HSBC Asia-Pacific Rates Guide 2011

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Overview 1

Market profiles 9

China 10

Hong Kong 18

India 24

Indonesia 30

Korea 36

Malaysia 42

Philippines 48

Singapore 54

Sri Lanka 60

Taiwan 66

Thailand 72

Vietnam 78

Australia 84

New Zealand 90

Japan 96

Appendices 103

Disclosure appendix 111

Disclaimer 112

Contents

We would like to thank Ronald Man, our graduate trainee, as well as our HSBC colleagues throughout Asia-Pacific for

their valuable contributions towards this bond guide.

1

Asia-Pacific Rates Guide 2011 Global Fixed Income Strategy December 2010

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Executive summary The Asian local bond market has firmly established itself as an asset class in its own right. Global excess liquidity

and economic decoupling from Western Europe and the US has encouraged strong inflows into Asia-Pacific aided by

portfolio diversification benefits, higher yields and currency appreciation prospects. The development of Asian

markets has progressed markedly and recent developments now include, among others, enhanced access to CNY via

Hong Kong’s CNH market as well as new futures contracts deepening Thai and Korean rates markets. In response to

significant foreign inflows, however, some countries such as Thailand, Korea and Taiwan have implemented capital

control measures, though there is little evidence of an initial material impact on net outflows.

HSBC conducted a survey to analyse key factors that are most important to Asian sovereign bond investors and its

results are presented in the first section of the Overview. The questionnaire was sent to a large sample of global and

emerging market (EM) dedicated bond funds located in the US, Europe and Asia between mid-November and December

2010. There are three key findings: First, investors intend to increase their portfolio allocation in Asian local bonds,

with 64% of those surveyed indicating plans to allocate more than 10% of their portfolio exposure in Asian bonds.

Second, the three markets with the most investment opportunities in 2011 are China, Korea and Indonesia, according

to survey respondents. Third, ‘capital controls’ and ‘liquidity and volatility’ are the main obstacles for investors

accessing Asian local bond markets.

HSBC’s Asian Local Bond Index (ALBI) has become a benchmark index for Asian bonds, delivering superior

performance since 2001. The second section of the Overview examines its performance in 2010, with three main

findings: First, ALBI delivered superior returns (10.4%) versus both US Treasuries (5.3%) and European government

bonds (0.8%) during 2010. Second, high-yielding regions, such as India (with an interest income of 7.3%),

outperformed, as higher accrual returns offset capital losses to generate a positive local currency return of 4.9%. Third,

ALBI outperforms EFFAS Global in both the short (12 months) and long run (5 years) based on the Sharpe ratio.

We conclude that investors want to further tap into the Asian local bond market. The portfolio diversification attributes

of this region, in the context of a global bond portfolio, support this preference. The third section of the Overview

analyses the dynamics of correlation changes since 2000. Our analysis shows that emerging market (EM) bonds,

including allocation to Asian local bonds, provide a significantly positive contribution to a global portfolio.

Market profiles follow this Overview, containing specific market developments as well as useful technical

information, including regulatory changes and market liquidity. This 2011 edition includes three new countries:

Australia, New Zealand, and Japan.

Overview

The strong development of emerging Asian bond markets has resulted in

market capitalisation growing to USD6.1trn (from USD5.3bn at end 2009)

HSBC’s survey indicates that investor appetite for Asian bonds remains

high for 2011, as portfolio allocation into Asian exposure is set to increase

Excess liquidity and economic divergence have generated sizeable

foreign inflows, prompting the imposition of capital controls

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HSBC survey indicates continued preference for Asian bonds HSBC conducted a survey to analyse key factors that are important to Asian sovereign bond investors. The questionnaire

was sent to a large sample of global and emerging market (EM) dedicated bond funds located in the US, Europe and Asia

between mid-November and December 2010. There are three key findings: (1) investors are set to increase their portfolio

allocation in Asian local bonds, (2) China, Korea and Indonesia are the most preferred markets for 2011 and (3) capital

controls and liquidity and volatility are cited as the main obstacles for investors accessing Asian local bond markets.

Allocations into Asia: Fundamentals become increasingly important

To gauge the prevalence of Asian local bond investments, funds participating in the survey were asked to indicate

how much of their portfolio is allocated into Asian bonds: under 3%, 3-5%, 5-10% or over 10%. A reasonably large

proportion have allocated over 10%, and this proportion is set to increase by 3ppt to 64% in 2011 (Figure 1). The

survey also indicated a decline in the proportion of investors allocating under 3% of the total portfolio in Asian

bonds, to 14% from 29%, between 2010 and 2011. Higher prospective portfolio allocations point to expectations of

continued inflows into Asian bonds rather than liquidation. Re-allocation into Asian bonds appears to be justified

mainly by a strong Asian fundamental outlook, which was ranked as the most important driver by 40% of respondents,

followed by developed market rates, FX outlook and attractiveness versus other EM local bond markets.

Local currency bonds are strongly preferred to USD-denominated Asian sovereign bonds. In addition to superior carry,

the preference for local currency bonds is likely motivated by a perceived undervaluation of Asian currencies. For

this reason, 34% of respondents ranked potential FX returns among the most influential factors in deciding allocations

within the Asian local bond market universe, followed by local capital gains, local carry return and weightings in

benchmark indices.

Most preferred bond markets: China, Korea, and Indonesia

The top three preferred Asian local bond markets that present the best opportunities in 2011, according to the survey,

are China, Korea and Indonesia (Figure 2). China was ranked the top Asian local bond market for 2011 by 26% of

respondents, having laid the foundation for international use of CNY and following market developments in the offshore

CNY (‘CNH’) market during 2010. The prospect of additional monetary tightening measures in response to inflation

is largely incorporated into China’s onshore government bond market, giving rise to potential opportunities for market

participants searching for yield. As mentioned in the China market profile section, however, bonds issued in the Hong

Kong CNH market are generally issued at a substantial yield discount versus onshore, as investor demand has

outstripped supply, influenced by the prospect of an eventual CNY revaluation.

Figure 1. Investors indicate higher portfolio allocation to Asian bonds

Figure 2. China, Korea and Indonesia are the most preferred Asian bond markets (Rank 1 being the most preferred)

2010 allocation Projected 2011 allocation

Under 3% 3-5% 5-10% Over 10%

0%

10%

20%

30%

40%

50%

60%

CN

Y

HKD INR

IDR

KRW

PHP

SGD

LKR

TWD

THB

VND

% o

f res

pond

ents

Rank 1 Rank 2 Rank 3

Source: HSBC Source: HSBC

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Korea is expected to sustain investor interest into 2011, as 54% of respondents ranked it as a top three market on a

par with China. Korean Treasury Bonds (KTBs) and Monetary Stabilisation Bonds (MSBs) may continue to be

dictated by developments in the areas of macro-prudential policies and geopolitics, but a potential cheapening of

valuations as a result of these developments provides opportunities to establish long positions. Relatively steep

curves in Korea are also likely to entice duration demand. Moreover, as the Korean rates market is one of the most

developed and accessible in Asia, there is a diverse range of rates and FX hedging instruments for investors.

Indonesia remains attractive for Asian bond investors, capturing 17% of votes for the market with the best

opportunities in 2011. This is attributable to persistently high fixed income returns over 2009 and 2010 of 22% and

20%, respectively, in local currency terms only. Closely following Indonesia, India was ranked the top Asian bond

market by 23% of those surveyed. Opportunities in India are partly a result of high relative yields, traditionally low

correlation versus EM Asia and a low foreign investor base, but these advantages are somewhat hampered by an

aggregate foreign investment cap even though the USD10bn-increase in the foreign institutional investors (FIIs) limit

on government and corporate bonds is seen as a positive step.

Obstacles to investing in local Asian bonds: ‘capital controls’ and ‘liquidity and volatility’

The threat of capital controls as a response to strong inflows into Asian local bond markets is the key barrier for

investors according to the survey. Around 34% of total respondents indicated capital controls as the most significant

obstacle, followed by liquidity and volatility, tax and regulations, political risk and benchmark restrictions (Figure

3). During 2010, Thailand, Korea and Taiwan have introduced measures to stem capital inflows. In October 2010,

Thailand instituted a 15% capital gains tax on government bond investments by foreign investors. At the time of

writing, Korea is on the cusp of repealing tax exemptions previously enjoyed by foreign bondholders. In November

2010, Taiwan imposed a 30%-cap on fixed income investments as a proportion of foreign investors’ total portfolio.

Liquidity & volatility is the primary concern for 31% of survey respondents.

Funds sailing from Western Europe into emerging Asia on a fundamentals current

Since November 2008, according to the Emerging Portfolio Fund Research (EPFR), global bond funds have been

reducing their portfolio allocation from developed Europe whilst simultaneously increasing exposure to emerging

Asia (Figure 4). Allocations into emerging Asian bonds increased from 3.4% to 5.2%, and those for developed

Europe fell from 34.9% to 30.2%. On the back of relatively strong Asian fundamentals, HSBC’s survey results

indicate that these trends are likely to continue into 2011.

Figure 3. Capital controls remain the biggest obstacle perceived by investors

Figure 4. Global funds shift their portfolio allocation from developed Europe into Emerging Asia

0%

10%

20%

30%

40%

Liquidity

& v ol.

Political

risk

Capital

control

Tax &

reg.

