN foreign ministers meeting in Pattaya, Thailand in 2009. The implementation plan covers six principles that were agreed by ASEAN Capital Market Forum (ACMF):

1) Adoption of international standards to the extent possible 2) Progressive liberalization to facilitate more open access and cost reduction through

greater competition 3) Sequencing of regional integration initiatives, with ease of implementation, market

preferences, and technical linkages taken into account. 4) Engage the ASEAN secretariat as the main coordinator 5) Consistent implementation of policies to support regional integration at country level,

with effective monitoring mechanisms. 6) Strong communications plan and consultative processes to build consensus and set

priorities for integration initiatives.

The establishment of an integrated capital market is expected to result in freer international capital market movement, easier capital raise for companies, regional expansion of financial institutions, and wider choice of assets for investors. However, achieving an integrated market is not easy because of significant differences in the level of development of capital markets in the region. Some countries have more advanced capital markets in terms of system, number of investors, number of issuers, variety of products, product restrictions, legal frameworks, and other factors. Beside, the authority in each country also has responsibility for keeping the capital market fair and sound, ensuring that market participants follow capital market law and regulation, and maintaining financial stability.

Hence, to address challenges in integrating ASEAN capital market and to meet the

diverse need and interest of capital market stakeholders, the ASEAN Capital Market Forum (ACMF) assigned a group of experts to develop guidance for the development of the implementation plan. The ASEAN secretariat responsible to coordinating with financial regulators on assessing and implementing financial liberalization initiatives and tax system reform was also involved in developing the plan. The ACFM identified six strategic components for the plan (Table 2.3.).

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Table 2.3. Strategic Components of ACFM Implementation Plan for Integrating Capital Markets

STRATEGIC COMPONENT 1

Development of a mutual recognition framework to facilitate :

· Cross border fundraising · Product distribution · Cross border investment within ASEAN · Market access by intermediaries


· Strengthen bond markets · Accelerate reform in bond issuance, listing

and distribution · Design a regional strategy for rating

comparability · Improve market liquidity and clearing and

settlement of linkages STRATEGIC COMPONENT 2

ASEAN exchange alliance and governance framework:

· Build trading alliance and governance framework

· Enhance governance, trading efficiency, and cost reduction

· Clearing, depository and settlement linkages · Marketing and investor education


· Align domestic CMPD to support regional integration

· Align national development initiatives to support cross border integration

· Adopt phased approach to liberalization to ensure domestic market readiness


· Promote new product and build ASEAN as an asset class

· Promote private sector led regional sector development

· Promote ASEAN star companies under the ASEAN board

STARTEGIC COMPONENT 6

· Reinforce ASEAN working process · Establish ASEAN coordinating team,

composed of dedicated resources from ASEC and dedicated point persons from ACMF member to monitor, coordinate, report on, and raise issues on the implementation plan.

Source : ASEAN Capital Market Implementation (2009)

Furthermore, among ASEAN+3 countries, the ASEAN-5 members (Singapore, Malaysia, Indonesia, Philippines, and Thailand) introduced reforms to further develop and deepen capital markets following the Asian financial crisis of 1997. The Singapore Exchange opened in December 1999 and became the first publicly held stock exchange in Asia Pacific in 2000; the Philippine Stock Exchange became a stock corporation in 2001 and listed in 2003; and Indonesia had merged the Jakarta and Surabaya stock exchanges in 2007. In Malaysia, there was a gradual lifting of capital controls, such as those involving non-resident holdings of Malaysian securities. In Thailand two capital market development plans implemented, one in 2002 to improve institutions and attract more investors and issuers, and another in 2006 to develop the corporate bond market (Lee and Takagi, 2013).

Meanwhile, the Lao Securities Exchange started trading with two listed companies in

January 2011, while the Cambodia Stock Exchange opened in July 2011 after years of deferment. Lao PDR regularly issues treasury bills to finance the country’s budget deficit and arrears clearance bonds to clear government debt from state-owned enterprises. There are no formal markets as such in Brunei Darussalam or Myanmar, but it should be mentioned that, in 2002, Brunei Darussalam ventured into the international debt market for the first time by undertaking a USD 250 million syndicated loan. The government regularly issues sukuk bonds under the Islamic bond program, which started its first offering in 2006.

Moreover, in terms of bonds outstanding, the largest of ASEAN+3 bond markets in 2013 is Japan, accounted for 217.72% for bond market capitalization in relation to GDP,

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followed by Republic of Korea (128.85%), and Malaysia (103.19%). In relation to GDP, Singapore has the fourth largest local currency bond market among ASEAN+3 (or the second largest in ASEAN). In 2007 Singapore began to issue 20-year government bonds and launched its first Islamic bond program in 2009. During 2013, Singapore bond market capitalization to GDP accounted for 85.05%. Meanwhile, Thailand’s local bond market continued to expand in the mid-2000s. The country implemented its second capital market development plan in 2006 and started offering Islamic sukuk bonds in 2009. Besides, in Indonesia, Islamic bonds play a major role in the capital market especially with the passage of the Islamic Shari’a Debt Bill in 2008. The Philippines sold 25-year peso global bonds—allowing the government to lengthen its debt maturity profile and reduce exposure to foreign exchange risk ((Lee and Takagi, 2013).

Table 2.4. Bond Market Capitalization in ASEAN+3 Countries, 1997 – 2013 (% of GDP)

INDICATORS COUNTRIES 1997 1998 2000 2005 2008 2009 2010 2011 2012 2013Brunei Darussalam NA NA NA NA NA NA NA NA NA NA

Cambodia NA NA NA NA NA NA NA NA NA NAPeople's Republic of China 3.51 5.01 7.07 10.71 15.93 19.32 21.46 23.08 12.47 14.95

Indonesia 1.55 1.57 1.34 2.23 1.57 1.50 1.61 1.41 2.27 2.43Japan 43.25 47.84 48.14 40.98 40.33 39.74 37.34 37.19 18.02 17.32

Republic of Korea 29.66 45.95 50.72 53.04 56.43 65.73 66.83 59.25 75.18 79.38Lao PDR NA NA NA NA NA NA NA NA NA NAMalaysia 35.86 41.23 32.79 47.42 56.49 58.89 58.67 58.09 42.61 42.55Myanmar NA NA NA NA NA NA NA NA NA NA

Philippines 0.19 0.20 0.21 0.71 0.93 0.93 1.03 0.96 4.98 4.83Singapore 9.87 11.52 16.52 17.81 16.60 14.20 11.56 10.01 31.57 32.41Thailand 7.32 8.38 11.46 10.43 11.91 13.31 13.25 12.73 15.48 16.17Vietnam 0.00 0 0.49 0.8 1.63 2.27 0.76 0.4

Brunei Darussalam NA NA NA NA NA NA NA NA NA NACambodia NA NA NA NA NA NA NA NA NA NA

People's Republic of China 4.22 5.39 8.14 23.73 30.39 29.35 26.36 22.44 33.25 32.46Indonesia 0.70 2.24 28.53 16.91 13.57 13.58 13.52 10.79 10.95 11.44

Japan 51.59 63.14 79.16 145.53 178.97 195.56 200.08 218.85 194.54 200.4Republic of Korea 8.56 14.15 20.73 44.23 39.66 43.05 46.97 44.81 47.86 49.47

Lao PDR NA NA NA NA NA NA NA NA NA NAMalaysia 23.21 25.47 28.23 36.65 42.17 48.66 53.33 54.02 63.61 60.64Myanmar 0.42 0.67 3.31 1.23 0.61 1.02 2.77 3.29 NA NA

Philippines 25.23 22.09 24.59 36.84 30.99 29.82 29.54 29.07 33.49 33.39Singapore 13.34 15.44 23.90 37.27 43.92 46.93 44.37 45.40 50.03 52.64Thailand 1.06 5.67 13.66 28.13 37.69 42.42 48.14 49.78 59.43 59.15Vietnam NA NA 0.28 5.01 13.51 15.1 12.21 13.5 16.98 16.49

Private Bond Market Capitalization to GDP (%)

Public Bond Market Capitalization to GDP (%)

Source : Asian Bond Online, CEIC (2013)

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CHAPTER III CAPITAL MARKET INFRASTRUCTURE

3.1. Overview of Asian Capital Market Capitalization ASEAN capital market has a significant performance progress for the recent years. ASEAN countries have progressed well, their market capitalization to the GDP ratio from year to year. In detail, the market capitalization to GDP ratio of the seven ASEAN countries including China, Japan, and South Korea in the recent years is depicted on the Table 3.1:

Table 3.1. Market Capitalization to GDP Ratio

Country 2008 2009 2010 2011 2012 2013 China 0.31 0.53 0.44 0.31 0.31 n.a.

Indonesia 0.21 0.35 0.49 0.45 0.47 0.43 Korea 0.55 0.81 0.95 0.82 0.88 n.a. Japan 0.37 0.43 0.42 0.35 0.42 n.a. Laos n.a. n.a. n.a. 0.08 0.11 n.a.

Malaysia 0.62 0.89 1.00 0.90 0.98 n.a. Philippines 0.22 0.33 0.43 0.46 0.57 0.55 Singapore 0.92 1.58 1.58 1.30 1.51 n.a. Thailand 0.38 0.63 0.81 0.79 1.02 n.a. Vietnam 0.10 0.27 0.27 0.16 0.21 0.23

Source: CEIC and Bloomberg (2014)

Based on the table, it is not only the ASEAN-5 (Indonesia, Malaysia, Philippine, Thailand, Singapore), which has progressed in market capitalization, but also the new comers of ASEAN, CLMV (Cambodia, Lao, Myanmar, Vietnam) has progressed rapidly. Nevertheless,, Singapore and Thailand have the highest market capitalization to GDP ratio. Meanwhile, Lao PDR and Vietnam, which are in the development stage, have the lowest market capitalization. Yet again, with positive trend of market capitalization to GDP, CLMV countries are potential to have equal performance of capital market to the ASEAN-5 countries.

3.1.1. Brunei Darussalam

3.1.1.1. Regulatory Framework of Brunei Darussalam Capital Market A. Corporate Action Processing Rules

1. Capital Market Types of Licenses, Capital Requirements and Fees

In order to manage its capital market, Brunei Darussalam Capital Markets: (1) Securities Order of 2001 which had been amended in 2002 and 2005; and (2) Mutual Funds Order of 2001. Both of them have been replaced with the Securities Market Order of 2013 (approved in June 2013).

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Based on the regulation, capital market manager determine the corporate action processing rules. The followings are several rules according to the Securities Order of 2001, and the Mutual Funds Order of 2001.

Table 3.2: Capital Market Types of Licenses, Capital Requirements and Fees (Based on Securities Order of 2001)

TYPES OF LICENCES

MIN. SHAREHOLDERS’ FUNDS

APPLICATION FEE (USD)

ANNUAL FEE (USD)

Securities Exchange To be prescribed by the Authority Dealer USD 250,000 5,000 4,000 Investment Advisor BND 100,000 4,000 3,000 Representative N/A 4,000 2,000

Tabel 3.3:Capital Market Types of Licenses, Capital Requirements and Fees (Based on Mutual Funds Order of 2001)

TYPES OF LICENCES

MIN. SHAREHOLDERS’ FUNDS (BND)

APPLICATION FEE (USD)

ANNUAL FEE (USD)

Public Fund N/A 1,000 3,000 Private / Professional Fund

N/A 500 1,000

Fund Manager

· Public Fund · Private /

Professional Fund

100,000

1,000 500

2,000 1,000

Fund Administrator


Professional Fund

50,000

1,000 500

2,000 1,000

Custodian / Trustee


Professional Fund

50,000

1,000 500

1,000 1,000

(Note: Initial payment for registering and applying licenses under the Mutual Funds Order of 2001 amounts to the Application Fee + the Annual Fee)

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2. Provisions Regarding Securities Order

Public data were collected from the Autoriti Monetari of Brunei Darussalam. Inside the securities order, there are around 94 arrangements of sections. Those arrangements must be followed to get permission from Brunei Darussalam Autoriti Monetari ‘Financial Services Monetary’.

The arrangements are divided into ten parts:

a. Preliminary It is an order to make provisions with respect to financial exchanges, dealers and other persons providing advice in respect of, managing or dealing in securities, for certain offences relating to securities, and for other purposes connected therewith.

b. Exchanges A person shall not, except as permitted pursuant to this order or any other written law, establish or maintain or assist to establish or hold him/herself out as providing or maintaining a market that is not the market of an exchange. A person, who contravenes or fails to comply with the provisions of subsection from the rule is guilty of an offense and liable on conviction to a fine not exceeding $1,000,000, imprisonment for a term not exceeding 10 years or both.

c. Licenses A license that a company has would be given to new players in capital markets. As players, there are some stuff that they need to follow or conduct. Also at the end, the players should obey the regulations, otherwise they would have to pay fines.

d. Records This part applies to a person who is a dealer, a dealer’s representative, an investment advisor, an investment representative, a person in direct employment of or acting for or in arrangement with a financial journalist, and an authorized depository agent approved by the authority.

e. Conduct of Securities Business A person who is the holder of a license shall not represent or imply, or knowingly permit to be represented or implied in any manner, to any person that the authority has in any respect approved his/her ability or qualifications. A statement that a person is the holder of a license is not a contravention of this section. The minister may prescribe, and an exchange shall make provisions to the rules provided for. Such provisions as in either case may be considered necessary to govern the practice known as short selling, including the penalties which may be imposed in case of the breach of any regulation or rule. In the case of prescribed penalties, up to a fine not exceeding $500,000, imprisonment for a term not exceeding 5 years or both.

f. Accounts and Audit This part applies to and is in relation to the business of a dealer within the meaning of this order, whether or not that business is carried on in or from within Brunei Darussalam.

g. Fidelity Funds The Minister's order may be published in the Gazette, requiring that an exchange shall establish and keep such a fidelity fund, which may be administered by a committee on behalf of that exchange. The assets of a fidelity fund shall be the property of the exchange but are separate from all other properties, and shall be held in trust for the purposes set out in this part.

h. Trading in Securities A dealer or an investment advisor and any employee shall not, as principal, jointly

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purchase or subscribe to, or agree to purchase or subscribe to, any security. A dealer or an investment advisor shall not give credits to any employee or to any person whom, to his knowledge, is associated with such employees if:

(i) Credit is given for the purpose of enabling or assisting the person to whom it is given to purchase or subscribe to any securities; or

(ii) The person giving the credit knows or has reasons to believe that it will be used for the purpose of purchasing or subscribing to securities.

(iii)A person who is an employee of a corporate that is a member shall not, as principal, purchase or agree to purchase any securities or rights or interests in securities unless the corporate acts as his/her agent with respect to the transaction.

(iv) A person who contravenes or fails to comply with this section is guilty of an offense and liable on conviction to a fine not exceeding $200,000, imprisonment for a term not exceeding 3 years or both.

i. Enforcement and Investigation This Part does not authorize any investigation into the business of a bank licensed under the Banking Act (Chapter 95) or the International Banking Order of 2000 (S 53/2000) or of a finance company as defined in the Finance Companies Act (Chapter 89), unless specifically provided for in this Part.

j. General There are some regulations and fines that a player should comply with. Overall, the arrangements are coming from 94 rules that the player should obey. Moreover, each rule has subsections of regulations.

3.Investor Protection, Capital Market Transparency, Taxation, and Corporate Disclosure

a. Regulations that provide protection for minority or individual investors in capital markets (e.g., investor protection funds, client money (or deposit) protection of securities accounts) The new legislation provides for the establishment of an investor compensation scheme as well as other mechanisms to enhance the protection of investors. However, this will only be implemented over next year.

b. Market Stabilizing Mechanism to Cope with Abrupt Changes in the Stock Market There is no market stabilizing mechanism to cope with abrupt changes in the stock market.

c. Prevention of Cross-Border Market Misconduct d. Disclosure of Material Information in a Timely Manner to Investors of Both

Exchanges e. Non-Discriminatory Investor Protection Scheme and Standards f. Corporate Disclosure to Enhance Transparency of Capital Markets

(i) Frequency (e.g., annual, quarterly) Different activities have different frequencies of disclosure. For instance, for all licensees, financial disclosure is required to be done annually and semi-annually. Mutual fund reports are to be submitted monthly and any material changes taking place with regard to the company must be disclosed not later than 14 days since the day of the event.

(ii) Criteria of companies for mandatory corporate disclosure Companies conducting any regulated activities in Brunei Darussalam and licensed under AMBD.

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(iii) Things that should be included in corporate disclosure All financial and material information in relation to the company that can affect the interests of clients/customers and the public, and that which the Authority deems necessary for disclosure.

(iv) Sanctions applied when companies fail to fulfill the duty of corporate Disclosure.Late payment penalty and compounded fine for continuing offenses.

(v) Media used for corporate disclosure · Financial position disclosure in the audited financial statements. · Circular resolutions in writing to the public for any changes. · Company websites.

(vi) Taxation in Capital Market There is no tax in Brunei Darussalam.

(vii) Securities Investor Protection Bailout There is currently no such bailout in Brunei.

The capital market infrastructure is still being established and there are plans to have linkages for cross-border cooperation especially with the ASEAN member countries.

4.Legal Framework and System of Capital Markets

a. Laws and Systems Have Been Newly Introduced or Revised in Regard to Capital Markets In The Past Three Years Brunei has developed the latest order for its capital markets, named the Securities Markets Order (SMO) approved in June 2013. It is part of the Autoriti Monetari of Brunei Darussalam’s efforts to build stronger legal and regulatory framework in governing activities and all components of capital markets systems. The SMO repeals the Securities Order of 2011 and the Mutual Fund Order of 2001. The SMO is adjusted to align with the International Organization of Securities Commissions (IOSCO) objectives and principles of securities regulation. It is expected to provide better oversight of the capital markets and its participants, improve disclosure requirements and finally result in greater investor protection as well as increase market confidence.

b. Plan to Introduce or Revise Related Laws, or Change Related Policies and

Systems Currently no plan to introduce or revise laws or change related policies and systems.

c. Future Plan to Introduce or Revise Laws and Change Systems in Regard to Capital Market Infrastructure. The plans to be introduced:

(i) Bill of Exchange (Amendment) Order of 2013, which allows the truncation of checks, facilitating electronic or cross-border transactions to take place.

(ii) Payment and Settlement Systems (Finality and Netting) Order of 2013

(iii) Payment and Settlement Systems (Oversight) Order of 2013. Both laws govern payment and settlement systems.

(iv) Government Securities Law which will govern the activities of government securities.

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B. Regulators for Brunei Darussalam Capital Market 1. Main Market Authorities

Regulations of the Capital Markets in Brunei Darussalam are controlled by:

a. His Majesty Paduka Seri Baginda Sultan Haji Hassanal Bolkiah Mui’zzaddin Waddaulah as the head of state

b. Brunei International Financial Centre (BIFC), Ministry of Finance c. Prime Minister d. Autoriti Monetari of Brunei Darussalam

AMBD acts as the central bank of Brunei Darussalam. It conducts the formulation and implementation of monetary policies, the regulations and supervision of financial institutions as well as currency management According to Section 4(1) of the Autoriti Monetari Brunei Darussalam Order of 2010, the principal objectives of AMBD are:

(i) To achieve and maintain domestic price stability; (ii) To ensure the stability of the financial systems, in

particular by formulating financial regulations and prudential standards;

(iii) To assist in the establishment and functioning of efficient payment systems and to oversee them; and

(iv) To foster and develop a sound and progressive financial services sector.

2. Self-Regulatory Organizations There is currently no stock exchange and self-regulatory organization in Brunei Darussalam. The capital markets of Brunei Darussalam are currently in the development stage (ADB, 2012).

3.1.1.2.Physical and Organizational Infrastructure 1. Market Infrastructure to Facilitate Connectivity

Brunei has investment advisers, investment dealers, investment representatives, fund operators and banks as part of its capital market infrastructure. At the moment, there is only one company offering its stock publicly OTC. This is through a licensed dealer, and trading volume is very low. According to the AMBD’s policy statement dated July 23, 2013, i.e., Section 11 on Future Developments:

“High in AMBD’s agenda is the enhancement and further strengthening of the financial sector infrastructure. To this end, the establishment of the national payment and settlement systems is well under way, with the implementation of the Real-Time Gross Settlement (RTGS) and Automated Clearing House (ACH) proceeding on schedule. The third component of the project is the Central Securities Depository (CSD) which will be implemented at a later stage. These projects are crucial as the AMBD’s efforts to ensure financial stability, and to further develop the money market, capital market and the financial services sector as a whole. The establishment of the systems will also align Brunei Darussalam with the ASEAN payments connectivity initiatives.”

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It is expected that the development of market infrastructure could be done in the planned deadline, and support the capital market integration.

Brunei has capital market intermediaries whose head offices are based in other ASEAN member countries. The intermediaries outsource some operations to their head offices.

2. Technical Assistance, Technology and Infrastructure

Asian Development Bank provides assistance for the development of Brunei Darussalam Capital Markets.

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ADB (2012). ASEAN+3 Bond Market Guide. Asian Development Bank. Brunei Profile, (June 13th 2013). BBC News. News Asia-Pacific. www.bbc.co.uk

Constitution of Brunei Darussalam, Securities Order: Arrangement of Section, p 935 – p 998, Brunei Darussalam, 2001.

Mohd. Shril Matswai, A study of Takaful and Conventional Insurance Preferences: The Case of Brunei, International Journal of Business and Social Science, Vol 3, No 22, November 2012. Insurance/Takaful and Capital Market Supervision, (November 24th 2011). Autoriti Monetari Brunei Darussalam. www.ambd.gov.bn

Questionnaire Responses of AMBD.

Asian Development Bank 2008, ADB Assistance for Domestic Capital Market Development, Available from: <http://www.adb.org/sites/default/files/SES-OTH-2008-36.pdf>

__________________________, Available from: <http://www.ambd.gov.bn/>.

__________________________, About Autoriti Monetari Brunei Darussalam (AMBD), Available from: <http://www.ambd.gov.bn/index.php/faqs>.

__________________________, Capital Market: Types of Licences, Capital Requirements and Fees, Available from: <http://www.ambd.gov.bn/index.php/component/content/article/15-pitpm/40-capital-market-types-of-licences-capital-requirements-and-fees>.

__________________________, Financial Institutions Directory, Available from: <http://www.ambd.gov.bn/index.php/regulatory/financial-institutions-directory>.

__________________________, Autoriti Monetari Brunei Darussalam Policy Statement, Available from: <http://www.ambd.gov.bn/index.php/component/content/article/19-publication/223-autoriti-monetari-brunei-darussalam-policy-statement>.

__________________________, Autoriti Monetari Brunei Darussalam Policy Statement, Available from: <http://www.ambd.gov.bn/index.php/component/content/article/19-publication/259-autoriti-monetari-brunei-darussalam-policy-statement-22013>.

Bank Islam Brunei Darussalam, Available from: <http://www.bibd.com.bn/>.

Roslan, Nurhamiza HJ dan Rachel Thien 2011, Need to Build Brunei Stock Exchange, Available from: <http://www.bt.com.bn/news-national/2011/03/06/need-build-brunei-stock-exchange>.

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3.1.2. Cambodia

3.1.2.1. Regulatory Framework of Cambodian Capital Markets A. List of Regulations

Cambodian Stock Exchange began its trading on April 18, 2012. There are five kinds of regulations related to the capital market.

1. Laws a) Laws and regulations applicable to bank and financial Institutions b) Preah Reach Kret on the appointment of civil servants of the Securities

and Exchange Commission of Cambodia c) Law on the issuance and trading of non-government securities d) Law on government securities

2. Anukrets a) Anukret on the Supplements to Anukret No. 41/ANKR/BK dated August

6, 1997 on the Implementation of Preah Reach Kram on the General Statutes of Public Enterprises

b) Anukret on tax incentives in securities sector c) Anukret on the conduct and organization of the Securities and Exchange

Commission of Cambodia d) Anukret on the appointment of the composition of the Securities and

Exchange Commission of Cambodia e) Anukret on the appointment of civil servants of the Securities and

Exchange Commission of Cambodia f) Anukret on the implementation of the Laws on the issuance and trading

of non-government securities 3. Prakas

a) Prakas on the Code Conduct of securities firms and securities representatives

b) Prakas on the implementation of the operating rules of securities market c) Prakas on the implementation of the operating rules of securities clearing

and settlement d) Prakas on the implementation of listing rules e) Prakas on the implementation of membership rules f) Prakas on the implementation of the operating rules of securities

depository g) Prakas on the corporate governance for listed public enterprises h) Prakas on the accreditation of valuation companies providing services in

securities sector i) Prakas on the registration of securities registrars, securities transfer

agents, and paying agents j) Prakas on the accreditation of cash settlement agents

4. Orders and Guidelines a) Guidelines on the procedures of cash settlement in the securities market b) Guideline on book-building and subscription of equity securities c) Promulgation on the establishment of the subcommittee on corporate

governance development under the private sector development committee 5. Other Rules Regulation

Financial sector development strategy 2006-2015 6. Type of information must be listed by companies/issuers of securities:

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a) Timely Disclosure: Information that may have impacts on price or trading of an issuer's securities, and when the information occurs, it shall be disclosed immediately.

b) Periodic Report: Reports that are prepared for a specific reporting period, including quarterly, semi-annual and annual reports.

c) Special Disclosure: Information such as stock buy-back and cancellation, tender offer, merger and acquisition, and takeover.

d) Requested Disclosure: Any information which the SECC requires an issuer to disclose.

7. Time of disclosure of information a) Timely Disclosure

Issuer shall submit information to the SECC immediately if any event, as mentioned in article 5 in Prakas on Corporate Disclosure, occurs one hour before or during trading hours. In case any event occurs not during trading hours but in working hours, information shall be submitted in working hours of the day that such an event occurs. In case any other event happens, information shall be submitted at least one hour before trading hours of the next business day.

b) Periodic Report An issuer shall submit reports to the SECC as follows:

(i) Annual report within 90 days after the end of financial year. (ii) Semi-annual report within 45 days after the end of semi-

annual. (iii)Quarterly report within 45 days after end of quarter.

c) Special Disclosure (i) Before the events:

Stock buy-back and cancellation and tender offer: An issuer shall submit information to the SECC within three working days after the resolution of the board of directors or after making the decision. Takeover and merger and acquisition: An issuer shall submit information and attached documents to the SECC immediately after the resolution of the board of directors.

(ii) After the events: Issuer shall submit the report on results of stock buy-back and cancellation, merger and acquisition, and takeover to the SECC within three working days after its completion. In case of failure to complete, the issuer shall submit information to the SECC immediately.

d) Requested Disclosure: An issuer shall submit the information immediately upon request by the Director General of the SECC.

e) Requirements in Disclosing Information Issuer shall follow the steps below:

(i) Appoint at least one disclosure officer. (ii) Classify the type of information as "For Public Release" or

"NOT For Public Release".

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(iii) The disclosure information shall be reviewed by the Director General of SECC before sending it to permitted securities market to distribute to investors and public immediately.

(iv) An issuer may disclose information to the permitted securities market and public through its website and/or other newspapers after obtaining approval from the Director General of SECC.

Figure 3.1. Diagram of Information Disclosure

8. Regulators for Cambodian Capital Markets Main Market Authorities The Royal Government of Cambodia (RGC Committee on Economic and Financial Policy) a) Technical Working Group for Financial Sector Development b) Securities Exchange Commission of Cambodia

Cambodia as a newcomer in the global capital and security exchanges marketplace through its newly established Cambodian Securities Exchange (CSX) in February 28, 2011, established the Securities and Exchange Commission of Cambodia (SECC) through the “Law on the Issuance and Trading of Non-Government Securities: Preah Reach Kram No. NS/RKM/1007/028”. SECC was established to regulate the securities industry in Cambodia through capital mobilization from public to meet the demand of financing for enterprises.

SECC when conducting their functions aim a mission for: (i) Develop and maintain the confidence of public investors in the

Kingdom of Cambodia by protecting their lawful rights and ensuring that the offer, issue, purchase and sale of securities are carried out in a fair and orderly manner;

(ii) Promote the effective regulations, efficiency and orderly development of securities markets;

(iii) Encourage the variety of saving tools through buying of securities and other financial instruments;

(iv) Encourage foreign investments and participation in the securities markets in the Kingdom of Cambodia, and;

(v) Assist in facilitating the privatization of state-owned enterprises in the Kingdom of Cambodia.

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Regarding the organizational structure, the SECC is chaired by the Minister of Economy and Finance and composed of representatives from various ministries including the Ministry of Economy and Finance, the NBC, Ministry of Commerce, Ministry of Justice, Council of Ministers, independent experts and the Director General who become the actual essential power throughout the SECC.

Table 3.4. Financial Supervisory Infrastructure in Cambodia

Source: Naron (2007)

c) National Bank of Cambodia (NBC)

NBC has a responsibility of managing the national clearing system in Cambodia. NBC has developed a National Clearing System in 2012 as the effort to encourage efficiency and broaden clearing services, and also transfer settlements among banks. This system supports fast clearing systems and settlements, and also increases electronic business transactions while decreasing the use of cash in economic activities. This clearing activity increased in 2012 with the check amounts in Kamboja Riels increased by 13%, and the checks in USD increased by 18% compared to 2011.

B. Self-Regulatory Organizations

During its inception, only three government-owned companies listed on the Cambodian Security Exchange (CSX) and there were seven brokerage companies that have rights for securities underwriting. The three government-owned companies listed are:

1. Phonm Penh Water Supply, 2. Telecom Kamboja, 3. Shanoukville Autonomous Port.

The seven brokerage firms listed are:

1. Phnom Penh Securities Firm Plc., 2. OSK Indochina Securities Limited, 3. Kamboja – Vietnam Securities Plc., 4. Cana Securities Ltd., 5. Campu Securities Plc.,

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6. Tong Yang Securities (Kamboja) Plc., 7. SBI Royal Securities Plc.

Figure 3.2. Organizational Chart of Cambodia Securities Exchange

Source: CSX (2013)

Figure 3.3. The CSX’s Board of Directors

Source: CSX (2013)

C. Historical Highlights of CSX: April 18, 2012 Phnom Penh Water Supply Authority became the first domestic company listed on CSX. July 11, 2011

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CSX was inaugurated by the Deputy Prime Minister Keat Chhon, Minister of Economy and Finance. February 28, 2011 CSX received approval from the SECC to operate as Market Operator, Clearing and Settlement Facility, and Depository Operator.

February 23, 2010 Business Registration as a public enterprise with majority government shareholding.

March 23, 2009 “Joint Venture Agreement” between the Royal Government of Cambodia represented by Ministry of Economy and Finance and Korea Exchange. January 21, 2008 MOU on the establishment of a Cambodian Securities Exchange in the Kingdom of Cambodia was signed by MEF and KRX. September 6, 2007 International Conference on the Launching of the Cambodian Securities Market Project. November 20, 2006 MOU on the development of the Securities Market in Cambodia was signed by MEF and KRX. As of 2012, companies listed on the CSX were still those three companies, indicating that most companies in Cambodia have not been ready to fulfill mandatory requirements to go public. Moreover, the Cambodian government only has 55% of CSX whereas 45% is owned by the Korean Exchange. 3.1.2.2 Physical and Organizational Infrastructure A. Market Infrastructure to Facilitate Connectivity Cambodian Securities Exchange is the only securities exchange in Cambodia. After almost two years of CSX opening, there was no additional companies listed on the CSX, but there is a decreasing number of companies listed on the CSX, left only Phnom Penh Water Supply Authority (PPWSA). It could be concluded that companies in Cambodia have not been ready yet to be listed on the CSX.

1. CSX Roles a. Market Operations

Providing facility for stock trading, such as: procedures for trading stocks, stock market data publication, monitoring issues related to stocks and communicate them to parties who need the information.

b. Securities Depository Providing a place for depositing securities and transfer securities ownership rights from one party to another without physical movement of the securities.

c. Clearing and Settlement CSX does its responsibility as a Central Counter Party in the Cambodian Securities Market.

2. Listing Procedures

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Figure 3.4. CSX’s Listing Procedures

Source: CSX (2013)

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Figure 3.5. CSX’s Order Execution

Source: CSX (2013)

a. Investors open a trading account (a cash account and a securities account) at a securities firm (SF) at one day before trading day.

b. Investors give instruction of order (bid or ask) to the SFs in writing, voice (recorded) or electronic means.

c. The SFs place relevant orders to the CSX. However, before the placing of order, the SFs already freeze at least 100% of the cash amount or securities quantity in respect of each order.

d. Orders are matched in the CSX’s trading system according to the predetermined auction principles.

e. The CSX notifies the trading results to the SFs (T+0).

f. SFs confirm the relevant trading results with their respective customers (T+0).

g. In case there are transaction errors made by an SF, the SF has to submit an application to the CSX for correction by noon on T+1. After errors are corrected, the processes (e) and (f) apply again.

h. Investors pay cash or deliver securities through SFs. Actually the SFs use the customers’ frozen cash or securities to settle or without the customers’ further consent.

i. SFs settle trades on behalf of investors at the CSX.

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3. Publication of Market Data

The CSX enables efficient market data to take place in a fair, transparent, orderly and rule-based environment. Investors and market participants can benefit from true and comprehensible market information, made available to all parties simultaneously. In this regards, the CSX makes public the following market data:

(1) Opening and closing prices; (2) Trading volume and value; (3) Expected price and expected volume; (4) Base price; (5) Index; (6) Other useful information.

4. Market Surveillance/Stock Watch

In order to ensure the market integrity and investor protection, the CSX conducts market watch to identify issues suspicious of abnormal trading by monitoring trading manners, price fluctuation, trading volume, the relationship between the market price and trade, and the details of rumors.

Any person found conducting intentionally insider trading or market manipulation shall be liable to punishments in accordance with the existing laws and regulations in the Kingdom of Cambodia.

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References

Cambodia Stock Exchange, Available from: <http://www.csx.com.kh>.

Cambodia Stock Exchange, Clearing and Settlement, Available from:

<http://www.csx.com.kh/operation/clearing/listPosts.do?MNCD=3030>.

Royal Government of Cambodia, Financial Sector Development Strategy 2006-2015,

Available from:

<http://www.nbc.org.kh/download_files/publication/blueprints_eng/blueprint_2006-

2015_English.pdf>.

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3.1.3. Indonesia

3.1.3.1. Regulatory Framework of Indonesian Capital Markets A. List of Regulations and Objects of Regulations In the wake of 2008 global financial crisis, the Indonesian Government had their financial systems restructured by establishing the Financial Services Authority. The Financial Services Authority of Indonesia (Otoritas Jasa Keuangan/OJK) is the Indonesian government agency that regulates and supervises the financial sector. The agency was newly established in 2011, replacing the role of BAPEPAM-LK and part of the Central Bank of Indonesia’s duties. OJK is an autonomous institution which directly reports its duties to the parliament and is free from interference by other parties, with functions, duties, and authority to regulate, supervise, examine, and investigate financial services sector in Indonesia. By law, the objectives of OJK are to ensure that activities within the financial services sector are:

1. Implemented in an organized, fair, transparent and accountable manner; 2. Able to realize the financial systems that grow in a sustainable and stable

manner; and 3. Capable of protecting the interests of consumers and the society.

OJK is funded by the State Budget and/or fees from parties who conduct their businesses in the financial services industry.

Figure 3.6. Financial Supervisory Infrastructure in Indonesia

Source: Aziz (2013)

B. Regulators for Indonesian Capital Markets 1. Main Market Authorities

Indonesia’s financial and capital markets are being regulated by the followings institutions:

a. BAPEPAM BAPEPAM, well known as the Indonesian Capital Market and Financial Institution Supervisory Agency, is the capital market agency of the Ministry of Finance, acting as a supervisory agency for all capital market participants including stock exchanges. It also approves listings on the Indonesian Stock

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Exchange. BAPEPAM-LK is also responsible for issuing custodial bank licenses. Now the duty of BAPEPAM has been replaced by Otoritas Jasa Keuangan (OJK).

b. Ministry of Finance (MoF) The MoF has the ultimate responsibility for regulating the capital market industry through OJK. MoF merged Bapepam with the Directorate of Financial Institutions in which oversees insurance, multi finance and pension fund industries in October 2005.

c. Bank Indonesia (BI) – Central Bank BI is an independent body reporting directly to the House of Representatives. It provides currency control, and supervises the banking sector in Indonesia. Settlements of government debt instruments and Certificate of Bank Indonesia are conducted by BI through its Scriptless Settlement Securities System (BI–SSSS).

d. Financial Services Authority of Indonesia or Otoritas Jasa Keuangan (OJK) OJK is the Indonesian government agency that regulates and supervises the financial services sector. OJK is an autonomous agency designed to be free from interference. The agency was established in 2011 to replace the roles of Bapepam-LK.

(i) Transfer of Financial and Capital Market Authorities to the Financial Services Authority (OJK) OJK began taking over some supervisory functions of the Capital Market Supervisory Agency on January 1, 2013, in a process that will end in 2014 with the full transfer of Bapepam-LK authority to the OJK. When the transfer is complete, Bapepam-LK will no longer exist as a regulating agency, and Bank Indonesia (while retaining other functions) will no longer supervise everyday banking activities. However, so far the OJK has only taken over regulations and supervision of capital markets, including stock exchanges and equity flows. Eventually, the transfer will result in the OJK being a centralized financial and banking regulatory body. In 2011, the Ministry of Finance and the House of Representatives appointed Dr. Muliaman Hadad as the Head of the OJK for a five-year term. It is believed that the OJK’s authority transfer is significant since it also has a broader authority to coordinate with more regulating agencies and other financial institutions. Service fees imposed by the OJK on financial institutions have been hot discussion in financial and banking sectors. Some perceive that it will be a burden, and the fee will be calculated on the basis of capital-to-asset ratios, so as to almost punish institutions with larger asset pools.

(ii) First OJK Regulation Increases Customer Protection

Consumers in the financial services sector will have greater protection following the issuance of the first ever regulation by the OJK.The regulation announced by the Head of the OJK’s Board of Commissioners Muliaman Hadad has provided stronger protection for consumers of financial services, which not only include banking and insurance but also those related to investment activities. Other than principles and provisions

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on consumer protection, the regulation stipulates the need for financial service providers to ensure internal controls, as well as the OJK’s facilitation of consumer complaints and enactment of sanctions.

e. Indonesian Deposit Insurance Corporation (IDIC)

In Indonesia, the Institution that handles deposit insurance is called LPS (Lembaga Penjamin Simpanan) or Indonesian Deposit Insurance Corporation. It was formed on September 22, 2004 by Law No. 24 of 2004, and has been effective since September 22, 2005. Its main duty is to insure deposits on the banking industry and actively participate in maintaining stability in the banking system. IDIC insures deposits in the forms of saving accounts, time deposits, current accounts/checking, certificate of deposits, and/or other forms of deposits that have similar characteristics. Duties of IDIC are: (i) To formulate and determine the implementation of policies on deposit

insurance. (ii) To implement the deposit insurance program. (iii) To formulate and issue policies so as to actively participate in ensuring

the financial system’s stability. (iv) To formulate, determine, and implement the resolution policies for

failing banks that do not pose as a systemic threat. (v) To perform the handling of failing banks that pose as systemic threats.

Authorities of IDIC are: (i) To determine and collect insurance premiums. (ii) To determine and collect initial contributions from banks upon

becoming members of IDIC. (iii) To manage IDIC’s assets and liabilities. (iv) To obtain data on customers’ deposits, a bank’s soundness report, a

bank’s financial statements, and to report on examination of the bank provided that it does not violate the bank’s secrecy.

(v) To perform data reconciliation, verification, and/or confirmation on data.

(vi) To determine the terms and conditions, procedures, and requirements on claim payments.

(vii) To appoint, delegate, and/or assign other parties to act in the interest and/or on behalf of the IDIC to perform specific tasks.

(viii) To carry out public awareness programs on deposit insurance to banks and the general public..

(ix) To implement administrative sanctions.