BM

restriction

% o

f res

pond

ents

25

30

35

40

45

Jan-08 Dec-08 Nov -09 Oct-10

%

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

%

Developed Europe (LHS) Emerging Asia (RHS)

Source: HSBC Source: HSBC, EPFR

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Performance of the HSBC ALBI ALBI delivered superior returns versus other markets during 2010

High-yielding regions continue to outperform with higher accrual returns

ALBI outperforms EFFAS Global both in the short and the long term, based on Sharpe ratios

The HSBC Asian Local Bond Index (ALBI) outperformed the developed bond indices, generating superior returns of

10.4% (6.2% and 4.2% accounted by fixed income and FX, respectively) in 2010 to 17 December, versus 5.3% and

0.8% delivered by US Treasuries and European Government bonds, respectively. This is an outperformance

compared with 2009 as well, when ALBI generated around 7.17% in total returns. In general, all the regional markets

outperformed the 2009 returns (Figure 5), in part as a consequence of stronger capital inflows from developed markets.

Indonesian government bonds were the best performers for the third consecutive year, returning 20% in local currency

and 24% in USD terms.

The HSBC ALBI tracks the total return performance of a bond portfolio, which consists of local-currency denominated,

high-quality and liquid bonds in Asia ex-Japan. The ALBI includes bonds from the following countries/regions:

China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand. For

more information including country weights derivation, see ALBI factsheet.

Return attribution and analysis

Total returns can be dissected into individual components: FX gains/losses, capital gains/losses, and accrual returns

(Figure 6). During 2010, all the regions generated positive FX returns, with Thai government bonds delivering the

most currency gains (around 10%). In terms of capital gains and losses, Indonesia and Philippines generated the

highest capital gains (around 12.1% and 6.3%, respectively). Increased foreign participation in Indonesia and stronger

domestic demand in the Philippines helped lower yields. Meanwhile, Indian government bonds suffered the largest

loss (2.5%), primarily on the back of heavy bond supply and worsening liquidity conditions.

The benefits of high interest income can be seen clearly in markets such as India, where capital losses were more than

offset by a higher interest accrual return, to generate a positive total return of 4.9% year-to-date. High-yielding markets

such as Indonesia, India and the Philippines continue to generate highest interest income (10.4%, 7.3%, and 6.0%

respectively) while low yielding regions such as China, Taiwan, Hong Kong, and Singapore, as expected, delivered

relatively low accruals (3.2%, 2.5%, 3.1%, and 2.9%, respectively). In addition, the mid-yielding markets, such as

Korea, Malaysia, and Thailand, generated modest accruals of around 4.7%, 3.9%, and 4.1%, respectively.

Figure 5. Fixed income and FX returns Figure 6. ALBI return attributes

-10%

0%

10%

20%

30%

40%

JPY

AUD

CN

Y

HKD IN

R

IDR

KRW

MYR PH

P

SGD

TWD

THB

Ret

urn

Return FI y-t-d Return FX y-t-dReturn FI y-t-d 2009 Return FX y-t-d 2009

-5

0

5

10

15

20

25

30

CN

Y

TWD

HKD

SGD

KRW

MYR TH

B

INR

IDR

PHP

Tota

l ret

urn

(%)

Capital gains Interest accruals FX gains

Source: HSBC, Bloomberg Source: HSBC

http://www.hsbcnet.com/treasury/attachments/markets/pdf/albi_factsheet.pdf

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Performance during 1H10 exceeded that of 2H10 in most of the regional markets. In terms of capital gains, India was

the only market that slightly underperformed during 1H10, with capital losses of 0.45%. However during 2H10, six

markets (China, Singapore, India, Hong Kong, Thailand, and Taiwan) suffered significant capital losses (2.9%,

2.4%, 2.1%, 1.9%, 3.1%, and 0.1%, respectively). FX returns were also relatively weak during this period, with

regions such as Indonesia and China registering relatively suppressed gains of around 1% and 2% respectively. Even

with such capital losses, total returns were positive, with the exception of China, which generated a total return of

negative 1.3%. The primary reasons for such underperformance during the second half were the correction in US

Treasuries, inflation uncertainty, and quantitative tightening by the PBoC.

Varying risk and return profiles in ALBI

Higher returns offered by Asia Local markets are often characterised by higher volatility and risk (Figure 7). As

illustrated in Figure 7, the two best-performing assets in 2010 – Indonesia and the Philippines – also have the most

volatile returns (32.2% and 11.1% in annualised terms, respectively). By contrast, low-yielding regions such as

Singapore and China delivered lower returns with less volatility (2.8% and 1.6%, respectively). This should not

imply, however, that higher returns of ALBI will also be associated with higher risks. The natural diversification

benefits offered by an index comprising a variety of asset classes reduce the volatility and increases the return of the

ALBI. In a global context, the addition of Asian local government bonds to a global bond portfolio could result in an

improvement in the risk-return profile.

ALBI outperformance versus developed bond markets

In 2010, ALBI has outperformed most of the developed bond markets on a total return basis (Figure 8). Moreover,

Sharpe ratios suggest superior performance of Asian local bonds versus developed bond markets both in the short

and in the long term. Using the 5-year US Treasury rate as a risk-free rate for monthly returns during January 2001-

December 2006, the Sharpe ratio (measured as excess return per unit of risk) for ALBI is approximately 0.50 versus

0.12 for EFFAS Global Index. An even larger differential in Sharpe ratios (0.70 for ALBI versus 0.09 for EFFAS) is

observed using data for the past 12 months, which may be explained by reduced EM volatility and higher return

because of consistent FII inflows.

Figure 7. Risk and volatility relationship (y-t-d 2010) Figure 8. ALBI outperformed developed markets during 2010

IDR

PHP

GRE

IREPOR

ESP

DEUUSD

HKD

KRW

CNY

M YRSGD

JPY

THB

INR

-20

-15

-10

-5

0

5

10

15

20

25

-5 5 15 25 35Volatil ity (%)

Ret

urn

(%)

0%

2%

4%

6%

8%

10%

12%

ALBI

US

Trea

surie

s

UK

Gilt

s

Euro

pe

Aust

ralia

Japa

n

Ret

urn

(%)

Source: HSBC, EPFR Source: HSBC, Bloomberg, EFFAS

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Asia local bond markets: Opportunities for diversification Emerging local bond markets have experienced a surge in foreign capital inflows. In addition to the prospect of

higher total return, the demand for EM assets is likely to continue to increase on the basis of their diversification

benefits. In a majority of Asia EM markets, the Sharpe ratio (defined as excess return over the risk-free rate per unit

of risk) is above that of developed bond markets. This measure, however, often fails to highlight the precise

diversification benefits in the context of a global portfolio.

Efficient frontier – not Sharpe ratio – is a better guide for global allocation

A more appropriate technique for achieving higher return with reduced risk is to allocate the portfolio on the basis of

the efficient frontier, which represents the best possible return that can be generated given a specified number of

asset classes for the specified amount of risk appetite. This is achieved by making relatively large allocation to assets

that generate high returns but are weakly correlated with one other. The strategy not only achieves a higher return but

also reduces the portfolio’s systemic risk. But, as the global economy has become increasingly integrated in the last

decade, two questions relating to global asset allocation have emerged: (1) How are the benefits of an internationally

diversified portfolio affected in the event of a crisis? and (2) Do these potential benefits shrink over the time?

In the event of crises, diversification benefits are generally reduced because of higher correlation among the various

asset classes. To analyse the diversification attributes a heatmap of correlation between various government bond

markets is plotted using data during 2008 crisis. The regions of heat-map with yellow and blue colours indicate a

weaker correlation whilst the regions with red and orange colours highlight a stronger correlation. Figure 9 illustrates

clustering of higher correlation between regional bond markets between September 2008 and March 2009. Relatively

weaker correlation exhibited by Asian local bond markets, however, highlights the potential opportunity to diversify

systemic risks even during such periods. Divergent total returns generated by the ALBI index (+0.73%) and

developed bond markets in EFFAS global indices (-0.73%) during this period also reinforce diversification benefits.

Over a longer time horizon, it is logical to expect stronger correlation among different markets and hence a decrease

in return-to-risk ratio of a global portfolio. In Figure 10, the diversification benefits of Asian domestic bond markets

are highlighted by plotting returns per unit of risk observed at Maximum Sharpe Ratio (MSR) portfolio for two

portfolios representing global government bond markets and global government bond markets excluding Asia. As

indicated, the incremental benefits of adding Asia local bonds reduced somewhat during the 2008-2009 period which

witnessed the Lehman crisis. During 2004-2010, however, the potential benefits do not appear to be reduced,

suggesting that diversification benefits with dynamic allocations are sustainable over a longer period of time.

Figure 9. Clustering correlation during 2008 crisis (September 2008-March 2009)

Figure 10. Asia Local bonds continue to improve the risk-return attributes of the Global bond portfolio