2. Self-Regulatory Organizations a. PT Bursa Efek Indonesia (BEI)

The BEI (or Indonesian Stock Exchange), a private company, took over the day-to-day administration of the previous JSX. It is now the main stock exchange, which monitors trading, settlement, and listed companies’ compliance with its regulations. It also receives corporate action notifications from companies and announces them to the market.

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b. PT KPEI PT KPEI is a limited liability company, which has obtained a business license from the OJK as a clearing and guarantee institution to provide services in clearing and stock exchange transactions settlement guarantee.

c. PT KSEI PT KSEI is a private limited liability company, which has obtained a license from the OJK to conduct central depository activities.

3.1.3.2. Physical and Organizational Infrastructure A. Indonesian Stock Exchange

Indonesia Stock Exchange (IDX) is based in Jakarta, Indonesia. It was formerly known as Jakarta Stock Exchange (JSX). In 2007, Surabaya Stock Exchange was merged into the Jakarta Stock Exchange. As a result, JSX changed its name into the "Indonesian Stock Exchange." The IDX also organizes many education programs to educate potential investors about capital markets. One of them is the IDX Regular Education Program which aims to arouse public interest in learning investment in stocks so that they will become competent investors. On June 17, 2009, the IDX, the Indonesian Clearing and Guarantee Corporation, and the Indonesian Central Securities Depository (SROs), through the Indonesian Capital Market Education Association, signed an MoU related to the establishment of the “Indonesian Capital Market Education Center” with the University of Indonesia. On April 15, 2010, the IDX and the Hanoi Stock Exchange (HNX) signed an MoU between the two exchanges.

B. Central Securities Depository Trading through an exchange is administered and managed by the Indonesian Stock Exchange (IDX) with Jakarta Automated Trading Systems - Next Generation (JATS). The clearing for securities transactions in Indonesia is processed by PT Kliring Penjaminan Efek Indonesia (KPEI). The central securities depository for government securities is Bank Indonesia, while for corporate securities is PT Kustodian Sentral Efek Indonesia (KSEI). In Indonesia, the IDX is the sole trade repository for all of securities transactions.

C. Criteria For Counterparties of Bank Indonesia Monetary Operations The criteria for banks deemed eligible to become Bank Indonesia's counterparty in monetary operations, both in rupiah and foreign currencies are: 1) The bank is a direct member of Bank Indonesia Real Time Gross Settlement

System (BI-RTGS) and Bank Indonesia Scriptless Securities Settlement System (BI-SSSS);

2) The bank is a subject of the minimum reserve requirement regulation; 3) The bank holds a license to operate as a foreign exchange bank in the domestic

market (applicable only for transactions in domestic foreign exchange market).

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D. Kliring Penjaminan Efek Indonesia (KPEI) PT Kliring Penjaminan Securities Indonesia was established based upon the Capital Market Law No. 8/1995 to provide orderly, fair, and efficient clearing services and transaction settlement guarantee. Services provided are: 1) Exchange transaction clearing services 2) Equity transaction clearing and settlement 3) Clearing and derivative transaction settlement 4) Clearing and settlement of bonds transaction 5) Guarantee services KPEI provides guarantee services of stock exchange transaction settlement. The guarantee services provide assurance members' rights and obligations arising from exchange transactions will be settled. KPEI also provides securities lending & borrowing (SLB) services with the main purpose of helping members avoid stock exchange transaction settlement failure. KPEI is a self-regulatory organization (SRO) which also has a role in shaping the direction of the Indonesian capital market development. Currently, there are 117 clearing members, of which 98 brokers and three custodian banks are participants in the SBL market.At the moment, it has 118 stocks eligible for SBL from approximately 416 listed stocks on the IDX, though every month the list is adjusted. Of eligible stocks, 23 are SOEs and 44 stocks are available for short selling.

Figure 3.7. Indonesian Capital Market Structure

Source: OJK (2013)

E. Indonesian Central Securities Depository

In Indonesia, the institution that acts as the Central Securities Depository is Kustodian Sentral Efek Indonesia (KSEI). It was established on December 23, 1997 in Jakarta. KSEI serves the function of providing securities depository and transaction settlement services, such as: 1) electronic securities depository

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2) securities transaction settlement 3) securities account administration 4) distribution of corporate action

To assure a speedy, secure and satisfying settlement transaction of securities in the capital markets, all KSEI’s activities are operated through an electronic securities depository and transaction settlement system known as the Central Depository and Book Entry Settlement System or C-BEST. This system is an integrated electronic platform that supports securities transaction settlements in the Indonesian capital markets. Since June 2002, KSEI had completed the conversion of all the stocks listed on the stock exchange from script to scriptless form.

F. Derivatives Clearing Houses Indonesian Derivatives Clearing House was established on August 25, 1984

according to the Government Regulation No. 6 of 1984. On May 28, 2001, the company changed its name to its current name, i.e., Indonesian Derivatives Clearing House. By the end of 2010, the Clearing House has launched a new business field as a clearing house for physical commodities markets in Indonesia, while is still running the clearing and settlement guarantee for futures and other derivative contracts.

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References

Areddy, James T. (2005-10-11). "Chinese Markets Take New Step With Panda Bond" . The Wall Street Journal

Aziz, Gonthor R., Indonesia Financial Services Authority, Paper Presented on OECD 13th Tokyo Roundtables on Capital Market Reform in Asia, April 2013.

Bappepam, Kelahiran Bappepam, Available from: <http://www.bapepam.go.id/old/profil/sejarah_bapepam.htm>. [13/9/2013 00:30]

Asia E-Trading, Indonesia, Available from: <http://asiaetrading.com/regulators/indonesia>

Black Knight Media. 2013, Indonesia, Available from: <http://www.securitieslendingtimes.com/countryfocus/country.php?country_id=50>.

Bursa Efek Indonesia. 2010, Indonesia Capital Market Structure, Available from: <http://www.idx.co.id/en-us/home/aboutus/indonesiacapitalmarketstructure.aspx>.

Chung, Amber (2007-04-19). "BNP Paribas mulls second bond issue on offshore market". Taipei Times.

Bapepam, Available from: <http://www.bapepam.go.id/>. [13/9/2013 00:25]. Bank Indonesia, Available from: <http://www.bi.go.id/web/id/>. [13/9/2013 00:45]. Bank Indonesia, Status dan Kedudukan, Available from:

http://www.bi.go.id/web/id/Tentang+BI/Fungsi+Bank+Indonesia/Status+dan+Kedudukan/. [13/9/2013 00:46].

Quint, Michael (August 14, 1984). "Elements in Bearer Bond Issue.”New York Times. <http://www.tradingeconomics.com/indonesia>. Lembaga Penjamin Simpanan, Available from: <http://www1.lps.go.id>. Kliring Berjangka Indonesia. 2013, Available from:

<http://www.bumn.go.id/kliring/tentang-kami/tentang-perusahaan/>. PT. Kliring Penjaminan Efek Indonesia. 2012, Available from:

<http://www.kpei.co.id/Page/Detail/profil>>. Bank Indonesia. 2008. Operasi Moneter, Available from:

<http://www.bi.go.id/web/en/Moneter/Operasi+Moneter/counterparty/>. Iyer, Lakshmi, and David Lane 2013, Indonesia's OJK: Building Financial Stability,

Available from: <http://hbr.org/product/indonesia-s-ojk-building-financial-stability/an/713003-PDF-ENG>.

The Jakarta Post. (2013). First OJK Regulation Increases Customer Protection, Available from: <http://www.thejakartapost.com/news/2013/07/31/first-ojk-regulation-increases-customer-protection.html

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3.1.4. Lao PDR

3.1.4.1. Regulatory Framework of Lao PDR Capital Markets PDR as part of CMLV (Cambodia, Myanmar, Lao and Vietnam) ASEAN member

countries is considered one of the most least-developed financial systems in the ASEAN region. Lao PDR just had their own Lao Stock Exchange (LSX) back in January 11, 2011 along with Cambodia which also established their own stock exchange in the same year. Regarding financial system development, Lao PDR still consists of financial activities based on agricultural sectors which are considered micro in capitalization. Since their securities and capital activities are still not well structured, all of the financial supervisory activities in Lao PDR are conducted by the cooperation between the Central Bank and the Ministry of Finance.

Table 3.5 Financial Supervisory Infrastructure in Lao PDR

Source: Asian Development Bank (2012)

A. List of Regulations Lao has several regulations regarding their securities exchange on the LSX (Lao

Securities Exchange). This law covers various aspects of transactions and other dealings with securities. The regulations hold for purely governmental regulatory agencies, but sometimes may also encompass listing requirements of other exchanges. 1. Market Operation Regulation (Amended)

Articles in this regulation tells mainly about specifying matters necessary for the trading of securities in the securities market that the Lao Security Exchange has established pursuant to the Government Decree on Securities and Securities Market such as the divided markets into stock market and bond market, validity orders, cancellation of order submitted and opening/closing hours.

2. Deposit Regulation

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In this regulation, the articles tells about matters necessary for depositing and transferring securities on the LSX, regarding sum of money held in trust either as an initial part-payment in a purchasing process that is often used to prevent a seller selling an item to someone else during an agreed period of time, while the buyer verifies the suitability of the item, or arranges finances. It is also known as an earnest payment. The articles emphasize centralized deposit and book-entry delivery, administering accounts, and handling lost or stolen securities.

3. Disclosure Regulation This regulation articles rule about reporting, disclosing and managing corporate information by corporations that have listed their stocks on the LSX. The financial matters to this are based on financial statements revised according to the findings of the audit, Lao PDR Accounting standards and Lao Accounting. When applying this regulation to a stock-listed corporation whose equity capital is less than its register capital, it shall be construed to be its equity capital.

4. Listing Regulation This regulation specifies on matters necessary for the listing of securities on the LSX. It stresses on listing securities where securities shall be listed upon the submission of the application by the issuer of the security concerned, financial statements preparation that is adjusted and taken into qualified opinions consideration by an external certified auditing company.

5. Clearing and Settlement Regulation The articles in this regulation are aimed to stipulate the matters necessary for clearing and settlement in the securities market. It states that the LSX shall act as a clearing house pursuant to the role of Securities Depository Center to make a clearing and settlement relating to securities transaction.

6. Surveillance Regulation The purpose of this regulation is to make safe transaction by using surveillance, investigation into abnormal trading activities and inspection of members in the securities market and follow-up actions. It monitors and analyzing the transaction of securities in the market or the status of orders and quotations for such transactions or the related announcements, disclosures, rumors, etc.

B. Regulators for Cambodia Capital Market

1. Main Market Authorities The current securities regulator is now the SECO (Securities and Exchange Commission Office) that was implemented in second of July in 2009. It is made by replacing the General Leading Committee and Securities Market Establishment (SMEC) to become SECO that was once called Securities and Exchange Commission (SEC). This joint venture agreement was signed by Bank of the Lao PDR (BOL).

2. Central Bank The central bank of Lao namely the Bank of Lao People’s Democratic Republic (PDR) was created in 1990 as a state management organization at the central level within the government apparatus. Before its creation, there was only a mono-bank system existed which carried out commercial bank and central bank functions altogether. But after the realization of the economic reform followed with the restructuring of financial sector, the central bank was

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formally created to separate the central bank functions from the commercial ones. As for the rights and duties of the central bank are: (a) promote and maintain internal and external monetary stability, an efficient payments mechanism and the liquidity, solvency and proper functioning of a soundly based monetary, credit and financial system; and (b) foster conditions conducive to orderly, balanced, and sustained economic growth for the prosperity of the Lao people. Furthermore, entrustment for the Bank of Lao PDR to manage foreign reserves as an important component of a market-based monetary management. Later on in the 1992, some series of banking decrees established in giving the Bank of Lao PDR authorization to grant or refuse a license for establishing a bank or financial institutions as in the Decree No. 53 on the Management of Foreign Exchange and Precious Metals, and Decree No. 3 on the Management and the Operations of the Commercial Banks and Other Financial Institutions. (1) Article 3: The Scope of Authority of the Bank 3.1 Print and sell banknotes and coins with the authorization of the government and manage their circulation throughout the country. 3.2 Undertake monetary management, and act as the central bank for commercial banks and financial institutions that are under its authority. To act as the lender of last resort for the commercial banks and financial institutions, as part of monetary policy implementation. 3.3 Implement policies on the management of foreign currency and exchange rates. 3.4 Sell banknotes on behalf of the bank as part of monetary policy implementation. Buy and sell bonds directly with commercial banks and other financial institutions. 3.5 Grant permission for the establishment of branches of the Bank of Lao PDR and local foreign commercial banks as well as financial institutions under Bank’s authority, with the agreement from the government. 3.6 Implement other rights as prescribed by law or as delegated by the government.

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Figure 3.8. Organizational Chart of The Bank Lao PDR

Source: Bank of Lao PDR The Executive Board is the top administrative organization which consists of a

president, vice-president and a certain number of members. The management of the Bank of Lao PDR consists of one governor who is appointed and dismissed by the President of the Republic on the recommendation of the Prime Minister and with the approval of the National Assembly. The Bank of Lao PDR also consists of a certain number of vice-governors who are appointed or dismissed by the Prime Minster.

3. Deposit Insurance Corporation

Deposit insurance or explicit limited guarantees to protect depositors usually distinguished by statuses or other legal instruments which stipulate the rules governing the terms and conditions of protection. Explicit limited deposit insurance clarifies the authorities’ obligations to depositors; reduces the incidence of bank runs; contributes to stability; and can provide a formal mechanism for transferring the cost of resolving bank failures to the industry rather than taxpayers. The rapid financial system development, economic crises, and a general desire to improve depositor protection and financial stability has been the factors of the growth of deposit insurance systems around the world. Take an example from South East Asian, since the Asian financial crisis in 1997, there has been a growing recognition among the South East Asian member banks that deposit insurance is an important part of financial safety and contributes to financial stability. While deposit insurance systems have recently been introduced in some countries of ASEAN which has been designed to meet specific country and regional circumstances, it should be supported by strong prudential regulation and supervision,

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effective laws, sound corporate governance and risk management in banks and appropriate accounting standards and disclosure regimes. As for Lao, it does not have formal explicit limited deposit insurance systems. Lao protects depositors with a special fund created by the central bank.

3.1.4.2. Market Infrastructure Development A. Exchanges (stock, bond, derivatives, over-the-counter)

1. Stock Lao PDR is considered as a new player in the stock exchange market. Lao PDR stock exchange (LSX) was formally launched in January 2011. One of the responsibilities of LSX is to make the listing rules. Until now, there are only two companies listed in LSX: the Electricite du Laos Generation Company and the Banque Pour Le Commerce Exterieur Lao.

2. Bond Marker Facilities a. Primary Market

In the primary market, there are three types of method of operation of T-bills and Bank of Lao PDR (BOL) bonds: interest value, auction value, and over the counter. Bond interest calculations are classified into two types: discount and coupon.

b. Secondary Market Trading in the secondary market is done through 14 days of repurchase agreement, discount or outright agreement, and collateralized lending. As bonds are mostly traded on over-the-counter (OTC) market or quote-driven markets, rather than at an exchange or auction markets, the development of well-trained dealers becomes essential especially to develop the bond market. At this stage, bank dealers are allowed and encouraged to trade among themselves for the sake of practicality. By encouraging inter-bank dealing, BOL would eventually step back to work as a “last resort” for the government securities market, taking position only when no counterparts within banks are available. However, market condition still holds the key to stipulate market intervention level. For example, BOL may take a more aggressive role when the market declines due to lack of confidence or depending on seasonal fund shortage. In order to develop banks’ securities business as intermediaries, BOL may take further steps to expand its roles and functions, namely: systemizing its open market operations, working as the central custodian and/or securities depository, and issuing detailed guidelines on securities business by banks.

c. Listing Procedures

3. Central Securities Depository (CSD) Central Securities Depository (CSD) is an important infrastructure in modern securities markets. It serves crucial services that allow at a minimum the registration, safekeeping, settlement of securities in exchange for cash and efficient processing of securities transactions in financial markets. While securities markets traditionally relied on the physical exchange of paper, CSD now assumes a critical role to guarantee a safe and efficient transfer of

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securities that exist to a large extent only in book entry form. It has become a central point of reference for an entire market. Due to its location at the end of the post-trading process, CSD witnesses all the settlement fails occurring during the settlement period. Therefore, CSD is the key element of any policy of settlement discipline. Given the systemic importance of CSD and it strategic position at the end of the post-trading process, appropriate regulatory framework for CSD needs to be formulated.

Figure 3.9. Trading Flow of LSX

Source: LSX

LSX depository was established by the Prime Minister’s decree and strongly supervised and regulated by Securities and Exchange Commission (SEC). The depository is in charge of wide range of securities related matters such as clearing, settlement, depository and transfer agent services. LSX is the sole central depository center in Lao PDR. It deposits and transfers securities traded in the LSX. The diagram below explains about flow of trading at LSX stock markets.

4. Clearing Houses Clearing is a series of processes that a Central Counter-party (CCP) performs to guarantee the settlement by netting the credits and liabilities between the sellers and the buyers and instruct the settlement agency to settle Trade Comparison is the comparison is a legal action in which traders compare trading conditions with trade details. It is done by Clearing Houses for an organized market and by Settlement Institutions for OTC.

(a) Settled unless cancelled by trading parties (b) High credibility of market participants and reduction in costs & efforts

Netting is the process of reducing multiple credit/ debit obligations among multiple traders to several credit/ debit obligations. Through netting, LSX fixes the final

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settlement size. After netting, original credit or debit obligations are replaced with a single credit or debit obligation.

Figure 3.10. Clearing Houses Organization

Source: Lao Bankers Clearing House

The Lao Bankers’ Clearing House began operating in Vientiane in June 1990 with five charter members: the Bank of the Lao People’s Democratic Republic, the Banque Pour Le Commerce Exterieur Lao, Nakhoneluang Bank, Sethathirath Bank and the Joint Development Bank. In 1996, nine more banks joined the Lao Bankers’ Clearing House: Vientiane Commercial Bank, Thai Military Bank, Thai Farmers Bank, Agricultural Promotion Bank, Bangkok Bank, Krung Thai Bank, Bank of Ayudhya, Berhard Public Bank and Standard Chartered Bank. The Bank of the Lao People’s Democratic Republic has also been representing four regional banks: Lao May Bank, Phak Tai Bank, Aloun Mai Bank and Lane Xang Bank.

The Lao Biosafety Clearing-House (Lao BCH) was established by Article 20 of the Cartagena Protocol on Biosafety, in order to facilitate the exchange of scientific, technical, environmental and legal information on, and experience with, living modified organisms (LMOs).

5. Settlement between member and LSX

(a) Article 3. Clearing House (1) The LSX shall act as a clearing house pursuant to the role of Securities

Depository Center in [Article 55] of the Decree to make a clearing and settlement relating to securities transaction.

(2) Upon trade confirmation, the LSX, as a CCP, shall assume the liabilities of a member and undertakes to fulfill its obligation to deliver or to pay each member.

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(3) The concerned member shall assume the same liability that the LSX has assumed against the LSX and free from the liability against the original counterparty.

(b) Central Counterparty (CCP) CCP is an entity that interposes itself between counterparties to the contracts traded, in one or more markets, becoming the buyer to every seller and the seller to every buyer and thereby guaranteeing the performance of open contracts. According to Article 2 Paragraph 3 in the Lao Securities Exchange Regulation, the term “Clearing house” shall refer to the Securities Depository Center’s role as a Central Counterparty (“the CCP”) to make clearing and settlement relating to securities transaction within the LSX market.

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References Asian Development Bank, Financial Sector Assessment: Consultant Final Report: TA 7500 –

Lao PDR: Enhancing Financial Sector Supervision Component 2, Project Number: 42224, July 2012.

Bank of Lao PDR, Decree on The Organisation and Activities of The Bank of Lao PDR, Available from: <http://www.bol.gov.la/english/boldecree.pdf>.

European Commision, Central Securities Depositories, Available from: <http://ec.europa.eu/internal_market/financial-markets/central_securities_depositories/index_en.htm>.

Lao Stock Exchanges, Stock Trading, Available from: <http://www.lsx.com.la/en/product/trading_equities.jsp>.

____________________________, Settlement and Depository, Available from: <http://www.lsx.com.la/en/product/settlement.jsp>.

____________________________, The History of LSX, Available from: <http://www.lsx.com.la/en/about/history.jsp>.

ASEAN+3 Bond Market Forum, Available from: <https://wpqr1.adb.org/LotusQuickr/asean3abmf/Main.nsf/h_Index/4CC53EFBD63D7BA3482579D4001B5CED/$file/ABMF%20Vol1%20Sec%206%20Lao%20PDR.pdf

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3.1.5. Malaysia

3.1.5.1. Regulatory Framework of Malaysia Capital Market Securities Commission (SC) (Suruhanjaya Sekuriti) becoming a statutory body entrusted with the responsibility of regulating and systematically developing the capital market in Malaysia which is established on March 1st, 1993 under Securities Commission Act 1993, SC is a self-funding statutory body with investigative and enforcement powers while its reports to both Minister of Finance and National Parliament annually. Stated in its enactment law, the SC’s regulatory functions include: 1. Supervising exchanges, clearing houses and central depositories; 2. Registering authority for prospectuses of corporations other than unlisted recreational

clubs; 3. Approving authority for corporate bonds issues; 4. Regulating all matters relating to securities and derivatives contracts; 5. Regulating the take-over and mergers of companies; 6. Regulating all matters relating to unit trust schemes; 7. Licensing and supervising all licensed persons; 8. Encouraging self-regulation; 9. Ensuring proper conduct of market institutions and licensed persons; 10. Encourage and promote the development of the securities and derivatives markets in

Malaysia.

Figure 3.11. Financial Supervisory Infrastructure in Malaysia

Source: Yunus (2007)

A.Regulations

Malaysia is a country with good trading regulations and rules. These rules were crafted to maintain a fair trade in the market and also to protect all applicants, listed issuers, investors, management companies, trustees, trustee-managers, their directors, officers, advisers, and other persons and therefore these rules apply to them.

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In designing the regulation The Securities Commission Malaysia was formed. The Securities Commission Malaysia is also responsible for the development of the capital markets of Malaysia and promoting the development of the securities and futures markets in Malaysia. Formed on March 1st, 1993, The Securities Commission Malaysia has functions namely:

1. Supervising exchanges, clearing houses and central depositories 2. Registering authority for prospectuses of corporation 3. Approving authority for corporate bond issues 4. Regulating all matters relating to securities and futures contracts 5. Regulating the takeovers and mergers of companies 6. Regulating all matters relating to unit trust schemes 7. Licensing and supervising all licensed persons 8. Encouraging self-regulations 9. Ensuring proper conduct of market institutions and licensed persons

There is also Bursa Malaysia that offers equities, derivatives, offshore, bonds as well as regulating the trading activities of securities. In negotiating, there is a minimum amount that can be placed by the Trading Participating Member (TPM) and/or Executing Participating Member (EPM) that is one thousand Ringgit Malaysia excluding the Repo, or if the stock is in another currency it is to be set in the value of 1000 in that currency. As for proceeding exports, it is required that they be repatriated and the payment must be made 6 months after the contract has been signed. Deals made in other currency are to be sold for Ringgit or retained in a foreign currency account with the limit of US$1 million to US$ 10 million. Those who want to be trading participant should own at least one preference share of Bursa Malaysia. Bursa Malaysia formed Compensation Fund of Bursa Malaysia Securities, Fidelity Fund of Bursa Malaysia Derivatives, and Compensation Fund of Bursa Malaysia to protect investors from suffering losses which the fund of compensation is to be administered by the Compensation Committee. Risk Management Committee will manage and control risks, identify, list, and rank based on the likelihood of the occurrence. This was done in the attempt of protecting the investors. Import duties are to be charged depending on the type and class of items ranging from 0 – 30%. Luxury goods, automobiles, tobacco, alcoholic beverages will be charged higher tariffs while petroleum products, live animals, local and/or abroad products that are transported between Peninsular Malaysia, Sabah, and Sarawak are among exceptional goods therefore normal rate does not apply. Procedures of the World Trade Organization (WTO) were used to value and classify imports. Since Malaysia is a member country of ASEAN along with Indonesia, Brunei, Vietnam, Cambodia, Myanmar, Laos, Singapore, Thailand, and the Philippines under the AFTA CEPT scheme where they agree to reduce import duties on all product therefore import duties shall be reduced ranging from 0 – 5%. Sales tax tariffs apply to all goods except the products described above by 5%, 10%, or 15%. B. Capital Market Types of Licenses, Capital Requirements and Fees

1. Corporate Action Processing Rules

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2. Investor Protection, Capital Market Transparency, and Corporate Disclosures

a) Regulation that provides protection for minority or individual investors on capital markets

(E.g. investor protection funds, client money (or deposit) protection of securities accounts)

b) Market Stabilizing Mechanism to Cope with Abrupt Changes in the Stock Market

c) Prevention of Cross-Border Market Misconduct d) Disclosure of Material Information in a Timely Manner to Investors of

Both Exchanges e) Non-Discriminatory Investor Protection Schemes and Standards. f) Corporate Disclosure to Enhance Transparency of Capital Markets g) Securities Investor Protection Bailout

3. Legal Framework and System of Capital Markets a) Laws and systems have been newly introduced or revised in regard to

capital markets in the past three years b) Plan to introduce or revise related laws or change related policy and

systems

4. Regulators for Malaysia Capital Market a) Main Market Authorities

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Figure 3.12. Organization of Malaysia‘s Ministry of Finance

Source: http://www.bursamalaysia.com (2014)

The Securities Commission Malaysia (SC) is a statutory body entrusted with the responsibility of regulating and systematically developing the Malaysia's capital markets. It has direct responsibility in supervising and monitoring the activities of market institutions and regulating all persons licensed under the capital market. The SC is a statutory body formed under the Securities Commission Act 1993 (SCA), which reports to the Minister of Finance. It has the power to investigate and enforce the areas within its jurisdiction. The SC is a self-funding organization where its income is derived from the collection of retribution and application fees. The SC is required to table its annual report in the Parliament. The SC's many regulatory functions include:

(1) Registering authority for prospectuses of corporations other than unlisted recreational clubs;

(2) Approving authority for corporate bond issues; (3) Regulating all matters relating to securities and futures contracts; (4) Regulating the take-over and mergers of companies; (5) Regulating all matters relating to unit trust schemes; (6) Licensing and supervising all licensed persons; (7) Supervising exchanges, clearing houses and central depositories;

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(8) Encouraging self-regulation; and (9) Ensuring proper conduct of market institutions and licensed persons.

Underpinning all these functions is the SC's ultimate responsibility of protecting the investor. Apart from discharging its regulatory functions, the SC is also obliged by statute to encourage and promote the development of the securities and futures markets in Malaysia.

b) Central Bank of Malaysia Established on 26 January 1959 under the Central Bank of Malaysia Act 1958 (CBA 1958). The major rule of the bank is usually the prudent of monetary policy, which has seen generally low and stable inflation for decades and thereby, preserving the purchasing power of ringgit. Another responsibility for the central bank of Malaysia is to bring financial system stability. The bank also plays a significant developmental role, including development of financial system infrastructure, emphasizing on building the nation’s efficient and secured payment systems as well as necessary institutions that important for building an efficient and comprehensive financial systems. The bank also being a banker and adviser to the government, playing an active role in advising on macroeconomic policies and also managing the public dept. It is also the sole authority in issuing currency as well as managing the country's international reserves. Bank Negara Malaysia, as the Central Bank, is committed to excellence in promoting monetary and financial system stability and fostering a sound and progressive financial sector, to achieve sustained economic growth for the benefit of the nation. Board of Director : Governor and Chairman : Tan Sri Dato' Sri Dr. Zeti Akhtar Aziz Deputy Governor : Datuk Nor Shamsiah Mohd Yunus Deputy Governor : Dr. Sukhdave Singh Secretary General to the treasury : Tan Sri’ Dato Dr. Mohd Irwan Serigar Bin Abdullah Deputy Governor : Dato' Muhammad bin Ibrahim

c) Deposit Insurance Corporation

Deposit insurance is a system established by the Government to protect depositors against the loss of their insured deposits placed with member institutions in the event the member institution fails. Commercial and Islamic banks that are member institutions of PIDM are also referred to as ‘member banks’. As an integral component of an effective financial safety net, a deposit insurance system enhances consumer protection by providing explicit protection to depositors. Depositors will know when, how much and how their deposits are insured in the event that a member institution fails or is unable to make payment to depositors.

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Table 3.5. Protection Provided by PIDM

Deposit Insurance System Takaful and Insurance Benefits Protection System (TIPS)

Protects depositors against the loss of their insured deposits placed with member banks, in the unlikely event of a member bank failure.

Protects owners of takaful certificates and insurance policies from the loss of their eligible takaful or insurance benefits, in the unlikely event of a failure of an insurer member.

Malaysia introduced its Deposit Insurance System in September 2005. Malaysia Deposit Insurance Corporation (MDIC) (Malay: Perbadanan Insurans Deposit Malaysia (PIDM)) is a statutory body formed under the Malaysia Deposit Insurance Corporation Act (Akta Perbadanan Insurans Deposit Malaysia). All commercial and Islamic banks, including foreign banks operating in Malaysia, are compulsory member institutions of PIDM. The maximum coverage limit is RM250,000 per depositor per member institution. Islamic accounts, joint accounts, trust accounts and accounts of sole proprietorships, partnerships or persons carrying on professional practices are separately insured up to the RM250,000 limit.

3.1.5.2. Physical and Organizational Infrastructure A. Market Infrastructure to Facilitate Connectivity

1. Exchanges There are currently 819 companies listed on Bursa Malaysia. These companies are either under ACE markets or the Main markets. The list is dominated by Malaysian company. Bursa Malaysia Derivatives offers three kinds of derivatives namely: Commodity Derivatives, Equity Derivatives, and Financial Derivatives. An example of Commodity Derivatives is Crude Palm Oil Futures (FCPO). The contract size is per 25 metric tons. The maximum number of net long or net short positions which a client or a participant may hold or control is 800 contracts for the spot month, 10,000 contracts for any one contract month except for the spot month, and 15,000 contracts for all months combined. FTSE Bursa Malaysia KLCI Futures (FKLI) is an example of Equity Derivatives with minimum price fluctuation of 0.5 index point valued at RM25. And 3 Month Kuala Lumpur Interbank Offered Rate Futures (FKB3) is an example of Financial Derivatives with minimum price fluctuation of 0.01% or 1 tick and the contract size is RM 1,000,000.

It is described earlier that those wanting to be a trading participant should own at least one preference share of Bursa Malaysia. Preference shares are shares that give the shareholders the opportunity to gain dividend before ordinary shareholders as they are preferred shareholders. Bursa Malaysia also offers Islamic trading system named Bursa Suq Al-Sila’ to accommodate Islamic liquidity management and financing by Islamic banks. Bursa Suq Al-Sila’ was formed as the collaboration of Bank Negara Malaysia, the Securities Commission Malaysia, Bursa Malaysia Berhad, and the supporters of Malaysia International Islamic Financial Centre.

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Financial instruments that are being traded in the Malaysian bond market are government securities including Malaysian treasury bills and Malaysian government securities, Bank Negara papers including Bank Negara bills and Bank Negara notes, Cagamas papers (paper of Cagamas Berhad, the national mortgage corporation of Malaysia), private debt securities issued by private corporations, and asset backed securities including loans, mortgages, receivables, etc that are issued by private or quasi government corporations. Below is the market statistics showed by top 20 daily active stocks (by volume),

Table 3.6. Top 20 Daily Active Stocks’ Market Statistic

Source: www.bursamalaysia.com (2014)

Ranked at the top is the government with stock code MI130002 with 1,039,700,000 total volume followed by Bank Negara Malaysia at the second and third place with stock code BNMNI002 and BNMNI004 at 480,000,000 and 280,000,000. It is clear that the government and state owned enterprises performs best and ranked among the top issuers with highest bond sold by volume. 2. Central Securities Depository (CSD)

All depositories or clearing facilities including any central registration system operated by the treasury, the central bank or the reserve bank of the country. In Malaysia, it goes to the Bursa Malaysia Depository Sdn. Bhd. Bursa Malaysia Depository Sdn. Bhd operates and maintains a central depository for securities listed on the securities exchange in Malaysia. It is 55% owned by the Kuala

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Lumpur Stock Exchange (KLSE) and operates the CSD. CSD brings an efficient clearing and settlement system that eliminates the problems associated with the physical scrip-based system. The lost, misplaced, and forged scrip will no longer be a problem and the automatic registration results in savings from registration fee and stamp duty payment. For listed companies and their share registrar, there will be savings in registration costs and from being able to know at any point of time the actual beneficial shareholders.

3. Clearing House in Malaysia

An agency or corporation of future exchange responsible for settling the trading accounts, clearing trades, collecting, regulating delivery and reporting trading data. So both of the parties understand each other transaction that been help by the clearing house, the clearing house acted as third parties that process or legalize the transaction. Once a trade has been executed by two counterparties either on an exchange, the trade can be handed over to a clearing house, which then steps between the two original traders' clearing firms and assumes the legal counterparty risk for the trade.

Bursa Malaysia or before known as Kuala Lumpur Stock Exchange (KLSE), is clearing house in Malaysia, Bursa Malaysia is an exchange holding company. Offering the complete range of exchange related services including trading, clearing, settlement and depository services. Bursa Malaysia is the main headquarter that have ten subsidiaries owned by Bursa Malaysia.

There are two clearing house in Malaysia that running below the Bursa Malaysia. First is Bursa Malaysia Securities Clearing Sdn Bhd - Provide, operate and maintain a clearing house for the securities exchange. The second one is, Bursa Malaysia Derivatives Clearing Bhd - Provide, operate and maintain a clearing house for the futures and options exchange

4. Central Counterparty

Central Counterparty in Malaysia is belong to Bursa Malaysia, it is an organization exists in Malaysia that operate and regulate a fully integrated exchange offering a comprehensive range of exchange-related facilities including listing, trading, clearing, settlement and depository services. The counterparty prime responsibility is to provide efficiency and stability to the financial markets that they operate in. Bursa Malaysia is an exchange holding company approved under Section 15 of the Capital Markets and Services Act 2007. It operates a fully-integrated exchange, offering the complete range of exchange-related services including trading, clearing, settlement and depository services.

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References

Perbadanan Insurans Deposit Malaysia, Mandate, Available from: <http://www.pidm.gov.my/About-PIDM/Mandate.aspx>.

Bursa Malysia, Available from: <http://www.bursamalaysia.com>. ___________, Overview, Available from: <http://www.bursamalaysia.com/corporate/about-

us/overview/>. ___________, Available from: <http://www.bursamalaysia.com/market/>. ___________, Bonds, Available from:

<http://www.bursamalaysia.com/market/securities/bonds>. ___________, Bond Market Statistics, Available from:

<http://www.bursamalaysia.com/misc/system/bond_market_statistics>. ___________, Derivatives, Available from:

<http://www.bursamalaysia.com/market/derivatives/>. ___________, Product Services, Available from:

<http://www.bursamalaysia.com/market/products-services/>. ___________, Securities, Available from:

<http://www.bursamalaysia.com/market/securities/>. ___________, Regulation, Available from:

<http://www.bursamalaysia.com/market/regulation/>. Suruhanjaya Sekuriti Securities Commision Malaysia, Available from:

<http://www.sc.com.my>. Malaysian Investment Development Authority, Available from: <http://www.mida.gov.my>. CME Group, Bursa Malaysia, Available from:

<http://www.cmegroup.com/international/partnership-resources/bursa-resources.html>.

Bloomberg Businessweek, Company Overview of Bursa Malaysia Derivatives Clearing Berhad, Available from: <http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=32794740>.

Bank Negara Malaysia, About the Bank, Available from: <http://www.bnm.gov.my/index.php?ch=en_about&pg=en_intro&ac=641&lang=en>.

___________________________, Mission Statement, available from: <http://www.bnm.gov.my/index.php?ch=en_about&pg=en_thebank&ac=647&lang=en>.

___________________________, Board of Directors, Available from: <http://www.bnm.gov.my/index.php?ch=en_about&pg=en_thebank&ac=643&lang=en>.

Interband enterprise, Available from: <http://www.ibmalaysia.com>. Bond Info Hub, Available from: <http://bondinfo.bnm.gov.my/>.

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3.1.6. Myanmar There is not much information about Myanmar Capital Market since it is in the development stage. But the development stage situation could be known by reading the description about the development stage from Central Bank of Myanmar below. Myanmar has a plan to open the capital market by 2015. To support the plan, Myanmar, led by the Minister for the Ministry of Finance and Revenue, organize Capital Market Development Committee on 1st July, 2008. After the formed of the Committee, six sub-committees then formed on September 17, 2008:

1. Sub-committee for the development of domestic securities market 2. Sub-committee relating to establishment and encouragement of public

companies 3. Sub-committee regarding the enactment of the Securities Exchange Law 4. Sub-committee concerning with the establishment of securities companies 5. Sub-committee for training, educating and information concerning with the

capital market and 6. Sub-committee for accounting and auditing standards for Securities Market

Myanmar also built Road Map for the development of capital market in accordance with the time frame for the effort to gain ASEAN integrated Capital Market. There are three phases to be implemented. The first phase has already been implemented from 2008 to 2009. The second phase is being implemented from 2010 to 2012 and the third phase will be implemented from 2013 to 2015. As an implementation of the bond market development in Myanmar, the Central Bank of Myanmar has issued 2-year government treasury bond and kyat ten million denomination of treasury bond has been issued apart from current issued treasury bonds since 1st January 2010. Myanmar Economic Bank (MEB) and Myanmar Securities Exchange Center Co., Ltd (MSEC) have been appointed as underwriters of the sale of the Government Treasury Bonds since January 2010.The Securities and Exchange Law (draft) has been approved by National Parliament and is being now submitted to People Parliament. Regarding the development of Bond Market, under the ASEAN Bond Market Initiative (ABMI) program, with the assistance from the Japan-ASEAN Fund for the Technical Assistance (JAFTA), the ASEAN Secretariat assigned the Daiwa Institute of Research (DIR) for the Technical Assistance. The technical assistance Phase1 was implemented from June, 2011 to May, 2012. On 29th May, 2012, in order to support for the Capital Market Development in Myanmar, Central Bank of Myanmar and Tokyo Stock Exchange (TSE)/ Daiwa Institute of Research Ltd. signed an MOU. Another MOU has been signed on 13rd August, 2012 between the Central Bank of Myanmar and Policy Research Institute, the Ministry of Finance, Japan in order to provide rules and regulations related Securities and Exchange LawUnder the MOUs, TSE/ DIR and PRI are providing technical assistance for capital market development in Myanmar.

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The financial system in Myanmar remains one of the least developed in the world, with only under 10% of the population holding of a bank account and less than one citizen per 1000 active in the credit market. This lack of financial development happens due to a combination of high inflation, bank runs and insider lending and low capital bases. The new Central Bank of Myanmar (CBM) Law was signed by the president, Thein Sein, on 11 July 2013. The legislation secures the bank’s autonomy and clarifies its responsibilities to regulate local banks, oversee the development of capital markets and manage the official foreign exchange reserves. Under this new law, the role of CBM Director will be upgraded to ministerial level to give more flexibility in conducting their business. Through this new law its clearly reflected that all kinds of financial activities in Myanmar are solely supervised by the CBM.

Figure 3.13. Organizational Structure of CBM

Source: Central Bank of Myanmar (2014)

References

Central Bank of Myanmar, Available from: <http://www.cbm.gov.mm> [February, 1st 2014].

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3.1.7. Phillipines

3.1.7.1. Regulatory Framework of Philippines Capital Market A. Regulations

1. Personal Equity Retirement Act of 2008-An act establishing a provident personal savings plan, known as the Personal Equity and Retirement Act (PERA)

2. Credit Information System Act of 2008- Establishes a credit information system for the collection and dissemination of fair and accurate information related to the credit activities of all entities within the financial system in the Philippines. The government is in the process of establishing the credit information system.