UK US EU JP AU NZ CA PD CZ HU RSA CH HK SG KR MY TH PH IN ID

UK 1 0.22 0.78 -0.4 0.87 0.76 0.83 0.76 0.84 0.69 0.76 -0.1 -0.1 0.11 0.19 -0.1 0.18 0.54 0.08 0.58

US 0.22 1 0.62 0.3 0.41 0.65 0.39 0.52 0.42 0.69 0.41 0.24 0.44 0.79 -0.1 0.6 0.33 0.2 0.22 0.54

EU 0.78 0.62 1 0.11 0.96 1 0.83 0.91 0.93 0.96 0.92 0.23 0.32 0.6 0.42 0.44 0.55 0.51 0.45 0.81

JP -0.4 0.3 0.11 1 -0 0.12 -0.1 0.22 0.13 0.2 0.12 0.74 0.67 0.42 0.6 0.83 0.51 -0.2 0.74 0.14

AU 0.87 0.41 0.96 -0 1 0.95 0.9 0.93 0.96 0.92 0.97 0.16 0.23 0.38 0.51 0.29 0.53 0.61 0.43 0.8

NZ 0.76 0.65 1 0.12 0.95 1 0.82 0.9 0.92 0.96 0.91 0.24 0.33 0.63 0.4 0.45 0.55 0.48 0.45 0.8

CA 0.83 0.39 0.83 -0.1 0.9 0.82 1 0.9 0.83 0.88 0.93 -0 0.13 0.11 0.38 0.25 0.39 0.87 0.24 0.9

PD 0.76 0.52 0.91 0.22 0.93 0.9 0.9 1 0.96 0.95 0.96 0.38 0.47 0.34 0.58 0.46 0.64 0.66 0.58 0.82

CZ 0.84 0.42 0.93 0.13 0.96 0.92 0.83 0.96 1 0.89 0.93 0.4 0.42 0.37 0.58 0.31 0.63 0.51 0.58 0.69

HU 0.69 0.69 0.96 0.2 0.92 0.96 0.88 0.95 0.89 1 0.94 0.28 0.45 0.52 0.45 0.52 0.63 0.66 0.51 0.88

RSA 0.76 0.41 0.92 0.12 0.97 0.91 0.93 0.96 0.93 0.94 1 0.22 0.35 0.3 0.62 0.4 0.63 0.73 0.53 0.88

CH -0.1 0.24 0.23 0.74 0.16 0.24 -0 0.38 0.4 0.28 0.22 1 0.9 0.33 0.59 0.41 0.76 -0.2 0.89 -0.1

HK -0.1 0.44 0.32 0.67 0.23 0.33 0.13 0.47 0.42 0.45 0.35 0.9 1 0.33 0.52 0.45 0.89 0.09 0.87 0.13

SG 0.11 0.79 0.6 0.42 0.38 0.63 0.11 0.34 0.37 0.52 0.3 0.33 0.33 1 0.05 0.62 0.31 -0.2 0.32 0.33

KR 0.19 -0.1 0.42 0.6 0.51 0.4 0.38 0.58 0.58 0.45 0.62 0.59 0.52 0.05 1 0.46 0.73 0.29 0.86 0.41

MY -0.1 0.6 0.44 0.83 0.29 0.45 0.25 0.46 0.31 0.52 0.4 0.41 0.45 0.62 0.46 1 0.38 0.12 0.53 0.58

TH 0.18 0.33 0.55 0.51 0.53 0.55 0.39 0.64 0.63 0.63 0.63 0.76 0.89 0.31 0.73 0.38 1 0.32 0.92 0.36

PH 0.54 0.2 0.51 -0.2 0.61 0.48 0.87 0.66 0.51 0.66 0.73 -0.2 0.09 -0.2 0.29 0.12 0.32 1 0.11 0.79

IN 0.08 0.22 0.45 0.74 0.43 0.45 0.24 0.58 0.58 0.51 0.53 0.89 0.87 0.32 0.86 0.53 0.92 0.11 1 0.26

ID 0.58 0.54 0.81 0.14 0.8 0.8 0.9 0.82 0.69 0.88 0.88 -0.1 0.13 0.33 0.41 0.58 0.36 0.79 0.26 1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2004 2005 2006 2007 2008 2009 2010

Ret

urn

/ Ris

k ra

tio

Global government bond portfolio

Global ex Asia government bonds portfolio


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Resulting dynamics in the efficient frontier

The efficient frontier shows the optimal risk-return trade-off and is a result of minimising idiosyncratic risk by

exploiting correlations between assets to improve the risk-return trade off in a portfolio. Given changes in

correlation, diversification benefits from a global portfolio vary over time as the efficient frontier changes. Analysis

of the efficient frontier over last 5 years suggests a decreasing trend in diversification benefits. The Maximum Sharpe

Ratio (MSR) represents the highest mean-variance efficiency that can be achieved on an efficient frontier. Figure 11

shows both the MSR and Minimum Variance Portfolio (MVR) of a global portfolio has shifted down and right

respectively over 2004-10. In 2008-09 at the peak of the crisis, it was virtually impossible to achieve any return

without taking on approximately 5% risk. This directional movement indicates higher systemic risk as the coupling

of markets shrinks the benefits of diversification. Such shifts, however, can also be triggered by a crisis event. It is

therefore appropriate for investor to revise allocations actively according to market dynamics.

The apparent diminishing benefits from diversification questions the justification of its application. To examine this,

three different government bond portfolios were created using Asian Local Bond Indices (ALBI) and European

Federation of Financial Analysts Society (EFFAS) bond indices to act as proxy for global government bonds, global

ex-Asia government bonds and developed market government bonds. Three efficient frontiers representing each

portfolio are generated using the historical return and volatility data over last 10-years. Figure 12 shows the global

efficient frontier formed by adding Asia government bonds to the Global-ex Asia portfolio shifting significantly left

and upwards, dominating the other two frontiers by potentially yielding higher return for any level of risk.

One quantifiable measure of the benefits from an additional asset class into a portfolio is the change in MSR. ALBI

increased the maximum return that can be achieved on efficient frontier by around 200bp and the MSR by around

0.30. A second measure is the realised reduction in the MVP after adding a new asset class. The MVP reduced by

around 1.31% relative to global ex-Asia or developed market frontier. A third measure combines the previous two

methods to compute the Treynor ratio, which divides the MSR by a percentage increase in MVP. The Treynor ratio

for global portfolio is around 1.28% after the addition of ALBI which indicates significant diversification benefits.

The benefits of a global portfolio are anchored upon the correlation matrix of its assets. Strong quantifiable measures

indicate that local investors have a chance to improve the risk-return efficiency of their portfolios by investing in EM

assets, in particular Asia. In the event of clustered correlation similar to the 2008-09 crises, benefits from a global

portfolio may be severely impaired by strong systemic risk. It therefore remains critical to account for temporal

variations in the return vector and variance-covariance matrix in asset allocation to fully capture benefits of a

globally diversified portfolio.

Figure 11. Extreme risk-return trade off of global portfolio during peak of crisis

Figure 12. A global portfolio gives superior risk-return trade off (2001-2010)

0%

5%

10%

15%

20%

25%

30%

2% 7% 12% 17%Risk

Ret

urn

2004-2005 2006-20072008-2009 2009-2010

5%

7%

9%

11%

13%

15%

3% 7% 11% 15%Risk

Ret

urn

Global portfolio Global ex Asia portfolioDeveloped markets

Source: HSBC Source: HSBC, EFFAS, ALBI total return index

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Market profiles

10

Asia-Pacific Rates Guide 2011 China December 2010

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Market developments During 2010, China took significant steps towards

gradual capital account liberalisation and

internationalising the Chinese yuan (CNY). A rapid

succession of recent moves – CNY de-peg and

expansion of CNY trade settlement (June 2010), lifting

most restrictions on Hong Kong’s CNY business (July

2010), acceleration of offshore CNY bond issuance

(August 2010) and improved access to onshore bond

market (August 2010) – suggests that additional

measures aimed at opening both the offshore and the

onshore CNY markets are likely to intensify in the years

ahead. See The rise of the redback – A guide to RMB

internationalisation, 9 November 2010.

In July, the People’s Bank of China (PBoC) laid the

groundwork for an offshore CNY (“CNH”) interbank

market by allowing all companies to open offshore

CNY accounts without limits. Corporate, institutional

and retail investors may now transfer funds between CNY

accounts held at different Hong Kong banks for any

purpose. Previously, CNY funds were non-transferable

between entities outside China. Allowing banks to

circulate CNY among themselves (on behalf of retail as

well as corporate clients) facilitates the development of

an offshore CNY interbank market deposit base and

related investment and financial products. The result is

an expansion in the number of vehicles through which

foreign investors and enterprises can invest their CNY

earnings and funds, especially as trading volumes become

sizeable and the deposit base grows (approximately

CNY200bn as of November 2010).

Trade settlements with the mainland are cleared in Hong

Kong only through Bank of China (HK) Limited – the

designated trade settlement clearing bank – which is

subject to a total annual settlement quota (CNY8bn in

Aa3/AA-/A+China

China takes major steps to develop CNY market on- and offshore, laying

the groundwork for future internationalisation of the CNY

Foreigners may access a newly launched offshore, deliverable CNY

(“CNH”) market

CNH bond market develops rapidly during 2010, but supply is outstripped

by demand

Bonds outstanding Government bond maturity profile (as of July 2010)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Sep-02 Sep-04 Sep-06 Sep-08 Sep-10

USD

bn

0

10

20

30

40

50

60

% G

DP

Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)

1-3 y ears

20%3-5 y ears

12%

5-7 y ears

9%

Less than 1 y ear

30%

7-10 y ears

14%

Ov er 10 y ears

15%

Source: ADB Source: HSBC, Chinabond

http://www.research.hsbc.com/midas/Res/RDV?ao=20&key=GWt0eFMerf&n=282337.PDF

http://www.research.hsbc.com/midas/Res/RDV?ao=20&key=GWt0eFMerf&n=282337.PDF

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2010, quota for 2011 yet to be announced at the time of

writing) or any approved onshore bank (for example,

HSBC China), subject to limits set by the People’s Bank

of China (PBoC). In the future, approved onshore banks

(e.g. HSBC China) may be provided a similar quota set

by PBoC. In the event that the RMB conversion quota

allocated to the RMB trade settlement scheme runs out

(as happened in October 2010), emergency (trade

related only) access to a CNY200bn-swap line between

Hong Kong and China may be activated. Additionally,

repatriation of offshore CNY is only allowed for

participating Authorised Institutions (AIs) for the

purpose of settling trade specific transactions under a

trade settlement scheme first launched in July 2009. See

Hong Kong Economic Spotlight: Offshore renminbi

product take off, 22 July 2010 for more information.

The market for Hong Kong-issued CNY-denominated

(“CNH”) bonds rapidly developed in 2010, though

demand has outstripped supply. Foreign investors are

not subject to regulatory approvals in order to access the

offshore CNY market. The issuance process, however,

is still characterised by heavy regulatory barriers and

funding channels are asymmetrically tighter for CNY

flows into mainland China. Consequently, bonds are

oversubscribed with strong demand spilling into low

rated debt, resulting in a single-B rated bond from Galaxy

Entertainment receiving over 10x subscription in

December 2010 as the first high-yield CNH bond. Other

notable issues during 2010 include that of: Hong Kong

SAR-based Hopewell Highway Infrastructure (first non-

PRC corporate bond, July), Citic Bank (first certificate

of deposit, July), McDonald’s (first multinational bond,

September) and Asian Development Bank (first

supranational bond / 10yr bond / Hong Kong Exchange-

listed bond, October).

Since the first CNH bond issuance in 2007, the total

outstanding has reached CNY58bn at the time of writing.

This is equal to only 1/4,000 of the onshore interbank

market, indicating potential for market expansion. Gross

issuance is expected to increase over the next three years

given the tendency of CNH bond yields to trade well inside

onshore bonds and onshore deposit rates due to strong

demand. See RMB offshore bonds: Developments,

dynamics and outlook for more information.

In November 2010, China’s Ministry of Finance

(MoF) enhanced the CNH yield curve by issuing

CNY8bn in MoF bonds. The issues were in the 2, 3, 5

and 10 year tenors and were oversubscribed 10x. Market

demand resulted in a 2ppt primary yield discount versus

comparable onshore bonds. The establishment of a CNH

government curve is expected to serve as a benchmark

risk-free curve for future corporate bond issuance.

Access to the onshore CNY bond market has also

broadened. In August 2010, China allowed certain foreign

investors to access the CNY20trn-onshore interbank

bond market subject to approval and an investment quota

granted by the PBoC. Three types of investors – namely,

foreign central banks, CNY-clearing banks in Hong Kong

and Macau, and CNY-settlement banks – are now eligible

to access the onshore interbank market. The Qualified

China: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? NoEligible collateral for repos - For CB repos T-bonds- For interbank repos T-bonds, PBOC bills, financial bondsMark-to-market requirements - Banks? Yes- Insurance companies? No- Pension funds? No- Mutual funds? YesTaxation: Government bonds* - Onshore investors Tax exempt if held to maturity,

else 5% business tax- Offshore investors Same as onshore**Offshore investor access - Foreign ownership of government bonds CNY106bn (Oct-10)- As % of outstanding 0.6% of bond market (Oct-10)- Direct purchase? Yes (for QFIIs)- Subject to cap? Yes- Registration requirement? Yes- Access to onshore funding? No- Access to onshore FX hedging? No- Access to rates hedging (IRS, repo, futures)? Yes (NDIRS)Market liquidity statistics Treasury bonds - Daily turnover (LCbn) CNY20-30bn- Buying volume in a single day (USDm) (with minimal market impact)

USD10m

- Bid/offer spreads under normal conditions (bp) 8bpPBoC bills - Daily turnover (LCbn) CNY30-40bn- Buying volume in a single day (USDm)

(with minimal market impact) USD20m

- Bid/offer spreads under normal conditions (bp) 8bp

CNH bonds - Daily turnover (LCbn) CNY0.05bn- Buying volume in a single day (USDm)

(with minimal market impact) Variable

(eUSD0.8m for on-the-run)- Bid/offer spreads under normal conditions (bp) 30-40bp

*HSBC is not a qualified tax adviser. Consult a professional advisor for further guidance **Reducible by DTA Source: HSBC

http://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=ugOy-EOHOmBzjig3yhRrGuH&key=Mlf74nAc7e&n=273170.PDF

http://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=ugOy-EOHOmBzjig3yhRrGuH&key=Mlf74nAc7e&n=273170.PDF

http://www.research.hsbc.com/midas/Res/RDV?ao=20&key=8D6FYJfICx&n=286433.PDF


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Foreign Institutional Investor (QFII) scheme is the only

channel for the remaining foreign investors to access the

onshore market via the stock exchange. China’s onshore

interbank market accounts for more than 94% of trading

activity onshore, in contrast to the much smaller bond

trading volume on stock exchanges. See Hong Kong

Economic Spotlight: Completing the on/offshore RMB

circle, 18 August 2010 for more information.

New Credit Risk Mitigation (CRM) instruments

launched in November 2010. The new instruments are

essentially credit default swaps, using short-term bills,

mid-term bills and bank loans with maturities ranging

from 36 days to more than 26 months as underlying

assets. A total of CNY1.84bn CRM was launched and

20 deals were struck on the first day of trading. Only

authorised institutions may trade the new instruments,

including China Development Bank, most of the major

state lenders, joint-stock banks and the China units of

HSBC and Deutsche Bank.

Domestic banks are allowed to trade bonds on the

exchange from March 2010 subject to approval from

the China Banking Regulatory Commission (CBRC)

and the relevant stock exchange. Previously, bond

trading was permitted only in the interbank market.

Monetary policy While other central banks typically set short-term rates,

the People’s Bank of China manages monetary policy

both in the long term (e.g. setting 1yr benchmark

lending and deposit rates) as well as the short term

(rediscount rate). The PBoC also conducts open market

operations through repos, deposits, and the issuance of

PBoC bills. Though there are no explicit targets, the

PBoC has guided credit and money growth to control

inflation expectations.

Historically, the PBoC sets interest rates that are

divisible by 9bp as Chinese banks have used a 360-day

cycle to calculate interest rates rather than the 365-day

international norm. On 19 October 2010, the PBoC

hiked deposit and lending rates by 25bp, signalling a

move towards international standardisation.

Key policy rates

Rediscount rate: Interest rate charged to banks for

borrowing short-term funds. Bloomberg: CNDSC Index.

Time deposit and lending rates: Rate applied to bank

deposits and loans. Bloomberg: CNDR1Y Index (1yr

deposit), CHLR12M Index (1yr lending).

Reserve ratio: The PBoC may apply different levels of

required reserves to different domestic banks (e.g. large-,

medium- and small-size and rural banks). In addition to

setting the level of reserves, the PBoC may change deposit

rates on these reserves. Bloomberg: CHRRDEP Index.

PBoC bill yields: Domestic rates may be guided by the

PBoC through yield cut-offs for PBoC bills. Bloomberg:

CNBI3MO Index (90-day), The 90-day PBoC bill daily

fix rate is calculated as the average yield (excluding 25%

of both max and min) provided by more than 20 quote

banks. Reuters: CN3MNFIX=R.

USD/CNY fix: The fixing sets the midpoint for the

daily interbank trading band of +/- 0.5% around this

reference rate. Bloomberg: CNYMUSD Index.

Key market rates

7-day repo rate: The interbank benchmark rate and

primary fixing rate for both onshore and offshore swaps.

Bloomberg: RP07 Index (page CIRS). Reuters:

CN7DRP=CFXS.

Shanghai Interbank Offer Rate (SHIBOR):

Weighted average of offered rates of domestic banks for

a range of tenors (overnight to 1yr). Bloomberg:

SHIF3M Index (3mth).

USD/CNH: Exchange rate for Hong Kong deliverable

Chinese yuan. Bloomberg: CNH Curncy.

Fixed income instruments The Chinese bond market has grown to a market

capitalisation of USD2.8trn (52.6% of GDP), making it

the largest local bond market in Asia outside of Japan.

Approximately 56% of the bond market is composed of

government bonds (including Treasury bonds and PBoC

bills), 26% are quasi-government bonds (financial

bonds issued by state policy banks) and the remaining

17% is accounted for by private sector bonds (mostly

corporate bonds and MTNs).

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Onshore CNY bonds by type (total: CNY19.3trn)

PBoC bills

23%

Other

8%MTNs

7% Corporate

bonds

7%

Financial

bonds

26%

Gov ernment

bonds

29%

Source: HSBC, Chinabond

There are 61 government bond underwriters, including

HSBC. More than 90% of bond trading activity takes

place in the interbank market. Key participants in the

bond market include commercial banks, policy banks,

and national social security funds. Participation by

institutional investors such as mutual funds, securities

companies and insurance companies has also increased.

There are 54 PBoC open-market-operations primary

dealers, including HSBC, where the PBoC issues PBoC

bills and other money market instruments twice a week

to control the liquidity of the onshore funding market.

At the moment, there are issuances of 3mth, 1yr and

3yr, but issuing plans will be changed subject to the

PBoC’s overall sterilization strategy.

Offshore CNY cross-border participating banks investing

in the onshore interbank bond market must invest

through a licensed agent for clearing, in accordance to

PBoC regulations introduced in August 2010. There are

45 licensed clearing agents, including HSBC. Offshore

banks that are qualified and also interested in investing

in the CNY bond market must file an application with

the PBoC and receive an investment quota in advance.

Foreign investment by means of QFII is relatively

small, at USD16bn as of October 2010 (0.6% of the

bond market). QFIIs may invest in A-shares, government

bonds, corporate bonds, convertible bonds and warrants

listed on China’s stock exchanges, and other financial

instruments as approved by the CSRC.

Bonds

Treasury bonds, commonly referred offshore as

Chinese government bonds (CGBs), are issued by the

Ministry of Finance (MoF) as the government’s main

debt instrument. Treasury bonds are sold in scripless

form through Dutch-style auctions to government

underwriters. Maturities typically range between 1yr

and 10yr but are increasingly available in longer-term

tenors (e.g. 15yr, 20yr, 30yr and – since November

2009 – in 50yr).

PBoC bills are issued by the PBoC to manage liquidity

and sterilise FX operations. They are sold in scripless

form via a Dutch auction. Available maturities range

between 1m and 3yr. The volume and frequency of

PBoC bill issuances have risen sharply due to persistently

high balance-of-payments surpluses. Active trading in

PBoC bills makes it – particularly the 3yr – a useful

benchmark for money market rates.