3. Real Estate Investment Trust Act of 2009 (REITS Law)-An act providing the legal framework for Real Estate Investment Trust and for other purposes

4. Revised Code of Corporate Governance (2009) 5. Financial Rehabilitation and Insolvency Act of 2010 – An Act providing for the

rehabilitation or liquidation of financially distressed enterprises or individuals 6. Insurance Code of the Philippines (2013) 7. SEC Memorandum Circular no. 10 Rules and Regulations on Exchange Traded

Funds (2012) Plan to introduce or revise related laws or change related policy and systems 1. Implementing Rules and Regulation of the Securities Regulation Code (targeted to

be completed by the first half of 2014) 2. Investment Houses Law (Presidential Decree No. 129) and its implementing rules 3. Corporation Code of the Philippines 4. Collective Investment Schemes Law (Revision of the Investment Company Act of

1960) There are three agencies that supervise the different institutions in the Philippine financial system. In addition to being the monetary authority, the Bangko Sentral ng Pilipinas (BSP) supervises banks and their financial allied subsidiaries and affiliates (except insurance companies), non-stock savings and loan associations, and pawnshops as provided for in its Charter (R. A. 7653), the General Banking Law (R. A. 8791) while The Securities and Exchange Commission (SEC), on the other hand, has oversight on the domestic capital market and, as such, supervises self-regulatory organizations (SROs), investment houses, and securities dealers/brokers. It also supervises investment companies, finance companies and pre-need firms. Finally, the Insurance Commission (IC) supervises insurance and reinsurance companies, insurance brokers, and mutual benefit associations. In addition, the Philippine Deposit Insurance Corporation (PDIC) also shares some supervisory powers with BSP over banks consistent with its role as deposit insurer.

Regarding inter-institutions coordination for maintaining financial stability, in July 2004, the three financial supervisory agencies, together with the PDIC, formed the Financial Sector Forum (FSF) through the signing of a Master Memorandum of Agreement (MMOA). The FSF is essentially a cooperative effort without any specific legal authority, and thus it is not intended to function as an integrated supervisory body. The FSF primarily serves as a forum for the separate financial regulators to coordinate and discuss matters of common concern. It meets on a regular bi-monthly schedule. The key objectives for setting up the FSF include the improvement of the

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supervision of financial conglomerates and addressing the occurrence of firms operating in “regulatory grey areas”.

Figure 3.14. Organizational Structure of SEC

Source: Securities and Exchange Commission The Philippines (2014)

B. Rules Governing The Trading of Philippine Stock Exchange (Pse) Shares

1. A broker dealer shall be prohibited from buying PSE shares for its own account or for the principal account of another broker dealer (i.e., done through transaction) until such time that the brokers and dealers, as a business industry, are in compliance with the 20% Rule on industry ownership. Even after the broker dealer industry is already in compliance with the 20% Rule, the moratorium should automatically set in whenever the benchmark is breached;

2. A broker dealer who is currently using a different code system to identify its customers has to notify the Commission of such existing system and convey to the Commission the preferred code that it will be using.

3. A broker dealer shall submit to the Commission on a daily basis, either by e-mail or by facsimile, a report, signed by the Associated Person, of all transactions of PSE shares that the broker dealer has effected for the day not later than 3:00 p.m. of the same day.

4. A broker dealer shall submit not later than 12:00 noon of every Monday an original signed copy of the daily reports he has submitted during the immediately preceding week.

5. A broker dealer files a separate report on transaction of PSE shares that he effects outside of the PSE. The filing shall be made not later than 12:00

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noon of the next day. 6. A broker dealer shall be prohibited from soliciting and/or receiving

discretionary proxies from customers and a customer shall be prohibited from issuing discretionary proxies in favor of their brokers, relative to PSE shares. This is to prevent any broker dealer from exercising effective control over voting rights in the PSE beyond the allowable limit; and

7. A broker dealer and/or the PSE may be required to submit other reports and perform other acts as may be deemed reasonably necessary by the Commission to ensure compliance with these rules.

These Rules were approved by the Commission on 30 December 2003 effective immediately, except for Rules 4 & 5, which shall take effect on 12 January 2004.

C. Investor Protection & Capital Market Transparency

1) Regulation that provides protection for minority or individual investors on capital markets The Securities Regulation Code (SRC) and its implementing rules and regulations (IRR) provides the following investor protection features: (1) Full disclosure of material information; (2) Regulation of market participants (issuers, market professionals, exchanges, SROs, transfer agents, etc.); (3) Tender offer requirements; and (4) Penalties for violations.

Based on the provisions of the SRC IRR, the Securities Investors Protection Fund (Fund) was established, which is a non-stock, nonprofit corporation that was organized for the purpose of promoting the securities industry and to compensate the investors in cases of loss due to fraud, or failure or default by a stockbroker/dealer. The maximum amount payable per investor is currently at Php100,000. The Fund collects from member-brokers a fee of 1/1,000 of 1 percent of their gross transaction value.

2) Market stabilizing mechanism to cope with abrupt changes in the stock

market Philippine Stock Exchange: The PSE implements a trading halt or circuit breaker rule such that there will be a 15-minute trading halt in the event its main index, the PSEi, decreases by at least 10 percent based on the previous day's closing index value. The trading halt will be implemented only once in a trading day and will not be resorted to if the decrease in the PSEi by at least 10 percent occurs 30 minutes prior to market close

3) Corporate Disclosure

Under Section 17.1 of the SRC, every issuer satisfying certain requirements shall file with the Commission:

(a) annual report; (b) quarterly report; and

(c) Such other periodical reports for interim fiscal periods and current reports on significant developments of the issuer as the Commission may prescribe as necessary to keep current information on the operation of the business and financial condition of the issuer.

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The SRC also requires the filing of beneficial ownership reports under Section 18 and 23 of the SRC. Other reports are required under the relevant rules of the exchange.

Under Section 17.2 of the SRC, the reporting entities are:

(a) An issuer which has sold a class of its securities pursuant to a registration under Section 12 hereof: Provided, however, That the obligation of such issuer to file reports shall be suspended for any fiscal year after the year such registration became effective if such issuer, as of the first day of any such fiscal year, has less than one hundred (100) holders of such class of securities or such other number as the Commission shall prescribe and it notifies the Commission of such;

(b) An issuer with a class of securities listed for trading on an Exchange; and

(c) An issuer with assets of at least Fifty million pesos (P50,000,000.00) or such other amount as the Commission shall prescribe, and having two hundred (200) or more holders each holding at least one hundred (100) shares of a class of its equity securities: Provided, however, That the obligation of such issuer to file reports shall be terminated ninety (90) days after notification to the Commission by the issuer that the number of its holders holding at least one hundred (100) shares is reduced to less than one hundred (100).

The information to be disclosed depends on the type of report (i.e. annual, quarterly, current, etc.). The forms itself provides the required information. Please see attached:

1. Annual report 2. Quarterly report 3. Current report 4. Beneficial ownership report 5. Information statement 6. Reports required by the relevant exchange:

For the stock market these are the types of corporate disclosures: Annual report, Stockholders Meeting, Company Announcement, Corporate Governance Reports, Definitive Information Statement, Dividend Notice, Initial Statement of Beneficial Ownership of Securities, List of top 100 securities, Notice of investors’ briefing, Preliminary Information Statement, Public Ownership report, Quarterly report, report by owner of more than five (5) percent, report of loss of stock certificate, request for extension to file SEC Form 17-A or 17-Q, Short Form report of certain institutional investors of more than 5 percent, Statement of Changes in Beneficial Ownership, Stock rights notice, Tender Offer Report, Verification of the Department of Energy or the Bureau of Mines and Geosciences. For Corporate Bond issuer listed in PDEX: Any amendments to the terms of the admitted Securities; Any default on the terms of the admitted Securities; Any delay in the payment of any admitted Securities or any other publicly-traded security of the Issuer; Any material default in the payment of principal, interest, sinking or purchase fund installment, or any other material default not cured within thirty (30)

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days, with respect to any indebtedness of the Issuer or any of its significant subsidiaries; Changes in the rights of the holders of the Securities or limitation or qualification of the rights of the holders of the Securities by issuance or modification of any other class of securities; Any purchase, redemption or cancellation of the admitted Securities; For admitted Securities with conversion rights, any exercise of such rights; Any decision taken to carry out extraordinary investments or enter into financial or commercial transactions that might have a material impact on the Issuer’s situation; Losses of a significant part of the Issuer’s net worth; Changes in the Issuer’s corporate activities or operations, or the initiation of new ones; Occurrence of any event of dissolution; Suspension, retirement, or cancellation of the admission of the Issuer’s Securities on an exchange or organized over-the-counter electronic marketplace, domestic or foreign; For listed Securities, any change in the credit rating of the Issuer and listed Securities, as applicable; and Other events or conditions requiring disclosure under Securities Laws and other pertinent laws and regulations.

D. International Coordination for Capital Market Infrastructure

1. Cases of cross-border cooperation or partnership among capital market institutions such as stock exchanges, CSDs and clearing houses The Philippine Dealing System Holdings Group (PDS) is partly owned by Singapore Stock Exchange (SGX) and PDS owns PDEX. In the past, the PSE entered into the following agreements: a. Memorandum of Understanding with the Stock Exchange of Thailand

for information technology assistance. (2008) b. Memorandum of Understanding with NYSE Euronext to explore new

opportunities in trading system architecture and technology, exchange traded products, market participant connectivity and market date management (2008)

c. Memorandum of Agreement with Bursa Malaysia Berhad, Indonesia Stock Exchange, Singapore Exchange Securities Trading Limited and The Stock Exchange of Thailand for the creation of trading linkages and forge strategic alliances for the development of the capital market in the region. (2009)

d. Memorandum of Understanding with Korean Exchange Inc. (KRX) to explore mutual cooperation through information and experience sharing in securities matters. (2009)

e. Memorandum of Understanding with Ho Chi Minh Stock Exchange (HOSE) to enhance their cooperation in financial services. (2010)

f. Memorandum of Understanding with Hanoi Stock Exchange for long-term cooperation between the two bourses.

g. Memorandum of Understanding with Singapore Exchange Derivatives Trading Ltd. pertaining to the development of Philippines-linked derivative products. (2013)

h. Memorandum of Agreement with stakeholders of Philippine Dealing Systems and Holdings Corp. (PDS, the holding company of PDEx) regarding the acquisition by PSE of PDS (2013)

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3.1.7.2 Capital Market Infrastructure A. Major changes that took place in capital market infrastructure in the past three

years On July 26, 2010, PSE`s New Trading System (NTS) now known as PSEtrade was launched to replace the Maktrade System. PSE conducted a series of trainings on related systems namely: (1) PAM (Poste D'Access Aux Marche); (2) Broker Utility; (3) Client Code Generation; (4) Trade Amendments; (5) Trade Unbundling. Along with the introduction of the PSEtrade is the implementation of a new set of Trading Rules in 2010. Following are some of the major adjustments on the trading rules and regulation as a result of the new functional features that goes with the new System:

a. New Trading Hours. The Exchange has introduced the pre-close phase which is the period wherein the closing price for a Security is determined.

b. Dynamic Threshold. This price control mechanism replaced the system embedded three-tick rule which the former trading system offers. The Dynamic Threshold is the permitted difference in price between two Last Traded Price updates for a given Security.

c. Inter-broker Deal. Block sale between two Trading Participants is now permitted. d. Order Types and Validities. These features of the new System are designed to serve as

added strategic tool for the Trading Participants. While all the validity types have already been introduced, only limit order type is currently set off until the PSEtrade Project Committee transitions to the next phase of the project implementation plan.

e. Board Lot Table. The Exchange has introduced a new Board Lot Table which goal is to promote liquidity. The said new table has a far narrowed tick size compared to the previous, the purpose of which is to provide more point of entries for average investors.

B. Future plans to introduce or revise laws and change systems in regard to capital

market infrastructure. Laws for revision Implementing Rules and Regulation of the Securities Regulation Code (targeted to be completed by the first half of 2014) Systems The PSE is in the process of changing its disclosure system from the Online Disclosure System (ODiSy) to the PSE Electronic Disclosure Generation Technology (PSE EDGE). the current PSE Online Disclosure System (ODiSy) uses a web-based system which allows listed companies to electronically submit disclosures to the PSE. These disclosures are then made available to the PSE website, internal users and applications, and to the market data distribution system. The PSE EDGE will utilize a standard submission of data using electronic templates or forms instead of the current PDF format. The new ODiSy will also open up new revenue lines for the PSE in terms of its market data business, as listed company data can be delivered faster and in more flexible formats as may be specified by data clients Capital Market Infrastructure The Securities Clearing Corporation of the Philippines Depository was approved by the SEC in 2013, however it is not yet operational. Once it has become operational, there shall be two depositories in the market.

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C. Regulators for Philippines Capital Market Philippine capital market has some main market authorities, namely:

a) The Securities and Exchange Commission (SEC): an independent government agency which supervises the securities market, oversees the operations of the PSE and its members, and ensures compliance with the provisions of the securities act. Also issues the rules and regulations on long and short term papers subject to approval by the Monetary Board.

b) Philippine Stock Exchange: a self-regulatory organization (SRO) with the authority to police its ranks through the Compliance and Surveillance Group (CSG).

c) Central Bank – Bangko Sentral ng Pilipinas (BSP): mandated to provide direction in the areas of money, banking and credit. Its primary objective is to maintain price stability, promote monetary stability and convertibility of the peso. BSP supervises the operations of banks and has regulatory powers over the operations of finance companies and financial institutions.

d) Department of Finance: responsible for the management of the government’s financial resources; formulation and administration of fiscal policies; and the supervision of revenue operations for national and local governments.

e) Bureau of Treasury: custodian of all national government funds; creation and execution of policies on financial management, public borrowings and capital market development; and the management and control of public debts from domestic and foreign sources.

f) Philippines Central Bank The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines. It was established on 3 July 1993 pursuant to the provisions of the 1987 Philippine Constitution and the New Central Bank Act of 1993. The BSP took over from the Central Bank of Philippines, which was established on 3 January 1949, as the country’s central monetary authority. The BSP enjoys fiscal and administrative autonomy from the National Government in the pursuit of its mandated responsibilities.

D. Market Infrastructure to Facilitate Connectivity 1. The Philippine Stock Exchange

The Philippine Stock Exchange (PSE) is one of the oldest stock exchanges in Southeast Asia, having been in continuous operation since its inception in 1927. The PSE has eight constituent indices3:

a. PSE All Shares Index (ALL) b. PSE Composite Index (PSEi) c. PSE Financials Index (FIN) d. PSE Holding Firms Index (HDG) e. PSE Industrial Index (IND) f. PSE Mining and Oil Index (M-O) g. PSE Property Index (PRO) h. PSE Services Index (SVC)

3 http://en.wikipedia.org/wiki/Philippine_Stock_Exchange

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The PSE Composite index is considered as the main index for the Philippine Stock Exchange. It is composed of thirty listed companies with a specific set of criteria.

a) Active Stocks A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings4. The most five active stocks in the Philippine Stock Exchange and thus the most traded and preferred by the 12th of September 2013 are the following:

No Security Name 1 SM Investments Corporation 2 Philippine Long Distance

Telephone Company 3 Ayala Corporation 4 SM Prime Holdings, Inc. 5 Metropolitan Bank & Trust

Company Source: http://www.pse.ph/html/MarketInformation/mostactive.jsp

b) Dividends

Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this5. The most valuated Dividends traded in the PSE are the following:

No Company Name 1 Jollibee Foods Corporation 2 Vista Lands & Landscapes, Inc. 3 Energy Development Corporation 4 Petron Corporation

Source: http://www.pse.com.ph/stockMarket/dividendRights.html

c) Over-the-Counter Trade Listed shares and stocks not listed on the PSE, but registered and licensed for sale by the Securities and Exchange Commission, may be traded over-the-counter by brokers. Transactions are executed by direct inquiries and negotiation between dealers6. Over-the-Counter (OTC) is another mode of originating for specific investors, namely, the Government Owned or Controlled Corporations, the Local Government Units and the Tax Exempt Institutions, e.g., pension funds, etc. And it is non-competitive7.

4 http://www.investopedia.com/terms/s/stock.asp 5 http://www.investopedia.com/terms/d/dividend.asp 6 http://www.sec.gov.ph/investorinfo/opinions/sec-mrd%20opinion%20no.%201.pdf 7 http://www.treasury.gov.ph/govsec/aboutsec.html#otc

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2. Central Securities Depository A Central Securities Depository (CSD) is defined as a specialist financial organization holding securities such as shares either in certificated or uncertified form so that ownership can be easily transferred through a book entry rather than the transfer of physical certificates8. By providing securities accounts, central safekeeping services, and asset services which may include the administration of corporate actions and redemptions, the entity plays an important role in helping to ensure that these securities are not accidently or fraudulently created or destroyed or their details changed.

a. The Philippine Central Depository In the Philippines, the Philippine Central Depository Inc. (PCD) operates as a central securities depository and was established on March 31, 1995. It is a private company, which is regulated by the Securities and Exchange Commission (SEC) and owned by major capital market players in the Philippines, namely9:

PCD Owners Philippine Stock Exchange Inc. (PSE) 31,72% Bankers Association of the Philippines (BAP) 31,72% Financial Executives Institute of the Philippines (FINEx) 10% Development Bank of the Philippines (DBP) 10% Investment House Association of the Philippines (IHAP) 6,56% Social Security System (SSS) 5% Citibank 5%

b. Offered services Aside from lodgment which is the process that allows to all the participants to deposit their eligible securities in the PCD, the Philippine Central Depository Inc. offers also many other services such as book-entry settlements for exchange and non-exchange trades, electronic pledge, bonds, commercial papers, and negotiable certificates of deposits10. The participants have to pay a deposit fee and can benefit from minimized paperwork, reduced investment risks and enhanced liquidity of the equities market.

3. Clearing Houses

Clearing house is an agency or financial institution of a futures exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery and reporting trading data.11 In Philippines, there is Securities Clearing Corporation of the Philippines (SCCP). It was registered with the Securities Exchange Commission (SEC) in 1996 and was issued a provisional license to operate as a clearing house for equities market in 1998 to manage cash and securities settlement of exchange trades. 12

In addition, SCCP or Clearing house is a subsidiary of the Philippine Stock Exchange,

Inc. (PSE). It is under the regulatory supervision of SEC. All eligible trades executed at the PSE go through the SCCP, which has clearing responsibility for the settlement of funds and

8 http://en.wikipedia.org/wiki/Central_securities_depository 9 http://www.pse.ph/html/RelatedOrganizations/related_org.html#PCD 10 http://www.pse.ph/html/RelatedOrganizations/related_org.html#PCD 9 http://www.investopedia.com/terms/c/clearinghouse.asp 10http://www.clearstream.com/ci/nonav/en/cic/CIC/Market_Reference/ICSD/Philippines/Market_Profile/Market_infrastructure.htm

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the transfer of securities, acts as Central Counterparty (CCP) for exchange trades by brokers. 13 4. Central Counter Party (CCP) A CCP (central counterparty) is a corporate entity that provides a guarantee to both parties in a trade that if one party defaulted before the discharge of its obligations, the CCP would fulfill the financial obligations to the remaining party as agreed at the time of the trade14. A CCP centralizes counterparty risk management and ensures a safe and controlled post-trade process. There are two main processes that are carried out by CCPs: clearing and settlement of market transactions15. Clearing is about identifying the obligations of both parties on either side of a transaction, while settlement is when the final transfer of securities and funds occur. The Securities settlement instructions are netted multilaterally into a net receipt or delivery position in a given Security for each Clearing Member. All Cash debits and credits from these Securities Settlement instructions are also netted into a single net cash position for each Clearing Member. On Settlement Date, book-entry settlement instructions will be created for each net position to facilitate movements from the net delivering Clearing Members to the net receiving Clearing Members. As a result of Novation, SCCP becomes a Central Counterparty (“CCP”) to all matched trades executed at the Philippine Stock Exchange. As a CCP, SCCP assumes the role of a Seller to all Buying Clearing Members and the Buyer to all Selling Clearing Members. Thus, SCCP as the Central Counterparty takes the buyer’s credit risks and assumes the seller’s delivery risks, thereby addressing settlement concerns for market participants. References

Bangko Sentral ng Pilipinas, Available from: <http://www.bsp.gov.ph/>. Philippine Deposit Insurance Corporation, Available from: <http://www.pdic.gov.ph/>. Market Infrasturcture, Available from:

<http://www.clearstream.com/ci/nonav/en/cic/CIC/Market_Reference/ICSD/Philippines/Market_Profile/Market_infrastructure.htm>.

The PSE Academy, Securities Clearing Corporation of the Philippines, available from: <http://www.pseacademy.com.ph/LM/investors~details/id-1317985230246/Securities_Clearing_Corporation_of_the_Philippines.html>.

13http://www.clearstream.com/ci/nonav/en/cic/CIC/Market_Reference/ICSD/Philippines/Market_Profile/Market_infrastructure.htm 14 http://www.euroccp.co.uk/leadership/faq_clearing_ccps.php 15 http://www.investopedia.com/terms/c/ccph.asp

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3.1.8. Singapore

3.1.8.1. Regulations of Singapore Capital Market Singapore operates a predominantly disclosure-based regime for capital markets. SGX rules augment the disclosure-based regime with high baseline admission standards and continuing requirements on issuers. SGX operates a centralized electronic marketplace for trading, clearing and settling securities and derivative products. As the market operator, SGX seeks to secure the trust and confidence of its market users in the integrity of the various facilities and services which make up the marketplace. The regulatory activities of SGX are directed at achieving a fair, orderly and transparent market, at having high quality market intermediaries and issuers and at maintaining safe and efficient clearing and settlement facilities. To meet these objectives, SGX establishes listing rules for issuers and business rules for all members, which meet internationally accepted standards. In conducting its regulation of the market, SGX adopts six guiding principles which include: 1. Disclosure-based regulation 2. Comprehensive risk management 3. Risk-Based Targeting of Regulatory Activities 4. Balanced approach to International Best Practice 5. Transparency 6. SGX as a Frontline Regulator

There are altogether 7 Rulebooks issued by the SGX. These Rulebooks contain the various rules governing the listing, clearing, trading and depository services that the industry needs to comply with. The Rulebooks are often updated and revised to keep pace with market developments.

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Figure 3.15. SGX’s Rulebooks

Source: SGX (2014)

A. Regulators for Singapore Capital Market 1. Main Market Authorities The Monetary Authority of Singapore (MAS) is Singapore's central

bank and financial regulatory authority. Before its establishment, monetary functions were performed by government departments and agencies. The MAS now administers the various statutes pertaining to money, banking, insurance, securities and the financial sector in general. Following its merger with the Board of Commissioners of Currency on 1 October 2002, the MAS has also assumed the function of currency issuance. MAS works closely with our counterparts as they carry out their duties as Singapore’s central bank and financial sector regulator. They have developed close bonds not only with their ASEAN and Asia-Pacific counterparts – including China, Japan, Korea, Australia and New Zealand - but also with their counterparts further abroad such as the US Federal Reserve Board, European Central Bank, and key European and Latin American central banks and regulators. In their financial system architecture, Singapore has an integrated financial regulatory structure, under which the Monetary Authority of Singapore (MAS) has the authority to regulate the banking, securities, futures, and insurance industries in the nation-state. The MAS is Singapore’s central bank, created by an Act of Parliament in 1970. Before the establishment of the MAS, monetary functions were performed by various

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government departments and agencies. In 2002, Singapore’s Board of Commissioners of Currency merged with the MAS to rationalize common functions and realize efficiency gains, transforming the MAS into a central bank. Then in 2007 after the amendments to the act of establishment, MAS then restate as an integrated financial services supervisor and central bank managing Singapore’s official foreign reserves. The MAS has operational autonomy, although the board remains accountable to the Parliament through the minister in charge of the MAS while The MAS receives its income from its investment activities. Through the enactment act, MAS is entrusted to conducting function in following business:

1. act as the central bank of Singapore, which includes the conduct of monetary policy, the issuance of currency, the oversight of payment systems, and to serve as banker to, and financial agent of, the government;

2. conduct integrated supervision of financial services and financial stability surveillance; 3. manage the official foreign reserves of Singapore; and 4. develop Singapore as an international financial center.

Regarding functioning in securities and capital field, MAS having The Securities and Futures Act (2001) which created it as the existing framework for authorization of markets and licensing of intermediaries, the scope of regulated activities, and an enforcement mechanism in securities aspects, while The Financial Advisers Act (2001) regulates financial advisory activities in respect to investment products, and the distribution or marketing of specific functionally similar investment products.

The MAS maintains a close relationship with the Ministry of Finance (MOF). However, MOF’s role is limited with regard to the regulation of banks and financial institutions, as all supervisory powers are vested in the MAS. As an integrated regulator, many of the coordination functions needed in other systems are internal to the MAS organization.

Figure 3.16. Financial Supervisory Infrastructure in Singapore

Source: The Group of Thirty (2007)

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2. Market Infrastructure to Facilitate Connectivity a. Exchanges

In Singapore, they used that called Straits Times Index that is a key benchmark for the Singapore market and is used as the basis of a range of financial products including; Exchange Traded Funds (ETFs), futures, warrants and other derivatives. The indices are reviewed half-yearly by the independent FTSE ST Index Advisory Committee, in accordance with the index ground rules. The FTSE ST methodology ensures that the indices represent the investable universe accurately for benchmarking purposes and can be easily replicated as the basis of index-linked products.

b. Over the Counter OTC Capital is currently Singapore’s only market making online equity

trading platform for shares of unlisted Singapore incorporated public companies. OTC Capital helps companies with a viable business and good growth prospects to raise up to SGD5m (in aggregate) within any 12-month period in a relatively cost-effective manner; and allows the trading of UNLISTED securities amongst OTC Capital investors who are registered with Phillip Securities.

c. Central Securities Depository

1) Central Depository (Pte) Ltd (CDP) 2) Established in 1987 3) Wholly-owned subsidiary of the Singapore Exchange (SGX) 4) Operates the securities clearing and settlement systems for equities

and corporate debt securities. CDP clears and settles trades in equities listed on a related entity, SGX Securities Trading (SGX-ST), which is also a wholly-owned subsidiary of SGX. CDP acts as the central counterparty for the clearing and settlement of these equities trades.

5) At the same time, CDP provides a clearing and settlement facility for corporate debt securities, but does not function as a central counterparty for this purpose.

To start trading in SGX, trader must have a CDP account. Which is only opened once.

1) The Central Depository (Pte) Ltd (CDP) account is for the settlement of trades.

2) It maintains all the shares you’ll buy on SGX, 3) It electronically records the movements of the shares in and out of

your account as you buy and sell them. 4) To open a CDP account, you will need to be 18 years of age and must

not be an undischarged bankrupt. 5) For Singaporean/Permanent Resident (“PR”) of Singapore, who

wish to trade in SGX listed shares, you need to open a corresponding CDP Individual/Joint Securities Account (commonly known as the CDP account) with the Central Depository Pte Ltd ("CDP").

6) For Non-Singapore Permanent Resident/Foreigner, you would need to open a CDP Sub-Account.

So CDP in Singapore act as more or less like Kustodian Sentral Efek Indonesia (KSEI) in Indonesia.

d. Singapore Clearing House Association (SCHA)

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1) SCHA is an association formed in December 1980 2) Its function is to establish, manage and administer clearing services

and facilities for checks and debit and credit items of its members. 3) It comprises MAS and the commercial banks in Singapore that wish to

become members. 4) As at end of December 2000, SCHA had 48 ordinary members and 87

associate members. 5) The SCHA also establishes the rules on the rights and responsibilities

of participating banks as well as the service providers for the various clearing systems.

6) The SCHA is responsible for the Singapore Automated Clearing House (ACH), which runs the Singapore Dollar Check Clearing System, the United States Dollar Check Clearing System and the Interbank GIRO System.

e. Central Counterparty (CCP) in Singapore

1) There are two main processes that are carried out by CCPs: clearing and settlement of market transactions. Clearing relates to identifying the obligations of both parties on either side of a transaction. Settlement occurs when the final transfer of securities and funds occur.

2) CCPs benefit both parties in a transaction because they bear most of the credit risk. If two individuals deal with one another, the buyer bears the credit risk of the seller, and vice versa. When a CCP is used the credit risk that is held against both buyer and seller is coming from the CCP, which in all likelihood is much less than in the previous situation.

3) A central counterparty (CCP) is a clearing facility that provides a service by which a party to a transaction substitutes, through novation or otherwise, the credit of a clearing facility for the credit of its counterparty to the transaction. CCPs allow for multilateral netting of transactions and thus are argued to reduce counterparty credit risk.

4) Singapore is one of the major derivatives markets in Asia attracting trade of about US$9.8 trillion a year, mainly relating to interest rates, foreign exchange and oil. Currently the Singapore Exchange (SGX) is the only clearing house in Singapore for over the counter (OTC) derivatives and some banks have their own in-house e-trading platform for OTC products.

5) Monetary Authority of Singapore (MAS) proposes to introduce a new class of instruments to the Securities and Futures Act (SFA) - "derivative contracts" - which will encompass commodities, credit, equities, foreign exchange and interest rate derivatives, thereby bringing the major asset classes of the derivatives market within the SFA's ambit.

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References

Monetary Authority of Singapore, Overview about MAS (2013). Available from: http://www.mas.gov.sg/About-MAS/Overview-of-MAS.aspx.

_______________________________, Groups and Department of MAS (2013). Available from: http://www.mas.gov.sg/About-MAS/Overview-of-MAS/Groups-and-Departments.aspx.

_______________________________, International and Regional Financial Cooperation (2013). Available from: <http://www.mas.gov.sg/About-MAS/International-and-Regional-Financial-Cooperation.aspx>.

_______________________________, Central Bank Operation and Liquidity Management (2013). Available from: <http://www.mas.gov.sg/Monetary-Policy-and-Economics/Central-Bank-Operations-and-

Liquidity-Management.aspx>. _______________________________, MAS Standing Facility (2013). Available from:

<http://www.mas.gov.sg/Monetary-Policy-and-Economics/Central-Bank-Operations-and-Liquidity-Management/MAS-Standing-Facility.aspx>.

_______________________________, MAS Intra-Day Liquidity Facility (2013). Available from: <http://www.mas.gov.sg/Monetary-Policy-and-Economics/Central-Bank-Operations-and-Liquidity-Management/MAS-Intraday-Liquidity-Facility.aspx>.

_______________________________, Payment System in Singapore (n.d.). Available from: http://www.mas.gov.sg/~/media/MAS/Singapore%20Financial%20Centre/Why%20Singapore/Payment%20and%20Settlement%20Systems%20redirect%20pages/EMEAPRedBookSingaporeChapter.pdf>.

_______________________________, Capital Markets, Available from: <http://www.mas.gov.sg/singapore-financial-centre/overview/capital-markets.aspx>.

How to Open a Stock Trading Account in Singapore (2012). Available from: <http://forums.hardwarezone.com.sg/stocks-shares-indices-92/how-open-stock-trading-account-singapore-updated-2012-a-3628498.html>.

Overview of Singapore’s Payments and Securities Settlement Landscape (2010). Available from: <http://www.emeap.org/emeapdb/upload/WGMeeting/Singapore_Redbook_(Mar_2010).pdf>.

Singapore Exchange, Regulation, Available from: <http://www.sgx.com/wps/portal/sgxweb/home/regulation/overview#panelhead1>.

______________________________, Rulebooks, Available from: <http://rulebook.sgx.com>.

Singapore Deposit Insurance Corporation, Available from: <https://www.sdic.org.sg/>. Singapore Government Securities, Availbale from: <http://www.sgs.gov.sg>. Cloin Ng & Partners, MAS Reviews Regulation of Derivatives Market in Singapore,

Available from: <http://www.cnplaw.com/cnpupdate/cnpalert_270212.html>.

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3.1.9. Thailand

3.1.9.1. Regulatory Framework of Thailand Capital Market A. Regulations

In dealing with capital market, Thailand especially in its price regulation sets 2 major important points since 1997, which are Floor and Ceiling Limits, and also Circuit Breaker

1. Floor and Price Ceiling On 1 December 1997, the SET (Stock Exchange of Thailand) introduced new floor and ceiling price limits for trading. In this new system, prices can fluctuate within a range of 30% from the closing prices, while in the previous limits, its only allowed to fluctuate within 10%. Ceiling and floor limits apply to each trading board utilizing the AOM system, with the exception of the foreign board

2. Circuit Breaker It is along with the set of floor and price ceiling that SET also implemented a system name Circuit Breaker to ease unusual volatility in the market which can cause panic to customers. The system works in two stages. First if the SET index falls by 10% from the previous day's close, all trading in listed securities will be halted for 30 minutes. Secondly, if the

In addition as stated in the official site of Stock Exchange of Thailand, it is stated that "The Regulatory Policy Department promotes a fair, transparent and orderly market and participants' confidence by offering practical and competitive regulatory policies and regulations relevant to listed companies, securities companies and trading. Those policies and regulations are also in line with international standards and regulatory policies."

B. Legal Framework and System of Capital Markets 1. Laws and systems have been newly introduced or revised in regard to capital markets

in the past three years Liberalization of securities business licenses and brokerage fees in January 2012.

2. Plan to introduce or revise related laws or change related policy and systems The SEC has submitted to the Ministry of Finance, the draft amendment of the Securities and Exchange Act to allow the use of civil penalties in enforcement actions and to better cope with unfair securities trading practices and the draft amendment of the Civil Procedure Code to include class action lawsuits.

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C. Regulators of Thailand

Table 3.7. Regulators of Thailand

Item Regulator Related Law

1 The Bank of Thailand Ministry of Finance Bank of Thailand Act B.E.2485 and amended

2 Commercial Banks

Bank of Thailand Financial Institutions Businesses Act B.E.2551

3 Foreign Bank branches

4 Subsidiary

5 Retail Banks

6 Finance Companies Bank of Thailand Financial Institutions

Businesses Act B.E.2551 7 Credit Foncier Companies

8 The Government Savings Bank

Ministry of Finance/ Bank of Thailand

Government Savings Bank Act, B.E.2489

9 The Bank for Agriculture and Agricultural Cooperatives (BAAC)


The Bank for Agriculture and Agricultural Cooperatives Act, B.E.2509

10 The Government Housing Bank


Government Housing Bank Act, B.E.2496

11 The Export - Import Bank of Thailand (EXIM-Bank)


The Export-Import Bank of Thailand Act, B.E.2536

12

Small and Medium Enterprise Development Bank of Thailand (SME Bank)

Ministry of Finance/ Bank of Thailand/ Ministry of Industry

Small and Medium Enterprise Development Bank of Thailand Act, B.E. 2545

13 Islamic Bank of Thailand Ministry of Finance/ Bank of Thailand

Islamic Bank of Thailand Act, B.E.2545

14 The Small Industry Credit Guarantee Corporation (SICGC)

Ministry of Finance/ Ministry of Industry

The Small Industry Credit Guarantee Corporation Act, B.E. 2534

15 Secondary Mortgage Corporation (SMC)


Emergency Decree on Secondary Mortgage Corporation B.E.2540

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16 Thai Asset Management Corporation (TAMC) Ministry of Finance

Emergency Decree on the Thai Asset Management Corporation B.E.2544

17 Asset Management Companies


Emergency Decree on the Asset Management Company B.E.2541

18 Money Changers Ministry of Finance/ Bank of Thailand

Exchange Control Act, B.E.2485

19 Securities Companies Securities and Exchange Commission

The Securities and Exchange Act, B.E.2535

20 Mutual Fund Management Companies

21 Life Insurance Companies Ministry of Finance/ Office of Insurance Commission

Life Insurance Act, B.E.2535 and amended

22 Agricultural Cooperatives The Department of Cooperatives Promotion and the Department of Cooperative Auditing, Ministry of Agriculture and Cooperatives

Cooperative Act, B.E.2511 and amended

23 Savings Cooperatives

24 Provident Fund Securities and Exchange Commission

Provident Fund Act, B.E. 2530

25 Social Security Fund Ministry of Labor Social Security Act, B.E.2533

26 Pawnshops Ministry of Interior Pawn-shop Act, B.E.2505 and amended

C. Investor Protection, Capital Market Transparency, and Corporate Disclosures 1. Regulation that provides protection for minority or individual investors on capital

markets (E.g. investor protection funds, client money (or deposit) protection of securities accounts).There are many regulations related to protection of individual investors in many aspects in accordance with the Amendments to the Securities and Exchange Act of 1992 revised version as below:

a) Investors have the right to obtain sufficient information for making decisions.

b) Investors can bring a civil action on their own behalf to claim for compensation from such directors or management who involved in such wrongful actions.

c) Investors jointly submit agenda in the shareholders’ meeting; however, the board of directors is permitted to reject the proposal under pre-indentified specific conditions or circumstances.

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2. Market Stabilizing Mechanism to Cope with Abrupt Changes in the Stock Market

Thailand has some measures to stabilize as well as reduce noises and chaos in the stock market as below:

a) Allow prices of a stock traded on the SET to fluctuate within a range of 30 percent of the previous closing price.

b) Implement a circuit breaker system to ease any unusual volatility in the market that may cause investors’ panic. The circuit breaker functions as follows:

First stage: If the SET index falls by 10% from the previous day's close, all trading in listed securities will be halted for 30 minutes. Second stage: If the SET index falls by 20% from the previous day's close (i.e., another 10%), trading in all listed securities will be halted for 1 hour. For Study Under The ASEAN+3 Research Group Only | Thailand 21

If the trading time left in a session is less than 30 minutes, or one hour (as the case may be) after the circuit breaker comes into effect, trading will be halted until the closing time of that session, and the trading will then resume in the next session.

3. Non-Discriminatory Investor Protection Schemes and Standards. 4. Corporate Disclosure to Enhance Transparency of Capital Markets

D. Regulators for Thailand Capital Market 1. Main Market Authorities

a. SEC and The Ministry of Finance of Thailand Market players, including member companies, stockbrokers, custodians, and

listed companies in Thailand are regulated both by the Securities and Exchange Commission (SEC) and the Stock Exchange of Thailand (SET). Established on May, 16th 1992, the Securities and Exchange Commission (SEC) is an independent public agency under the Securities and Exchange Act B.E. 2535 (1992) with the duty to supervise and develop the Thai capital market to ensure efficiency, fairness, transparency and integrity.

Beside SEC, The Ministry of Finance of Thailand also has the power to regulate securities trading on the Stock Exchange of Thailand (SET) by issuing regulations or approving those drafted by the SET Board of Governors, accepting listing and delisting and supervising securities businesses by approving rules issued by the Bank of Thailand, issuing and revoking licenses for securities business undertaking. Meanwhile, the Bank of Thailand issued regulations and supervised business operation of securities companies, the SET oversaw members’ operation pursuant to the rules drafted by the Bank of Thailand and approved by the Minister of Finance.

Since the market became more developed, new products were introduced then two new laws were introduced namely the Derivatives Act B.E. 2546 (2003) and the Trust for Transactions in Capital Market B.E. 2550 (2007) to strengthening the SEC functions.

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SEC has four primary goals, namely: 1. Investor protection: Overseeing securities business intermediaries, the stock exchange,

securities trading and other market activities to ensure credibility and fairness; 2. Market orderliness: Overseeing financial system to ensure functional stability and

effective crisis management in case of possible severe fluctuation without widespread impacts on investors and the capital market at large;

3. Product innovation: Facilitating introduction of diverse investment choices and capital raising channels and adopting proactive approaches to maximize opportunities of the Thai capital market arising from the development of the Asian economy;

4. Stakeholders’ relations: Reaching out to business sectors and the investing public with an emphasis on fundraising channels and preparation procedures in concurrent with continuing promotion of financial literacy.

Regarding conducting their supervisory aspect, every securities issuance for sale to the public must receive an approval from the SEC. The SEC, however, does not approve appropriateness of securities prices. After listing, the SEC continues to oversee the issuer’s disclosure of information to ensure that it is complete and timely and in compliance with governing regulations to protect the interest of investors.