Corporate debt is issued by firms approved by the

National Development and Reform Commission

(NDRC). Corporate debt includes Commercial Paper

(CP) and Medium Term Notes (MTNs). They are sold

by book-running. Maturities vary according to business

needs and typically range between 3 and 30 years.

Financial bonds are issued by corporate firms and

underwritten by banks and leading securities firms. The

main type of financial bonds are policy bank bonds that

are issued by the three policy banks backed by the

government (China Development Bank, Export-Import

Bank of China and Agricultural Development Bank of

China) for the purpose of financing key national projects

that are not covered by the national budget. Financial

bonds are sold via an electronic auction at the China

Government Securities Depository Trust and Clearing

Company (CDC).

Hong Kong-issued CNY-denominated (“CNH”)

bonds were first issued in 2007, but the market

experienced rapid growth in 2010 due to market

liberalisation measures that fostered the growth of an

offshore CNY market that is deliverable, convertible

and transferable.

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Relative to the onshore CNY market, the CNH bond

market is characterised by shorter duration, generally

higher credit quality, lower yields, and very thin liquidity.

The average tenor is 1.5yr as of December 2010 with over

90% of bonds having a single-A rating or higher. Yields

are currently much lower than their onshore CNY bonds

and offshore Eurodollar Chinese bonds counterparts, but

estimated turnover is only CNY50m per day, with bid-

offer spreads of 20-40bp compared with 10bp and 15bp for

onshore government and corporate bonds respectively.

Offshore CNY bonds can be settled via the Central

Monetary Unit (CMU) under HKMA, as well as the

international clearing companies Euroclear/Clearstream.

See RMB offshore bonds: Developm ents, dynamics and

outlook, 13 December 2010 for further details. As of

December 2010, CNH bond supply stood at CNY58bn.

Derivatives

An onshore and offshore market exists for CNY interest

rate swaps (see table China: IRS and CCS markets).

Onshore IRS is a relatively new market, established in

2006. Foreign investors are not allowed to participate in

the onshore swap market. The market has grown rapidly

in recent years in terms of overall turnover, which was

CNY400bn in 2009 and CNY900bn as of October 2010.

It is still relatively small compared with the size of

outstanding bank loans (CNY50trn as of October 2010.

Although the 3mth Shanghai Interbank Offer Rate

(SHIBOR) was envisaged by authorities to serve as the

market’s swap fixing rate, in practice, a variety of

reference rates have been used with a majority of swaps.

The 7-day repo rate is still considered the most widely

used funding instrument in money markets. Consequently,

the 7-day repo IRS has the best liquidity among all

different types of IRS, taking around 65% of the overall

IRS turnover. Overnight SHIBOR and 1yr PBoC deposit

and lending rates have also been employed as fixing

rates in relative IRS products.

The main regulator of the swap market is the PBoC while

the China Foreign Exchange Trade System (CFETS),

also known as the National Interbank Funding Center

(the Center), is responsible for the daily monitoring and

deal reporting of the interbank market for PBoC.

CNH bond issuance and forecast

0

20

40

60

80

100

120

2007 2008 2009 2010f 2011f 2012f 2013f

CN

Ybn

Gross issuance Redemption Net issuance

Source: HSBC

China: IRS and CCS markets

Onshore IRS Offshore NDIRS Offshore CCS (NDS)

Non-resident access: Not allowed Existent Existent Tenors 1-10 years 1-10 years 1-10 years Liquid tenors 1-5 years 1-5 years 1-5 years Average trade size CNY100m CNY100m USD10m Bid/offer spreads under normal conditions (bp)

2-5bps 2-5bps 15-30bp

Fixing rate Various: 7-day repo rate, 3mth SHIBOR, o/n SHIBOR, 1yr PBoC deposit rate

7-day repo rate, 1yr PBoC deposit, 6mth SOR, 3mth SHIBOR

6mth USD Libor

Day count Fixed leg: Actual/365 Floating leg: Actual/365 for 7-day repo rate Actual/360 for 3mth SHIBOR, o/n SHIBOR and 1yr deposit rate

Actual/365 Actual/360

Effective date T+1 T+1 (7 day, 1yr deposit), T+2 (SOR), T+0/T+1 (SHIBOR)

T+2

Fixing time (local time) 11am for 7-day fixing repo rate, 11:30am for 3mth SHIBOR and o/n SHIBOR

11am 11am

Fixing page www.chinamoney.com.cn Reuters: CNREPOFIX=CFXS (repo), SHIBOR (3mth Shibor), PBOCB (1yr PBoC deposit), CNYSORFIX (6mth SOR),

Reuters: PNDS

Local market hours OTC, normally 9am-5:30pm 9am-5pm 9am-5pm Main participants Interbank, corporates Interbank, corporates Interbank, corporates

Source: HSBC



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Offshore non-deliverable IRS (NDIRS) and CCS

(NDCCS) curves have developed in Hong Kong. Like

its counterpart onshore, the CNY NDIRS curve may use

a variety of fixing rates, although the most common is

the 3mth SHIBOR. The fixing pages for NDIRS and

NDCCS markets are CNREPOFIX=CFXS.

The credit risk mitigation (CRM) market was launched

in November 2010 for China’s version of the CDS with

the aim of helping investors to hedge against risks in the

domestic corporate bond market. Currently, only China

Development Bank, most major state lenders, joint stock

banks such as China Everbright Bank, and the China

units of HSBC and Deutsche Bank are allowed to trade

these credit derivatives. Reuters: CN/CDS1.

Regulatory, settlement and tax issues Regulation

Three types of investors can access the onshore

interbank market subject to a quota assigned by the

PBoC: foreign central banks, CNY-clearing banks in

Hong Kong and Macau, and CNY-settlement banks.

Other foreign investors are required to have a QFII

status. QFIIs must appoint a local custodian and a

domestic broker. QFIIs are allowed to invest in T-

bonds, convertible bonds and corporate bonds listed on

the stock exchange. For more information, refer to the

China Securities Regulatory Commission (CSRC).

For the CNH market, there are no restrictions.

Settlement

Onshore settlement is done by the China Government

Securities Depository Trust & Clearing Co. For more

information, see http://www.chinaclear.cn.

For the CNH market, settlement is conducted by the

Central Money Markets Unit (CMU) or Euroclear on a

T+3 basis.

Taxation1

Onshore bonds are subject to taxes as stipulated by a

circular2 issued by the Chinese State Administration of

Taxation (SAT) in January 2009.

Tax liabilities of QFII investors depend on the bond

investment. Coupon income from government bond

investments is generally exempt from the 25% income

tax.

While income tax treatment on capital gains for QFII

investors remains unclarified, capital gains are generally

subject to an income tax of 25% and a business tax of

5%. Income tax on capital gains derived by foreign

investors may be further reduced to 10% or lower, subject

to a double tax treaty.

Foreign exchange Normal market conditions

Onshore spot daily average volume USD30-40bnOnshore spot volume per transaction USD5-10mOnshore Bid/Ask spread 5-10 pips (0.0005-0.0010 CNY)Onshore forward & swap transaction USD10-20bnOnshore forward spread 50–100 pips (0.0050 – 0.010 CNY) in 6M Offshore daily NDF average volume USD3bnNDF volume per transaction USD10mNDF spreads 40-60 pips (0.0040 – 0.0060 CNY) in 6MOffshore implied option volatility spread 0.2 vol

Notes: Data above only refers to interbank market. Spreads are subject to change with market developments Source: HSBC FX strategy

Useful links Information sources

China Government Securities Depository Trust & Clearing Co. Ltd

www.chinaclear.cn

People’s Bank of China www.pbc.gov.cnChina Securities Regulatory Commission (CSRC) www.csrc.gov.cnChina Insurance Regulatory Commission (CIRC) www.circ.gov.cnChina Bank Regulatory Commission (CBRC) www.cbrc.gov.cnNational Council for Social Securities Fund www.ssf.gov.cnChina National Social Security (CNSS) www.cnss.cnChinese State Administration of Taxation (SAT) www.chinatax.gov.cnState Administration of Foreign Exchange (SAFE) www.safe.gov.cnCentral Moneymarkets Unit www.cmu.org.hk

______________________________________ 1 HSBC is not a qualified tax adviser. Consult a professional adviser for further guidance

2 Guoshuihan [2009] No. 47 (Circular 47)

http://www.chinaclear.cn/

http://www.safe.gov.cn/

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China: Bonds

Treasury bonds PBoC bills Corporate bonds Offshore CNY (“CNH”) bonds

Issuer People's Republic of China (PRC)

People's Bank of China (PBoC)

Firms approved by the National Development and Reform Commission

Ministry of Finance (MoF, PRC), financial institutions, corporations

Currency Renminbi (CNY) Renminbi (CNY) Renminbi (CNY) Renminbi (CNY) Form Scripless Scripless Scripless Scripless Minimum denomination CNY100-1,000 CNY100-1,000 CNY100-1,000 CNY50,000 (institutional

tranche) Tenors 3 months, 1-10, 15, 20, 30, 50

years 1, 3, 6 months, 1, 3 years 3- 30 years 2-10 years

Coupon/discount Fixed rate, floating rate or zero coupon

Zero or fixed rate Fixed rate, floating rate or zero coupon

Fixed/ floating rate

Coupon frequency Annual or semi-annual None Annual Semi-annual Amortising schedule Bullet Bullet Bullet Bullet Day count Actual/ 365 Actual/ 365 Actual/ 365 Actual/365 Amount outstanding CNY6.4trn (Oct-2010) CNY4.4trn (Oct-2010) CNY3.3trn (Oct-2010) CNY58bn (Dec-2010)

Primary market Auction style Dutch auction Dutch auction Book running Book running Average issue size CNY26bn-35bn CNY3-50bn CNY1bn-10bn CNY200m-5bn Auction frequency Weekly Weekly Ad hoc Ad hoc Participants Underwriting group members

only Primary dealers only Selected underwriter Selected underwriter

Settlement T+3 T+1 T+1 or T+2 T+3

Secondary market Trading mechanism OTC, stock exchange OTC OTC, through stock exchange OTC, stock exchange Trading hours 9-12am, 1:30-4:30pm;

9:30-11:30am and 1-3pm 9-12am, 1:30- 4:30pm 9-12am, 1:30-4:30pm;

9:30-11:30am and 1-3pm n/a

Quoting convention Yield to 2-4 decimals Yield to 1-3 decimals Yield to 3-8 decimals Price to 2 decimals Average bid-offer spreads 10bp 10bp 15bps 30-40bp Average trade size CNY30-100m CNY30-200m CNY30-100m CNY1-5m Volume CNY7bn per day CNY21.4bn per day CNY3bn per day CNY50m per day Settlement T or T+1 in interbank market,

T for bonds, T+1 for cash in stock market

T or T+1 T+0 or T+1 in interbank market, T+0 for bonds, T+1 for cash in stock market

T+3

Clearing CDC or CSDCC CDC CDC or CSDCC CMU, Euroclear Main participants Members and domestic

investors if listed Members Members and domestic

investors if listed Members, foreign investors

Regulations for foreign investors Restriction on foreign investment

Generally closed to foreigners, open to QFIIs

Closed to foreigners Generally closed to foreigners, open to QFIIs

None

Custodian Local custodian required n/a Local custodian required None Interest income tax Government bonds generally

exempt from 25% income tax n/a n/a None

Capital gains tax 5% business tax. Related capital gain/loss will be included in 25% profit tax

n/a 5% business tax. Related capital gain/loss will be included in 25% profit tax

None

Entry/exit (SAFE) PBoC and CFETS approval required

n/a (SAFE) PBoC and CFETS approval required

None

Source: HSBC

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18

Asia-Pacific Rates Guide 2011 Hong Kong December 2010

abc

Market developments During 2010, Hong Kong strengthened its offshore

CNY (“CNH”) market platform status. The CNH

trade settlement scheme was expanded in July 2010,

making it easier for the private sector to open CNH

bank accounts and conduct payments and transfers with

them. This is achieved by eliminating restrictions on

banks in Hong Kong when opening CNH accounts for

and providing related services to financial institutions.

The People’s Bank of China (PBoC) allowed foreign

central banks and all CNH-clearing accounts

participating in the CNY trade settlement scheme to

enter its CNY20trn onshore interbank bond market. This

helps Hong Kong strengthen its comparative advantage

as an offshore CNY centre that develops a varied range

of CNY-related products and services.

The CNH bond market started in 2007, initially via

supply from mainland China-incorporated financial

institutions. In late 2009, sovereign bonds issued by the

Ministry of Finance (MoF) were sold for the first time

outside of mainland China. In 2010, strong demand for

sovereign/quasi-CNH bonds was evident with the

Chinese Government’s RMB8bn issuance of 2, 3, 5, 10

year bonds in November drawing 10x oversubscription

and the 3-year tranche drawing 15x oversubscription.

Recent issuance from CHEXIM (Export-Import Bank of

China) received a book of 12.6x and China

Development Bank (CDB) 9x. To develop a liquid

benchmark curve for this growing CNH market, further

sovereign and quasi-issuance is likely.

A total of HKD19.5bn new Hong Kong Government

Bonds (HKGBs) are issued under the 2009-14

Government Bond Programme in 2010. Bonds are

issued in either 2, 5 or 10 years tenors. During 2010,

HKD7bn, HKD4bn and HKD8.5bn of HKGBs were

issued in 2, 5, 10 year maturity respectively. The10-year

issue size was raised from an initial announcement of

HKD2bn to HKD3bn in October 2010.

Under the programme, the Special Administrative

Region may issue debt up to HKD100bn over the next

few years. As opposed to Exchange Fund Bills and

Notes (EFBNs), these bonds are not backed by foreign

reserves under Hong Kong’s currency board but are

Hong Kong

Strengthens offshore yuan (CNH) market platform status

Hong Kong Government continues debt issuance under the Institutional

Issuance Programme

Bonds outstanding Government bond maturity profile (as of September 2010)

0

20

4060

80

100

120140

160

180


USD

bn

0

10

20

30

40

50

60

70

80%

GD

P


1-3 y ears,

54.9%

3-5 y ears,

22.2%

Ov er 10 y ears,

7.9%

5-10 y ears,

15.0%

Source: ADB Source: ADB

Aa1/AAA/AA+

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liabilities of the Special Administrative Region’s

government.

Monetary policy The Hong Kong Monetary Authority (HKMA) has

enforced a currency board against the USD, which

requires both the stock and flow of the Monetary Base

to be fully backed by foreign reserves. Changes in

foreign reserves fully match any change in the size of

the Monetary Base, which comprises: Certificates of

Indebtedness and government-issued notes and coins

issued by the three note-issuing banks (NIBs, including

HSBC), sum of balances of banks’ clearing accounts

(Aggregate Balance) maintained with the HKMA as

well as the outstanding amount of EFBNs.

Since 1983, the HKMA has maintained a Linked

Exchange Rate of 7.80 vs. the USD. In 2005, a

convertibility zone of 7.75-7.85 with two-way

convertibility undertaking was introduced. The currency

regime is fully backed by foreign reserves held in the

HKMA’s Exchange Fund. Apart from ensuring that the

fund meets its statutory roles, one of the HKMA’s

principal day-to-day activities is the active management

of the fund’s assets. These are held mainly in the form

of marketable interest-bearing instruments and equities

in certain foreign currencies.

Whilst not permanently appropriated for the use of the

Exchange Fund, the government’s fiscal reserves are

also managed by the HKMA. Proceeds from fiscal

reserves are repaid to the General Revenue Account

when they are required to meet the government’s

operational needs.

Open market operations are used to control the

monetary base. This includes purchase or issuance of

EFBs for liquidity management purposes, repos and

direct intervention in the FX market. FX swaps and term

repurchase arrangements are incorporated into the

HKMA’s continuing market operations. This provides

HKD liquidity assistance to banks and eligibility is

assessed case-by-case.

Key policy rate:

Base rate: Cost of borrowing by banks from the

HKMA’s overnight discount window. Along with its

open-market operations, the base rate is used by HKMA

as a tool for influencing overnight interbank rates and

for managing liquidity in the banking system.

Bloomberg: HKBASE Index.

Key market rate:

Overnight HIBOR: Interest rate stated in HKD in

overnight lending and borrowing between banks in the

Hong Kong interbank market. HIBOR fixing rates

(ranging from 1 to 12 months) are based on the average

of the middle 14 of 20 HIBOR quotations provided by

banks designated by the Hong Kong Association of

Banks. HIBOR rates are used in conjunction with USD

LIBOR rates for quotations in the active basis swap

market. Bloomberg: HIHDO/N Index (overnight).

Prime rate: Also known as the best lending rate (BLR),

it is a standard measure for mortgage and other

consumer-based interest rates. Market rates are greatly

influenced by the prime rates of four dominant banks in

Hong Kong, including HSBC. Bloomberg: PRIEHSBC

Index (HSBC).

Hong Kong: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos EFB/EFNs- For interbank repos Government bonds, EFB/EFNs,

high-grade corporate bondsMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors None- Offshore investors NoneOffshore investor access - Foreign ownership of government bonds n/a- As % of outstanding n/a- Direct purchase? Yes- Subject to cap? No- Registration requirement? No- Access to onshore funding? Yes- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? YesMarket liquidity statistics EFB/Ns - Daily turnover (LCbn) HKD300bn- Buying volume in a single day (USDm) (with minimal market impact)

USD100m (1yr), USD20m (10yr)

- Bid/offer spreads under normal conditions (bp) 3-5bp (EFB), 5-10bp (EFN)HK SAR Government bonds - Daily turnover (LCbn) HKD0.3bn- Buying volume in a single day (USDm) (with minimal market impact)

USD10-20m


Source: HSBC * HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.

20


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Composite interest rate: Introduced in 2005, the rate

reflects movement in various deposit rates, interbank

rates and other interest rates associated with banks’

average cost of funds. It enables banks to track changes

in their funding costs and is intended by the HKMA to

be a benchmark in setting mortgage rates. Bloomberg:

HKIRCOMP Index.

Fixed income instruments The Hong Kong bond market has grown to a market

capitalisation of USD167bn as of November 2010. The

market is dominated by quasi-government bonds,

constituting 55%. Government and corporate bonds

make up 1% and 44% of the market, respectively.

There are no “Primary Dealers”, but in the Hong Kong

Exchange Fund (EF) market, the HKMA publishes

every June and December a league table with the top-12

market makers for EFs based on six-month turnover.

Principal institutional investors in HKD fixed income

include banking institutions, the Mandatory Provident

Fund (MPF) and all pension plans under the Occupational

Retirement Schemes Ordinance (ORSO), insurance

companies, asset management companies and government-

related institutions (eg the Housing Authority).

Bonds

Exchange Fund Bills and Notes (EFB/Ns) are issued

by the EF and guaranteed by the government. They are

mainly held by banks to meet liquidity ratios. EFBs

have maturities ranging between 1 week and 12 months.

EFNs have maturities between 2 and 15 years and carry

a fixed rate coupon paid semi-annually.

Auction frequency is dependent on the tenor issued. For

EFBs, 91-day bills are held weekly, 182-day bills are

held bi-weekly and 364-day bills are held monthly. On

the other hand, for EFNs, 2, 3 and 5 year notes are held

quarterly whilst 10 and 15 year notes are held semi-

annually. All auctions use a multiple price system but a

small portion of EFNs may also be allocated using a

non-competitive bid.