Figure 3.17. Organizational Structure of SEC

Source: Securities and Exchange Commission Thailand (2014)

b. The Bank of Thailand or BOT

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BOT was first set up as the Thai National Banking Bureau. This bank was developed on 28 April 1942 and it’s responsible for all central banking function in Thailand. The Bank of Thailand opened on 10 December 1942. The Bank of Thailand is responsible to create a mechanism to guard against economic crisis. Moreover, members of the public will be able to audit and increase the understanding of the BOT’s operations. Roles and responsibilities of the Bank of Thailand comprises of : (1) Print and issue banknotes and other security documents; (2)Promote monetary stability and formulate monetary policies; (3) Manage the BOT’s assets; (4)Provide banking facilities to the government and act as the registrar for the government bonds; (5) Provide banking facilities for the financial institutions; (6)Establish or Support the establishment of payment system; (7) Supervise and examine the financial institutions; (8)Manage the country’s foreign exchange rate under the foreign exchange system and manage assets in the currency reserve according to the Currency Act; (9)Control the foreign exchange according to the exchange control act.

c. Deposit Insurance Corporation of Thailand

The main responsibility are : (1)to provide protection for depositors; (2) to remit premium from insured financial institutions into Deposit Protection Fund, in order to make reimbursement to insured depositors under the stipulated amount of coverage within a certain period of time when a particular financial institution fails; (3)To proceed with liquidation process and to make reimbursement to insured depositors in case the deposits exceed the amount of coverage.

3.1.9.2Market Infrastructure to Facilitate Connectivity A. Stocks

A stock index or stock market index is a method of measuring the value of a section of the stock market. It is computed from the prices of selected stocks. It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investment. SET Index is a composite index which represents the price movement for all common stocks trading on the SET.

B. Bonds

Investors can buy/sell bond in Bond Electronic Exchange (BEX), which has been officially launched on November 26th, 2003. BEX's primary goal is to develop all facets of the Thai bond market to reach an international standard, on par with other mature bond markets in the rest of the world. In addition, the institution of an electronic trading platform like BEX is a step of progress towards creating a vibrant Asian Bond Market, whose development and progress would contribute to the stabilization of the regional economy.

Besides, BEX, was established to provide investors with additional investment instruments. In addition to a better access to information by investors, BEX will also provide investors with an ease to conduct trading transactions. BEX enhances the bond’s secondary market. Prior to BEX, bonds were traded in the Over-the-Counter ‘OTC’, which was mainly the institutional investors arena. Small investors were

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unable to get into that particular market due to its size and its ambiguity or simply the lack of information.

C. Derivatives A derivative is a type of securities or financial instrument which derives its value from the value of underlying entities such as an asset, index, or interest rate -it has no intrinsic value in itself. Derivative transactions include a variety of financial contracts, including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards, and various combinations of these. To derivative conditional contracts belong option and insurance contracts, while other (futures, forwards, swaps) consider to be unconditional derivative contracts. Most of derivatives marketed through over-the-counter (off-exchange) or exchange, while insurance contracts have developed into a separate industry.

Derivatives in Thailand have started long before Thailand Futures Exchange (TFEX) came into existence. Usually in the form of an OTC between each counterparties and is usually comprise of retail bank and their client wishing to hedge away any unnecessary risk such as exchange rate and interest rate risk. Before the establishment of TFEX, derivatives products are only available to those directly involved and are not available to the public investors.

Thailand Futures Exchange (TFEX), a subsidiary of the Stock Exchange of Thailand (SET), was established on May 17, 2004 as a derivatives exchange. TFEX is governed by the Derivatives Act B.E. 2546 (2003) and is under the supervision of the Securities and Exchange Commission (SEC). TFEX receives license and permission to trade derivatives products from the SEC on Feb 11, 2005.

Trading futures is very similar to trading stocks. To trade futures, investors can place an order with members (broker) of Thailand Futures Exchange (TFEX) who will then submit the order to TFEX where the order can be matched via an electronic trading system. TFEX uses the same Price/Time priority rules as the equity market for order matching. Price/Time priority refers to how orders are prioritized for execution. Orders are first ranked according to their price; orders of the same price are then ranked depending on when they were entered. Right after a trading transaction is matched and TFEX has confirmed the matching transactions with their members, the TCH, as the direct central counterparty (CCP), will become a buyer to every selling member and a seller to every buying member. Therefore, a member who has long or short futures has an obligation not to the party on the other side of the transaction, but to the clearinghouse, just as the clearinghouse has an obligation to the member. As a CCP, TCH guarantees the performance of payment and securities delivery of any trading transactions on the SET, BEX and TFEX. This reduces the risks stemming from clearing members who fail to meet their contractual obligations or „credit risks‟. TCH have in place a margining system that requires each broker to deposit margin with the TCH while investors are require to deposit margin with the brokers. Futures price will generally change daily, the difference in the prior agreed-upon price and the daily futures price is settled daily. The exchange will draw money out of one party's margin account and put it into the other's so that each party has the appropriate daily loss or profit. If the margin account goes below a

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maintenance margin level, then a margin call is made and the account owner must replenish the margin account. This process is known as marking to market.

D. Central Securities Depository (CSD) of Thailand A Central Securities Depository (CSD) is a specialist financial organization holding securities such as shares which helps to transfer ownership easily through a book entry rather than the transfer of physical certificates. This allows brokers and financial companies to hold their securities at one location where they can be available for clearing and settlement. This is usually done electronically making it much faster and easier than was traditionally the case where physical certificates had to be exchanged after a trade had been completed. In some cases these organizations also carry out centralized comparison, and transaction processing such as clearing and settlement of securities.

Thailand Securities Depository Co., Ltd. (TSD) The TSD is a one-stop center for post-trade securities services related to trading on The Stock Exchange of Thailand and offers post-trade services for other exchanges as well, The TSD provides three types of services; 1) Securities depository services: The TSD is a central securities depository for equity and fixed income debt instruments, using a secure and efficient scriptless system. 2) Securities registration services: The TSD is a registrar for common and preferred stocks. It also offers registrar-related services, mainly preparing and maintaining registry books to ensure that they contain correct, complete, and timely information. The TSD delivers its services using a cutting-edge and efficient computer system that is directly linked to the Exchange's Securities Depository Center. 3) Provident fund registration services: The TSD is a registrar for provident funds, offering all registry-related services, including requesting employers to deposit into their employees' savings accounts, and employer's granted deposit, preparing and updating provident fund member lists, and calculating and recording such deposits.

Thailand Clearing House Co., Ltd. (TCH) The TCH is a clearinghouse for all securities and derivatives traded on the SET, mai, BEX, TFEX. and all debt instruments traded on the over-the-counter market. The TCH's most important role is to serve as the central counterparty to all trading activities on those exchanges. Thus, the TCH will guarantee clearing and settlement for all concerned parties to a given trade, no matter which counterparty may break its commitment..Performing this function well is crucial to greatly lessening counterparty risks and generating confidence among all market participants.

Settrade.com Co., Ltd. was established by The Stock Exchange of Thailand (SET) on October 13, 2000. The company has operated since November 13, 2000 to provide Internet trading platforms and leverage investment technology for brokerage houses in order to accommodate retail investors with increasing trading channels. Settrade's mission also includes developing computerized systems related to securities business. In addition,

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the company was appointed as the official selling agent and marketer of the SET's information products to ensure the efficiency of the information dissemination to investors and other market participants such as data vendors, brokers, research houses, and press.

E. Clearing Houses of Thailand

Thailand Clearing House or shortened to be TCH is the subsidiary of The Stock Exchange of Thailand or can be called SET which was founded in 2004. Firstly, it registered its capital with the amount of THB 100 million which is equals to USD 2.85 million. Thailand Clearing House is governed by the Securities and Exchange Act B.E. 2535 (1992) for equity and bond and the Derivatives Act B.E. 2546 (2003) for derivatives and is under the supervision of the Securities and Exchange Commission (SEC). Thailand Clearing House is now accepting applications for both general clearing members and those who wish to clear only precious metal-related products, which are gold and silver futures. Thailand Clearing House will also consider accepting membership applications every quarter. The Thailand Clearing House Co., Ltd will allow foreign investors to use US dollars and Euros as collateral — only for derivative transactions – to reduce their foreign exchange risk. This step will not affect the value of the baht, and will attract foreign investors to Thailand’s derivative market. Placing foreign currency as collateral will be conducted in the same way as placing Thai baht as collateral, or conducted through electronic systems of settlement banks, i.e., Siam Commercial Bank PCL and Krung Thai Bank PCL, which provided cooperation and support for TCH and its members. All parties, including TCH members and settlement banks which will be responsible for settling, have tested their systems with TCH and successfully passed. The graph below explains briefly how Thailand Clearing House works :

Figure 3.18. The Works of Thailand’s Clearing House

Source: TCH (2014)

F. Central Counterparty of Thailand

Beside serve as a clearinghouse for all securities and derivatives traded on the SET, mai, BEX and TFEX, Thailand Clearing House’s most important role is to serve as

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the central counterparty to all trading activities on those exchanges. Thus, TCH will guarantee clearing and settlement for a concerned party no matter what any counterparty may break the commitment or not. This is a crucial mechanism to lessen counterparty risks. Right after a trading transaction is matched and those exchanges have confirmed the matching transactions with their members, the TCH, as the direct central counterparty (CCP), will become a buyer to every selling member and a seller to every buying member. Therefore, a member who has bought or sold the securities has an obligation not to the party on the other side of the transaction, but to the clearinghouse, just as the clearinghouse has an obligation to the member. This is called a novation process. As a CCP, TCH guarantees the performance of payment and securities delivery of any trading transactions on the SET, mai, BEX and TFEX. This reduces the risks stemming from clearing members who fail to meet their contractual obligations or ‘credit risks’, thereby strengthening the confidence in and by the involved parties as well as preserving the financial integrity of the clearinghouse and the market as a whole.However, TCH will not guarantee the payment and securities delivery for gross settlement transaction.

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References

Clearing House Thailand, viewed September 14 2013, <http://www.thaiclearing.com/en/about.html

Bank of Thailand, viewed September 14 2013, <http://www.bot.or.th/English/FinancialMarkets/Fin_Mkt_Development/Pages/FinancialMarketDevelopment.aspx>

Thailand Bond Market Guide, viewed September 14 2012, <https://wpqr1.adb.org/LotusQuickr/asean3abmf/Main.nsf/h_Index/4CC53EFBD63D7BA3482579D4001B5CED/$file/ABMF%20Vol1%20Sec%2010%20THA.pdf>

The Structured Bond Market in Thailand, viewed September 14 2013, <http://www.jbic.go.jp/en/research/report/research-paper/pdf/rp35_e.pdf>

Stock Exchange Thailand, viewed September 14 2013, <http://www.set.or.th/en/about/overview/history_p1.html>

Stocks Market Data.(n.d.). Retrieved September 13th,2013, from <http://marketdata.set.or.th/mkt/sectorialindices.do?language=en&country=US>

Stocks Product Information.(n.d.). Retrieved September 13th,2013, from <http://www.set.or.th/en/products/index/setindex_p1.html>

Bonds Product information.(n.d.). Retrieved September 13th,2013, from <http://www.set.or.th/en/products/bonds/bonds_p1.html>

Bonds Trading Procedure.(n.d.). Retrieved September 13th,2013, from <http://www.set.or.th/en/products/trading/bond/bond_trading_p1.html>

Bonds Market Data.(n.d.). Retrieved September 13th,2013, from <http://marketdata.set.or.th/tfx/bexGovBondYield.do?locale=en_US>

TFEX as the subsidiaries under SET.(n.d.). Retrieved September 13th,2013, from <http://www.tfex.co.th/en/about/glance.html>

Derivatives Market Data.(n.d.). Retrieved September 13th,2013, from <http://marketdata.set.or.th/tfx/marketOverview.do?locale=en_US>

Derivatives Trading Procedure.(n.d.). Retrieved September 13th,2013, from <http://www.tfex.co.th/en/education/files/2011-09-FiveSteps-Trading-En.pdf>

SET Central Securities Depository.(n.d.). Retrieved September 13th,2013, from <http://www.set.or.th/en/about/overview/setgroup_p1.html>

CAS. (1997) The Structure of the Thai Capital Market. (ONLINE) available from : <http://webh01.ua.ac.be/cas/PDF/CAS13.pdf >

SEC(2010) Corporate Governance Development in the Thai Capital Market (ONLINE) available from : <http://www.sec.or.th/infocenter/th/seminar/CG_Experiences.pdf>

SET (ONLINE) available from : <http://www.set.or.th/set/notification.do?language=en&country=US>

Bank Of Thailand:< www.bot.or.th/English/AboutBOT/index/Pages/RolesAndResponsibilities.aspx> [15 Sept 2013].

Bank Of Thailand: <www.bot.or.th/English/FinancialInstitutions/FIStructure/FI_System/Regulator/Pages/Regulator.aspx> [15 Sept 2013].

Deposit Protection Agency: <http://www.dpa.or.th/main.php?filename=index___EN> [15 Sept 2013.

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3.1.10. Vietnam

3.1.10.1. Regulatory Framework of Vietnam Capital Market A. Regulations

Given the interconnectedness of financial markets both across sectors and globally, regulations are designed to ensure that the infrastructure supporting the financial markets is even more robust and thus even better placed to withstand financial shocks at the present. Every country would have their own set of regulations. In the case of Vietnam, below are some regulations related to the government and corporate bonds.

1. Government Bonds:

a. Circular No. 29/2004/TT-BTC dated 6 April 2004 provides the guidelines on issuance underwriting and issuance agency for government bonds, government- guaranteed bonds, and municipal bonds.

b. Circular No. 21/2004/TT-BTC issued by the MOF provides the guidelines on tenders of government bonds, government-guaranteed bonds, and municipal bonds via the centralized securities trading market.

c. Decision No. 46/2006/QD-BTC provides the guidelines on the issuance of large lots of government bonds to strengthen capital mobilization, enhance the liquidity of government bonds, and help build a benchmark rate for debt instruments.

d. Circular No. 132/2010/TT-BTC dated 7 September 2010 issued by the MOF provides the guidelines for the amendment and supplement to Decision N. 46/2006/QD-BTC.

e. Regulation No. 46/2008/QD-BTC dated July 1, 2008 and issued by the MOF to provide rules for government bond trading management at the Hanoi Securities Trading Center (HaSTC, former name of HNX).

f. Circular No. 19/2004/TT-BTC dated March 18, 2004 and issued by the MOF to Bank of Vietnam.

g. Regulation No. 935/2004/QD-NHNN dated July 23, 2004 and issued by the State Bank of Vietnam (SBV) to provide guidelines for T-bill and foreign currency bonds auctions via SBV.

h. Decree 01/2011/ND-CP regulates the issuance of government bonds, government- guaranteed bonds, and municipal bonds. It took effect on 29 February 2011, and is expected to boost the development of Viet Nam’s bond market.

i. Circular 17/2012/TT-BTC dated February 8, 2012 issued by MOF provides guidelines for Government Bond Issuance in the domestic market.

2. Corporate Bonds

a. Securities Law 2006 No. 70/2006/QH115 stipulates that an issuer who wishes to make a public offering of bonds must prepare certain documents and follow disclosure requirements, prior to a formal approval by the SSC. It stipulates the issuer’s responsibilities to maintain a healthy financial condition to meet its financial obligations to bondholders. This law clearly mentions disclosure rules and practices for issuers. Vietnam’s National Assembly passed a law amending the 2006 Law on Securities (known as the Amended Law), and became effective on 01 July 2011. The Amended Law revisits a number of issues on securities, securities business and the securities market.

b. Enterprise Law 2005 No. 60/2005/QH11 facilitates the means for issuing debt for a shareholding firm by stating their rights to issue corporate bonds, convertible

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bonds, and other types of bonds. The law prohibits enterprises from issuing bonds when they do not exhibit a sound financial position, having indications of either low debt-servicing capability or below- average profitability.

c. Circular No. 17/2007/TT-BTC dated 13 March 2007 detailing Investor Profile Questionnaire (corporate bond included).

d. Decision 07/2008/QD-NHNN by the SBV governs particular credit institutions operating in Viet Nam, including state-run and joint-stock commercial banks, foreign bank branches, and 100% foreign-owned and joint-venture banks.

e. Decree 90/2011/ND-CP dated 14 October 2011 and issued by the government to regulate the issuance of corporate bonds; Decree 90 replaced Decree 52/2006/ ND-CP dated 19 May 2006 regulating the issuance of corporate bonds, and replaced the concept of the issuance of corporate bond to the international market which was stipulated in Decree 53/2009/ND-CP regulating the issuance of international bonds.

In addition to the above regulations, there are some important regulations in the

Vietnam market that concerns the foreign investors. Decision No.121/2008/QD-BTC, passed on 24 December 2008, is a special regulation for investment activities of foreign investors, which took effect on 17 February 2009. This Decision provides detailed guidelines for foreign investors investing in the Vietnam stock exchanges, the general principles of which have been provided for ease of reference. This includes restrictions and securities trading code, which foreign visitors must first apply to participate in Vietnam’s market trading.

B. Regulators for Vietnam Capital Market 1. Main Market Authorities

a. The Ministry of Finance The Ministry of Finance (MOF) and the State Bank of Vietnam (SBV) jointly regulate the capital markets. SBV is the central bank and chief regulatory body for all issues affecting the banking industry. It administers monetary, credit and banking regulations, and issues regulations on matters such as exchange controls, interest rates and banking license application procedures. The State Securities Commission (SSC), which reports to the Minister of Finance, regulates the securities market. The Ho Chi Minh Stock Exchange (HOSE), Hanoi Stock Exchange (HNX), and the Vietnam Securities Depository (VSD) are under SSC jurisdiction, and are required to adhere to regulations relating to accounting, auditing, and statistical reporting.

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Figure 3.19. Vietnam Market Regulatory Structure

Source: Vietnam Bond Market Association

Firstly, the MOF manages the State budget; the collection of tax, fees, and other revenues under the State budget; the budget fund, the State reserve fund, and other State financial funds; the national reserves and State assets; the domestic and foreign government borrowing and debt servicing, as well as international grants; and issues government bonds. In addition, it regulates banks and non-bank institutions; and participates in the management of the stock market. Next, the SBV, which is the central bank of Vietnam mainly formulates and implements the national monetary policy, stabilizes the currency, controls inflation, and improves socioeconomic development, as well as manages currency and banking activities and contributes to the development of the market structure. It regulates foreign exchange controls for stock market activities. The SSC regulates and acts as the supervisory agency for the securities market, and HOSE and HNX. All exchange regulations are issued by the SSC, which has the power to suspend trading in securities, delete listings of companies to protect investors’ interests, and grant or revoke licenses relating to securities issuance, brokerage and custody services. Effective March 2004, the SSC came under the jurisdiction of the MOF.

b. Central Bank Like other countries, Vietnam has central bank named The State Bank of Vietnam (SBV). Also currently it holds an about 65% stake of Vietin Bank which is the country's largest listed bank by capital. The bank is in the same level of ministry and works under the government. More specific, the bank governor is a member of the cabinet who is in the same level to a minister in the cabinet. The governor is chosen by the prime minister with the approval of the National Assembly (Parliament) while the vice governors or deputy governors are appointed by the prime minister on the recommendation of the governor. Both governor and vice governors have a 5-year term.

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There are some major roles of SBV which are to promote monetary stability and formulate monetary policies; promote institutions stability and supervise financial institutions; provide banking facilities and recommend economic policies to the government; provide banking facilities for the financial institutions; manage the country’s international reserves; print and issue banknotes; supervise all commercial banks’ activities in Vietnam; lend the state money to the commercial banks; issue about government bonds, organize bond auctions and the last is to be in charge of other roles in monetary management and foreign exchange rates. Also there are 27 functions and responsibilities of central bank. Governor Nguyen Van Binh together with 5 others deputy governor of SBV period 2013 are trying to develop SBV as Vietnam’s currency civilization has gradually been recognized through value stability.

c. Deposit Insurance Corporation Deposit Insurance of Vietnam (DIV) is the only deposit insurance corporation in Vietnam and a member of National Financial Safety Network. DIV is a state-owned institution and established by the Vietnamese Government in 1999. It has its independent legal entity. Also SBV implement some rights for DIV. It was inaugurated in July 2000. In early 1990’s there were systematic failures of the people’s credit fund system and continued to 1997, Vietnam faced financial and monetary crisis that give negative impact to the financial system. It was very important to build public confidence in banking and to establish a financial institution that protect the depositors and contribute to help the stability of the financial system. The recovering process start in 1988, Vietnamese banking started to increase competitiveness. The DIV protect the legitimate rights of depositors and provide financial assistance for financial institutions, also to supervise and prevent risk in banking operations.

Nowadays, DIV has been under construction of the law on deposit insurance to become a totally independent organization. The organizational structure composed of the Board of Directors, the Supervisory Committee and the Board of Management including the General Director and a support team. The Board of Directors are chosen by the SBV Governor and the Minister of Home Affairs to submit to the Prime Minister. More specific, the Board of Directors of DIV composed of 5 members, including 3 full-time members namely the Chairman, the General Director and the head of Supervisory Committee; and 2 non-standing members namely a Vice Minister of Finance and a Deputy Governor of the State Bank of Vietnam. Now, the chairman is Mr. Nguyen Van Thanh. Basically, the Board of Directors perform the management function and also take responsibility for annual operations of DIV as regulated by the charter that is approved by the Prime Minister. While the Board of Management have some obligations for example to receive capital (including debts), land and other resources allocated by the State to manage and use for the set objectives etc.

3.1.10.2Market Infrastructure to Facilitate Connectivity A. Vietnam Exchanges

Basically, for the exchange purpose and activity, Vietnam uses the Ho Chi Minh City Stock Exchange (HOSE) and Hanoi Securities Trading Center (Hanoi STC). HOSE, located in Ho Chi Minh City, is the largest stock exchange in Vietnam. It was the first ever established stock exchange in Vietnam. Established in 2000 in the name of Ho Chi Minh City Securities Trading Center (HoSTC), it was an administrative agency of

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the State Securities Commission, along with the Hanoi STC. On 8 August 2007, HoSTC was renamed and upgraded to the Ho Chi Minh Stock Exchange (HOSE). The stock exchange is located at 45-47 Ben Chuong Duong, District 1, Ho Chi Minh City, Vietnam.

It was revealed that the HOSE had 141 listings in January 2008, including 138 company stocks and three fund certificates, with a total market capitalization of 365.7 trillion dong ($23 billion). As of July 2010, there were 247 companies listed on the HOSE with a market capitalization of VND 537.4 trillion ($28.28 billion). As of January 2013, there were 308 listed companies on the HOSE, and it believed to raise in the following year. The Hanoi STC, located in Hanoi, was launched in March 2005. It mainly handles auctions and the trading of stocks and bonds. Since its establishment, the Hanoi STC has successfully organized many share auctions and bond biddings. This has led to a vibrant secondary market for securities and helped the State in capital mobilization and economic management. At the end of 2006, combined market capitalization of both Ho Chi Minh City Securities Trading Center and Hanoi Securities Trading Center is 14 billion USD, or 22.7% the GDP of Vietnam. For the additional info, in both stock exchanges, Vietnam also limits foreign ownership of listed companies to 49%. Both of the Vietnam’s stock trading centers are also the official mechanism through which new government bonds are issued, and they function as the secondary market for a number of existing bond issues too. All securities traded on the Stock Trading Center of Vietnam are denominated in Vietnamese Dong (VND). Par value is standardized at VND 10,000 ($ 0.47) for equities and VND 100,000 ($ 4.73) for bonds. Trading is conducted daily with two matches in a morning session, from 9 a.m. to 11 a.m.

B. Vietnam Central Securities Depository (CSD)

In the initial stage of organizing securities market, registration, depository, clearing and settlement functions are performed by Hanoi and Ho Chi Minh securities trading centers. Registration, depository, clearing and settlement system of the two securities trading centers are operated separately. Besides, services supplied by the system are mainly depository, clearing, settlement and corporate actions with reference to securities which are listed on and registered with the two centers. Performing the system under this model is not highly efficient and a waste of resources.

In order to increase efficiency in performance of the securities market in general and registration, depository, clearing and settlement system in particular, the Prime Minister issued Decision No. 189/2005/QD-TTg dated July 27th 2005 on establishing Vietnam Securities Depository (VSD). The establishment of VSD in the context that Vietnam Securities Market is developing rapidly is completely suitable with requirements from market practices and also with recommendations from international organizations as G30, IOSCO whereby each market shall have an independent central securities depository.

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With the main function of supporting post-trade activities, the operation of VSD really helps to minimize costs and improve processing capacity of the whole market thanks to economy of scale.

Besides, by re-organizing functions among VSD, Stock Exchange and Securities Trading Center whereby post-trade services are separated from trading services undertaken by the Stock Exchange and the Securities Trading Center, each organization shall specialize much more in their own activities. In addition, scope and quality of supplied services are improved thanks to bettering organization and administration operation of each organization.

C. Clearing House

Is an agency or corporation of a futures exchange responsible for clearing trades, settling trading accounts, collecting and maintaining margin, and reporting trading data. Once a trade is agreed, clearinghouse enters the picture. Rather than having the long and short traders hold contracts with each other, the clearinghouse becomes the seller of the contract for the long position and the buyer of the contract for the short position.

The clearinghouse is obligated to deliver the commodity to the long position and to pay for delivery from the short. It makes the clearinghouse become trading partner of each trader, both long and short. In Vietnam, the Vietnam Business Forum is currently proposed the central bank to become clearing house for security transactions. The current clearinghouse in Vietnam, BIDV ( Bank for Investment and Development of Vietnam, is a joint stock commercial bank, and the transaction is not secured.

Figure 3.20. Clearing House’s Flow

Source: Bank for Investment and Development of Vietnam

D. Central Counterparty

An organization that exists in various European countries that helps facilitate trading done in European derivatives and equities markets. These clearing houses are often operated by the major banks in the country. The house's prime responsibility is to provide efficiency and stability to the financial markets that they operate in.

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There are two main processes that are carried out by CCPs: clearing and settlement of market transactions. Clearing relates to identifying the obligations of both parties on either side of a transaction. Settlement occurs when the final transfer of securities and funds occur. CCPs benefit both parties in a transaction because they bear most of the credit risk. If two individuals deal with one another, the buyer bears the credit risk of the seller, and vice versa. When a CCP is used the credit risk that is held against both buyer and seller is coming from the CCP, which in all likelihood is much less than in the previous situation.

References International Capital Market Association, CPSS/IOSCO Principles for Financial Market

Infrastructures, Available from: <http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/market-infrastructure/cpss-iosco-principles-for-financial-market-infrastructures/>.

Vietnam Bond Market, ASEAN +3 Bond Market Guide Volume 1 Part 2 Section 11

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3.1.11. People’s Republic of China

3.1.11.1. Regulatory Framework of China Capital Market A. List of Regulations and Objects of Regulations

According to Wang (2005), China has maintained its effort to enhance the globalization of its capital market. To achieve that, China has raise its supports to the market, as well as its effort to promote legal and regulatory framework. Though, some aspects such as liberal ownership ideology and effective institutional operation have to be still noticed, for they gives some disadvantages to the operation of open and supportive capital market. To achieve this objective, the key will be to enhance the regulatory framework which, based on rule of law, can provide financial institutions with a supportive market. During the past two decades, Chinese authorities have been promoting a more effective legal and regulatory framework for the market and the nation’s corporate sector. It is fair to acknowledge that important legal reforms have led to clearer rules for the transactional and contractual relationship, greater enterprise autonomy, and better corporate structures according to company laws. However, certain structural flaws remain. Due to the absence of liberal ownership ideology and effective institutional operation, China’s stock market is suffering from over-reaching regulations, under-enforcement of laws, a swaying regulatory culture, massive market manipulation and insider trading, as well as poor corporate governance and little minority investor protection—with the root of all these problems being the SOEs. The predominance of state shareholders in listed companies, coupled with an undefined role of the state as shareholder and regulator, provide the source for flaws in the market—and with these flaws, China faces difficulty in attracting international and even domestic investors. Objects of current regulations in China are:

1. Operational autonomy of supervisory committee; 2. Skills; 3. Ability of risk monitoring; 4. Resources; 5. Organizational coordination.

There are some regulatory and supervisory functions for different body in the regulations:

1. Regulation and Supervision of Commercial Banks Commercial Banks are supervised by CBRC (China Banking Regulatory Commission). Its operation mechanism is to supervise bank actions and give sanctions to any action that could impede economic stability. 2. Regulation and Supervision of Underwriter and Securities Market

Underwriter and Securities Market are supervised by CSRC (China Securities Regulatory Commission). CSRC supervise regulation reformation to support financial market system to be more efficient. Certain steps have been taken by CSRC to detect and prevent investors from manipulation in trading. Although CSRC has done some policies to support securities market, there are still many things to be fulfilled, such as the need of commercial courts formation, clear law enforcement related to illegal investment activities and better detection and prevention of unfair trading.

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China adopts a sector-based approach for its financial industry supervision, with securities, banking and insurances sectors under separated supervision by the China Securities Regulatory Commission (CSRC), the China Banking Regulatory Commission (CBRC) and the China Insurance Regulatory Commission (CIRC) respectively, pursuant to applicable laws. China Securities Regulatory Commission (CSRC), a ministerial-level public institution directly under the State Council, performs a unified regulatory over the securities and futures market of China, maintains an orderly securities and futures market order, and ensure a legal operation of the capital market which is established back in 1992 and has functions similar to the SEC in the US.

CSRC performs the following duties in the supervision and administration of the securities market:

Figure 3.21. Financial Supervisory Infrastructure in People’s Republic of China

Source: The Group of Thirty (2007) 3. Regulation and Supervision of Other Financial Institution

Regulation for other financial institution is formed to ensure fluent of those institutions with limited banking sectors.

A. Regulators for China Capital Market 1. China Financial Department

Department of the Government of People’s Republic of China is a national executive body that regulates macroeconomic policy and national budget plan. It also regulates fiscal policy, economic regulation, and government expenditure for the country. The minister also record and publish annual China macroeconomic data, involving China economic growth, central government debt and loan and many other indicators related to China economic sector.

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Main functions of China Financial Department are: 1) Formulate and implement strategic policy and guideline to enhance the

economic development and public finance. 2) Prepare annual central government budget, expenditure priority, and budget

balance. 3) Formulate and implement distribution policy between country and

government-owned company. 4) Supervise social security expenditures by the government, formulate

managerial accounting rules in social security fund, monitoring the uses of social security fund.

5) Formulate and implement accounting rules for government and private company and enhance accountability and transparency.

6) Monitoring implementation of fiscal and taxation policy-law and regulation, overlook the system problem and make changes.

2. China Banking Regulatory Commission (CBRC) Main functions of CBRC:

1) Formulating rules and regulations which regulate banking sectors activity. 2) Authorization of formation, changes, and the cease of banking business. 3) On-site and off-site monitoring of banking institution and take law

enforcement procedures in case of any break of law; 4) Do fit and proper test to the senior managerial personnel of banking

institution; 5) Compilation and publication of statistic and the overall report of banking

industry based on the relevant regulations:

3. Central Bank of the Republic of China 1) Bank Operation

According to the decision of Central Bank of China, the objectives of the Bank operation involve support the financial stability, ensure healthy banking operation, ensure internal and external stability of currency, and finally enhancing economic development. To gain those objectives, Central Bank of the Republic of China do the duties below:

a) Monetary Management, b) Treasury Agency Functions c) Currency Issuance d) Clearing and Settlement Services e) Foreign Exchange Management f) Participation in International Organizations g) Statistics and Research h) Bank Examination

2) Organization

The Central Bank is the only policy-maker of monetary decision and entity execution in People’s Republic of China.

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3) Governor and the Deputy Governor Governor is the head of the board of directors (helped by 2 deputies, they all (governor and his deputies are appointed for 5 years and could be chosen again after the 5 years).

3.1.11.2 Market Infrastructure to Facilitate Connectivity

A. China Bond Market

From trading perspective, China has two bond markets, the are interbank bond markets (regulated by People Bank of China) and stock bond market (regulated by China Securities Regulatory Commission). Interbank bond market ia bigger than stock bond market with more than 95% of total trading volume. Trading activities are very liquid, at the amount of (more or less) USD $35 triliun from total trades in 2012 (Grafik 3).

Figure 3.22. Secondary Market Trading Activity Has Grown Rapidly

Source: Wind, as of December 2012

B. China Stock Market

There are two stock markets in China : Shanghai Stock Exchange, which is inaugurated at 1990 and Shenzhen Stock Exchange, inaugurated at April 1991. Amount of stocks listed is now more than 400.

1. Shanghai Stock Exchange (SSE)

Securities listed in SSE has three main categories from stock, bonds, and funds. Bonds traded in SSE include T-bond, corporate bonds, and convertible corporate bonds. T-bond market in SSE is the most active in China. There are two stocks published in SSE: "A" stocks and "B" stocks. The A stocks is the price in local currency yuan renminbi, then the “B” stocks cited in US Dollar. The foreign investors are now permitted to trade “A” stocks under Foreign Institutional Investor (QFII) program, which formally launched at 2003.

2. Shenzhen Stock Exchange (SZSE)

SZSE is one of three stock exchanges in China, besides Shanghai Stock Exchange and Hong Kong Stock Exchange. The pre-market session os SZSE is 09:15-09:25 and normal trading hours is 9:30-11:30 and 13:00-3:00 China Standard Time (UTC +8) in all days except Saturday, Sunday, and holidays announced first by the stock

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exchange. Listed companies: 730 and market capitalization : RMB 3 521 745,3 million (US $ 514.700.000.000)

C. Deposit Insurance Corporation in China China does not insure deposits, but according to IADI, the country and the other 23 have delayed system or have a plan to establish deposit insurance. Hong Kong, which is a special administration district under China sovereignty, has deposit insurance for its banks.

D. Central Securities Depository (CSD) China Securities Depository and Clearing Corporation Limited (CSDC) is a deposit and settlement organization in China capital market (its central office is in Beijing). It was established in March 30 2001 based on China Securities Act and People’s Republic of China Company Act. In September 2001, CSDC branch in Shanghai and Shenzhen was established. By October 1 2001 CSDC do all registration, clearing, and securities settlement which previously managed by Shanghai and Shenzhen Stock Exchange. Total capital registered was RMB 1.2 billion. CSDC stockholder is Shanghai and Shenzhen Stock Exchange, each holds 50%.

E. Clearing House Shanghai Clearing House (SHCH) is appointed by People’s Bank of China (?) (PBC) and Financial Minister to be a clearing house in China. SHCH was established at the same time with China Foreign Exchange Trading System (CFETS), China Central Depository & Clearing Ltd Co (CCDC), China paper money printing (?), Mining Corporation (CBPM) dan China Gold Coin Incorporation (CGCI) with RMB 300 million registered capital. SHCH objective is to provide safe and efficient clearing services for the financial market participant. This indicates China national strategy to develop Shanghai as international financial center and promoting domestic and international communication. According to PBC, SHCH provides central and standardized clearing services for spot and derivatives transaction in Yuan and foreign currency and Yuan transaction among countries permitted by China Sentral Bank. With effective and efficient clearing model, SHCH purpose is to provide standardized and efficient clearing with international orientation.

F. Central Counterparty (CCP) of China SD&C provides centralized registration, depository, clearing and settlement services in securities market, and implement industry self-discipline management. SD&C settles most transactions as CCP except for some SSE transactions: repurchase of T-bond at the maturity date, execution of warrants, transfer of Specific Asset Management Plan (SAMP), bond placement for stockholders, new stock emission for the stockholders, and bond issuance through exchange systems. SD&C is owned by SSE (50%) and SZSE (50%). Settlement coud be in cash (daily mark to market) or physical settlement (delivery on expiration). These markets implement pre-margining system, whwre futures contracts could only be bought with sufficient margin deposits assumption. Moreover, those markets also control other risk management, such as price limitation, limitation for speculative position and major shareholders, warning indicator system and settlement reserves. Settlement in cash is done by five commercial “settlement” bank accounts. Commercial “settlement” banks only operate as custodian and facilitatior for the fund transfer with futures exchanges do settlement function. Besides that, China Futures Margin Monitoring Center (CFMMC) was established in 2006 as non-profit company which is funded by ZCE, DCE, dan SHFE to ensure the profit safety in the future.

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References

Goldman Sachs Global Liquidity Management. First Issue 2013. FAQ: China’s Bond Market. Available from: <http://www.goldmansachs.com/gsam/docs/fundsgeneral/general_education/economic_and_market_perspectives/china_bond_market_faq.pdf>

Dongwei Su and Belton M. Fleisher. Risk, Return and Regulation in Chinese Stock Markets. Available from: <http://economics.sbs.ohio-state.edu/pdf/fleisher/volpap-j.pdf>

Jinan Yan. Development and utilization of financial derivatives in China. Available from: <http://www.bis.org/ifc/publ/ifcb35c.pdf>.

People’s Republic China: Detailed Assessment Report: CPSS-IOSCO “Recommendations for Securities Settlement Systems and Central Counterparties”, a 2011 Financial Sector Assessment Program documentation by International Monetary Fund and The World Bank.

Shanghai Stock Exchange. Available from: <http://english.sse.com.cn/>. [February 1st 2014]. Shenzhen Stock Exchange. Available from: <http://www.szse.cn/main/en/>. [February 1st

2014.]. CPSS Red Book 2012 “Payment, clearing and settlement systems in China”, a publication of

the Committee on Payment and Settlement Systems (CPSS).

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3.1.12. Japan 3.1.12.1. Regulatory Framework of Japan Financial and Capital Market

Act on the Rational Use of Energy Order for Enforcement of the Act on the Rational Use of Energy Foreign Exchange and Foreign Trade Act Ordinance for Enforcement of the Act on Utilization of Information and Communications Technology in Administrative Procedure pertaining to Foreign Exchange Laws and Regulations Cabinet Order on Inward Direct Investment, etc. Order on Inward Direct Investment, etc. Defined Contribution Pension Act Order for Enforcement of the Defined Contribution Pension Act Order on Defined Contribution Pension Plan Operational Management Institution Money Lending Business Act Order for Enforcement of the Money Lending Business Act Ordinance for Enforcement of the Money Lending Business Act Loan Trust Act Order for Enforcement of the Loan Trust Act Ordinance for Enforcement of the Loan Trust Act Act on Regional Economy Vitalization Corporation of Japan Order for Enforcement of the Act on Regional Economy Vitalization Corporation of Japan Ordinance for Enforcement of the Act on Regional Economy Vitalization Corporation of Japan

Order on Special Provisions, etc. for the Business of the Deposit Insurance Corporation of Japan Provided in Chapter VIII of the Act on Regional Economy Vitalization Corporation of Japan Order on the Procedures for Applying for Recognition of the Risk Provided for in Article 25, Paragraph (1), Item (i) of the Act on Regional Economy Vitalization Corporation of Japan Industrial Revitalization Corporation Act Order for Enforcement of the Industrial Revitalization Corporation Act Ordinance for Enforcement of the Industrial Revitalization Corporation Act Order on Special Provisions, etc. for the Business of the Deposit Insurance Corporation of Japan Provided in Chapter VIII of the Industrial Revitalization Corporation Act Shoko Chukin Bank Limited Act Order for Enforcement of the Shoko Chukin Bank Limited Act Ordinance for Enforcement of the Shoko Chukin Bank Limited Act Relevant to the Ministry of Economy, Trade and Industry, the Ministry of Finance and the Cabinet Office Act on Corporation for Revitalizing Earthquake affected Business Order for Enforcement of the Act on Corporation for Revitalizing Earthquake affected Business

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Cabinet Order for Designating the Areas under Article 19, Paragraph (1) of the Act on Corporation for Revitalizing Earthquake affected Business Ordinance for Enforcement of the Act on Corporation for Revitalizing Earthquake affected Business Order on Special Provisions, etc. for the Business of Deposit Insurance Corporation of Japan Provided for in Chapter VIII of the Act on Corporation for Revitalizing Earthquake affected Business Order on Special Provisions, etc. for the Business of Agricultural and Fishery Cooperative Savings Insurance Corporation Provided for in Chapter VIII of the Act on Corporation for Revitalizing Earthquake affected Business Order Providing for the Methods to Prepare and Release Environmental Reports Provided in Article 9, Paragraph (1) of the Act on the Promotion of Business Activities with Environmental Consideration by Specified Corporations, etc., by Facilitating Access to Environmental Information, and Other Measures Act on Protection, etc. of Depositors and Postal Saving Holders from Unauthorized Automated Withdrawal, etc. Using Counterfeit Cards, etc. and Stolen Cards, etc. Act on Financial Businesses by Cooperative Order for Enforcement of the Act on Financial Businesses by Cooperative

Ordinance for Enforcement of the Act on Financial Businesses by Cooperative Order Providing for the Categories, etc. Prescribed in Article 26, Paragraph (2) of the Banking Act as Applied Mutatis Mutandis Pursuant to Article 6, Paragraph (1) of the Act on Financial Businesses by Cooperative Act on Preferred Equity Investment by Cooperative Structured Financial Institution Order for Enforcement of the Act on Emergency Measures concerning Financial Institutions' Accounting Ordinance for Enforcement of the Act on Emergency Measures concerning Financial Institutions' Accounting Financial Institutions' Reconstruction and Readjustment Act Order for Enforcement of the Financial Institutions' Reconstruction and Readjustment Act Ordinance for Enforcement of the Financial Institutions' Reconstruction and Readjustment Act Cabinet Order on Special Provisions for Consolidation, etc. of Accounts in Closed Institutions Pursuant to Article 58 of the Financial Institutions' Reconstruction and Readjustment Act Act on Collective Liquidation of Specified Financial Transactions Conducted by Financial Institutions, etc. Order for Enforcement of the Act on Collective Liquidation of Specified Financial Transactions Conducted by Financial Institutions, etc. Ordinance for Enforcement of the Act on Collective Liquidation of Specified

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Financial Transactions Conducted by Financial Institutions, etc. Act on Special Treatment of Corporate Reorganization Proceedings and Other Insolvency Proceedings of Financial Institutions, etc. Order for Enforcement of the Act on Special Treatment of Corporate Reorganization Proceedings and Other Proceedings of Financial Institutions, etc. Ordinance for Enforcement of the Act on Special Treatment of Corporate Reorganization Proceedings and Other Proceedings of Financial Institutions, etc. Act on Special Measures for Promotion of Organizational Restructuring of Financial Institutions, etc. Order for Enforcement of the Act on Special Measures for Promotion of Organizational Restructuring of Financial Institutions, etc. Cabinet Office Ordinance on Special Measures for Promotion of Organizational Restructuring of Financial Institutions, etc. Order on Special Measures for Promotion of Corporate Reorganization of Labor Banks and Federation of Labor Banks Order on Special Measures for Promotion of Corporate Reorganization of Agricultural and Fishery Cooperative Order for Enforcement of the Act on Emergency Measures for Early Strengthening of Financial

Functions Ordinance for Enforcement of the Act on Emergency Measures for Early Strengthening of Financial Functions Order on Definitions under Article 2 of the Act on Emergency Measures for Early Strengthening of Financial Functions Order on the Matters to be Stated in the Statement of Operational Procedures pertaining to Operation for Early Strengthening of Financial Functions Provided for in Article 14 of the At on Emergency Measures for Early Strengthening of Financial Functions Act on Issuance, etc. of Corporate Bonds for Financial Corporations' Loan Business Order for Enforcement of the Act on Issuance, etc. of Corporate Bonds for Financial Corporations' Loan Business Ordinance for Enforcement of the Act on Issuance, etc. of Corporate Bonds for Financial Corporations' Loan Business Cabinet Office Ordinance on Keeping of Accounts by Specified Finance Companies, etc. Cabinet Office Ordinance on Disclosure of Specified Finance Companies, etc. Ordinance of the Ministry of Finance on Changes, etc. to the Registration of Financial Debentures Financial Instruments and Exchange Act Order for Enforcement of the Financial Instruments and Exchange Act

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Cabinet Order on Travel Expenses and Allowances Payable to Witnesses and Expert Witnesses in Trial Procedures of the Financial Instruments and Exchange Act Cabinet Order on Delegation of Authority under Article 3, Paragraph (5) of the Supplementary Provisions of the Act for Partial Revision of the Financial Instruments and Exchange Act, etc. Cabinet Order on the Time Limit for Exemption from Liability for Failure to Perform the Obligation to Submit Annual Securities Report, etc. due to the Great East Japan Earthquake Cabinet Office Ordinance on Definitions under Article 2 of the Financial Instruments and Exchange Act Cabinet Office Ordinance on Disclosure of Corporate Affairs, etc. Cabinet Office Ordinance on Disclosure of Information, etc. on Issuers of Foreign Government Bonds, etc. Cabinet Office Ordinance on Disclosure of Information, etc. of Regulated Securities Cabinet Office Ordinance on Financial Instruments Business, etc. Ordinance on Deposit for Operation of Financial Instruments Business Operators Cabinet Office Ordinance on Financial Instruments Firms Association, etc.

Cabinet Office Ordinance on Financial Instruments Exchanges, etc. Cabinet Office Ordinance on Restrictions on Securities Transactions, etc. Cabinet Office Ordinance on Special Measures for the Cabinet Office Ordinance on Restrictions on Securities Transactions, etc. Cabinet Office Ordinance on Restrictions on Over-the-Counter Derivatives Transactions, etc. Cabinet Office Ordinance on Financial Instruments Clearing Organizations, etc. Order on Investor Protection Fund Order Providing for Loan of Funds Prescribed in Article 43, Paragraph (1) of the Supplementary Provisions of the Act on Arrangement of Relevant Acts for the Financial System Reform Cabinet Office Ordinance on Securities Finance Companies Cabinet Office Ordinance on Transactions under Article 161-2 of the Financial Instruments and Exchange Act and Deposits Related Thereto Cabinet Office Ordinance Specifying the Form of the Identification Card that Needs to be Carried by the Officials of Securities and Exchange Surveillance Commission, in Conducting Inspection and Investigation into a Criminal Case Cabinet Office Ordinance on Solicitation to Exercise Voting Rights of Listed Shares by Proxy Cabinet Office Ordinance on Disclosure Required for Tender Offer for Share Certificates, etc. by Person Other than Issuer

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Cabinet Office Ordinance on Disclosure Required for Tender Offer for Listed Share Certificates, etc. by Issuer Cabinet Office Ordinance on Disclosure of the Status of Large Volume Holding of Share Certificates, etc. Cabinet Office Ordinance on Special Provisions, etc. for Procedures by Use of Electronic Data Processing System for Disclosure Cabinet Office Ordinance on Provision or Publication of Information on Securities, etc. Ordinance on Terminology, Forms and Preparation Methods of Financial Statements, etc. Ordinance on Terminology, Forms and Preparation Methods of Interim Financial Statements, etc. Ordinance on Terminology, Forms and Preparation Methods of Consolidated Financial Statements Ordinance on Terminology, Forms and Preparation Methods of Interim Consolidated Financial Statements Cabinet Office Ordinance on the System for Ensuring the Adequacy of Documents on Financial Calculation and of Other Information Ordinance on Terminology, Forms and Preparation Methods of Quarterly Financial Statements, etc. Ordinance on Terminology, Forms and Preparation Methods of Quarterly Consolidated Financial

Statements Cabinet Office Ordinance on Audit Certification of Financial Statements, etc. Cabinet Office Ordinance on Administrative Monetary Penalty Provided for in Chapter VI-II of the Financial Instruments and Exchange Act Cabinet Office Ordinance on Designated Dispute Resolution Organization Provided for in Chapter V-V of the Financial Instruments and Exchange Act Act on Sales, etc. of Financial Instruments Order for Enforcement of the Act on Sales, etc. of Financial Instruments Act for Establishment of the Financial Services Agency Cabinet Order for Organization of the Financial Services Agency Cabinet Order Specifying the Designated Dispute Resolution Organization Provided for in Article 4, Item (iii), (aa) of the Act for Establishment of the Financial Services Agency Cabinet Order Providing the Date Specified by Cabinet Order as Prescribed in Article 9, Paragraph (1) of the Supplementary Provisions of the Act for Establishment of the Financial Services Agency Business Accounting Council Order Financial System Council Order

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Cabinet Office Ordinance for Organization of the Financial Services Agency Cabinet Office Ordinance Specifying the Form of Identification Card that Needs to be Carried by the Official of the Financial Services Agency, etc., in Conducting Inspection Act for Promotion of Worker's Property Accumulation Order for Enforcement of the Act for Promotion of Worker's Property Accumulation Act on Use of the Past Name of the Public Accountant Certified Public Accountants Act Order for Enforcement of the Certified Public Accountants Act Cabinet Order on Travel Expenses and Allowances Payable to Witnesses and Expert Witnesses in Trial Procedures of the Certified Public Accountants Act Certified Public Accountants and Auditing Oversight Board Order Ordinance for Enforcement of the Certified Public Accountants Act Cabinet Office Ordinance on Surcharge under the Provisions of the Certified Public Accountants Act Ordinance for Registration of Certified Public Accountants, etc. Ordinance for Registration of Specified Partners

Cabinet Office Ordinance on Foreign Audit Firms, etc. Ordinance on Enforcement of Certified Public Accountant Examination Ordinance on Professional Accountancy Education Program Ordinance on Internship, etc. Cabinet Office Ordinance on Delivery of Copy of the Protocols on Disciplinary Action Case of Certified Public Accountants, etc. Cabinet Office Ordinance Specifying the Form of Identification Card that Needs to be Carried by the Official of the Certified Public Accountant and Auditing Oversight Board, in Conducting Inspection Ordinance on Organization of the Secretariat of the Certified Public Accountants and Auditing Oversight Board Cabinet Office Ordinance on the Japanese Institute of Certified Public Accountants Cabinet Office Ordinance on Continuing Professional Education Provided for in Article 28 of the Certified Public Accountants Act Ordinance for Deposit Money of Limited Liability Audit Corporation Act on Special Measures concerning Industrial Revitalization and Innovation of Industrial Activities Order for Enforcement of the Act on Special Measures for Industrial Revitalization and Innovation of Industrial Activities

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Ordinance for Enforcement of the Act on Special Measures for Industrial Revitalization and Innovation of Industrial Activities Payment Services Act Order for Enforcement of the Payment Services Act Cabinet Office Ordinance on Prepaid Payment Instruments Cabinet Office Ordinance on Fund Transfer Service Providers Cabinet Office Ordinance on Fund Clearing Organization Cabinet Office Ordinance on Certified Fund Settlement Business Operator Associations Cabinet Office Ordinance on Designated Dispute Resolution Organization for Fund Transfer Service Ordinance on Security Deposit for Issuance of Prepaid Payment Instruments Ordinance on Performance Security Deposit for Fund Transfer Service Assets Revaluation Act Order for Enforcement of the Assets Revaluation Act Ordinance for Enforcement of the Assets Revaluation Act Ordinance of the Ministry of Finance on Special Provisions for Assets Revaluation Standard Act on Securitization of Assets

Order for Enforcement of the Act on Securitization of Assets Ordinance for Enforcement of the Act on Securitization of Assets Ordinance on Audit on Specific Purpose Companies Ordinance on Accountings of Specific Purpose Companies Ordinance on General Meeting of Specific Purpose Companies Cabinet Office Ordinance on Conduct Control, etc. Pertaining to Specific Purpose Companies or Specified Transferor that Makes or Handles Public Offering, etc. of Asset-Backed Securities Cabinet Office Ordinance on Conduct Control, etc. Pertaining to Originators who Makes Public Offering, etc. of Beneficiary Certificates of Specific Purpose Trust Ordinance on Accountings of Specific Purpose Trust Property Ordinance on Beneficiary Certificate Holders' Meetings, etc. of a Specific Purpose Trust Order on Special Former Specific Purpose Company Defined in Article 230, Paragraph (1) of the Act on Arrangement, etc. of the Relevant Acts Associated with the Enforcement of the Companies Act Cabinet Office Ordinance on the Special Former Specific Purpose Company under the Act on Arrangement, etc. of Relevant Acts Associated with the Enforcement of the Companies Act

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Act concerning Special Measures for Total Emission Reduction of Nitrogen Oxides and Particulate Matter from Automobiles in Specified Areas Order for Enforcement of the Act concerning Special Measures for Total Emission Reduction of Nitrogen Oxides and Particulate Matter from Automobiles in Specified Areas Ordinance for Enforcement of the Act concerning Special Measures for Total Emission Reduction of Nitrogen Oxides and Particulate Matter from Automobiles in Specified Areas Order Providing Submission Methods, etc. for Emission Reduction Plan of Nitrogen Oxides, etc. from Automobiles Pertaining to Business Operators Other than Providers of Transportation Service by Automobiles Automobile Liability Security Act Order for Enforcement of the Automobile Liability Security Act Compulsory Automobile Liability Insurance Council Order Cabinet Order Providing for the Amount of Charge, etc. Imposed by Automobile Liability Security Business Cabinet Office Ordinance on report to Non-Life Insurance Rating Organization by Liability Insurance Companies and Cooperatives Provided in Article 29-2, Paragraph (1) of the Automobile Liability Security Act Order on Accumulation, etc. of Reserves Provided in Article 28-3, Paragraph (1) of the Automobile Liability Security Act

Order on Measures to Achieve Appropriate Payment of Insurance Claims, etc. of Compulsory Automobile Liability Insurance and Mutual Aid Money, etc. of Compulsory Automobile Liability Mutual Aid Compulsory Automobile Liability Insurance Council Ordinance Act on Book-Entry Transfer of Company Bonds, Shares, etc. Order for Enforcement of the Act on Book-Entry Transfer of Company Bonds, Shares, etc. Order on Supervision of General Book-Entry Transfer Institutions Order on Supervision of Special Book-Entry Transfer Institutions Order on Transfer Account Management Institution Order on Book-Entry Transfer of Company Bonds, Shares, etc. Order on Book-Entry Transfer of National Government Bonds Order on Participants Protection Trust Act Regulating the Receipt of Contributions, Receipt of Deposits and Interest Rates Cabinet Office Ordinance Specifying Small Scale Business Operators Provided in Paragraph (9), Item (i) of the Supplementary Provision of the Act on Partial Revision of the Act Regulating the Receipt of Contributions, Receipt of Deposits and Interest Rates

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Cabinet Order Specifying the Amount Provided for in Paragraph (15) of the Supplementary Provisions of the Act on Partial Revision of the Act Regulating the Receipt of Contributions, Receipt of Deposits and Interest Rates Former Act Regulating the Receipt of Contributions, Receipt of Deposits and Interest Rates Act on Reserve Requirement System Order for Enforcement of the Act on Reserve Requirement System Order on Procedures of Payment to the Government by the Bank of Japan in cases of Shortage in the Designated Financial Institution's Current Account at the Bank of Japan Act on Regulation of Business Pertaining to Commodity Investment Order for Enforcement of the Act on Regulation of Business Pertaining to Commodity Investment Order on Separate Management of the Property Contributed Based on a Commodity Investment Contract Trust Business Act Order for Enforcement of the Trust Business Act Ordinance for Enforcement of the Trust Business Act Order on Registration Method, etc. for Registered National Government Bonds Held by a Trust Company as Trust Property

Order on Registration Method, etc. for Registered Corporate Bonds, etc. Held by a Trust Company as Trust Property * Repealed by Cabinet Office Ordinance and Ordinance of the Ministry of Justice No. 10 as of December 14, 2007; provided, however, that as a transitional measure, said Order shall remain effective with regard to corporate bonds which have been already registered. Ordinance for Security Deposit of a Trust Company, etc. Ordinance for Security Deposit of a Financial Institution Engaged in Trust Business Shinkin Bank Act Order for Enforcement of the Shinkin Bank Act Cabinet Order on Issuance of Bond Certificates by Federation of Shinkin Banks, Which Operates Nationwide Ordinance for Enforcement of the Shinkin Bank Act Order Providing for the Categories, etc. Prescribed in Article 26, Paragraph (26) of the Banking Act As Applied Mutatis Mutandis Pursuant to Article 89, Paragraph (1) of the Shinkin Bank Act Act for Enforcement of the Shinkin Bank Act Credit Guarantee Corporations Act Order for Enforcement of the Credit Guarantee Corporations Act

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Ordinance for Enforcement of the Credit Guarantee Corporations Act Ordinance for Enforcement of the Act on Utilization of Information and Communications Technology for Preservation, etc. of Documents Conducted by Private Business Operators, etc. that Pertains to the Credit Guarantee Corporations Act Fishery Cooperative Act Order for Enforcement of the Fishery Cooperative Act Order on Credit Business Conducted by Japan Fisheries Cooperative, etc. Order on Report, etc. to the Competent Minister under the Provisions of Article 30, Paragraphs (3) to (5) of the Order for Enforcement of the Fishery Cooperative Act Order Providing for the Categories, etc. Prescribed in Article 123-2, Paragraph (3) of the Fishery Cooperative Act Act on Carrying Out, etc. Sports Promotion Lottery Order for Enforcement of the Act on Carrying Out, etc. Sports Promotion Lottery Order on Business Operation of a Financial Institution Entrusted With the Operation Pertaining to Sports Promotion Vote Act on Non-Life Insurance Rating Organization

Order for Enforcement of the Act on Non-Life Insurance Rating Organization Cabinet Office Ordinance on Non-Life Insurance Rating Organization Cabinet Office Ordinance on Open Hearing under the Provisions of the Act on Non-Life Insurance Rating Organization Secured Bonds Trust Act Order for Enforcement of the Secured Bonds Trust Act Ordinance for Enforcement of the Secured Bonds Trust Act Act on Promotion of Global Warming Countermeasures Order for Enforcement of the Act on Promotion of Global Warming Countermeasures Ordinance for Enforcement of the Act on Promotion of Global Warming Countermeasures Small and Medium-Sized Enterprise Cooperatives Act Order for Enforcement of the Small and Medium-Sized Enterprise Cooperatives Act Ordinance for Enforcement of the Small and Medium-Sized Enterprise Cooperatives Act Cabinet Office Ordinance on Business of Credit Cooperatives or Federation of Credit Cooperatives under the Small and Medium-Sized Enterprise Cooperatives Act Cabinet Order on Delegation of the Competent Minister's Authority under

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the Provision of Article 36, Paragraph (3) of the Act for the Enforcement of the Small and Medium-Sized Enterprise Cooperatives Act Ordinance of the Ministry of Finance, Ministry of Health, Labor and Welfare, Ministry of Agriculture, Forestry and Fisheries, Ministry of Economy, Trade and Industry, and Ministry of Land, Infrastructure, Transport and Tourism on Application Procedures for Approval of Resolution for the Continuance of a Cooperative under Provision of Article 36, Paragraph (3) of the Act for Enforcement of the Small and Medium-Sized Enterprise Cooperatives Act Ordinance for Enforcement of the Act on Utilization of Information and Communications Technology for Preservation, etc. of Documents Conducted by Private Business Operators, etc. that Pertains to the Small and Medium-Sized Enterprise Cooperatives Act Act for Enforcement of the Small and Medium-Sized Enterprise Cooperatives Act Act for Facilitating New Business Activities of Small and Medium-sized Enterprises Order for Enforcement of the Act for Facilitating New Business Activities of Small and Medium-sized Enterprises Order Concerning Certification of Persons Engaged in Business Innovation Support Services prescribed in Article 17, Paragraph (1) of the Act for Facilitating New Business Activities of Small and Medium-sized Enterprises

Act on Loan Security for Small and Medium-Sized Fishery Industry Order for Enforcement of the Act on Loan Security for Small and Medium-Sized Fishery Industry Ordinance for Enforcement of the Act on Loan Security for Small and Medium-Sized Fishery Industry Order on the Business Report, Balance Sheet, and Profit and Loss Statement, as well as the Accountings of Fisheries Credit Guarantee Fund Association Long Term Credit Bank Act Order for Enforcement of the Long Term Credit Bank Act Ordinance for Enforcement of the Long Term Credit Bank Act Order Providing for the Categories, etc. Prescribed in Article 26, Paragraph (26) of the Banking Act as Applied Mutatis Mutandis Pursuant to Article 17 of the Long Term Credit Bank Act Act on Regulation, etc. of Mortgage Security Business * Repealed by Act No. 66 of June 14, 2006; provided, however, that as a transitional measure, said Act shall remain effective with regard to registered mortgage corporations, for six years after the enforcement of the Financial and Instruments Exchange Act Order for Enforcement of the Act on Regulation, etc. of Mortgage Security Business * Repealed by Cabinet Order No. 233 of August 3, 2007; provided, however, that as a transitional measure, said Order shall remain effective with regard to registered mortgage corporations, for six years after the enforcement of the Financial Instruments and Exchange Act

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Ordinance for Enforcement of the Act on Regulation, etc. of Mortgage Security Business * Repealed by Cabinet Office Ordinance No. 55 of August 7, 2007; provided, however, that as a transitional measure, said Ordinance shall remain effective with regard to registered mortgage corporations, for six years after the enforcement of the Financial Instruments and Exchange Electronically Recorded Monetary Claims Act Order for Enforcement of the Electronically Recorded Monetary Claims Act Ordinance for Enforcement of the Electronically Recorded Monetary Claims Act Act on Investment Trusts and Investment Corporations Order for Enforcement of the Act on Investment Trusts and Investment Corporations Ordinance for Enforcement of the Act on Investment Trusts and Investment Corporations Ordinance on Accountings of Investment Trust Property Ordinance on Accountings of Investment Corporations Ordinance on Accounting Audit of Investment Corporations Lottery Ticket Act Cabinet Order Specifying the Financial Institution Provided for in Article 6, Paragraph (1) of the Lottery Ticket Act

Act on Special Measures concerning Promotion of Disposal of Claims and Debts of Specific Jusen Companies Order for Enforcement of the Act on Special Measures concerning Promotion of Disposal of Claims and Debts of Specific Jusen Companies Ordinance for Enforcement of the Act on Special Measures concerning Promotion of Disposal of Claims and Debts of Specific Jusen Companies Act on Special Measures concerning Suspension of Prescription of Disposal of Claims Held by Specific Jusen Companies Act on Special Measures Concerning Promotion of Research and Development Business by Specified Multinational Enterprises Ordinance for Enforcement of the Act on Special Measures Concerning Promotion of Research and Development Business by Specified Multinational Enterprises Order Concerning Certification of Research and Development Business Plans Order Concerning Certification of Supervisory Business Plans Act on Specified Commitment Line Contract Act on Revaluation of Land Order for Enforcement of the Act on Revaluation of Land Ordinance for Enforcement of the Act on Utilization of Information and Communications Technology in

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Administrative Procedure, etc. Pertaining to Finance Related Laws and Regulations Under the Jurisdiction of the Cabinet Office Ordinance for Enforcement of the Act on Utilization of Information and Communications Technology for Preservation, etc. of Documents Conducted by Private Business Operators, etc. That Pertains to Finance-Related Laws and Regulations under the Jurisdiction of the Cabinet Office Bank of Japan Act Order for Enforcement of the Bank of Japan Act Cabinet Office Ordinance on Contracts Concerning On-Site Examinations Concluded Between the Bank of Japan and the Counterparty Financial Institutions, etc. Agricultural Cooperatives Act Order for Enforcement of the Agricultural Cooperatives Act Order Providing for the Categories, etc. Prescribed in Article 94-2, Paragraph (3) of the Agricultural Cooperatives Act Order on Credit Business Conducted by Agricultural Cooperatives or Federation of Agricultural Cooperatives Agricultural Credit Guarantee Insurance Act Order for Enforcement of the Agricultural Credit Guarantee Insurance Act

Ordinance for Enforcement of the Agricultural Credit Guarantee Insurance Act Order on the Business Report, Balance Sheet, and Profit and Loss Statement, as well as the Accountings of the Agriculture Credit Guarantee Fund Association Agricultural and Fishery Cooperative Savings Insurance Act Order for Enforcement of the Agricultural and Fishery Cooperative Savings Insurance Act Ordinance for Enforcement of the Agricultural and Fishery Cooperative Savings Insurance Act Act on Enhancement and Restructuring of Credit Business Conducted by The Norinchukin Bank and Specified Agricultural and Fishery Cooperatives, etc. Order for Enforcement of the Act on Enhancement and Restructuring of Credit Business Conducted by The Norinchukin Bank and Specified Agricultural and Fishery Cooperatives, etc. Ordinance for Enforcement of the Act on Enhancement and Restructuring of Credit Business Conducted by The Norinchukin Bank and Specified Agricultural and Fishery Cooperatives, etc. Norinchukin Bank Act Order for Enforcement of the Norinchukin Bank Act Ordinance for Enforcement of the Norinchukin Bank Act

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Order Providing for the Categories, etc. Prescribed in Article 85, Paragraph (2) of the Norinchukin Bank Act Act on Prevention of Transfer of Criminal Proceeds Order for Enforcement of the Act on Prevention of Transfer of Criminal Proceeds Ordinance for Enforcement of the Act on Prevention of Transfer of Criminal Proceeds Ordinance on Utilization of Information and Communications Technology in Reporting Suspicious Dealings Act on Damage Recovery Benefit Distributed from Funds in Bank Accounts Used for Crimes Order for Enforcement of the Act on Damage Recovery Benefit Distributed from Funds in Bank Accounts Used for Crimes Ordinance for Enforcement of the Act on Damage Recovery Benefit Distributed from Funds in Bank Accounts Used for Crimes Order Specifying the Ratio Provided for in Article 20, Paragraph (1) of the Act on Damage Recovery Benefit Distributed from Funds in Bank Accounts Used for Crimes Order Specifying the Rate and Expenditure Pursuant to the Provision of Article 20, Paragraph (1) of the Act on Damage Recovery Benefit Distributed from Funds in Bank Accounts Used for Crimes

Order Specifying the Form of the Identification Card Carried by Officials Who Conduct On-Site Inspection Pursuant to the Provision of Article 36, Paragraph (1) of the Act on Damage Recovery Benefit Distributed from Funds in Bank Accounts Used for Crimes Order Concerning Special Measures, etc. for the Business of Deposit Insurance Corporation of Japan Provided for in Chapter V of the Act on Damage Recovery Benefit Distributed from Funds in Bank Accounts Used for Crimes Real Estate Specified Joint Enterprise Act Order for Enforcement of the Real Estate Specified Joint Enterprise Act Ordinance for Enforcement of the Real Estate Specified Joint Enterprise Act Ship Owners' Mutual Insurance Union Act Order for Enforcement of the Ship Owners' Mutual Insurance Union Act Ordinance for Enforcement of the Ship Owners' Mutual Insurance Union Act Insurance Business Act Order for Enforcement of the Insurance Business Act Ordinance for Enforcement of the Insurance Business Act Order Providing for the Categories, etc. Prescribed in Article 132, Paragraph (2) of the Insurance Business Act Order Providing for the Categories, etc. Prescribed in Article 272-25, Paragraph (2) of the

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Insurance Business Act Order Concerning the Special Measures, etc. for the Protection of Policyholders, etc. Ordinance for the Deposit Money of a Foreign Insurance Company, etc. Ordinance for the Deposit Money of a Licensed Specified Juridical Person Ordinance on Insurance Broker's Security Deposit Ordinance on Security Deposit of an Insurance Company, etc. Ordinance for the Deposit Money of a Small Amount and Short Term Insurance Provider Order on Authorized Specified Insurers, etc. Mutual Loan Business Act Order for Enforcement of the Mutual Loan Business Act Detailed Regulations on the Mutual Loan Business Act Case on Registration Provided for in Article 21-8 of the Mutual Loan Business Act Postal Service Privatization Act Order for Enforcement of the Postal Service Privatization Act Cabinet Office Ordinance Concerning the Notification under Article 52-39, Paragraph (1) or (2) of the Banking Act Made by the Entrustee Defined in Article 4, Paragraph (1) of the Postal Agency Act Order on Limitation, etc. on Business During the Transition Period Pertaining to Japan Post Bank and Japan Post Insurance Company

Order on Implementation Plan Pertaining to the Succession to the Business, etc. of Japan Post Public Corporation Cabinet Office Ordinance Specifying Procedures for Notification in Cases Where the Japan Post Public Corporation is a Bank Holding Company, etc. Act on Controlling Unjust Contract Pertaining to Deposit, etc. Deposit Insurance Act Order for Enforcement of the Deposit Insurance Act Ordinance for Enforcement of the Deposit Insurance Act Ordinance of the Ministry of Finance on Procedures to Receive Tax Exemption for the Registration of a New Company that is Established as a Result of Special Merger Ordinance of the Ministry of Finance on Procedures to Receive Tax Exemption for Registration and License Tax for the Registration of Transfer for Rights on Real Property Acquired by a Bridge Bank, etc. and a Partner Bank Cabinet Order on Bonds Issued by Deposit Insurance Corporation of Japan. Order of the Ministry of Finance on Issuance, etc. of National Government Bonds Delivered to the Deposit Insurance Corporation of Japan Cabinet Office Ordinance on Measures Provided for in Article 58-3, Paragraph (1) of the Deposit Insurance Act

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Act on Changing of Representation of Interest Rates, etc. to Annual Basis Cabinet Order on Changing of Representation of Interest Rates, etc. to Annual Basis Temporary Interest Rate Adjustment Act Labor Bank Act Order for Enforcement of the Labor Bank Act Ordinance for Enforcement of the Labor Bank Act Order Providing for the Categories, etc. Prescribed in Article 26, Paragraph 82) of the Banking Act as Applied Mutatis Mutandis Pursuant to Article 94, Paragraph (1) of the Deposit Insurance Act Order on Utilization of Information and Communications Technology for Preservation, etc. of Documents Conducted by Private Business Operators, etc. that Pertains to the Labor Bank Act.

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A. Investor Protection, Capital Market Transparency, and Corporate Disclosures 1. Regulation that provides protection for minority or individual investors on

capital markets (E.g. investor protection funds, client money (or deposit) protection of

securities accounts) 2. Market Stabilizing Mechanism to Cope with Abrupt Changes in the Stock

Market 3. Prevention of Cross-Border Market Misconduct

4. Disclosure of Material Information in a Timely Manner to Investors of Both

Exchanges

5. Non-Discriminatory Investor Protection Schemes and Standards. 6. Corporate Disclosure to Enhance Transparency of Capital Markets

7. Securities Investor Protection Bailout

B. Legal Framework and System of Capital Markets 1. Laws and Systems Have Been Newly Introduced or Revised in Regard to

Capital Markets In The Past Three Years I. List and brief description

2. Plan to Introduce or Revise Related Laws or Change Related Policy and Systems

C. Regulators for Japan Capital Market

The Japanese financial regulatory structure is characterized as an integrated approach led by the Financial Services Agency (FSA), with the Ministry of Finance and the Bank of Japan continuing to retain an important role. Although the MOF’s supervisory role is limited as a result of the establishment of the FSA, it retains a strategic role within the crisis management council.

The Financial Supervisory Agency (FSA) was established in June 1998 and since then it has been in charge of inspection and supervision. The FSA is responsible for ensuring stability of the financial system; protection of depositors, insurance policyholders, and securities investors; smooth finance; supervision of private sector financial institutions.

The FSA is headed by a commissioner appointed by the Minister for Financial Services based on approval of the Cabinet. The Minister for Financial Services, the Senior Vice-Minister, and the Parliamentary Secretary, who are appointed by the Prime Minister, are assigned to oversee the FSA’s operations. Under FSA then established the Securities and Exchange Surveillance Commission (SESC) that conducts market surveillance and on-site inspections of securities companies. The FSA has the authority to supervise securities companies while the SESC has the authority to inspect them. Japan has a specific crisis management mechanism—the Financial System Management Council (FSMC). The FSMC consists of the Prime Minister (chair), the Chief Cabinet Secretary, the Minister for Financial Services, the Minister of Finance, the Commissioner of Financial Services, and the Governor of the BOJ.

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Figure 3.23. Financial Supervisory Infrastructure in Japan

Source: The Group of Thirty (2007)

D. Financial Intermediaries

BOJ has a role as financial intermediaries for the banks in Japan. The duty of Bank of Japan in this position is as a bank though does not serve people’s individual transaction. BOJ has role as a bank for interbank transactions or financial institutions that want to do deposits or other banking transactions. The objectives of BOJ in this position is as interbank transaction monitor or maintaining liquidity of banks that face insolvency problem (for example, when there is rush).

a) BOJ as Central Bank Moreover, BOJ also has a role as regulator, where it determines policy such as

interest rate, the amount of money supply, and reserve money that has to be provided by every bank in Japan. All of BOJ decisions will broadly affect Japan economic thoroughly because every Japan monetary base is held directly by BOJ.

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Figure 3.24. Money Classification by BOJ

Source: Bank of Japan

b.) Money Insurer Other duty performed by BOJ is maintaining stability of Yen. BOJ divides currency

stability into two indicators: internal value stability and external value stability. External value stability defined by BOJ as the stability of exchange rates between Yen and foreign currency, internal value stability is the stability of Yen to the goods price.

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3.1.12.2.Physical and Organizational Infrastructure A. Market Infrastructure to Facilitate Connectivity 1. Central Securities Depository (CSD), Clearing Organization and Central

Counterparty

Japan Securities Depository Center, Inc. (JASDEC) is the book-entry transfer institution in accordance with the Act on Transfer of Bonds, Shares, etc. which facilitated the dematerialization of a wide range of securities. All domestic listed stocks became paperless in January 2009. JASDEC offers following services. Japan Securities Clearing Corporation (JSCC) acts as Central Counterparty (CCP). This institution determine criteria and qualification for institution that wants to be clearing member (participant) (Bapepam-LK, 2009). Main qualification for institution that wants to be a participant is minimum capital requirements (the details stated in Cabinet Office Ordinance on Financial Instruments Clearing Organizations, etc. and Cabinet Office Ordinance on Fund Clearing Organization, and other relevant regulations related to capital market operations). Japan Securities Depository Center (JASDEC). JASDEC also provides depository and settlement services for domestic equity in Japan including stocks, beneficiary certificates of exchange traded fund, preferred investment bond, real estate investment securities, and convertible bond. Japan Securities Depository Center (JASDEC) is CSD for equities and convertible bond, Bank of Japan (BOJ) is CSD for government debt and money market instruments.

2. Japan’s Active Stock Exchanges Fukuoka Stock Exchange (FSE) is a stock exchange located in Fukuoka, Japan. FSE operates Q-Board, a special market for new companies. In August 2000, FSE closed its trading floor and adopted electronic trading system from Tokyo Stock Exchange. January 2002, FSE made a mutual agreement (at that time) with other four Japan stock exchanges and Japan Securities Dealers Association (JSDA) to establish Japan Securities Clearing Corporation (JSCC). Meanwhile, Osaka Securities Exchange Co., Ltd. (is the second biggest securities exchange in Japan, for the amount of the businesses managed. Until December 31 2007, OSE has 477 companies listed with combined market capitalization of $212 billion. Nikkei 225 Futures, introduced in OSE at 1988, now is an international-recognized index future. Different with TSE which has power in spot trading transaction, OSE is more powerful in derivative product. OSE is the main Derivative Exchange in Japan and used to be the biggest future market in the world in 1990 and 1991. According to the statistic data in 2003, OSE handled 59% future market stock price index in Japan. Almost 100% trading in options market is also handled by OSE. OSE is the only one securities exchange market of Japan that go public on its own market.

July 2006, OSE launched its latest future contracts, Nikkei 225 mini with one-tenth of Nikkei 225 original and very popular among Japan individual investor. In September 2007 OSE determined night session for Stock Index Futures and Options. Trading

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hours in night session starts at 16.30 until 19.00. July 2012, merger plan with TSE is accepted by Japan Fair Trade Commission. OSE also acquired JASDAQ in 2010.

Furthermore, Tokyo Stock Exchange Tosho or TSE for short term, is a stock exchange in Tokyo, Japan. This is the third biggest exchange in the world with aggregate market capital of listed companies from 2.292 emitent at the amount of US $ 3.3 trillion by December 2011. In July 2012, a merger plan with Osaka Securities Exchange was approved by the Japan Fair Trade Commission. This resulted in the Japan Exchange Group (JPXlaunched on January 1, 2013. Additionally, the JASDAQ Securities was a securities exchange headquartered in Tokyo, Japan, now the name of the market by the Osaka Securities Exchange in Kitahama, Osaka. JASDAQ is not related to NASDAQ in the United States, but operates an electronic trading system similar to NASDAQ. In 1963, the Japan Securities Dealers Association set up an over-the-counter registration system for trading securities. This system was placed under the management of a private company, Japan OTC Securities in 1976.The JASDAQ automated quotation system became operational in 1991.In 2004, JASDAQ received a permit from the Prime Minister to reorganize as a securities exchange. It became the first new securities exchange in Japan in almost fifty years. On April 1, 2010, the Osaka Securities Exchange acquired the JASDAQ Securities Exchange, and merged it with OSE's NEO and Nippon New Market-Hercules markets to form the "new" JASDAQ market. The exchange has pre-market sessions from 08:00am to 09:00am and normal trading sessions from 09:00am to 03:00pm on all days of the week except Saturdays, Sundays and holidays declared by the Exchange in advance. On July 16, the cash equity market integration between Tokyo Stock Exchange (TSE) and Osaka Securities Exchange (OSE) was completed. The OSE cash equity market was integrated into that of TSE. Following the integration, the cash equity will operate under TSE listing and trading rules. Trading in the integrated cash equity market will be conducted on TSE trading systems. "arrowhead" will be used for the auction market and "ToSTNeT" (Tokyo Stock Exchange Trading Network System) for off-auction trading. There are an Outline of Cash Equity Market Integration. The OSE main markets (OSE First Section and Second Section) were integrated into the TSE main markets (TSE First Section and Second Section). The operation of JASDAQ was transferred from OSE to TSE as the newly established TSE JASDAQ.

Figure 3.25. Tokyo Stock Exchange Trading Network System

source: Tokyo Stock Exchange (2013)

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References

Japan Securities Depository Center, Available from: <http://www.jasdec.com/>. Thomas Murray, Available from: <http://www.thomasmurray.com/countries-

depositories/Japan_JASDEC.html>. Central Securities Depository Ad Skopje, Available from: <http://www.cdhv.mk/default-

en.asp?ItemID=0 London South East, Central Securities Depository (CSD) Definition, Available from:

<http://www.lse.co.uk/financeglossary.asp?searchTerm=&iArticleID=469&definition=central_securities_depository_(csd)>.

Financial Services Agency Japan, Available from: http://www.fsa.go.jp [February, 1st 2014]. Hung, Nguyen Quoc, Vietnam’s Capital Markets: Young and Growing, Chapter in 2011’s

Publication of Institute of Developing Countries Page 141-160, Japan External Trade Organization, 2012.

Ueda, Kazuo, The Structure of Japan’s Financial Regulation and Supervision and The Role Played by the Bank of Japan, CIRJE Discussion Paper, University of Tokyo, 2009.

3.1.13. South Korea

3.1.13.1. Regulatory Framework of Myanmar Capital Market a. Regulations and Regulators

The Financial Supervisory Service (FSS) is South Korea integrated financial regulator that examines and supervises financial institutions under the broad oversight of the Financial Services Commission (FSC), the government regulatory authority staffed by civil servants. Under the guidance from the FSC, the FSS conducts inspections of and supervision over financial institutions and then it also reports the results back to the FSC

FSC and FSS start their existence after the Republic of Korea National Assembly response to the Asia Crisis in 1997 by passing the bill on December, 29th 1997 which consolidates the four supervisory bodies (the Banking Supervisory Authority, Securities Supervisory Board, Insurance Supervisory Board, and the Non-bank Deposit Insurance Corporation into FSC.