Hong Kong Government Bonds (HKGBs) are

unsecured liabilities of the Hong Kong Government and

are not backed by the HKMA’s FX reserves, which make

them distinct from EFB/Ns. HKGBs cannot be used as

collateral to access the HKMA’s discount window.

Available maturities range between 2 and 15 years. The

bonds carry tax exempt status but are not fungible, unlike

EFBNs. Under the Institutional Bond Issuance

Programme, tender is open only to Recognized Dealers

which are appointed as Primary Dealers, though investors

wishing to apply for bonds during a tender offer can do so

through any of the Primary Dealers. Auctions are held bi-

monthly and use a multiple price system.

The current bond issue programme is scheduled to run

from 2009 to 2014, although bonds from the previous

programme in July 2004 are still traded in the secondary

market. There are two bonds from the 2004 programme:

a 2019 HKD500,000 HKD issue and a 2014

USD100,000 USD issue.

Negotiable Certificates of Deposits (NCDs) are

negotiable instruments issued by banks, financial

institutions and deposit-taking companies. They are

issued either as fixed or floating rate. Primary issues are

underwritten and arranged by banks as private

placements or public syndicated issues. Secondary

trading is conducted OTC.

Corporate bonds are private debt issued by non-

government issuers. They are usually sold through private

placements following a reverse enquiry process. Secondary

trades are mainly investor-driven and transacted OTC.

Corporate bonds issued by wholly-owned government

institutions are called “Specified Instruments”. “SIs” are

issued by the Airport Authority, Hong Kong Mortgage

Corp (HKMC), Kowloon-Canton Railway Corp

(KCRC) and Mass Transit Railway Corp (MTRC).

Exchange Fund Bills and Notes (EFB/Ns) outstanding

0

100

200

300

400

500

600

700

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

HK

Dbn

EF Bills EF Notes

Source: HKMA

21


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Derivatives

An onshore market exists for HKD interest rate swaps

(see table Hong Kong IRS and CCS markets).

Interest rate and cross-currency swaps extend out to

15 years but liquidity is greatest up to 10 years. There

are no restrictions on non-resident investor access to the

HKD IRS and CCS markets for HKD funding, or to

either hedge or take positions in HKD forwards, IRS

and CCS.

Overnight Index Swaps (OIS) were developed by the

Market Practices Committee of the Treasury Bureau.

The OIS market is a fixed-to-floating interest rate swap

with the floating leg tied to a published index of

overnight reference rates. Liquidity is extremely low,

with no market activity in 2010 but if there was to be a

trade, its size would be HKD500m.

HIBOR-LIBOR basis swap spreads is a market to

connect HKD liquidity to USD liquidity and vice versa.

They are normally transacted by HKD issuers looking to

swap USD liabilities back into HKD, supranational and

other foreign issuers looking to swap HKD liabilities

into USD, Hong Kong investors of USD-denominated

credits looking to swap back in HKD or HK banks and

foreign banks with HKD balance sheet transferring

liquidity to/from USD.

HIBOR (1mth and 3mth) and 3yr EFN futures are

available and traded in the derivatives market of the

Hong Kong Exchanges and Clearing (HKEx).


Hong Kong offers foreign and local investors equal

access to local securities. Trading is generally

unrestricted with no limit on size.

Settlement

There are three distinct clearing and settlement systems:

the Central Money Markets Unit (CMU) of the HKMA,

Central Clearing and Settlement System (CCASS) and

Derivatives Clearing and Settlement System (DCASS)

of the HKEx.

The CMU is a central securities depository unit provides

electronic clearing, settlement, and custodian services

for Hong Kong dollar-debt instruments. The

implementation of the Real Time Gross Settlement

(RTGS) system provides real-time, Delivery-versus-

Payment (DvP) service for all debt securities

transactions.

CCASS provides clearing, settlement, and depository

services for exchange-traded securities. Clearing and

settlement is conducted using a Continuous Net

Settlement (CNS), or trade-by-trade system.

CNY Real Time Gross Settlement (RTGS) System

clears and settles offshore CNY bond transactions.

Hong Kong: IRS and CCS market

Onshore IRS HIBOR-LIBOR Basis Swap Onshore CCS (Fixed vs. fixed) OIS

Non-resident access: Allowed Allowed Allowed Allowed Tenors Up to 15 years Up to 15 years Up to 15 years Up to 2 years Liquid tenors Up to 10 years Up to 10 years Up to 10 years Up to 1 year Average trade size HKD100mn HKD100m HKD100mn HKD500m Bid/offer spreads under normal conditions (bp)

2-3bp 2bp 3-4bp 10bp

Fixing rate 3mth HIBOR 3mth HIBOR /USD LIBOR 3mth USD LIBOR HONIX Day count Actual/365F Actual 365/360 Actual/365F Actual/365F Effective date T+0, T+1 (after 11am) T+2 T+2 T+0, T+1 (after 11am) Fixing time (local time) 11am 11am (HK time) and 11am (London time) 11am (London time) 4pm Fixing page Reuters: HKABHIBOR Reuters: HKABHIBOR Reuters: LIBOR01 Reuters: HONIX Reuters: LIBOR01 Local market hours 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm Main participants Corporates Corporates Corporates Corporates

Source: HSBC

22


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Taxation3

For foreign and resident investors equally, there is no

tax on interest income and capital gains in Hong Kong.

For domestic institutions, however, there is a profits tax

of 16.5% (15% if not a corporate) applied to capital

gains and coupons. Instruments eligible for a 50%

concession of profits tax are: qualified debt instruments,

quasi-government notes, and debt instruments issued in

Hong Kong. Interest deposits, trading profits and

interest income are exempt. A full list of corporate

bonds that are eligible for tax concession can be found

on: www.ird.gov.hk/eng/tax/bus_qdi.htm.

______________________________________ 3 HSBC is not a qualified tax advisor. Consult a professional advisor for further

guidance.


Onshore average daily volume USD12bnOnshore spot transaction USD50mOnshore bid/ask spread 2 pips (0.0002HKD)Onshore forward transaction USD50mOnshore forward spread out to 1 year 10 pips (0.0010HKD) Implied option volatility spread 0.1 vol

Note: Spreads are subject to change with market developments Source: HSBC FX strategy

Useful information Information sources

Hong Kong Monetary Authority (HKMA) www.info.gov.hk/hkma Central Moneymarkets Unit (CMU) www.cmu.org.hk Hong Kong Exchanges and Clearing Limited www.hkex.com.hk Financial Services and the Treasury Bureau www.fstb.gov.hk/eng/sfst/fstb.html Hong Kong Association of Banks (HKAB) www.hkab.org.hk Mandatory Provident Fund Schemes Authority (MPFA)

www.mpfa.org.hk/eindex.asp

Hong Kong Mortgage Corporation Limited (HKMC)

www.hkmc.com.hk/eng/

Invest Hong Kong www.investhk.gov.hk

http://www.investhk.gov.hk/

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Hong Kong: Bonds

Exchange Fund Bills (EFBs)

Exchange Fund Notes (EFNs)

HK Government Bond Programme 2009-14

Corporate bonds

Issuer Hong Kong Monetary Authority (HKMA)

Hong Kong Monetary Authority (HKMA)

Hong Kong SAR Government (HKSAR)

Local/ multilateral corporations, foreign banks

Currency Hong Kong Dollar (HKD) Hong Kong Dollar (HKD) Hong Kong Dollar (HKD) Hong Kong Dollar (HKD) Form Global bearer (CMU,

Euroclear, CEDEL) Global bearer (CMU, Euroclear, CEDEL)

Book entry in securities accounts maintained with HKMA

Global bearer (CMU, Euroclear, CEDEL)

Minimum denomination HKD500,000 HKD50,000 HKD50,000 HKD50,000-1m Tenors 1 week, 1, 3, 6, 9 months, 1

year 2-5, 10, 15 years 2, 5, 10 years 1-30 years, mostly 3-5 years

Coupon/discount Zero, issued at discount Fixed Fixed Fixed or floating rate Frequency None Semi-annual Semi-annual Quarterly, semi-annual or

annual Amortising schedule Bullet Bullet Bullet Bullet Day count Actual/ 365 Actual/ 365 Actual/ 365 Actual/ 365 Amount outstanding HKD581.19bn (Jun-10) HKD70.2bn (Jun-10) HKD16bn (Jun-10) HKD569bn (Jun-10)

Primary market Auction style Multiple price, competitive

tender on bid-yield basis Multiple price, competitive tender on bid-price basis, (small portion for non-competitive tender)

Multiple price, competitive tender on bid-price basis

Private placement, EMTN programmes

Average issue size HKD0.5bn-24bn total HKD600m-1200m HKD2-3.5bn HKD100m-1bn Issuance cycle Weekly (91-day), bi-weekly

(182-day), monthly (364-day) Quarterly (2, 3, 5-year), semi-annual (10, 15-year)

Bi-monthly Ad hoc

Participants Eligible Market Makers (EMMs) only

Eligible Market Makers (EMMs) only

Primary Dealers Fund managers, insurance companies and banks

Settlement T+1 T+1 T+1 T+5

Secondary market Trading mechanism OTC OTC OTC OTC Trading hours 9-11am, 2-4pm 9-11am, 2-4pm 9-11am, 2-4pm 9-11am, 2-4pm Quoting convention Yield to 2 decimal places Clean price to 2 decimal places Clean price to 2 decimal places Yield Average bid-offer spreads 91 and 182-day 3bp; 364-day

5-10bp HKD5-10bp (depending on tenor)

10bp 10-30bp depending on maturity and credit quality

Average trade size HKD200-300m HKD20-100m HKD10-50m HKD50m-100m Volume HKD214bn per day HKD83bn per day HKD267mn per day HKD4-6bn per month (for

NCDs and corporate firms) Settlement T+1 T+1 T+1 T+3 Clearing Central Moneymarket Unit

(CMU) Central Moneymarket Unit (CMU)

Central Moneymarket Unit (CMU)

Central Moneymarket Unit (CMU)

Main participants Mainly held by banks to meet liquidity ratio requirement

Mainly held by banks to meet liquidity ratio requirement

Mainly held by banks but some are also held by fund managers, insurance companies etc

Fund managers, insurance companies and banks


None None None None

Custodian None None None None Interest income tax None None None None Capital gains tax None None None None Entry/exit None None None None

Source: HSBC

24

Asia-Pacific Rates Guide 2011 India December 2010

abc

Market developments The quota limit on Foreign Institutional Investors’

(FII) government (GOI) and corporate bond

purchases is raised (September 2010). Specifically, the

GOI limit is lifted from USD5bn to USD10bn and

corporate limit from USD15bn to USD20bn. Purchased

bonds must have a remaining maturity of over 5 years

and corporate bonds must be issued by infrastructure

companies. See India Rates: FII Factor, 26 November.