Through its enactment bill, FSS conducting their duties as follows: 1. Supervision of financial institutions: (Preliminary) review of license

applications (for bank, non-bank, financial investment company, insurance company, credit card company, financial holding company, or any other kind of financial institution), review of the terms and conditions of financial institutions; supervision of the soundness of business management and business activities;

2. Examination of financial institutions: Analysis and evaluation of financial companies’ business activities, financial position, and risk management capacity; verification of companies’ compliance with relevant statutes;

3. Supervision of the capital market: Operation of disclosure system to maintain the sound operation of primary and secondary markets for marketable securities; capital market investigation to prevent unfair trade practices;

4. Supervision of accounting: Alignment of accounting standards to international accounting standards to achieve enhanced transparency;

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supervision of accounting to ensure a fair operation of the external audit system;

5. Protection of customers of financial services: Consultation and handling of customer complaints regarding financial services; protection of customer rights through dispute mediation; financial education of consumers.

Figure 3.26. Financial Supervisory Infrastructure in Republic of Korea

Source: Yung (2007) C. Disclosure Requirements

According to the KRX website, there are some aspects of disclosures that must be fulfilled by the members.

1. The Requisites for Disclosure

a. Timeliness of information

To avoid the distortion of stock prices due to outdated information, the company must issue the most updated information for the market.

b. Accuracy of information

The members should disclose any favorable and unfavorable facts and do not mislead the market by inaccurate information.

c. Usability of information

The information should have to be understood by any investor, including who has no financial education background.

d. Accessibility of information

The information should have to be easily accessed to minimize asymmetric information.

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2. Types of Disclosure

a. Business Report: Business results, etc. from the preceding business year must be disclosed and submitted within 90 days after the end of that business year

b. Semi-annual Report : Business results, etc. from the first six months of the business year must be disclosed and submitted within 45 days after the end of the semi-annual period.

c. Quarterly Report: Business results, etc. from the first three months and nine months must be disclosed and submitted within 45 days after the end of each quarterly term.

3. Main Statements

Company’s purpose, trade name, business details, officer compensation, finances, and other matters determined by executive orders (Refer to Article 168 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act).

4. Exemptions to Submissions

a. When the number of shareholders of the registered corporation falls below 300. b. When the submission of business reports is impossible or ineffective due to

circumstances such as bankruptcy, etc.

D. Market Infrastructure to Facilitate Connectivity 1. KRX (Korea Exchange) Korea Exchange (KRX) is the only securities market operator in South Korea.

This company operates in Busan and has office for cash market and market supervision in Seoul. Main stock market index for Korea Exchange is created by integrating Korea Stock Exchange, Korea Futures Exchange, and KOSDAQ Stock Market.

Korea Exchange business division is securities and derivative market, such as: Stock Market Division, KOSDAQ Market Division, and Derivative Market Division. In October 2012, Korea Stock Market has 1.796 listed companies with aggregated market capitalization at the amount of US $1,1 trillion. Trading hours in KRX is 09:00 until 15:15 every day except every Saturday, Sunday, and holidays announced by the market operator.

2. Korea Stock Market

a. KOSPI (Korea Composite Stock Price Index) Korea Composite Stock Price Index or KOSPI is aggregated index of

all common stock traded by stock market division of Korea. KOSPI is the representative of South Korea stock exchange index like Dow Jones Industrial Average or S&P 500 in United States of America. b. KOSDAQ (Korean Securities Dealers Automated Quotations)

KOSDAQ (Korean Securities Dealers Automated Quotations) is a center of trading market in Korea Exchange that was established in 1996. It is firstly formed by Korea Financial Investment Association as a independent institution of stock trading of Korea Stock Exchange, refer to its partner in US, such as NASDAQ. KOSDAQ is a special stock market for electronic industry. KOSDAQ trading hours is 09.00AM-03.00PM domestic time.

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c. Korea Bond and Derivative Market

Bond Market in Korea is one of the biggest markets in Asia. Many reformations have made advanced development, including gradual market liberalization. All fixed income instruments provided are for foreign investors. The government should issue bonds routinely with term 3, 5, and 10 years. In Korea, an emitent should be rated by at least two rating agencies.

d. Central Counterparty (CCP) According to Bank of International Settlement, institution that has role

as the Central Counterparty in South Korea is Korea Exchange or more known as KRX. Korea Exchange acts as the Central Counterparty (CCP) that provides clearing service for stock exchange, matching and confirmation of trading, KOSDAQ, and securities market. Korea Exchange also responsible to reduce counterparty risk.

Korea Securities Depository (KSD) facilitates trading settlement efficiently. Stock and bonds generally settled through commercial banks, whereas government bonds and repo market are settled through the central bank.

FCS acts as business supervisor of Korea Exchange. It needs approval from FCS to build and develop membership and rules of operation. Only Korea Exchange members that are allowed to perform trading in Korea Exchange Market. Korea Exchange members are responsible to contribute fund for the failure of settlement, pay transaction fee, and to report their financial status to Korea Exchange.

e. Central Securities Depository Korea Securities Depository (KSD) facilitates trading settlement

efficiently. Stock and bonds generally settled through commercial banks, whereas government bonds and repo market are settled through the central bank. f. Clearing House

The Capital Market and Financial Investment Service Act states again that based on acts, Korea Exchange should play clearing role. Clearing house is needed to reduce the risk in unregulated market. Moreover, at 2012 clearing house in Korea announced a plan to expand to other over-the-counter markets such as credit-default swaps cross border trading.

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Figure 3.27. Services Performed by KSD

Source: Korea Securities Depository

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References

Ahn, Soo Hyun, Financial Services and Capital Market Act in Korea, Final Report Hankuk University of Foreign Studies, December 2012.

Financial Services Commission Republic of Korea, http://fsc.go.kr, access: February, 1st 2014.

Yung, Lee Jang, Korea’s Experience of Financial Supervision and Financial Sector Examinations, Paper Presented on Financial Stability, and Financial Sector Supervision: Lesson From The Past Decade and Way Forward, Held by IMF Regional Office for Asia and The Pacific (OAP), December 17, 2007, Tokyo.

Financial Services Commision, Laws & Decrees, Available from: <http://www.fsc.go.kr/eng/lr/lr0101.jsp>.

CBonds. Korea: Bonds. Available from: <http://em.cbonds.com/countries/Korea-bond>. Interactive Brokers. Exchanges Around the World – Asia Pacific. Available from:

<https://www.interactivebrokers.com/en/?f=exchangesEduAsia&p=krx>. Bank for International Settlements. Payment, Clearing, and Settlement Systems in Korea.

Available from: <http://www.bis.org/publ/cpss97_kr.pdf>. Bloomberg, South Korea to Start OTC Derivatives Clearing House to Cut Global Risks,

Available from: <http://www.bloomberg.com/news/2012-01-12/south-korea-to-start-otc-derivatives-clearinghoue-to-reduce-global-risks.html>.

Korea Exchange, KOSPI Market-Types of Disclosure, Available from: <https://eng.krx.co.kr/m7/m7_3/m7_3_1/m7_3_1_2/UHPENG07003_01_02_01.html>.

Korea Security Depository, CEO Message, Available from: <http://www.ksd.or.kr/eng/html/introduction/ceomessage.home>.

_______________________________, History and Timeline, Available from: <http://www.ksd.or.kr/eng/html/introduction/history.home>.

_______________________________, Service at a Glance, Available from: <http://www.ksd.or.kr/eng/html/introduction/service.home>.

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CHAPTER IV MARKET PRODUCTS

4.1 BRUNEI DARUSSALAM

4.1.1 CAPITAL MARKET PRODUCTS Based on the Brunei Economy Minister website, Brunei Darussalam did not really use the

Stock Exchange like many other countries did right now. Brunei has its own ways to deal

with it.

4.1.1.1 Modern or institutionalized stock, bond or derivatives markets The stock and bond markets are small and conducted OTC. In the stock market, there is only

one market player/financial institution offering over-the-counter purchases and selling of

company stocks/shares. In the bond market, we have government and corporate sukuk

issuances. AMBD, on behalf of the government of Brunei Darussalam, is the main issuer for

Brunei Government Short-term Sukuk al-Ijarah. As for corporate sukuk issuances, the BLNG

(Brunei Liquified Natural Gas) issued Sukuk al-Ijarah in 2005.

a. Outstanding balance of stocks, sovereign bonds, corporate bonds in the past five

years

Table 4.1. Outstanding Balance of Stocks, Sovereign Bonds, Corporate Bonds in Brunei Darussalam Capital Market (2009 – Nov 2013)

Source: AMBD (2013)

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b. Trading volume of stocks, sovereign bonds, corporate bonds in the past five

years

The data is not available.

c. Trading volume of derivatives at OTC (over-the-counter market) or regular

exchange in the past five years


4.1.1.2 The track records of IPO, paid-in capital increase, and corporate bonds issuance in the past five years.

a. The volume of IPO, paid-in capital increase and issuance of corporate bonds in

the past five years


b. Number of companies that underwent IPO, paid-in capital increase or issued

bonds in the past five years


4.1.1.3 Number of Companies Listed on The Stock Exchange as of 2012 Brunei does not have stock exchange yet so no companies listed in 2012.

4.1.1.4 Bond exchanges (amounts and kinds of bonds are listed) There are no bond exchanges.

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4.1.2 FINANCIAL MARKETS PRODUCTS OTHER THAN CAPITAL MARKETS

4.1.2.1 Money Markets Concerning the Money Market Product in Brunei Darussalam; Brunei, now striving to

establish itself as an International Finance Centre, is reportedly making its first move to tap

into the international financial market for a loan of some $250 millions.

It was learnt that Brunei is making this interesting move in line with its programmers to

develop its International Financial Centre and International Islamic Money Market in the both

the domestic and international markets. Some of these programmers have already been

outlined in the 8th Five-year National Development Plan, said informed sources in the local

financial market. But they opted not to comment when asked to shed some light on the news

item reported by FinanceAsia.com.

4.1.2.2 Derivatives Markets Because Brunei Darussalam currently does not have any derivatives exchanges, and the

derivatives in the country are traded over-the-counter (OTC) between large companies or

banks, so there is a very limited opportunity for trading in derivatives for investors and

traders in Brunei which would normally trade in derivatives exchanges.

An Exchange-Traded Fund (ETF) is a derivative security that is based on a certain stock

market index, such as the Standard & Poor 500 (SPY) which follows the 500 companies that

are listed in the index. However, it is still possible for people in Brunei to trade in derivatives,

but they are from the markets in other countries such as in Australia (ASX), Hong Kong

(HKEX), Indonesia (IDX), and other countries (mostly in the Asia-Pacific region). The

transactions are facilitated by the banks in the country that have direct access to foreign

markets through their many partnerships and agreements.

There are also commodities derivatives available in the country for such commodities as

gold, silver, and oil. Trading for this type of derivatives is also facilitated in banks rather than

in commodity markets which are more common in larger countries.

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More complex derivatives such as options and futures are also available in Brunei

Darussalam. There are many banks that facilitate these types of derivatives because they are

mainly used by companies for hedging, so their demand is relatively higher than other

securities which are mainly for retail investors and traders. Basically, derivatives trading in

Brunei still rely heavily on major banks and large financial institutions that would most

likely have operations abroad, and may also originate abroad.

4.1.2.3 Futures Markets There is currently no futures market in Brunei.

4.1.2.4 Insurance Markets The Insurance/Takaful and Capital Market Supervision Division undertakes the registration,

licensing and supervision of insurance and takaful companies, their intermediaries, capital

market intermediaries, securities and mutual funds (conventional and Islamic). This Division

ensures its continuous compliance with the relevant international standards as guided by,

among others the International Associations of Insurance Supervisors (IAIS) and the

International Organization of Securities Commissions (IOSCO).

Currently, the Division oversees the following legislations:

2. Insurance Order 2006,

3. International Insurance and Takaful Order 2002,

4. Motor Vehicle Insurance (Third Party Risks) Act, Chapter 90,

5. Mutual Funds Order 2001

6. Securities Order 2001

7. Takaful Order 2008

These are what Brunei Darussalam does as their ways of Stock Exchange. In

conclusion, the Brunei Darussalam Capital Market products could be:

a. Insurance

It is the same insurance that many other countries have for their company. But the

company as the owner of this insurance is coming from Brunei Darussalam.

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b. International Insurance

The difference is that this insurance comes from international or any other country. So

Brunei makes an agreement with other country companies for the insurance.

c. Takaful

Takaful is a system of Islamic insurance based on the principles of „ta‟awun‟ (mutual

assistance) and ‟tabarru‟ (voluntary contribution)

d. Motor Vehicle Insurance

Same with leasing, but the collateral for a sum of money borrowed is a vehicle.

e. Long term-debt

Debt that we could get from banks or other financial companies.

f. Mutual Funds

Type of professionally managed collective investment vehicle that pools money from

many investors to purchase securities.

4.1.2.5 Foreign Exchange Markets

4.1.3 SECURITIES LENDING & REPO

4.1.3.1 Securities Lending or Repo Agreement Securities lending is allowed. However, there are no activities as yet.

4.1.3.2 Prominent Trends or Notable Events Related to Securities Lending or Repo There are no activities and data as yet.

4.2 CAMBODIA

4.2.1 CAPITAL MARKET PRODUCTS

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4.2.1.1 Stock Markets-Equities Products

Two types of securities that are able to be traded on CSX:

a. Common Stock

a. Preferred Stock

There are currently no such a modern or institutionalized stock in Cambodia Capital Market

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4.3 INDONESIA

4.3.1 CAPITAL MARKET PRODUCTS Basically, the capital market product in Indonesia can be divided into 3 instruments:

4.3.1.1 Equities (Stock)

Figure 4.1. Sample of Indonesia Stock in Indonesia Stock Exchange Website

Source: Indonesia Stock Exchange (2014)

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4.3.1.2 Bonds Bonds are long-term securities that are issued by a company or government for seeking long-

term loans. Bonds in Indonesia include:

a. Corporate Bonds: Bond issued by National Private Company, including BUMN and

BUMD.

b. Government Bonds: Bonds Issued by the Government in accordance with Law No.

22 Year 2002, including ORI and T-Bill.

c. Corporate Sukuk: Fixed Income instruments are issued based on Sharia principles in

accordance with Bapepam-LK Rule No. IX.A.13 concerning Sharia Securities. Corporate

Sukuk Revenue based on contract contained in Bapepam-LK rule concerning Contracts used

in Sharia Securities Contract.

d. State Sharia Securities/SBSN or Corporate Sukuk: Securities issued by the

Government based on Sharia in accordance with Law No. 19 Year 2008 concerning

Government Sharia Securities (SBSN).

e. Asset-Backed Securities (ABS): Debt Securities issued with underlying assets as the

basis.

4.3.1.3 Derivatives Derivatives issued in Indonesia include stock options and Index Future Contracts.

a. Derivative Market Products

Derivatives, being the markets that are based upon another underlying market, in Indonesia

option could be cited. This type of derivative product can be depended on other asset like

stock or forex. But in reality, it is rare to see option derivative and still few practice it because

of the unfair risk as the issuer take more risk.

b. Types of Derivatives Markets

Derivatives markets take many different forms, some of which are traded in the usual manner

(i.e. the same as their underlying market), but some of which are traded quite differently (i.e.

not the same as their underlying market). The following are the most often traded types of

derivatives markets:

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1. Futures Markets

2. Options Markets

3. Warrants Markets

4. Contract For Difference (CFD) Markets

5. Spread Betting

c. Trading Derivatives Markets

Of the above types of derivatives markets, futures markets and contract for difference

markets are traded in the same manner as their underlying markets, but options markets and

warrants markets are traded differently from their underlying markets. For example, futures

markets are traded by making a long trade when the market is expected to move upwards, and

a short trade when the market is expected to move downwards, whereas options markets can

be traded by making either a long trade or a short trade when the market is expected to move

upwards. Spread betting is different from both groups of derivatives markets because it is

classified as gambling rather than trading, and therefore can be traded in several different

forms (e.g. spread betting, binary betting, etc.).

d. Differences Between Derivatives Markets

A single underlying market usually has several different derivatives markets, which provides

several choices for trading a particular market. For example, the FTSE 100 stock index can

be traded via futures markets, options markets, warrants markets, contract for difference

markets, and spread betting markets. The different derivatives markets for a single underlying

market usually have different tick sizes, tick values, and margin requirements, which allows a

single underlying market to be traded using a variety of different trading configurations (e.g.

different amounts of risk, different amounts of trading capital, etc.).

4.4 LAO PDR


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4.4.1.1 Lao PDR Capital Market Products Capital Market is the part of a financial system concerned with raising capital by dealing in

shares, bonds, and other long-term investments. It also works as an exchange for trading

existing claims on capital in the form of shares.

The LSX (Lao Security Exchange) is the first capital market in Laos, which will attract huge

capital to develop and raise the long term funds for companies and also promote the integrity

of Lao financial market. So, Lao government deems it necessary to establish the capital

market to mobilize the long-term funds required for developing and expanding manufacturing

and services sustainability.

Laos has just established its first capital market in 2010 as a part of Laos government’s 5

years plans. There are two products offered in Laos’s capital market, which are stock and

bonds. And there are only two listed stocks in the market listed in LSX which are EDL

Generation Public Company (EDL-Gen), a state owned enterprise focusing on electricity and

Banque Pour Le Commerce Exterieur Lao Public (BCEL), a commercial bank.

EDL-Generation Company Limited (EDL-Gen) is a subsidiary to Electricite du Laos and was

founded in 2010. Electricite du Laos (EDL) is a state-owned corporation electric generator

that was founded in 1959 and it controls Laos’s eletricity transmission, generation and

distribution assets througout the nation. It is headquartered in Laos’s capital city, Vientiane.

EDL is famous as the “Battery of Asia” by providing services to Cambodia, China, Thailand

and Vietnam because it has the function to product, transmit and selling its electricity energy

and currently plans to double the hydropowered generator capacity. These capabilities are

seen and studied by the Financial Consultancy Service of KTZMICO (Thailand’s stock

online trading) to readjust business structure of EDL so it can grow and respond effectively to

the need of the people of the nation.

The result of this study is that EDL can be generated as capital for the creation of a new

company that is called EDL-gen. EDL-Gen Company was generated in order to increase the

Capital of the State-Owned Enterperise by selling 25% of its shares (initial public offering)

that are registered in the Lao Securities Exchange (LSX) in 2011, becoming the first

company listed in the country stock exchange.

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For the bonds, Laos issues three year Kip-denominated bonds and Baht-denominated bonds.

Recently the Lao’s PDR floated its second offering of Baht-denominated valued at 3 billion

baht. The first offering valued at 1.5 billion baht and was oversubscribed to twice its value.

The new bonds are expected to sell through private placement since they are unrated papers.

Aside from Lao’s economic development, Lao’s PDR decided to issue the baht bonds to

improve regional economic relationship

4.4.1.2 Bond Markets

a. Treasury Bills

1. Issuer

Since Lao PDR has to deal with fiscal deficits, the Ministry of Finance (MOF) issues

Treasury bills to overcome the problem. T-bills that are available in the market have varying

maturities from 3 months up to one year.

2. Investors

Financial institutions, state-owned enterprises (SOEs), private companies, and individuals are

welcomed to invest in T-bills. According to ADB visit in June 2011, T-bills with 1-year

maturity were priced at 7.5% per annum, whereas current account deposits at banks did not

yield any interest, regardless of principal and/or tenor. Companies consider investment in T-

bills more favorable compared with bank deposits or savings relative to the interest rate it

offers.

However, investors are reluctant to use T-bills as part of their investment portfolio because

apparently T-bills are not demandable at once; rather it is renewable and extendable, subject

to the budget and liquidity status of MOF. T-bills can be extended and renewed up to 1 year

to enjoy higher coupon rate relative to its initial rate.

3. Redemption of T-bills

T-bills are allocated to commercial banks and further transferred or sold to non-banks. The

National Treasury of the MOF sends to the Central Bank information on which T-bills that

had been issued are subject for redemption.

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Usually, these bills are those with high interest rates and bear an earlier tenor, i.e.,6 months.

The amount for redemption depends on the ceiling established and based on the budget

available. Once a month commercial banks go to BOL to ask for T-bills redemption. BOL

then advances payment to the commercial banks on behalf of the MOF. After which, the

MOF issues a letter similar to a Promissory Note (PN) stating when they can pay for the

advances BOL made on their behalf for a particular T-bill.

Figure 4.2. Bonds Market Flow in Lao PDR

Source: Lao Stock Exchange For coupon payments, where T-bills have been sold or transferred by commercial banks to

non-banks, the commercial bank advances the coupons for the MOF. Thus, commercial

banks report to BOL the advances they made on behalf of MOF, and BOL records these

advances made and later on reports to the MOF. Unlike the advances made by BOL on behalf

of MOF, the MOF need not issue a letter (similar to a PN) to BOL regarding advances made

by commercial banks.

This reminder is done on a quarterly basis through a report. The MOF, before making

payments, first reconciles the details with BOL, particularly on the amount for payment.

Since majority of T-bills are sold to commercial banks, these banks also work as an agent in

the sale or transfer of T-bills, although there is no law supporting such function. T-bills are

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allocated among commercial banks in accordance with their capacity. Such capacity is based

on their network (i.e., number of branches) and willingness and ability to advance for the

coupon payments on behalf of the government. Most of the T-bills are allocated for

distribution or sales to the following banks: Banque Pour Le Commerce Exterieur Lao

(BCEL), Lao Development Bank (LDB), and Agriculture Promotion Bank (APB). The

flowchart below summarizes the process of coupon redemption of treasury bills issued to

commercial banks.

3. Government Debt Instruments

In 1994, a directive was passed approving the issuance of Treasury-bills to help finance the

budget deficit. The Government issues Treasury-bills on a regular basis to finance the

country’s budget deficit. The Government also issues arrears clearance bonds to clear

government debt from state-owned enterprises (SOEs). A core goal of the Lao PDR’s bond

market development is to establish primary and secondary markets for government securities.

4. Bank Bills

The Bank of the Lao PDR (BOL) began issuing Treasury-bills in 1992 in an effort to manage

the exchange rate and address excess liquidity.

5. Corporate Bonds

The Government is drafting amendments to the Enterprise Law, which was passed in 2006,

that will support future corporate bond market development. Money market operations

(OMO): the Bank of Lao (BOL) utilizes net sales of BOL bonds (a short-term instrument)

and auctions of treasury bills to conduct OMO. Net sales of BOL bonds have been the most

active instrument in recent years, as they have been used to sterilize BOL’s quasi-fiscal

operations. Treasury bills have been used much less.

6. Certificates of Deposit

A certificate of deposit is a document evidencing a time deposit placed with a depository

institution. The following information appears on the certificate:

a) The amount of the deposit;

b) The date when it matures;

c) The interest rate; and

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d) The method under which the interest is calculated. Large negotiable CDs are

generally issued in denominations of $1 million or more.

b. Bonds Market Regulation & Strategy

According to the Law No. 5 dated October 14, 1995 On The Bank of the Lao PDR Part

IX about Relations with Financial Institutions

Article 35 : Rights and restrictions of activities.

The Bank of the Lao PDR may open deposit accounts with, and accept deposits from

financial institutions, called “account holders” as the terms and conditions the Board may

from time to time determine. The Bank of the Lao PDR is not entitled to invest in general

business operation except otherwise provided by this Law.

Article 36 : The buying and selling of valuable documents.

The Bank of the Lao PDR may, as the terms and conditions the Board may from time to time

determine, purchase from, sell to, discounted valuable documents from the account holders in

the following rules:

a) bills of exchange, promissory notes, certificates of deposits and cheques for

commercial, industrial or agricultural purposes;

b) treasury bonds or other securities guaranteed by the Government or issued for sale to

the public;

c) securities issued by the Bank of the Lao PDR.

These documents shall be valid for payment only if they bear two or more good signatures in

which at least one shall be signature of the financial institution. The documents shall repay

within one hundred and eighty (three) days from the date of acquisition by the Bank. The

Bank of the Lao PDR may advance loan to account holders with the period not exceeding one

hundred and eighty three days as the terms and conditions set forth by the Board may

determine.

Article 37: The advanced Loan with security.

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The Bank of the Lao PDR may grant advance Loan to account holder against the security of

valuable documents as stipulated in Article 36 of this Law and in accordance with resolutions

of the Board or secured by the following instruments:

a) Treasury bonds and other securities guaranteed by the Government issued the public

issue;

b) Commercial papers, documents of titles issued on insured commodities;

c) Any assets which the Bank permits to buy, sell provided in Article 31 of this Law.

Article 38: Unsecured advance Loan.

The Bank of the Lao PDR may grant unsecured advance Loan, the terms and conditions the

Board may determine, in the case such advance is exceptional necessary to liquidate financial

requirements of the borrower.

(New) Article 39: The determination of interest rates.

The Bank of the Lao PDR shall determine and promulgate its interest rate for the discounted

securities and the interest rate of its advance loan to the commercial banks and financial

institutions under its supervision. For the commercial banks and financial institutions may

determine their own interest rate for deposit and lending to general customers in accordance

with the market mechanism under the state management.

Financial Sector Strategy by Bank of Lao

a) Inter-bank money markets and the secondary bond market.

b) Limited members, small and weak transaction.

Obstacles to be solved:

a) Insufficient market management regulations,

b) Insufficient equipment,

c) Substandard practice of the international accounting standard by its members, Limited

products.

Ways to solve the obstacles:

a) Improve the infrastructure: rules and regulations.

b) Install equipment, modernized technologies for bond market and the foreign exchange

rate market among the banks.

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c) Install appropriate computer program for trading, settlement mechanism.

An Interbank market not only enables financial institutions to hold whatever level reserves

they desire at the equilibrium interest rate but also provides an important indicator for

monetary policy purposes. In general, however, the interest rate established in an overnight

interbank market will lie between the central bank’s rediscount rate (since bank can repay the

central bank rather than lend at less than this rate on the interbank money market) and the

penalty rate for reserve shortfalls (since it would be cheaper to pay penalty than a higher rate

in interbank market to avoid shortfall)

A central bank wishing to promote financial development could develop a treasury bill

market as a second step. The development of such a market would provide some salient

competition with the banking system. Negotiable treasury bills with short maturities of 30,

60, and 180 days could be sold by the central bank on behalf of the government. These bills

might be sold at auction once a week. The amount to be sold (and possibly also a reservation

price below which sales would not be made) would be announced by the central bank during

the preceding week.


a. Money Markets

a) Lao’s Money Markets

Money market operations (OMO): the Bank of Lao (BoL) utilizes net sales of BoL bonds (a

short-term instrument) and auctions of treasury bills to conduct OMO. Net sales of BoL

bonds have been the most active instrument in recent years, as they have been used to

sterilize BoL’s quasi-fiscal operations. Treasury bills have been used much less.

b) Monetary Unit

The new kip (k) is a paper currency of 100 at (cents). There are notes of 10, 20, 50, 200, and

500 new kip. K1 = $0.00009 (or $1 = k10,751) as of 2005. The monetary unit of lao people's

democratic republic shall be the “kip”, divided into one hundred “at”.

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b. Derivatives Markets

(E.g. interest rate swaps, FX swaps, currency swaps, credit derivatives), please explain recent

overview of the markets.

The derivative market consists of derivative assets that is known as the derived values of

other assets, or the explanation for the derivative products would be the instruments which

provide payoffs that depend on the values of other assets such as commodity prices, bond and

stock prices, or market index value. These instruments are recently known as futures

contracts and options.

Futures contract as the delivery of an asset at a specified delivery (long position) or maturity

date (short position) for a deal price, called the futures price, to be paid at contract maturity.

As for options which consists of call option and put option, while a call option gives its

holder the right to purchase an asset for a specified price (exercise or strike price) on or

before a specified expiration date, in contrast with a put option gives its holder the right to

sell an asset for a specified price on or before a specified expiration date.

The use of derivatives would be, the primary is to hedge risks or transfer them to other

parties, and then also to take highly speculative positions. Although derivative products have

been known as the most significant developments in financial market, research online has

been conducted on Lao’s financial market and apparently there is none of this product found.

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4.5 MALAYSIA


4.5.1.2 Stock Markets

a. Common stock

Common stock is a form of corporate equity ownership, a type of security. The terms "voting

share" or "ordinary share" are also used in other parts of the world; common stock being

primarily used in the United States. It is called "common" to distinguish it from preferred

stock. If both types of stock exist, common stock holders cannot be paid dividends until all

preferred stock dividends (including payments in arrears) are paid in full.

Common stockholders are on the bottom of the priority ladder for ownership structure. In the

event of liquidation, common shareholders have rights to a company's assets only after

bondholders, preferred shareholders and other debtholders have been paid in full. In the event

of bankruptcy, common stock investors receive any remaining funds after bondholders,

creditors (including employees), and preferred stock holders are paid. As such, common

stock investors often receive nothing after a bankruptcy.

On the other hand, common shares on average perform better than preferred shares or bonds

over time. Common stock usually carries with it the right to vote on certain matters, such as

electing the board of directors. However, a company can have both a "voting" and "non-

voting" class of common stock.

Holders of common stock are able to influence the corporation through votes on establishing

corporate objectives and policy, stock splits, and electing the company's board of directors.

Some holders of common stock also receive preemptive rights, which enable them to retain

their proportional ownership in a company that should issue another stock offering. There is

no fixed dividend paid out to common stock holders and so their returns are uncertain,

contingent on earnings, company reinvestment, efficiency of the market to value and sell

stock.

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b. Right issue

A rights issue is an issue of rights to buy additional securities in a company made to the

company's existing security holders. When the rights are for equity securities, such as shares,

in apublic company, it is a way to raise capital under a seasoned equity offering. Rights issues

are sometimes carried out as a shelf offering. With the issued rights, existing security-holders

have the privilege to buy a specified number of new securities from the firm at a specified

price within a specified time. In a public company, a rights issue is a form of public offering

(different from most other types of public offering, where shares are issued to the general

public).

Troubled companies typically use rights issues to pay down debt, especially when they are

unable to borrow more money. But not all companies that pursue rights offerings are shaky.

Some with clean balance sheets use them to fund acquisitions and growth strategies. For

reassurance that it will raise the finances, a company will usually, but not always, have its

rights issue underwritten by an investment bank.

Rights issues may be particularly useful for closed-end companies, which cannot retain

earnings, because they distribute essentially all of their realized income and capital gains each

year; therefore, they raise additional capital through rights offerings. As equity issues are

generally preferable to debt issues from the company's viewpoint, companies usually opt for

a rights issue when they have problems raising equity capital from the general public and

choose to ask their existing shareholders to buy more shares.

c. Preferred stock

Preferred stock (also called preferred shares, preference shares or simply preferreds) is an

equity security which may have any combination of features not possessed by common stock

including properties of both equity and a debt instruments, and is generally considered a

hybrid instrument. Preferreds are senior (i.e. higher ranking) to common stock, but

subordinate to bonds in terms of claim (or rights to their share of the assets of the company).

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4.5.2 OTHER STOCK MARKET PRODUCTS

4.5.2.1 Warrant Security that entitles the holder to buy the underlying stock of the issuing company at a fixed

exercise price until the expiry date. Warrants and options are similar in that the two

contractual financial instruments allow the holder special rights to buy securities. Both are

discretionary and have expiration dates. The word warrant simply means to "endow with the

right", which is only slightly different from the meaning of option.

Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the

issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the

bond and make them more attractive to potential buyers. Warrants can also be used in private

equity deals. Frequently, these warrants are detachable and can be sold independently of the

bond or stock.

4.5.2.2 Mutual Fund An investment vehicle that is made up of a pool of funds collected from many investors for

the purpose of investing in securities such as stocks, bonds, money market instruments and

similar assets. Mutual funds are operated by money managers, who invest the fund's capital

and attempt to produce capital gains and income for the fund's investors. A mutual fund's

portfolio is structured and maintained to match the investment objectives stated in its

prospectus.

One of the main advantages of mutual funds is that they give small investors access to

professionally managed, diversified portfolios of equities, bonds and other securities, which

would be quite difficult (if not impossible) to create with a small amount of capital. Each

shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or

shares, are issued and can typically be purchased or redeemed as needed at the fund's current

net asset value (NAV) per share, which is sometimes expressed as NAVPS.

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4.5.3 BOND MARKETS

A debt investment in which an investor loans money to an entity (corporate or governmental)

that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by

companies, municipalities, states and foreign governments to finance a variety of projects and

activities.

Bonds are commonly referred to as fixed-income securities and are one of the three main

asset classes, along with stocks and cash equivalents. It is a debt security, under which the

issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay

them interest (the coupon) and/or to repay the principal at a later date, termed the maturity.

Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very

often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the

secondary market.

Thus a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the

issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the

borrower with external funds to finance long-term investments, or, in the case of government

bonds, to finance current expenditure.Certificates of deposit (CDs) or short term commercial

paper are considered to be money market instruments and not bonds: the main difference is in

the length of the term of the instrument.

Bonds and stocks are both securities, but the major difference between the two is that

(capital) stockholders have an equity stake in the company (i.e. they are owners), whereas

bondholders have a creditor stake in the company (i.e. they are lenders). Another difference is

that bonds usually have a defined term, or maturity, after which the bond is redeemed,

whereas stocks are typically outstanding indefinitely. An exception is an irredeemable bond,

such as Consols, which is a perpetuity, i.e. a bond with no maturity.

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4.5.4.1 Money Markets / Negotiable Instruments of Deposit (NID) Negotiable Instrument of Deposit (NID) is an instrument issued by a banking institution

certifying that a certain sum in MYR or Foreign Currency has been deposited with the issuing

bank for a certain tenor at a specified rate of interest (coupon rate may be fixed, floating or

zero). NID is deposit document issued by the Bank to a customer certifying that a certain

amount has been deposited with the Bank at a specific rate and for a specific tenor (i.e. with

specific maturity date). Unlike Fixed Deposits (FDs), NID is negotiable. This basically means

that it can be sold before its maturity date. If the customer needs to realize cash before the

NID maturity, he has to sell the NID. However, the NID cannot be withdrawn prematurely

like in FDs.

GENERAL CONDITIONS

Tenor available is between 1 month - 10 years. Tenor may also be fixed in odd number of

days e.g. 105 days. Amount must be placed in multiple of RM50,000 subject to a minimum

deposit of RM100,000 per deposit. Minimum denomination is RM100,000 and maximum

denomination is RM10 million per certificate.

NID rate is generally influenced by interbank rates and may be higher or lower than the

bank's FD rates. However, for amounts that are below RM500,000, the rates are about the

bank's FD rates. Like STCP, larger amounts normally have a higher possibility of attracting

better rates. Interest on NID is based on simple interest formula like STCP: Interest =

(PRINCIPAL x RATE x NO. OF DAYS) / 36500

4.5.4.2 Short Term Corporate Placement (STCP) STCP provides an alternative investment avenue for customers to place their excess funds

with HLBB at a more flexible tenure as compared to fixed deposit.

GENERAL CONDITIONS

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STCP rates are influenced by the amount placed i.e. where larger amounts normally

command a better rate. Funds are placed for a fixed tenure and rate agreed upfront, which

will be remunerated at maturity.

The minimum period of the STCP placement is overnight while the maximum tenure will

depend on the funding positions of HLBB. Interest rates for STCP placements are based on

the interbank rate for a similar period of placement.

The customer can call the Money Market Dealer direct to conclude a STCP deal or

alternatively, the customer can also call the branch officer. The customer would need to

inform the dealer the amount, branch where account is maintained, STCP period, etc. Interest

paid is based on simple interest formula: Interest = (PRINCIPAL x RATE x NO. OF DAYS)

/ 36500

4.5.4.3 Bankers' Acceptance (BA) BA is a Bill of Exchange drawn on a Bank with a specific maturity date to finance a customer

for a trade transaction. It is a negotiable instrument, which may be sold to investors. This is a

trade financing facility available to buyers / importers and sellers / exporters which provides a

competitive source of working capital that offers flexibility and a complement to the other

banking facilities as well as an alternate form of short-term investment for the investor.

4.5.4.4 Fixed Income: Government Bonds/Private Debt Securities Fixed income securities are IOU where the issuer (borrower of funds) contracts to pay the

owner of the bond (the lender of the funds), the face value of the bond on a definite future

date (maturity) and pay interest (coupon) at specified dates at regular intervals (usually semi-

annually). Sophisticated individual investors (as defined under Schedule 2 & 3 of SCA 1993)

may invest in Government Bonds/Private Debt Securities as an Alternate Investment subject

to terms of offer. Tax Implications: No withholding tax & tax exempt on coupon payments to

non-resident companies and individual investors.

GENERAL CONDITIONS

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Note that fixed income instruments come in a variety of maturities, ranging from as little as 1

month to 10 years or longer. Instruments that have maturities of 1 year or less are usually

discount instruments.

Discount instruments are instruments where the buyer (lender of funds) pays an amount less

than the face value of the paper, and gets the face value upon maturity. For example, A buys

RM1 million of a 1-month Treasury bill at a yield of 3.00%. A will have to only pay

RM997,534.25 for the bill upon purchase. Upon maturity of the bill, A will get RM1 million.

All government, semi-government, and certain corporate debt securities are scripless. This

means that the initial step for any potential investor to take is to open a Fixed Income Trading

account and a Scripless Securities Trading System (SSTS)* account with Hong Leong Bank

Berhad. When the account is opened, the investor can conduct trades through that particular

SSTS account.

The SSTS account in any Authorised Depository Institution (ADI)** is linked to the

RENTAS funds transfer system. There is little fear of non-payment or failure of delivery as

securities in the SSTS account can only be moved or payment can only be made if and only if

there is a matching transaction from another institution. For example, B maintains an SSTS

account with Hong Leong Bank and buys a bond from Maybank. B has sufficient funds in his

account with Hong Leong Bank and is awaiting for Maybank to deliver the bond. B's funds

will remain with Hong Leong Bank until Maybank sends over a confirmation to Hong Leong

Bank to say that such a transaction has been made and is valid. When Hong Leong Bank

confirms the transaction, a simultaneous exchange of funds and securities will take place.

Trades in fixed income securities are encouraged to be in amounts greater than

RM100,000.00, as larger amounts tend to garner better prices in the market. Note that the

standard amount in the interbank market is RM5 million. Hence, odd amounts are usually

unable to command the best price in the market due to their illiquidity.

You can ask for a price from Hong Leong Bank Berhad, but there are also 9 other appointed

market-makers (also known as Principal Dealers) in the market. While these Principal

Dealers are only obliged to quote prices for certain selected issues, most (if not all) will

oblige to quote retail prices for customers.

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To buy and sell securities, you can call the Fixed Income Dealer at Hong Leong Bank

directly or alternatively, the customer can also call the branch officer or Priority Banking

officer for current rates. You would need to inform the dealer of certain particulars such as

the branch where the account is maintained, that is, the ADI where the SSTS account is

maintained, or the source of the funds used to purchase the bond, and the destination of the

bonds.

TAXATION

Non-resident persons are not subject to withholding tax if the interest they receive from a

bond is issued by the Federal Government, public companies listed on the Kuala Lumpur

Stock Exchange, or if the bond is rated by the Rating Agency Malaysia Berhad or Malaysian

Rating Corporation Berhad. One exception to this exemption is if interest is received from the

purchase of convertible loan stock. In the case where a non-resident purchases a convertible

loan stock, withholding tax will be charged as per norm. Corporate and individual residents

are exempted from withholding tax for Islamic private debt securities.

4.5.4.5 Treasury Bills Treasury Bills (T-bills) are short-term debt instruments issued by both the US and Canadian

governments. Similar to Federal T-bills, Provincial T-bills and promissory notes are backed

in full by the issuing province. Their many attractive features make T-bills popular

investment vehicles for individual, institutional, and corporate investors. T-bills offer the

highest possible level of financial security.

T-bills have maturity of one year or less and are issued in maturity terms of 30 days, 60 days,

90 days, 6 months, or one year. T-bills are highly liquid and many investors choose to hold

them instead of holding cash. They may be sold at any time.

4.5.4.6 Commercial Paper Commercial paper investments (CP) are unsecured promissory notes issued by corporations.

Companies issue CP in order to finance seasonal cash flow and working capital needs at

lower rates than conventional bank borrowings. CP is typically issued in one, two and three

month terms, but may be issued for any term from one day to one year. CP is highly liquid

and may be sold at any time, with settlement within one business day.

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4.5.5 DERIVATIVES MARKETS (E.g. interest rate swaps, FX swaps, currency swaps, credit derivatives), please explain recent

overview of the markets. The derivatives market is a financial instrument that provides a safe

and effective risk management tools in commodity products and financial futures. It manages

its exposure to the fluctuations in the options market, interest rates, stocks and stock index

futures markets. Malaysian derivatives market is the Malaysian Derivatives Exchange

(MDEX), the result of a combination KLOFFE and COMMEX.

Bursa Malaysia Derivatives Berhad (BMD), the sole derivatives exchange in Malaysia, is

75% owned by Bursa Malaysia Berhad. The remaining 25% stake is held by Chicago

Mercantile Exchange (CME). BMD provides, operates and maintains a futures and options

exchange. BMD’s derivatives products are available on the CME Globex electronic trading

platform for better accessibility, visibility and distribution globally. BMD operates the most

liquid and successful crude palm oil futures (FCPO) contract in the world.

These are the products of the derivatives markets in Malaysia.

Commodity Derivatives:

1. Gold Futures (FGLD)

2. USD Crude Palm Oil Futures (FUPO)

3. Crude Palm Oil Futures (FCPO)

4. Crude Palm Oil Kernel Futures (FPKO)

5. Options on Crude Palm Oil Futures (OCPO)

Equity Derivatives:

1. FBM Kuala Lumpur Composite Index Futures (FKLI)

2. FTSE Bursa Malaysia KLCI Options (OKLI)

3. Single Stocks Futures (SSFs)

Financial Derivatives:

1. 3 Month Kuala Lumpur Interbank Offered Rate Futures (FKB3)

2. 3-Year Malaysian Government Securities Futures (FMG3)

3. 5-Year Malaysian Government Securities Futures (FMG5)

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4.6 PHILLIPINES

4.6.1 FINANCIAL MARKET PRODUCTS

In The Philippines financial market consists of several market participants. There are issuers,

investors, underwriters, dealers/ brokers, settlement and clearing agency, registry, custodian,

and some others like Self-Regulatory Organizations (PDEx, PSE) and Regulatory Bodies

(BSP, SEC, IC). The issuers are defined as fund users or borrowers, for instance, national

government, banks, and corporations in The Philippines. Then, the investors or fund

providers like general public, Asset Pooling Industries (pension funds, insurance companies,

asset management companies), and financial institutions and other market players.

Thirdly, underwriters, they are automatically given license to act as dealer or broker like

investment houses and universal banks. While dealers act as principal in all transactions,

buying and selling for his own account and the brokers act as the agent for their clients. Next,

clearing and settlement agencies. As in the previous assignment about clearing houses in

Philippines, clearing process occurs between trading and involves the balancing positions

between the different parties. Settlement involves transfer of legal title. There are SCCP

(Securities Clearing Corporation of the Philippines) and Philippine Securities Settlement

Corp.

Sixthly, registry, it is appointed by issuer to maintain the securities registry book either in

electronic or in printed form. Prepares regular statement of securities balances at such

frequency as may be required by the owner on record. Then, there is custodian as safekeeping

function and act as a collecting and paying agent. Lastly, the other market participants, there

are PSE (Philippine Stock Exchange) and PDEx (Philippine Dealing and Exchange Corp).

PSE is a self-regulatory organization that handles secondary trading of equity securities,

while PDEx is a self-regulatory organization that facilitates secondary trading of fixed

income securities.

The financial products of Philippines consist of basic financial products or services and

investment services. Basic financial products or services consist of deposits (including ATM

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accounts), loan products, remittance, and bill payments. While the investment services like

fixed income instruments, equities, trust products, and insurance-products.


The Philippines has become one of Asia's hottest markets for share and bond sales, getting a

boost from a buoyant stock market and its recent acquisition of an investment-grade credit

rating (Wall Street Journal, 2014). The capital market in the Philippines is supervised by the

Capital Market Development Council (CMDC), which is a public-private partnership focused

on recommending policy and legislative reforms toward the development of the Philippine

capital market (CMDC, 2014).

4.6.2.1 Instruments traded in the Philippine Capital Market Instruments can be divided into:

1. Fixed Income Securities

2. Variable Income Securities

4.6.2.2 Fixed Income Securities

a. Bonds

Bonds are commonly referred to as fixed-income securities. Fixed income instruments are

debt securities issued by corporations, governments or government agencies with stated

interest rates and fixed dates when interest and principal are paid. The amount of income and

the timing of payments are known to the investor at the time of purchase. Fixed Income

instruments may be in the form of bills, notes, bonds, commercial papers, or promissory notes

(BDO, 2014):

1. Treasury Bills are short term and low-risk investments that are direct and

unconditional obligations by the Philippine government.

2. Corporate Debt Security: These are debt obligations issued by corporations to raise

money in order to expand their businesses. These may include senior unsecured bonds/

corporate notes and subordinated notes.

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3. Treasury Bonds are long-term, low-risk instruments that are direct and unconditional

obligations by the Philippine government.

4. Foreign Currency Denominated Government Bonds: These are Bonds issued by the

Republic of the Philippines (ROPs) and bonds issued by other countries.

b. Mortgage Backed Securities in the Philippines

Legal framework: Securitization Act of 2004

Table 4.2. Government Institutions Securities Role in Philippines Government Institutions Role in MBS

Bureau of Treasury Oversees the trading of government securities

specifically the auction of government securities and the

accreditation and evaluation of government securities

dealers

Securities and Exchange

Commission

Supervises over-the-counter securities trading as well as

other players in the securities industry including brokers

and dealers

Bangko Sentral ng Pilipinas Supervises securities transactions of banks (whether a bank

is the originator, trustee or issuer)

Home Guaranty Corporation Provides guarantees to MBS issued in the Philippines

Bureau of Internal Revenue Assesses and collects all national internal revenue taxes,

fees and charges including income tax of SPEs,

withholding tax of yield or income, etc.

National Home Mortgage

Finance Corporation

Major government secondary mortgage institution intended

to develop the secondary mortgage market in the

Philippines

Source: CREBA (2014)

Despite the passage of the Securitization Act in 2004, MBS in the Philippines is still in its

infancy stage:

1. Volume of mortgages securitized is small

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2. Institutions providing securitization services are mostly government-controlled banks

or finance corporations

3. MBS are mostly sold to institutional investors

c. Asset Backed Securities

The asset backed securities are defined in the Philippine law on securitization as the

following (Vinodkothari, 2014):

"Assets", whether used alone or in the term "Asset-backed securities," refer to loans or

receivables or other similar financial assets with an expected cash payment stream. The term

"Assets" shall include, but shall not be limited to, receivables, mortgage loans and other debt

instruments: Provided, That receivables that are to arise in the future and other receivables of

similar nature shall be subject to approval by the Securities and Exchange Commission (SEC)

or the Bangko Sentral ng Pilipinas (BSP), as the case may be: Provided, further, That the

term "Assets" shall exclude receivables from future expectation of revenues by government,

national or local, arising from royalties, fees or imposts.

d. Variable Income Securities

1. Derivatives

The liberalization of the Philippines derivatives market received a boost last month as the

Central Bank of the Republic of the Philippines, Bangko Sentral ng Pilipinas (BSP), issued a

circular containing amendment to the regulations governing banks derivatives activities.

Financial derivatives consist of three primary types of instruments – forward contracts, swap

contracts and option contracts. These are the building blocks of all derivative products.

The banks may also invest plain vanilla single-name credit-linked notes where the reference

asset is an obligation issued or guaranteed by the Republic of the Philippines. The total

carrying value of all investments in structured products by banks must not exceed 100% of

the bank's qualifying tier one capital or 50% of a trust entity's trust assets.

2. Equities

A share of stock is evidence of a fractional ownership in a corporation. Buying a share of

common stock is in fact buying a share of a business. An individual who owns shares in, say,

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Petron or PLDT has an ownership interest in that company and is called a stockholder or

shareholder. This ownership is also referred to as having equity in a company, hence, stocks

are also called equities or equity securities. The percentage or proportion of ownership

depends on how many of the company’s share one owns.The Philippine bourse has entered a

bear market, dropping more than 20 per cent from its peak, underscoring how even heavily

bought assets in the developing world are being hurt by the emerging market rout.

The Philippine Stock Exchange index slumped 3.1 per cent on Tuesday to its lowest level this

year. The market has now lost almost 22 per cent since May 22, when the US Federal

Reserve sparked a global sell-off by warning it was planning to scale back its emergency

bond-buying program, called quantitative easing.

e. Philippines Derivatives Markets

Derivatives dealers seeking new markets in emerging Asia in the wake of the global financial

crisis count regulatory restrictions, headline risk and poor product awareness as typical

barriers to entry. This has not been the case in the Philippines which, since 2008, has taken a

series of progressive steps to liberalize the derivatives market and encourage greater usage

among dealers and end-users. During the past two years, the Bangko Sentral ng Pilipinas

(BSP) has replaced its old dealer approval process with a list of generally authorized

derivatives markets activities, in which all universal and commercial banks may engage. On a

non-published basis, it has also encouraged domestic businesses to consider derivatives as a

risk management tool.

According to data compiled by the BSP, as of December 31, 2009, total contracts

outstanding in the Philippine derivatives market amounted to $65 billion consisting chiefly of

forex forwards, options, cross-currency swaps and interest rate swaps.

At the same time, however, the accounting implications of derivatives usage for all but the

largest and most sophisticated business in the Philippines remains daunting, although those

users that become comfortable with hedge accounting often increase their uptake of hedges.

Furthermore, the lack of upward movement in the country’s sovereign credit rating at double-

B means the number of banks willing and able to do the credit work to become significant

providers of liquidity is limited. Nonetheless, the relatively strong track record of corporate

derivatives in the region-there were no hedging-related bankruptcies in the last downturn

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although there were widespread losses – combined with a balanced approach from regulators

and participants is attracting interest.

f. FX dominates

Despite explicit regulatory approval for yield enhancement-driven usage, corporates in the

Philippines are increasingly focused on relatively simple hedge products. With the economy

continuing to outperform expectations, record corporate revenues are driving increased

financial exposures. The major risk dynamic for the user base is foreign exchange risk,

specifically Philippine peso/US dollar. Despite weakening against the dollar during the Greek

sovereign crisis earlier this year, the peso has resumed its bullish trend. Driven by healthy

economic growth and support for the new administration in Manila, most participants expect

this trend to continue, drawing more companies into the hedging market. Dealers say

corporate forex hedging focuses on short-term, flow solutions, which are generally traded

with little or no leverage. Beyond the simplest forex forwards and options, dealers say regular

trading centre’s on seagull and collar options and other relatively vanilla structures.

g. Stabilized market

While the regulatory environment has lowered barriers to entry for banks comfortable with

increasing exposure to the Philippine economy, it has also stabilized the market for corporate

hedgers, treasurer of ICTSI, a Philippine port-operator that has global operations in 13

countries and eight currencies. Circular 594 requires all derivatives dealers to adopt

formalized suitability testing for corporate clients and to regularly report all derivatives sales

volumes to the central bank. End-users, meanwhile, are also required to report the size of

their hedge books to the BSP.

h. Sovereign rating not a factor

At weak double-B, the Philippines shares a sovereign credit rating with Iceland and Pakistan.

With corporate credit quality necessarily capped by the sovereign, this could place significant

counterparty constraints on banks’ hedge providers. Despite the fact local banks may act as

dealer, end-user and broker of plain vanilla instruments allowed under Circular 594 without

the need for prior BSP approval, provided adequate risk, marketing guidelines (for dealer and

broker) and capital are in place, dealers say that the players with the most sophisticated credit

approach have taken significant market share and continue to dominate the competitive

landscape.

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i. Looking for local growth

The onshore peso bond market is relatively small compared to its regional peers. It is also

heavily skewed toward government supply, although corporates are slowly increasing their

debt market activity. Data collected by the Philippine Dealing System indicates that turnover

in the local debt markets spiked to its highest ever level this year, which bodes well for the

growth of the domestic interest rate swap business.

j. Liberalization accelerates

According to Circular 594 issued by Bangko Sentral ng Pilipinas (BSP) in January, which has

been effective since January 2008, legitimate economic uses of derivatives include, but are

not limited to, ‘hedging, proprietary trading, managing capital or funding costs, obtaining

indirect exposures to desired market factors, investment, yield-enhancement, and/or altering

the risk-reward profile of a particular item or an entire balance sheet.

Circular 594 also generally authorized derivatives activities, which had previously required

advanced authorization and specific licensing, allowing universal and commercial banks to

provide dealer services in forex derivatives with a tenor of three years or less, and interest

rate swaps and forward rate agreements (FRAs) with a tenor of 10 years or less. Universal

and commercial banks were also afforded general authority to participate as end-users in the

same product classes plus certain structured products. The circular also limited the

participation of thrift, rural and cooperative banks to hedging.

4.7 SINGAPORE

4.7.1 CAPITAL MARKET PRODUCTS A key aspect of Singapore’s financial center is its deep and liquid capital markets.

4.7.1.1 Debt Capital Markets Singapore’s bond market has grown in depth and breadth over the past decade. With an

extensive range of both Singapore government securities and foreign corporate bonds

available, Singapore offers fixed income investors a wide range of investment opportunities.

Bond offerings with a lower minimum subscription size and tradable on the Singapore Stock

Exchange (SGX) are also available for the retail market.

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4.7.1.2 Equity Capital Markets With one of the more well-established capital markets in Asia-Pacific, the Singapore

Exchange (SGX) is the preferred listing location of close to 800 companies. One of the

unique strengths of our equity capital markets is the large range of foreign listings on SGX.

About 40% of SGX’s listings are foreign, spanning regions such as Asia Pacific, particularly

in South East Asia, and further afield in Europe and America. There are strong listings in

diverse sectors including real estate, shipping and offshore marine and infrastructure.

Singapore is the largest REIT market in Asia ex-Japan and there are an extensive offering of

business trust listings on SGX of shipping, aviation and infrastructure assets.

4.7.1.3 Foreign Exchange The foreign exchange (FX) and OTC derivatives market plays a pivotal role in Singapore’s

vibrant and international financial markets, underpinned by Singapore’s growth as a major

global trading hub. Singapore houses the major global FX dealers and offers a deep and

liquid market for trading and hedging of G3 currencies, as well as emerging market

currencies. According to the latest 2010 Triennial survey by the Bank for International

Settlements (BIS), the average daily FX turnover volume in Singapore was US$266 billion

during April 2010. This ranked Singapore as the fourth largest FX Centre globally and the

largest FX Centre in Asia Pacific excluding Japan. From the 2010 Triennial BIS survey,

Singapore was also ranked the largest OTC interest rate derivatives Centre in Asia Pacific

excluding Japan by turnover. This underscores Singapore's leading position as an

international financial centre and a major treasury Centre in the region.

4.7.2 MONEY MARKETS With a semi-annual control followed by publication made by the Monetary Authority of

Singapore (MAS), monetary system in Singapore has a definite market operation.

4.7.3 DERIVATIVES MARKETS 1. Derivatives Market Product in General

The derivatives market is the financial market for derivatives, financial instruments like

futures contracts or options, which are consequential from other forms of assets. The market

can be split into two, that for exchange-traded derivatives and that for over-the-counter

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derivatives. The legal type of these products is very different as well as the way they are

traded, though many market participants are active in both.

Derivatives markets take many different arrangements, some of which are traded in the usual

method (but some of which are traded quite differently (i.e. not the same as their underlying

market). The following are the most often traded types of derivatives markets.

2. Futures Markets

Market in which participants can buy and sell commodities and their future delivery

contracts. A futures market provides a medium for the complementary activities of hedging

and speculation, necessary for dampening wild fluctuations in the prices caused by gluts and

shortages.

3. Options Markets

Medium of exchange for options contracts allowing the holder the right to sell or buy an

underlying commodity on an open market. The option contracts define the trading limitations

of the market, including the option type and the expiration date.

4. Warrants Market

A market that sells warrants. Warrants is a derivative security that gives the holder the right

to purchase securities (usually equity) from the issuer at a specific price within a certain time

frame. Warrants are often included in a new debt issue as a "sweetener" to entice investors.

5. Contract For Difference (CFD) Markets

A contract for difference (or CFD) is a contract between two parties, typically described as

"buyer" and "seller", stipulating that the seller will pay to the buyer the difference between

the current value of an asset and its value at contract time. (If the difference is negative, then

the buyer pays instead to the seller.) In effect CFDs are financial derivatives that allow

traders to take advantage of prices moving up (long positions) or prices moving down (short

positions) on underlying financial instruments and are often used to speculate on those

markets.

6. Spread Betting

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A type of speculation that involves taking a bet on the price movement of a security. A spread

betting company quotes two prices, the bid and offer price (also called the spread), and

investors bet whether the price of the underlying stock will be lower than the bid or higher

than the offer. The investor does not own the underlying stock in spread betting, they simply

speculate on the price movement of the stock.

7. Derivatives Market Product in Singapore SGX-DT

SGX-DT is a subsidiary of Singapore Exchange, Ltd. SGX-DT provides interest rate contract

such as indices futures trading services in the Asia-Pacific region

Table 4.3. Derivatives Market Product with Interest Rate in SGX

Source: SGX (2014)

Table 4.4. Equity Indices in SGX

Source: SGX (2014)

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Table 4.5. Dividend Indices in SGX

Source: SGX (2014)

4.8 THAILAND

4.8.1 CAPITAL MARKET PRODUCTS Thailand’s capital markets in recent times have grown very slowly. The size of the stock

market compared to GDP is only 51% (as of June 2009) which is much smaller than other

countries in the region such as Hong Kong (845%), Singapore (202%), Malaysia (104%) and

South Korea (66%). If its continued, then Thailand’s capital market will stagnate and become

increasingly marginalized. In the end, this will lead to loss of growth opportunities, standard

of living and prosperity. Moreover, there are some problems occurring in the Thai capital

market, such as: few institutional investors, small retail investor base, limited financial

products, high transaction costs, and lack of efficient regulatory enforcement are some

examples.

In recognizing the importance and concerning those problem above of the capital market,

Prime Minister of Thailand, Abhisit Vejjajiva has appointed the Capital Market Development

Committee (The Committee). In formulating the Capital Market Development Masterplan

(The Masterplan), (2010-2014) as follow:

“The Thai capital market is the primary mechanism for aggregating, channeling, and

monitoring economic resources. The goal of the capital market is to perform these tasks

efficiently to increase overall competitiveness of Thailand”

The Committee has formulated 6 primary missions and objectives to realize this vision:

1. Capital market must be easily accessible to investors seeking investment opportunities

and corporations seeking funds

2. Increase quality and variety of products and services

3. Reduce cost of funds to issuers and any intermediary and transaction costs to

investors to enable Thai companies to become more competitive

4. Develop efficient infrastructure framework in legal, regulations, accounting, tax,

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information, technology and enforcement

5. Educate investors and ensure that adequate protection mechanism are in place

6. Promote competition in the Thai capital market and build links with the global market

system

The Master plan consists of 8 important reform measures that will affect the course of

development and bring about major changes in the system.

Measure 1: Abolish the Monopoly and Improve Competitiveness of the Stock Exchange of

Thailand (SET). Liberalization of capital flows and competitive pressure increase the chances

of the SET being marginalized. To make the SET responsive to fast-changing business

environments, its business structure must be transformed to increase efficiency and promote

competitiveness. First step is to demutualize the SET, convert it into a public company (The

Exchange Company), separate the exchange business from capital market development work,

and establish a Capital Market Development Fund (CMDF) with the mission of long-term

capital market development. The SET’s monopoly on exchange businesses will also end.

Therefore, there may be other trading platforms permitted to trade listed stocks. The

Exchange Company will be allowed to permit persons other than securities firms

incorporated in Thailand to have direct access if it wishes to in order to increase liquidity and

expand investment base to promote linkage with global capital market, and decrease

limitations which currently obstruct the growth of Thai capital market.

Measure 2: Liberalization of securities business to promote market efficiency. This measure,

while in line with recent trends of liberalization in the financial system, also aims to increase

competitiveness of Thai capital market and enable it to withstand impact of fast capital flow.

Liberalization of licenses will foster the market competition. Securities firms will have to

adjust by forming alliances with strategic partners to increase its efficiency by offering new

products and services. Deregulation of commissions will reduce transaction cost and increase

market activities in the long run.

Measure 3: Reforming Legal Framework. Currently, there are draft laws relating to the

capital market, being proposed to the House of Representatives which are: (1) Amendment

Act to Royal Enactment on Special Purpose Juristic Persons for Securitization B.E..... (2) The

Draft of Commercial Collateral Act B.E and (3) Amendment Act to the Civil and

Commercial Code B.E..... The government should keep pushing for passage of these laws.

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The Committee also had the resolution to propose further reforms, including (1) Laws to

facilitate mergers and acquisitions activities, (2) Adopt civil penalty and (3) Amend the Civil

Procedure Code to include class action lawsuits, which would help make enforcement of the

Securities and Exchange Act more efficient.

Measure 4: Streamline Tax System. This measure aims to make the tax system more efficient

to transactions, improve fairness, and provide tax incentives for transactions that the state

would like to promote for the development of capital market. Taxation areas to streamline

include those related to mergers and acquisitions, investments in debentures, elimination of

double taxation on dividends, equalize tax incentives on direct investment and investment

through intermediaries, transfer of investments in provident funds, public savings funds, life

insurance premiums, Islamic bonds, securities borrowing and lending of the Bank of

Thailand, and venture capital.

Measure 5: Develop Financial Products. Currently, the Thai capital market has few financial

products to choose from, which cannot take care of diverse needs of investors thus making

the market relatively unattractive. This measure aims to push for development of new

products which would help increase the variety of instruments and consequently help develop

the market. Example of new products are Infrastructure Fund to promote investments by the

private sector, life annuities, interest rate derivatives, inflation-indexed government bonds,

Islamic bond, venture capital, and divestiture of ministry of finance’s shares of publicly

traded companies.

Measure 6: Establishment of a National Savings Fund. The Ministry of Finance had

proposed a National Savings Fund Act, and the cabinet in a meeting on October 20, 2009 has

agreed to the first draft. The National Savings Fund will cover workers outside the formal

system comprising approximately 70% to total labor force in Thailand. The objective is to

institutionalize savings for retirement, create equality of opportunity, and ensure that these

informal sector workers are provided with some income after retirement. The National

Savings Fund will become a major source of savings and investments in Thailand and will

contribute to the development of Thai capital markets. It will help lessen the volatility of

capital movements and also indirectly promote new financial products as well.

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Measure 7: Developing a Culture of Savings and Investments. This measure aims to provide

choices when investing in provident fund and Government Pension Fund, so that investors’

needs are met. It will also encourage investors to be proactive about acquiring new

knowledge on financial products, so that investors can truly determine what types of products

suit them.

Measure 8: Development of Domestic Bond Market. This measure aims to develop the

government’s cash management methods and study alternatives of amending laws relating to

treasury reserves, so that the government can issue treasury bills efficiently. The government

should also be able to manage treasury reserves for yield by such means as depositing the

reserves with other institutions instead of the Bank of Thailand. This will help decrease the

cost of funds that the government faces. Moreover, the Bank of Thailand will take the lead in

developing and promoting the private repo and securities borrowing and lending markets,

providing the bond market with another tool to manage liquidity efficiently with low risks.

Overall, this would lead to further growth in the market.

These 8 measures, and also the Masterplan which consists of 34 further measures that needs

to be implemented. These measures are important in changing the basic framework and

developing new infrastructures in the long run, which would lead to the fulfillment of the

Master plan’s main objectives.

After the Master plan has been approved, the drafting subcommittee will transform into the

Implementation and Oversight Committee and charged with overseeing, monitoring, and

assessing the implementation of the Master plan. The new committee will use KPIs to assess

progress and efficiency of the implementation.

The Committee believes that success in implementing the Master plan, aside from directly

benefiting the capital market, will have far-ranging benefits to society and economy as a

whole. It will improve competitiveness, promote savings and retirement planning, improve

linkage between Thai and global capital markets, and benefit all sectors of society. The

results will be reflected and noticeable in the capital market structure itself. Thai capital

market will grow larger with more liquidity which will strengthen balance and stability of the

financial market. It will become a key driver in economic development, which will be

observable in the prosperity of Thai people in the long run.

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Financial market is an important part that will significantly affect economic system in

particular country. In the financial market, all of the parties can do various kind of negations

and exchange wide range of informations that lead to an agreement as well, since it provides

many types of financial instruments that can be offered to investors and issuers. In Thailand,

there are 5 types of financial markets, which are :

1. Foreign Exchange Market

Foreign exchange market is a platform that enables the parties (individu, company,

institution,bank and etc) to buy and sell foreign currency. The forex trader will get a profit

from the fluctuative condition in particular country which influence the value of currency in

that country. There are 4 types of foreign exchange, but the most popular in Thailand is

foreign exchange swap since it has relation with other short-term instruments. Foreign

exchange market in Thailand are under the Exchange Control Act B.E. 2485 (1942) and

Ministerial Regulation No. 13 B.E. 2497 (1954). These laws set out the principles of controls

under which Notifications of the Ministry of Finance and Notices of the Competent Officer

were issued. Since 2 July 1997, Thailand has adopted a managed float exchange rate system

where Thai baht exchange rate is primarily determined by demand and supply in the FX

market.

2. Debt Market

Debt market is a platform where the players can do transactions with debt instruments. The

offerer will issue new debt instruments to be sold in primary market while the resale debt will

be offered to the secondary market. Thailand’s bond market has developed significantly since

the 1997–1998 Asian financial crisis, with increased bond issuance and an actively traded

local market. The long term corporate bonds in Thailand are mainly straight and plain. For

structured bonds which are featured to be more complicated than general debt instruments,

the market is still at an early stage of development. The structured bonds can be categorized

into two groups: structured notes and securitization bonds. Most of the structured notes in

Thailand are issued by commercial banks and are mainly Equity-Linked Notes (ELN) In

November 1994, the Bond Dealers Club (BDC) was set up to be the secondary market for

debt securities. The BDC was upgraded to the Thai Bond Dealing Centre (Thai BDC) in

April 1998 after it was granted the Bond Exchange license from the SEC. The goals of the

Thai BDC were to provide an environment for fair and secure trading, to monitor trade, and

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to disseminate information on the secondary bond market. It also functioned as a self-

regulatory organization (SRO) and implemented a number of standards and conventions for

bond trading. It continuously expanded its functions and took active roles in various area of

bond market development. In December 2004, the Bond Market Development Committee

chaired by the Finance Minister initiated a major reform of the Thai bond market. One of the

measures was to centralize the trading platform at the SET while ThaiBDC would remain and

expand its functions as the SRO and information center for the bond market. Types of Bonds

offered in Thailand are Thai Government Debt Securities and corporate Bonds.

3. Equity Market

Equity market is helping the business which need long-term funding. The equity market in

Thailand is governed by the Office of Securities and Exchange Commission and the Stock

Exchange of Thailand. The roles of Stock Exchange of Thailand are To serve as a center for

the trading of listed securities, and to provide the essential systems needed to facilitate

securities trading; To undertake any business relating to the Securities Exchange, such as a

clearing house, securities depository center, securities registrar, or similar activities; To

undertake any other business approved by the SEC. Its main operations include securities

listing, supervision of listed companies and information disclosure, trading, market

surveillance and member supervision, information dissemination and investor education.

The Securities and Exchange Act of 1992 (SEA), stipulates the Securities and Exchange

Commission (SEC), a single unified supervisory agency, as the regulator of the Thai Capital

Market. While the SEC oversees the development of the Kingdom's capital market, the Bank

of Thailand (BOT) is responsible for the country's money market. The SEA also provides a

clear separation between the primary and the secondary markets to facilitate their successful

development. Both primary and secondary markets are regulated by the SEC.

Primary market

The SEC oversees and regulates the primary market. In this regard, a company wishing to

issue new securities, carry out an initial public offering (IPO) or offer additional securities to

the public must first apply for SEC approval and comply with its filing requirements. The

SEC is then required to carefully review the financial status and operations of the company

before allowing the firm to issue securities to the public.

Secondary market

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Following the initial public offering, securities may be traded in the secondary market once

the issuer has applied for and been granted approval by the SET.

Figure 4.3. Securities Market Infrastructure in Thailand

Source: SET (2014)


4.8.2.1 Money Markets

Money market is a market for short-term borrowing and lending, within 1 year horizon,

mainly for the purpose of liquidity management. Most of the money market transactions are

unsecured interbank borrowing (clean loan), trading of short-term papers (such as Treasury

Bills, BOT securities, Promissory Note, and Bills of Exchange), and Repurchase Agreement

or Repo transactions. There are two types of Repo transactions: one that is between the BOT

and its PDs called “Bilateral Repo”, and one between market participants called “Private

Repo”. In 2004, the BOT introduced to the market a short-term interbank borrowing

reference yield curve called “BIBOR” (Bangkok Interbank Offered Rates). This BIBOR

curve is meant to be a reference for money market transactions as well as a reference floating

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rate for floating rate paper. Besides commercial banks, major players in money market

include financial institutions, large corporates, and large state owned enterprises.

4.8.2.2 Treasury Bills Treasury bills are treasury securities having a maturity period of one year or less and sold in

the primary market by auction at a discount from face value. Upon maturity, the face value

will be paid to the holder. Treasury bills were first issued in Thailand in 1945, worth 50

million baht with a maturity period of 4 months. The issuance of Treasury bills continued

until 1990 and no treasury bill was issued since then. However, since 27th September 1999,

the government has resumed issuing Treasury bills until now. At present, treasury bills

typically have 28-day, 91-day, and 182-day maturity periods.

4.8.2.3 Private Repurchase Operations In Thailand, the initiative on developing private repurchase market began in 1998 when the

bond market was activated by the massive issuance of government bond for Financial

Institutions Development Fund (FIDF) indemnification. In order to achieve this objective

with low cost, the government had realized the necessity of putting in place the elements and

mechanism to make the bond market a new investment alternative and then an efficient

source of funding. If bond prices are transparent and reliable, bonds can be used as collateral

in the money market. The link between these two markets was, thus, built through the

repurchase market. Having appreciated the importance of bond market, the Ministry of

Finance has set up a working group for bond market development with 8 sub-working

groups. One of which is sub-working group on repurchase market, comprising of

representatives from the Bank of Thailand (BOT), Securities and Exchange Commission

(SEC), Thai Bond Dealing Center (TBDC) and private sector. The group was entrusted to

deal with the master agreement and to resolve all tax-related impediments of the transaction.

In addition, BOT has shown firm commitment to encourage the repo market by using

bilateral repo transactions as a means to adjust market liquidity with its primary dealers.

4.8.2.4 Bilateral Repurchase Operations (BRP) The BOT uses bilateral repurchase and reverse repurchase transactions to temporarily add or

drain reserves available to the banking system. The transaction involves a purchase or sale of

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securities with a simultaneous agreement to reverse the transaction at an agreed date and

price in the future. This effectively is cash lending (injecting liquidity) or cash borrowing

(absorbing liquidity) with debt securities as collateral. The repurchase/reverse repurchase

prices would equal to the loan amount plus interest. The BRP is conducted through Primary

Dealers (PDs) appointed for BRP transactions. The BOT may conduct either a fixed-rate

tender or a variable-rate tender. A fixed rate tender is used for the 1-day transaction in order

to enhance the signaling effect of the policy rate, while a variable-rate tender applies for all

other longer-maturity transactions. In other words, when the BOT wishes to conduct a 1-day

bilateral repurchase transaction, it will do so at the policy rate. Thus, PDs only indicate the

amount of money they wish to transact with the BOT. In a variable-rate tender, which applies

to 7-day, 14-day and 1-month transactions, PDs have to indicate both the amount and the

interest rates. The BRP has been designed such that it conforms to international market

practices. For example, initial haircuts, margin calls and marking to market of collateral are

applied. The BRP has fostered the development of Thai money market and private repurchase

market. Since June 2006, the BOT has conducted the operation on a daily basis.

Table 4.3. Differences between Bilateral Repo Market and Existing Repo Market BOT-run repo market Bilateral repo market

(Between BOT and primary

dealers)

Private Repo market

1.Participants Commercial banks,

finance companies, FIDF

and State Enterprises of

which permission from

the MOF are granted

Only primary dealers Private sector

2.Role of the

BOT

As a matchmaker

between lenders and

borrowers

BOT actively adjust

market liquidity for

stability

Not relevant.

However, BOT

expects primary

dealers to bridge the

liquidity from bilateral

to private repo market

3. Maturity 1-, 7-, 14 days 1-, 3- and

6 months

Mainly 14 days as it

represents the policy rate of

Mutually agreed

between

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interest counterparties

4. Trading

session

Two sessions

1. Morning session:

9.30 am to 10.30 pm

2. Afternoon session:

15.30 pm to 16.30 pm

Only one session in the

morning from 9.15 am to 9.45

am (afternoon session might be

opened to trade in the future)

All day

5. Collateral

• eligible

securities

T-bill, government

bonds, BOT bonds, State

Enterprise bonds with

MOF guarantee and

bonds issued by State

Enterprises endorsed by

the specific law under

BOT’s consent.

Same as stated in BOT

repo market

Mutually agreed

between

counterparties

4.8.2.5 Derivatives Markets Derivative market is a place where the complicate financial instrument transaction is done by

the party. In Thailand, Thailand Futures Exchange (TFEX), a subsidiary of the Stock

Exchange of Thailand, was set up in 2004 to serve as an exchange for the trading of

derivatives as governed by the Derivatives Act B.E. 2546 (2003). TFEX has launched SET

50 Index futures in 2006, and SET 50 Index option in October 2007 respectively. As for

agricultural products derivatives, the Agricultural Futures Exchange of Thailand (AFET) was

established, under the provisions of the Agricultural Futures Trading Act B.E. 2542

(1999), to run the exclusive agricultural futures exchange in Thailand regulated by the

Agricultural Futures Trading Commission. Meanwhile, investors in the Thai bond market

may hedge their interest rate exposure by entering into an Interest Rate Swap agreement

(IRS) to change a fixed-rate exposure into a floating rate exposure, or vice versa.

Nevertheless, it should be noted that there is a limited scope of risk management instruments

overall in the Thai financial market. This encumbers the deepening of the financial market as

many market participants may choose to sideline if they cannot efficiently execute all

financial transactions needed to achieve desired risk-return profile.

To enhance the efficiency and raise the risk transfer capacity in the Thai financial market,

authorities and market participants need to put joint effort to remove obstacles to the

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development of the market for risk management, starting from improving relevant rules and

regulations and educating all market participants about derivatives product

complexity, management, and regulations.

Thailand Futures Exchange (TFEX) was established under the derivatives ACT of B.E.

2546(2003) and is governed by the Securities and Exchange Commission (SEC). Under the

current ACT of B.E. 2546(2003). Currently TFEX have several products such as :

a. SET50 Index Futures

SET50 Index Futures is the first product to be traded on TFEX. SET50 Index was launched in

1995 and it is the first large-cap index of Thailand to provide a benchmark of investment in

The Stock Exchange of Thailand. It is calculated from the stock prices of the top 50 listed

companies on SET in terms of large market capitalization, high liquidity.

b. SET50 Index Options

SET50 Index Options is a contract that gives the buyer the right, but not the obligation, to

buy or sell SET50 Index at a specific price on or before a certain date. An option, just like a

stock or bond, is a security. It is also a binding contract with strictly defined terms and

properties. The advantage of options is that you aren't limited to making a profit only when

the market goes up. Because of the versatility of options, you can also make money when the

market goes down or even sideways. SET50 Index Options is the second product on TFEX

and was launched on October 29th, 2007.

c. Gold Futures

Gold Futures is a futures contract with gold (96.5% purity) as an underlying asset. Gold is the

oldest precious metal known to man and for thousands of years it has been valued as a global

currency, a commodity, an investment and simply an object of beauty. The characteristic of

gold price movement that do not correlate with the equity market makes gold futures a very

interesting investment option. Holding precious metals such as gold in a portfolio can give

apparent benefits in the form of speculative gains, investment gains, hedging against

macroeconomic and geopolitical risk and or wealth preservation. Experienced and educated

investors have long known that gold and related investments can be strong investment

choices. Currently TFEX offers 2 type of gold futures.

50 Baht Gold Futures : Launched on February 2nd, 2009

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10 Baht Gold Futures : Launched on August 2nd, 2010

d. Silver Futures

Silver is unique amongst metals due to the fact that it can be classified as both a precious

metal and an industrial metal. Today, silver is sought as a valuable and practical industrial

commodity and as an investment. Silver Futures is a futures contract with Silver Bullion

(0.999 purity) as an underlying asset. Silver is an effective portfolio diversifier. Silver was

launched on June 20th, 2011.

e. Interest Rate Futures

An interest rate future is a futures contract with an interest-bearing instrument as the

underlying asset. Interest rate futures are used to hedge against the risk of interest rates

moving in an adverse direction. For example, borrowers face the risk of interest rates rising.

Futures use the inverse relationship between interest rates and bond prices to hedge against

the risk of rising interest rates. A borrower will enter to sell a future today. Then if interest

rates rise in the future, the value of the future will fall, and hence a profit can be made when

closing out of the future. 5-Year Thai Government Bond Futures launched since Oct 18,

2010.

f. Single Stock Futures

Stock Futures is intended to be a useful hedging tool to manage the equity market risks and to

provide investors with an alternative investment as another means to profit from the price

movement of stocks. With the characteristic of futures contracts, investors can profit from

both bull and bear market. Currently TFEX have 30 stocks futures available. Single Stock

Futures was first launched on November 24th, 2008.

TFEX is allowed to trade Futures, Options and Options on Futures where the permitted

underlying assets are:

1. Equities: Index and Stocks

2. Debt: Bonds and Interest Rate

3. Commodities: Gold, Silver and Crude Oil

4. Others Exchange Rate and other as may be announce by the SEC

g. Derivative Warrants (DW)

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More than 5 years, KGI Securities (Thailand) Public Limited Company has been developing

its infrastructure and workforce and expects to launch Derivative Warrants (DW). In 2009,

KGI was the first securities company in Thailand to launch DW. KGI launched 3 DW i.e.

PTT13CA, KBAN13CA and PTTE13CA since June 2009. All 3 DW were highly successful

and get great response from investors at IPO period and trading on the exchange, which total

IPO subscription amount of all 3 DW was around 150 millions baht.

DW is new investment product in Thailand. KGI plans to educate investors for the deeper

understanding, enhancing knowledge and build confidence in DW investment. KGI plans to

roadshow to local and foreign institutional investors to public new financial products and

attract new clients to invest in Thai Capital Market. KGI launched the first website in

Thailand, www.thaiwarrant.com. This website provides information of all DW in Thailand

which is useful for investors who are interested in DW.

KGI was the first broker to act as a principal and agent assisting of clients who want to lend

or borrow securities:

1. Institutional Lenders

2. Local and Foreign Institutional Borrowers

3. Retail Borrowers.

This service will help increase liquidity and price stability to the Thai capital market. In 2009,

SBL gained popularity due to the volatile stock market. SBL was popular among local and

foreign institutional clients. Especially retail clients, SBL volume increased double from

2008 resulting from campaign “Short Selling for Children” by Equity Derivatives

Department. This campaign summarized total SBL volume from 3 September - 30 December

2009 from retail borrowers. Every SBL volume of Baht 1 million, KGI donated amount for

children 100 Baht. The total donation amount equaled to 16,400 Baht and donated to Pakkred

Babies' Home and the Foundation for the Welfare of the Mentally Retarded of Thailand. This

campaign aimed to contribute to social.

In 2010, the Company plans to expand its SBL business as follows:

1. Reduce SBL fee to handle with new sliding commission rate and to repay the

Company’s clients and also introduce SBL to new clients who never borrow securities before.

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2. Expand client base, especially foreign institutional clients who are increasingly

interested in borrowing and lending Thai securities.

3. Consider to develop internal system to support SEC’s relaxation on regulations.

Among the relaxation is the allowance of SBL on cash account over than only credit balance

account in the past.

4. Consider to develop internal system to support SBL on DMA for local and foreign

institutional clients. Moreover, KGI plans to develop SBL on internet to make retail clients

more convenient.

h. OTC Derivatives

KGI is recognized as one of the leaders in innovation in the development of derivatives

products in Thailand. KGI has spent more than 10 years preparing for issuing and trading of

derivatives products. The major shareholder, the KGI Group has also provided valuable

assistance by transferring knowledge and technology to the Company. The KGI Group sent

derivatives experts to train the staffs to be ready for this new market in Thailand. At the same

time, KGI sent staff to its related companies in Taiwan and Hong Kong to closely study their

sophisticated derivatives markets.

KGI adopts the same program and software as those used in Taiwan and Hong Kong. The

software is widely recognized in developed derivatives markets in many countries and should

be effective in the Thai market as well. Such system will greatly enhance the risk

management capability of the Company in hedging our derivatives positions. KGI is ready to

provide services relating to derivatives products to clients. KGI Group and the Company

always develop such system to handle every market situation. KGI is completely ready for

OTC Derivatives. At the moment, the Company focuses mainly on institutional clients who

have better understanding about the risks and rewards of such products.

1) OTC Equity Derivatives

OTC Equity Derivatives products are tailor-made, and designed according to client’s request.

In 2009, OTC Equity Derivatives gained popularity due to the volatile stock market. OTC

Equity Derivatives was popular among local and foreign institutional clients including

Private Fund, purposely to manage their risk and gain their return.

The Company provides three types of OTC Equity Derivatives,

1. Basic Options, which are Call Options and Put Options

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2. Combination Options, which are Call Spread Options, Put Spread Options, and

Strangle, etc.

3. Exotic Options, apart from the basic options and combination options, the Company

has been launching more complex derivatives, such as Asian Call Spread Options and Digital

Call Options, Auto Redemption Options,Forward Start Options, and Himalaya Options and

will innovate more and more to match clients’ risk and return profiles in the future.

2010, KGI views the market is still volatile from both internal and external factors including

low interest rate trend, so KGI expects OTC Equity Derivatives will maintain its popularity.

KGI formed a partnership with reputed foreign banks in the area of OTC Equity Derivatives

on foreign equity underlying covering markets; Hong Kong, Japan, Singapore, Australia,

USA, and Europe. KGI will regularly organize training/seminars to ensure that our clients

thoroughly understand the products before investing in equity derivatives with us and that our

equity derivatives products would help reduce risk and/or enhance return of clients’

portfolios.

2) Structured Products

KGI is focusing on developing structured products that combine equity derivatives with

money market instruments to serve clients who want to invest in both the equity market and

money market. KGI offers structured products exclusively to institutional clients and private

funds with a good understanding and knowledge of derivatives.

The structured product that KGI provides is: Equity Linked Note (ELN): To serve the needs

of the clients who prefer investment in short term money market with high yield and who can

invest in equity market. At present, KGI provides various types of ELN with maximum term

of 270 days, whose investment returns are primarily linked to the performance of the

underlying asset. The feature of SN can be customized to fit client’s market view. The

underlying can be Single Stock, Basket of Stocks, Index and ETF, depends on the type of

equity linked product invested.

In 2009, KGI formed a partnership with reputed domestic banks to issue Structured Products

to fulfill need of bank-base clients who need higher return than interest from deposit.

In 2010, KGI will continue to develop new types of Structured Products that attractive and

serve the needs of our value clients.

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4.9 VIETNAM

4.9.1 BOND MARKETS In the case of Vietnam, when the capital market started in 2000, government bonds were the only

major products to be listed for trading on the market. Hanoi Stock Exchange (HNX) was assigned

as the only organizer of the secondary market for government bonds of Vietnam.

Similar to other countries, the main capital market product from Vietnam stock exchange comes

from stocks and bonds of companies being traded in the market. In the Ho Chi Minh Stock

Exchange (HOSE), the products include stocks, bonds and investment certificates. Stock is the

equity stake of the owners, which are the residual assets of the company that would be due to

stockholders. Bond an instrument of indebtedness of the bond issuer to the holders. It is a debt

security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is

obliged to pay them interest and to repay the principal at a later date. Investment certificate is an

investment product offered by an investment company or brokerage firm designed to offer a

competitive yield to an investor with the added safety of their principal. A certificate allows the

investor to make an investment and to earn a guaranteed interest rate for a predetermined amount of

time. The product rules and specifics can vary depending on the company selling the certificates.

The Vietnamese stock market includes two stock exchanges: Hanoi Stock Exchange (HNX) and Ho

Chi Minh City Stock Exchange (HOSE). At the end of 2011, 393 companies were listed in the HNX

with total market capitalization of approximately USD 4 billion and 300 stocks were listed in the

HOSE with total market capitalisation of approximately USD 22 billion. The majority of listed

firms are former State Owned Enterprises (SOEs) that have undergone partial privatization. At the

end of 2011, 133 companies were listed on Unlisted Public Company Market (UPCoM).

HNX Index is calculated since the first day of official trading session of the market (14/7/2005) or

the base day. The index is calculated by comparing the current market capitalization to the market

capitalization of all listed stocks on the base day. The value assigned to the base day index is 100.

HNX 30 Index is the price index of top 30 stocks, acting as a premise for developing products on

index. HNX 30 Index is calculated based on free float adjusted market capitalization and applies the

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cap ratio of 15%, the maximum rate of market value of a stock constituent in the index basket.

UPCoM Index is calculated by comparing the current market capitalization to the market

capitalization of all listed stocks on the base day.

In Vietnam, there are seven types of bonds:

1. Government Bonds

Government bonds are issued by the MOF through the State Treasury. All government bond

auctions are conducted via the HNX.

2. Government-Guaranteed Bonds

Government-guaranteed bonds are bonds with a maturity of more than 1 year, issued by authorized

entities to mobilize capital for investment projects as appointed by the Prime Minister. The main

issuers include the VDB, Vietnam Bank for Social Policies, and Vietnam Express Corporation.

3. Municipal Bonds

Municipal bonds are used for financing specific projects, and typically have a tenor of 1 year or

more. The average size of municipal bonds is equivalent to USD10 million. There are only three

known issuers: Ho Chi Minh City, Hanoi, and Dong Nai province.

4. Corporate Bonds

Corporate bonds are issued by companies and State Owned Enterprise (SOE). These bonds can be

held in bearer or registered form, and are normally categorized as unlisted bonds at the outset.

5. Treasury Bills

Treasury bills are issued by the State Treasury at tenors less than 1 year (normally 13 weeks, 26

weeks, and 52 weeks). These are discounted securities with a face value of VND100,000.

6. State Bank of Vietnam Bills

Banks were required to buy VND20.3 trillion worth of bills, and were not allowed to trade them

with the central bank, aiming to withdraw cash from the economy and actively control liquidity.

7. Repos of Government Bonds

Repos were introduced in 2003. Government bonds (including T-Bills and government bonds with

maturities of more than 1 year) are accepted as collateral for repos between commercial banks and

SBV. Such repos are conducted on the open-monetary market.

Recently, HOSE introduced a new product, called the covered warrant. It is a financial tool giving

the holder the right, but not the obligation, to buy or sell a set amount of stocks, bonds or other

securities at a specified price by a predetermined date. A covered warrant is issued by a financial

institution and can apply to outside securities. The warrant is covered because the issuing

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organization owns at least some of the underlying securities. There are two basic types of covered

warrant, known as calls and puts. A call covered warrant gives the buyer the right, but not the

obligation, to buy the underlying asset on or before expiry date at a predetermined price and vice

versa. As a result, the covered warrants are very similar to options.


4.9.2.1 Money Markets Money market is debt securities or organized exchange which someone can lend and borrow

a large sum of money in short period of time. Basically, it is daily operation which doesn’t

really need to have plan before doing it. For example, when Vietnamese businessman wants

to export his products to America, he needs to exchange his currency which is Vietnamese

Dong to US$. It is automatically happen. Nowadays the currency for 1 US$ is equal to

21.000 Vietnamese Dong. The trend of the currency is increasing.

First, concerning MB Securities Vietnam / Thang Long Securities; MBSV is one of the

leading brokerage in Vietnam. It provides some services both for institutional and individual

clients related to the securities needed. In our research, we found that most of money market

products in Vietnam come from the bank. In Vietnam, there is Bank For Investment and

Development of Vietnam (BIDV). BIDV is borrowing or lending money with other credit

institutions including commercial and financial companies. It promises to earn profit as the

most effective investing instruments. That permitted to do activities on interbank market.

Other than it, there is HSBC Vietnam that provides Time Deposit and Structured Deposits for

Yield Enhancement. Time Deposit has some choices start from 1, 3, 6, 9 and 12 months with

0.3% cash withdrawal fee while Structured Deposit Yield Enhancement ensures that these

can be lined to foreign exchange rates, interest rates, gold and equities. The next one is Asia

Commercial Bank in Vietnam, similar to HSBC. It provides Time Deposit and also Treasury

Services.

The Treasury Services is divided into 3 parts which are Foreign Exchange Swap, Foreign

Exchange Spot, Foreign Exchange Forward. In FE Swap, it controls the cash flow

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management, gives profit maximization and also protects currency risk from international

trade that is very useful for those companies which are working for exporting and importing.

While FE Spot helps to buy and sell foreign currency right at the time dealing. On the other

hand FE Forward is the simplest way to cover the foreign exchange risk. The last one, Hong

Leong Bank Vietnam also provides the three Treasury services similar to what ACB offered.

So for the conclusion, in our research, we found that there is not much information about

money market products in Vietnam. We found that most of them come from the banks. These

banks provide such important services for money market itself. Yet, some of the banks are

not Vietnamese local banks.

4.9.2.2 Derivatives Markets The derivatives market is the financial market for derivatives like future contracts or

options, which are derived from other forms of assets. In Vietnam, unfortunately in the past

10 years, the most derivatives such as options and future contracts are hold on off-exchange

trading. Participants in the market were mostly foreign banks, large domestic banks and

foreign-invested companies. Realizing that derivatives were essential for businesses,

especially exporters who suffered from price fluctuation risks, many economist from Vietnam

demands the government to open trading activities in a market specializing derivatives.

Because even in Vietnamese bonds market, currently there are no derivatives officially traded

there. At the same time, because derivatives are not applied, investors have no hedging

products when the market is volatile and agile. These conditions actually could provide more

capital if the Vietnam government react fast, precisely and correctly.

Currently in the Vietnamese market, investors often bought debt instruments with floating

rates and the transactions mainly took place in the short term. Consequently, they face two

major risks of interest rate and exchange rate. Whereas, if Vietnam has some kind of official

derivatives market, the investors would have more choice, and more choice means more

investors would take place in Vietnamese financial market.

The Vietnam economist had already backed Vietnam's plans for derivative products and

recommended the legal and official system for bonds and derivatives. They currently just

wait and still hope the government could pay attention to their plans and execute the plan as

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soon as possible. After more than 10 years, derivatives were still in an infant stage, but the

benefits to the economy were very promising in Vietnam. For banks, derivatives helped

diversify products to satisfy customer needs, thereby improving operational efficiency. The

draft decree on derivatives was expected to be finished by the end of this year

4.10 JAPAN


4.10.1.1 Stock Markets

Table 4.4. List of Stock Listing in Japan Stock Exchange

Taisei Corp 483.00 23,682,000

Mitsubishi Corp 2,030.00 4,720,600

Kawasaki Kisen Kaisha Ltd 236.00 30,998,000

COMSYS Holdings Corp 1,392.00 558,400

ITOCHU Corp 1,253.00 5,233,800

TDK Corp 3,920.00 1,332,100

Kyowa Hakko Kirin Co Ltd 1,015.00 798,000

FANUC Corp 16,640.00 834,700

Heiwa Real Estate Co Ltd 1,844.00 133,200

NKSJ Holdings Inc 2,594.00 920,000

Trend Micro Inc/Japan 3,725.00 657,800

Osaka Gas Co Ltd 421.00 5,043,000

Keio Corp 726.00 1,089,000

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Denso Corp 4,690.00 1,849,900

Nippon Telegraph & Telephone Corp 5,170.00 1,341,200

Japan Tobacco Inc 3,565.00 2,879,300

Komatsu Ltd 2,456.00 6,123,400

Nissan Motor Co Ltd 1,006.00 10,431,500

Odakyu Electric Railway Co Ltd 1,001.00 1,257,000

Obayashi Corp 592.00 4,051,000

Aozora Bank Ltd 294.00 7,343,000

Mitsubishi Logistics Corp 1,532.00 551,000

Maruha Nichiro Holdings Inc 188.00 866,000

Toyo Seikan Group Holdings Ltd 1,973.00 566,100

NTT DOCOMO Inc 1,587.00 4,904,000

UNY Group Holdings Co Ltd 641.00 613,700

Toyota Motor Corp 6,440.00 7,132,600

Credit Saison Co Ltd 2,736.00 1,186,700

JX Holdings Inc 522.00 8,103,300

Dowa Holdings Co Ltd 1,011.00 1,258,000

Chiyoda Corp 1,148.00 991,000

Kajima Corp 404.00 8,877,000

Aeon Co Ltd 1,372.00 3,350,600

Sumco Corp 800.00 1,025,200

NSK Ltd 1,037.00 1,728,000

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NEC Corp 231.00 12,422,000

Teijin Ltd 228.00 4,071,000

Sumitomo Mitsui Financial Group Inc 4,880.00 5,474,900

Nippon Soda Co Ltd 598.00 791,000

Nippon Electric Glass Co Ltd 525.00 3,950,000

Mitsui & Co Ltd 1,472.00 5,994,500

Hitachi Construction Machinery Co Ltd 2,244.00 1,107,300

Mitsubishi UFJ Financial Group Inc 644.00 51,798,600

Nitto Boseki Co Ltd 423.00 569,000

Toyota Tsusho Corp 2,648.00 935,800

Citizen Holdings Co Ltd 699.00 1,308,900

Hitachi Ltd 665.00 16,854,000

Mitsui OSK Lines Ltd 462.00 15,471,000

NTN Corp 455.00 2,695,000

Tokuyama Corp 389.00 1,637,000

Olympus Corp 3,060.00 1,291,600

Nitto Denko Corp 6,600.00 3,483,000

Shimizu Corp 478.00 5,689,000

Nichirei Corp 538.00 1,228,000

Tokyo Electron Ltd 5,360.00 2,282,400

Kuraray Co Ltd 1,164.00 2,864,900

Keisei Electric Railway Co Ltd 1,047.00 1,006,000

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T&D Holdings Inc 1,258.00 2,493,500

JTEKT Corp 1,373.00 1,118,200

Ajinomoto Co Inc 1,287.00 2,157,000

Toho Zinc Co Ltd 326.00 649,000

Tokyo Gas Co Ltd 537.00 7,227,000

Suzuki Motor Corp 2,395.00 2,493,900

Pacific Metals Co Ltd 416.00 1,284,000

Nissan Chemical Industries Ltd 1,489.00 669,600

Yokogawa Electric Corp 1,435.00 797,000

Nippon Meat Packers Inc 1,417.00 1,485,000

Nippon Yusen KK 324.00 15,410,000

Mitsumi Electric Co Ltd 726.00 975,500

Daikin Industries Ltd 5,340.00 1,257,200

Konica Minolta Inc 850.00 3,145,000

Konami Corp 2,300.00 1,607,100

Kyocera Corp 5,360.00 1,746,500

Kubota Corp 1,465.00 4,501,000

SKY Perfect JSAT Holdings Inc 532.00 711,800

Advantest Corp 1,159.00 4,112,200

Dai-ichi Life Insurance Co Ltd/The 1,428.00 3,029,100

Sumitomo Heavy Industries Ltd 449.00 10,539,000

Dainippon Screen Manufacturing Co Ltd 544.00 3,445,000

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Furukawa Co Ltd 226.00 6,488,000

Nippon Light Metal Holdings Co Ltd 153.00 4,873,100

Source: Tokyo Stock Exchange (2014)

4.10.1.2 Bond Markets

Types of Bonds in the Japanese Markets

Japanese Bonds are classified into the following categories:

1. Japanese government bonds: JGB;

2. Local government bonds (prefectures, municipalities (cities, towns and villages)

3. Government agency bonds

a. Japanese government-guaranteed bond

b. Fiscal Investment and Loan Program (FILP)-agency bond

c. Government-affiliated corporation bonds

4. Local public corporation bonds

5. Local governments agency bond

6. Corporate bonds

a. Straight corporate bonds, etc.

b. Asset-backed corporate bonds

c. Convertible bonds

7. Bank debentures, and

8. Nonresident bonds (foreign bonds)

a. Yen-denominated foreign bonds

b. Asset-backed foreign bonds

According to FIEA, public offering on corporate bonds, asset backed bonds and non-resident

bonds are subject to disclosure obligation; where as the other bonds are not.

4.10.1.3 Explanation of the Major Types of Bonds

a. Government bonds

Japan Government Bonds issued at the recent years could be classified into five categories:

1. Short-term bills (6-month and 1-year),

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2. Medium-term notes (2-year and 5-year bonds),

3. Long-term bonds (10-year bonds) and

4. Super long-term bonds (20-year, 30-year and 40-year bonds)

5. JGBs for retail investors (3-year, 5-year and 10-year)

In the fiscal year of 2002 (ended at March 31 2003), the government introduced Separate

Trading of Registered Interest and Principal of Securities (STRIPS) and (variable-rate) retail

10-year JGB programs.

Principal and individual interest of JGB are designed by MOF as “book-entry securities

eligible to strip” has been traded as bond zero coupon of government separately. Then, the

government starts issuing:

1. 10-year consumer price index (CPI)-linked bonds,

2. 5-year and three-year bonds for retail investors and

3. 40-year fixed-rate bonds in fiscal years 2003, 2005, and 2007, respectively.

All short-term JGB is discount bonds issued with the lower price compared to its face value.

No interest payment, though, when the maturity date, the principal will be paid at the face

value. In other sides, all medium-long, and super long-term bonds, and JGB for retail investor

(3 years, 5 years), are the bonds with fixed rate coupon. JGB for retail investors (10-year

floating rate) is JGB with the varied coupon percentage through times based on certain rules,

so as with the 15-year floating-rate bonds.

b. Local Governments Bonds

Region and municipalities borrow fund by issuing debt securities in the market.

c. Government Agency Bonds

Government agency bonds are debt securities issued by various government affiliated

entities, such as Agency Company. Bond agencies are divided into:

1. Government-guaranteed bonds guaranteed by the Government;

2. FILP-agency bonds issued by financial investors and loan agency which are not

guaranteed by the Government

3. Government-affiliated corporation bonds

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The three categories are usually called public sector bonds.

1) Corporate Bonds

Banks and companies can also issue corporate bonds according to the Companies Act.

2) Bank Debentures

Bank debentures are debt securities issued by certain banking institution under the special

law and play roles as fund collector, alternative deposit.

3) Japan Securities Dealers Association (JSDA)

JSDA is a self-regulatory organization (SRO) under Japan securities market. This

organization gives service for Over The Counter transactions.


4.10.2.1 Money Markets

a. Money Market and Some Historical Stories of Money Market in Japan

Looking up to the recent currency fluctuation of Japanese Yen (JPY) seems that Japan has

been encountering problems. Recently, Japanese Yen (JPY) is being depreciated during the

presidential election, yet affecting the investors’ decision into this country. Compared to the

foreign investors, the domestic investors have bigger assets globally. Apparently, Japanese

Yen (JPY) is a safe haven currency of which would be chosen when there is uncertainty

within the global market. The currency fluctuation of JPY forward is interrelated to the global

market. Earthquake, nuclear radiation and other natural disasters are causing the fluctuation

of JPY currency as well. Meanwhile, JPY has been encountering problems with other

countries in regards to global market. This is the background why monetary authorities in

Japan have been unwilling to allow themselves in global market in order to save their

currency.

b. Definition

Regarding to the definition of Britannica Encyclopedia, money market is a set of institutions,

conventions, and practices, the aim of which is to facilitate the lending and borrowing of

money on a short-term basis. The forms of money market are not limited to the bank notes,

but also short-term government securities, bills of exchange, and bankers’ acceptances. The

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fundamental of money market is to improve the ability of the retailers in financial services,

comprises housing investment, savings institution, lending agencies, commercial banks and

government. The distinctive characteristic of its is the existence of open competition among

those who are bulk suppliers of funds and among those seeking bulk funds in working out the

best distribution of the existing total volume of such funds.

c. Development of Money Market in Japan

The transactions in commercial notes are being discouraged because Japan would tend to

undermine the structure of interest rates and financial institutions. Both Ministry of Finance

of Japan and the Bank of Japan have been prohibiting market forces to equilibrate demand

and supply in many financial markets since the interest rates would become excessively high.

Japan become highly restrictive in global market since the problematic issues and natural

disaster come one after another to Japan.

The only money market that well developed is call money market. The reason why call

money market is well developed because of the participants obtains urgently needed liquid

resources or utilizes surplus liquid resources. Commonly, call money market is called short-

term money market since the Japanese banks maintain only a very small proportion of liquid

resources and short-term claims on the government. It is restricted to the transactions among

financial institutions. The interest rate on call money market has been relatively free.

Although small amounts are lent overnight, most are “unconditional loans” (repayment after

one day’s notice, with a minimum of two days) or “over-month-end-loans” (repayment on a

fixed day the following month). Major lenders in call money market are local banks, trust

banks, credit associations, and agricultural cooperatives, which collect individual urban and

rural savings and are attracted by the high yields, liquidity, and low risk of call loans relative

to other uses.

d. The Need for Money Market

The demand for funds, both short-term and long-term has been strong in Japan’s rapidly

growing economy. The ministry of finance and the bank of japan as monetary authorities in

Japan have not been willing to allow market forces to equilibrate demand and supply in many

financial market as they fear that the interest rates would become overly high. Most of

interest rates have been set administratively at levels high by international comparison but

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lower than market forces. Japan’s monetary policy is implemented by controls on both the

availability of credit and its cost.

Under these situations, Japan’s money market is very restricted. The market for short-term

government securities is insignificant. The low, pegged interest rate means that the bank of

Japan is the main buyer. Transaction in commercial papers are minimal, and also being

dissuaded because they would tend to undermine interest rates and financial institution

structure.

In Japan, only call money market that is well developed. It’s restricted to transactions among

financial institution. The interest rate on call money has been relatively free and also

persistently above most other short-term and long-term rates). The pattern of flows is quite

stable, despite seasonal and cyclical fluctuation. City banks are the major borrowers because

they have a strong demand for loans by large enterprises and use call funds as a major source

of liquidity. While the major lenders are local banks, trust banks, credit associations and

agricultural cooperatives, which collect individual urban and rural savings and are attracted

by the high yields, liquidity, and low risk of call loans relative to other uses.

Short money markets are defined as those in which assets have a maturity less than one year

and are traded by market participant. In Japan, money market is developed into call market,

repo market, CP market, yen funding activities with foreign investors, yen overnight index

swap market, and market participant’s attitudes toward arbitrage trading and operation issues.

e. Call Money Market and Rates

Call money market is a market in which brokers and dealers borrow money to satisfy their

need for credits, either used to finance their own inventory of securities or to cover their

customers’ margin account.

Collateralized call rate figures are contracted rates of brokered transactions, and

uncollateralized call rate figures are mid-market rates between lenders and borrowers. While

both figures are based on the highest rates quoted each day, due to changes in trading

methods the uncollateralized call rate figures were changed to weighted average rates for

each day's trading as follows: from February 16, 1994 for one- to three-month contracts; from

October 17, 1994 for same week contracts, and from May 16, 1995 for other contracts. The

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average figures covering these periods are estimates using daily data compiled on different

bases.

1. Through December 1984, rates are on the Tokyo Markets. Through November 20,

1990, rates on collateralized and unconditional. Through December 2006, rates are

lending rates of dealing transactions.

2. Through December 1969, rates are quoted on the most business days during the

month (if some rates on same days, average figures of these). From January 1970,

monthly averages are arithmetically calculated on the basis of business days.

f. Repo Market and Rates

Repo is short for repurchase agreement. Repo is used as a form of overnight borrowing. Repo

is a very short-term money market, range from overnight to 30 days. Repos are well known

because they can virtually eliminate credit problems.

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Figure 4.4. General Framework of Repo Transaction in Japan

Source: Waseda (2014)

Repo (repurchase agreement) rate figures are averages of indicative rates reported by

counterparties to the Bank of Japan's purchases/sales of JGSs under repurchase agreements

operations.

g. Commercial Money Market

Commercial paper is an unsecured, short-term loan issued by a corporation, typically for

financing accounts receivable and inventories. Commercial paper usually issued at a discount

indicating current market interest rates. The maturity on commercial paper is usually no

longer than nine months, with the average being one until two months. Commercial paper is

said to be a very safe investment because financial situation of company can be easily

anticipated. Commercial papers are usually issued by companies with high credit ratings and

credit worthiness. Commercial market is relatively new to Japan. The reason Bank of Japan is

buying commercial paper is to facilitate its corporate financing, making outright purchases of

corporate bonds with maturity up to a year.

h. Derivatives Markets

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The notional amounts for the OTC contracts gain total 18.8 trillion U.S. dollars and 3.9

trillion U.S. dollars for the Exchange-traded contracts. On the other hand, Credit derivatives

contracts gain a value of 1.1 trillion U.S. dollars. The IR swaps dominate the percentage of

shares of OTC contracts as of end-June 2013. The IR futures dominate the percentage of

shares in Exchange-traded contracts as of the end-June 2013. CDS dominate more than 90%

shares in credit derivatives contracts.

Figure 4.5. The Domination of CDS in Japan’s Credit Derivatives Contracts

Source: Bank of Japan (2013)

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4.11 REPUBLIC OF KOREA


4.11.1.1 Stock Market The KRX has 1,796 companies listed in its stock market with the total market capitalization

is 0.88 of total GDP.

a. Exchange Traded Fund

Table 4.5. Current State of ETF Market in Korea

Source: KRX (2013)

b. Trading system

Since the stock market trading system was applied in order to promote investor convenience,

the ELW trading method is nearly identical to the stock trading method in general.

Trading Hours 09:00~15:00, After-hours market *

Quotation price

unit KRW5

Trading unit 1 share

Daily price change

limit + 15% *

Type of order Limit, market, Conditional limit, Immediately executable limit, Best

limit *

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Trading Hours 09:00~15:00, After-hours market *

Short selling Allowed. Unlike the stock market, short selling at prices lower than

the price just before is allowed.

* Identical to the stock market

Source: KRX (2013)

c. ETF Price

Since net asset value exists for ETFs, ETF prices form much in the same way as net asset

value for 1 ETF share. However, since trust management companies plan for the net asset

value of 1 ETF share to become the price found by multiplying the uniform ratio to the index

tracked by the ETF, ETF prices eventually form like the prices found from multiplying the

uniform ratio to the tracking index.

For example, for KODEX 200, the ratio concerning the KOSPI 200 index is 100 times;

therefore, if the current index is 180.00, the price would form in the vicinity of KRW18,000

(100 times the index).

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Table 4.6. Price Multipliers for Product Indices in KRX

Product Tracking

index Multiplier Product

Tracking

index Multiplier

KODEX

200 KOSPI200 100

KODEX

Semicon

KRX

Semicon 10

KOSEF 200 KOSPI200 100 TIGER

Semicon

KRX

Semicon 10

KODEX

KRX 100 KRX100 1 KOSEF IT KRX IT 10

TIGER

KRX 100 KRX100 10

KODEX

Banks KRX Banks 10

KODEX

Star

STAR

INDEX 1

TIGER

Banks KRX Banks 10

KODEX

Autos KRX Autos 10

KOSEF

Banks KRX Banks 10

Source: KRX (2013)

d. Settlement System

1. Settlements for ETFs occur on the 2nd day (T+2) and the method is the same as for

ordinary stock settlements. Therefore, the delivery of trading prices occurs on the 2nd day

reckoned from the day trading is realized.

2. Since ETFs are all deposited at Korea Securities Depository, receipt and delivery of

ETFs are accomplished through the exchanging of accounts among securities firms.

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Figure 4.6. Settlement Flow Chart Procedures in ETF Products

Source: KRX (2013)

4.11.1.2 ELW

a. Trading system

Since the stock market trading system was applied in order to promote investor convenience,

the ELW trading method is nearly identical to the stock trading method in general.

Trading hours 09:00~15:00

Quotation price unit KRW5

Trading unit 10 shares

Price change limit The application of price change limits are removed in

consideration of high price fluctuations.

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Trading hours 09:00~15:00

Type of order Limit

Exceptions to Trading

Conclusions

Removal of applications for large quantity of reports, large

quantity during trading hours, basket, after-hours trading, etc.

Trading halt

ㆍThe ELW Market stops and resumes when stock market

trading stops (CB) and resumes

ㆍELW stops and resumes when underlying stock trading stops

and resumes

ㆍStop and resume when ELW stocks or trading volumes change

(are expected to change)

drastically with relation to ELW issuing companies

Substitute security Excluding designations based on the possibility of sharp declines

in guarantee values that follow high price fluctuations.

Short selling Not allowed

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b. Settlement System

1. Settlements for ELWs occur on the 2nd day (T+2) and the method is the same as for

ordinary stock settlements. Therefore, the delivery of trading prices occurs on the 2nd day

reckoned from the day trading is realized.

2. Since ELWs are all deposited at Korea Securities Depository, receipt and delivery of

ELWs are accomplished through the exchanging of accounts among securities firms.

Figure 4.7. Settlement Flow Chart Procedures in ELW Products

Source: KRX (2013)

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4.11.2 KRX DERIVATIVES PRODUCTS

1. Stock Index Products: KOSPI 200 Futures, KOSPI 200 Options, STAR Futures

2. Individual Equity Products: Individual Equity Futures, Individual Equity Options

3. Interest Rate Products: 3 Year Korea Treasury Bond Futures(KTB3), 5 Year Korea

Treasury Bond Futures(KTB5), 10 Year Korea Treasury Bond Futures(KTB10), MSB

Futures

4. Currency Products: USD Futures, USD Options, Japanese Yen Futures, Euro Futures

5. Commodity Products: Gold Futures, Lean Hog Futures

4.11.3 BOND MARKET

Bonds in Korea Republic could be classified into two kinds, they are: government bond and

corporate bond. Government bond market could be divided into National Housing Bond and

Seoul Metropolitan Subway Bonds. These also involve monetary stabilization bonds of the

central bank and financial debt letter issued by the Korea Development Bank. Government

bonds are the most liquid in trading and form base for benchmark yield of bonds.

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CHAPTER V

SWOT OF CAPITAL MARKETS IN THE ASEAN+3 REGION

5.1 Countries’ Capital Markets SWOT Country Strengths Weaknesses Opportunities Threats

Brunei Darussalam

(i) Availability of liquidity. (ii) Readily available capital market intermediaries to support the growth of the market.

(i) Small number of domestic securities offered as investments means to the domestic market forces;

(ii) Lack of local expertise in the capital markets industry forces a lot of activities being outsourced.

(i) Further enhancement and growth of the capital markets. (ii) More investment avenues offered in this country that can cater domestic investors. This will stimulate the investment activities within Brunei. (iii) Development of local investment companies where compliance standards are increased to an international level. (iv) Development of Islamic Capital Markets will further enhance the development of Islamic finance in Brunei which is another stepping stone for Brunei to achieve its objective as an Islamic Financial Center.

(i) Financial Institutions in Brunei will take time to adjust to the Securities Markets Order. Entity segregation of capital markets business from the banking business of financial institutions may increase costs in the short-term. Some financial institutions may avoid the high costs by closing down their capital markets business. (ii) With the current structure of the private sector, companies may not have incentives to raise funds from the public.

Cambodia

(i) Developing infrastructure (more advanced than the past)

(ii) Strong disclosure requirements

(i) Limited infrastructure and products (only one exchange in Cambodia)

(ii) Newly established

trading facilities (iii) Limited number of

companies listed.

“Joint Venture Agreement” between the Royal Government of Cambodia represented by the Ministry of Economy and Finance and Korea Exchange could produce more advanced technology and systemic transfers.

Fast capital market development outside the countries, strict competition

Indonesia

(i) Robust capital market regulations.

(ii) Robust effort by OJK to enhance the openness of listed firms.

(i) Relatively small number of companies listed.

(ii) Limited products.

Market integration effort in the ASEAN+3 region

(i) Turkey policy to raise interest rates may cause capital withdrawal from emerging countries, including Indonesia.

(ii) Tough competition among countries and regions.

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Lao PDR More developed capital market infrastructure than in the past.

(i) Lao PDR is the one of least developed financial systems in the ASEAN+3 countries.

(ii) Securities and capital activities are still not well structured.

Market integration effort in ASEAN+3 region

Tough competition among countries and regions in the future.

Malaysia (i) High market capitalization.

(ii) Various products.

Relatively unpractical regulations on the Deposit Insurance Corporation.

The recent trend of Islamic finance to increase diversification of products.

(i) Stiffer competition among countries and regions.

(ii) Uncertain global

economic condition.

Myanmar Is still developing a capital market.

Cooperation with other countries.

Tough competition.

Phillipines (i) Sound regulatory framework that generally conforms with global best practices

(ii) Stable inflation environment

(i) Low liquidity (ii) Small number of

product offerings, listed companies, and corporate bonds

(iii) Lack of, or undeveloped market maker program, repo market, securities borrowing and lending program

(iv) Small number of retail investors

(v) Regulations allow for issuance of certificated equities which bar the full dematerialization of equities trading

(vi) Lack of regulations to cover new products and services

(vii) Friction costs (viii) Multiple

regulators (ix) Low savings in

the economy

(i) Since this market is still developing, there is a great opportunity for expansion by increasing investor base and launching new securities products and services.

(ii) The dismantling of the Special Deposit Accounts (SDA) with the Central Bank will increase liquidity in the market and can be channeled into financing the capital raising activities of firms.

Lack of government support, especially in the area of rationalizing the tax environment for investment and the securities sector.

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Singapore (i) A modern capital market.

(ii) Very high (the highest)

market capitalization. (iii) One of the most

developed capital markets in the world.

(i) SGX's dual role as a market operator as well as regulator could raise the conflict of interests.

Capital market integration among the ASEAN+3 countries.

Uncertainty in global economic condition.

Thailand (i) According to the Global Competitiveness Index 2012–2013 (source: WEF Report), the stability of Thai’s macroeconomic environment continues to improve— albeit marginally (27th, up one spot)—as the budget deficit and the debt-to-GDP ratio declined. (ii) The SEC of Thailand has formed its key roles based upon International Organization of Securities Commissions’ principles of securities regulations, including protecting investors, ensuring that markets are fair, efficient and transparent, . reducing systemic risk, and investor education. In addition, the World Bank’s report – The Report on the Observance of Standards and Codes – finds that Thailand obtained a score of 82.83 points (of 100), receiving the highest score in the disclosure and transparency areas (iii) The attractiveness of capital markets that have various composition of business sectors with majority in commodity sector, the highest liquidity with an average volatility compared with peers.

In Thailand, the financial systems are developed from the bank-based system. Hence, the role of capital markets still has some limitations such as the limited number of listed companies and the low penetration rate compared with peers.

The rise of emerging Asia and global connectedness accelerates fund flows rapidly, especially into stock and bond markets, thus offering outstanding returns in the region.

Liberalization of capital flows and competitive pressure.

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Vietnam . (i) Is currently developing a capital market

(ii) Is one the least

developed financial markets in the region.

Capital market integration effort among the ASEAN+3 countries and a positive trend in Vietnamese real sectors.

Uncertain global economic condition and tough competition among countries and regions.

People’s Republic of China

(i) A relatively developed capital market.

(ii) Robust effort of market

liberalization, with high government support.

(i) Liberal ownership ideology and effective institutional operations have to be still improved, for current regulations render some disadvantages to the operations of open and supportive capital markets.

(ii) A relatively small

market capitalization.

Robust development in the Chinese industry sector.

Uncertain global economic condition.

Japan A modern capital market, highly developed infrastructure.

Too high a saving rate rather than investment in capital markets.

Capital market integration effort among the ASEAN+3 countries.


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South Korea (i) Effort to build more highly developed infrastructure.

(ii) Relatively high

market capitalization.

Compared to the Korean real sector, its capital markets are still lagging behind.

Capital market integration effort among the ASEAN+3 countries.


5.2 Final Conclusion - SWOT in the ASEAN+3 Capital Markets This section discusses the strengths, weaknesses, opportunities, and threats of the ASEAN+3

capital markets to gear toward market harmonization and integration in the region.

Strengths:

1. There are great efforts and awareness by all member countries to develop their capital

markets.

2. There have been strong willingness by member countries to embark on capital market

cooperations for the last decade.

3. Mobility of funds and professionals have been extensive for the last decade.

4. ASEAN countries’ economic growth has been robust and sturdy in the wake of the

Asian crisis of 1998.

Weaknesses:

1. There are sheer differences among countries in the ASEAN+3 region pertaining to

political system, economic development, and sosio-cultural ambience.

2. There are, unfortunately, still inequalities among countries in the ASEAN+3 region

with regard to capital market development, readiness of infrastructure, and the quality

of human capital if the capital markets are to be harmonized and integrated.

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3. Current circumstances indicate that member countries have enacted and administered

so much diverse regulations and regulators. Moreover, law enforcement is of various

degrees in the ASEAN+3 region.

4. Traditionally, risk appetite of the region’s society is relatively low. Citizens are more

inclined to save in the banking system rather than invest in capital market products.

Opportunities:

1. The realization of the ASEAN Economic Community (AEC) in 2015 will manifest in

a huge ASEAN market. This would be enormous opportunities for capital market

participants with respect to portfolio diversification, market expansion, and capital

movement.

2. Economists and business community deem the 21st century as the Asian awakening

era, indicating that the shift in capital flows will be (and actually have been)

magnificent to the Asian region.

3. Continuing the second opportunity argument above, potential capital sources from

outside the ASEAN+3 region are very lucrative and readily available, especially in

the wake of the European market debacle.

Threats:

1. There have been historically volatilities in financial markets in the ASEAN+3 region,

which might endanger the stability and sustainability of the region’s financial

systems.

2. The fear for contagion effect from other regions that are experiencing financial crisis

is always prevalent.

3. Tapering by the U.S. Federal Reserve has reduced capital inflows into the ASEAN

markets.

4. The risk of financial instability and crisis is still intact due to the still-to-be-enhanced

political and economic foundations of the ASEAN+3 countries.

5. The fledgling ASEAN+3 integrated capital markets will be competing with other

economic communities and integrated capital markets. For instance, competitive

pressure will come from the NYSE-Euronext in relation to capital attractiveness.

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All countries in the ASEAN+3 regions have made effort to develop their capital markets

to be ready for the capital market integration. The robust effort includes the development

of infrastructure, regulations, investor protection, and information and disclosure

requirements. Nevertheless, some countries such as Cambodia, Myanmar, Lao, and

Vietnam that are the least developed capital markets seem less ready for market

integration. As a consequence, they need support, not only from countries cooperating

with them, but also from market participants in their own countries. For instance, the few

number of firms listed in Cambodia are still a hindrance to the countries’ capital market

development.

The integration among the ASEAN+3 countries is still very possible but requires

additional work and effort. In short and medium terms, the region has to address the

issues of sufficient capital market infrastructure, comparable capital market products, and

high caliber capital market professionals in the region. In the long run, if the equal and

leading development of infrastructure has been attained, capital market integration in the

region is on the way to be capitalized on.

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