Domestic banks shift to a Base Rate system from a

Benchmark Prime Lending Rate (BPLR) system

(July 2010). The new system aims to increase

transparency by preventing banks from lending below a

self-imposed base rate. It also provides policymakers

with a greater assessment of monetary policy

transmission. Under the previous system, bank BPLRs

were set high and effectively functioned as the ceiling

rate for higher-risk small loans that historically did not

fluctuate with the Reserve Bank of India (RBI)

benchmark policy rates, particularly during monetary

easing periods.

Liquidity Adjustment Facility (LAF) corridor is

narrowed from 150bp to 100bp, reducing money

market volatility (23 September 2010). LAF corridor is

defined as the spread between the repo and reverse repo

rates set by the RBI to manage short-term liquidity.

During two policy meetings (July 2010 and September

2010), the RBI reduced the width of the LAF corridor

by 50bp to a 100bp-spread considered a normalisation

move. The LAF corridor had been maintained at 150bp

since November 2008.

RBI doubles the number of monetary policy meetings

during a fiscal year from once per quarter to twice-

quarterly. The change in the frequency of regular policy

reviews aligns the RBI schedule closer with other central

banks globally. The RBI had resorted to inter-meeting

changes to benchmark policy rates 13 times since 2008.

Corporate bonds rated AA or above are eligible for

repo transactions (March 2010). All scheduled

commercial banks are allowed to borrow under this

system. Mutual funds and insurance companies must be

approved by Securities and Exchange Board of India

(SEBI) and Insurance Regulatory and Development

Baa3/BBB-/BBB-India

Foreign limit on GOI and corporate bond holdings is raised by USD10bn

Domestic banks switch to a Base Rate system from BPLR system

LAF corridor is narrowed 50bp to 100bp, reducing money market volatility

Bonds outstanding INR bond market composition (as of June 2010)

0

100

200

300

400

500

600

700

800

Sep-04 Sep-06 Sep-08 Sep-10

USD

bn

0

10

20

30

40

50

60%

GD

P


Financial

Institutions

3%

Local

bodies 0%Supran'l

0%

G-Sec

62%

Tbill

4%

State loans

17%

PSU

5%

Corp.

4%

Bank

bonds

5%

Source: ADB Source: CEIC

http://www.research.hsbc.com/midas/Res/RDV?ao=20&key=lR9PlxPpvL&n=285218.PDF

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Authority (IRDA) to trade in corporate bond repos.

Certificates of Deposits (CDs), Commercial Paper (CP)

and non-convertible debentures with maturity less than

one year do not qualify.

Infrastructure bonds with at least seven years

maturity are classified under held-to-maturity

(HTM) category from April 2010. Bonds under the

HTM category are exempt from mark-to-market

requirements and may constitute up to 25% of a bank’s

investment. The change is aimed at encouraging

investment by local banks in bonds sold by local

infrastructure firms to fund new projects.

Ceiling on banks’ exposure to unlisted non-SLR

papers is relaxed (April 2010). Banks are permitted to

treat exposure to unlisted non-statutory liquidity ratio

(SLR) debt securities as an investment in listed securities

at the time of making investments. This promotes the

corporate bond market and diverts corporate financing

from direct bank credit to the market. Eligible papers

cover investments in primary bond offerings and those

picked up from the secondary market.

India plans to introduce new interest rate futures on

91-day T-bill, 2- and 5-year government bonds (April

2010), providing investors a means to hedge long bond

positions.

Monetary policy The Reserve Bank of India does not have an explicit

inflation target. Its key benchmark policy rates are the

repo and reverse repo rates, which serve as the top and

low end of the LAF corridor, respectively. The repo rate

is applied to short-term loans from the RBI while the

reverse repo rate is applied to overnight deposits.

The RBI conducts liquidity management largely through

the LAF as well as the issuance of Market Stabilisation

Scheme (MSS) bonds. The LAF acts as a window for

adjusting day-to-day liquidity mismatches, whereas the

MSS addresses large swings in liquidity conditions that

can typically affect markets for 1 to 3 months. The RBI

may also control liquidity through adjustments to banks’

Cash Reserve Ratio (CRR) as well as the SLR. The RBI

may also impose ceilings on bank external commercial

borrowings (ECBs) and offshore investment in

government and corporate bonds.

During extreme conditions of tight domestic liquidity or

exceptionally heavy GOI supply, the RBI may

accommodate market conditions through GOI buyback

programmes as part of open market operations (OMOs).

In the past, the RBI has also temporarily reduced the

SLR.

Key policy rates:

Repo rate: Rate applied to short-term loans by banks

from the RBI. Bloomberg: INRPYLD Index.

Reverse repo rate: Rate applied to banks’ overnight

deposits held by RBI. Bloomberg: RSPOYLD Index.

Cash reserve ratio (CRR): Minimum reserves each

commercial bank must hold to customer deposits and

notes. Bloomberg: RBICRRP Index.

India: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? NoEligible collateral for repos - For CB repos GOIs, T-bills- For interbank repos GOIs, Oil bonds, T-bills, corp. bonds (>AA)Mark-to-market requirements - Banks? Yes- Insurance companies? Yes (Unit-Linked Insurance Plans only)- Pension funds? No- Mutual funds? YesTaxation: Government bonds* - Onshore investors Capital gains:

10% (if maturity <12mths), 30% (if maturity >12mths)

- Offshore investors 20% withholding tax, capital gains tax same as onshore**

Offshore investor access - Foreign ownership of government bonds Approx. INR210bn (Nov-2010)- As % of outstanding Approx. 1% of GOIs (Nov 2010)- Direct purchase? Yes (for FIIs)- Subject to cap? Yes (FII limits:

USD10bn government, USD20bn corporate)

- Registration requirement? Yes- Access to onshore funding? No- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? Yes (NDOIS)Market liquidity statistics GOIs - Daily turnover (LCbn) INR100-150bn- Buying volume in a single day (USDm) (with minimal market impact)

USD100m

- Bid/offer spreads under normal conditions (bp) 1-2bpCorporate bonds - Daily turnover (LCbn) INR2bn- Buying volume in a single day (USDm) (with minimal market impact)

USD6-20m

- Bid/offer spreads under normal conditions (bp) 2-3bp

Source: HSBC * HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance. **Reducible by DTA.

26


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Statutory liquidity ratio (SLR): Minimum percentage

of demand and time liabilities that must be held in liquid

assets including cash, gold and approved securities such

as government bonds. Bloomberg: RBICSLR Index.

Key market rates:

Call money rate: Overnight interest rate that a bank

pays to borrow from another. It is also the floating rate

fixing for the OIS market. Bloomberg: NSERO Index.

Mumbai Interbank Forward Offered Rate

(MIFOR): Implied forward INR rates derived from the

London Interbank Offer Rate (LIBOR) and the forward

premium implied by the Indian FX markets. Bloomberg:

MIFORIM6 Index (6mths).

Fixed income instruments The Indian bond market has grown to a market

capitalisation of USD742bn as of September 2010 (49%

of GDP), making it the third largest local bond market

in Asia outside of Japan. Approximately 68% of the

bond market is composed of government bonds, 20%

are quasi-government bonds and the remaining 11% is

accounted for by corporate bonds.

There are 20 primary dealers (PDs), including HSBC.

PDs are required to provide two way prices for

Government Securities (“G-Secs”) through the

Negotiated Dealing System-Order Matching (NDS-OM),

OTC market and recognised Stock Exchanges in India.

Foreign investors held USD17.3bn (2.3% of total) GOIs

and corporate bonds in September 2010, according to

HSBC estimates. At that time, foreign investment under

India’s FII scheme was marginally below the aggregate

investment limit set by the RBI (USD20bn). In

September 2010, the quota limits on GOIs and corporate

bonds were raised from USD5bn to USD10bn and from

USD15bn to USD20bn, respectively, with new

purchases limited to bonds with a maturity of over 5

years. The increased limit for corporate bonds is

restricted to bonds issued by infrastructure companies.

Bonds

GOI bonds are medium- to long-term obligations

issued by the government to finance the fiscal deficit

and infrastructure development programmes. GOIs are

allocated through a multiple price auction. Maturities

range between 1 and 30 years. Most GOI bonds carry a

fixed, semi-annual coupon with bullet redemption.

Primary issues are underwritten by PDs and carry back-

up underwriting by the RBI. Each PD is required to bid

for a minimum of 3% of the notified amount. Major

players in the secondary market include banks,

insurance companies and pension funds. Liquidity is

concentrated in the 5- to 15-year segment.

Treasury bills are short-dated discount securities issued

by the RBI on behalf of the government. Maturities

range between 91 and 364 days. They are sold through a

multiple price auction held on Wednesdays and

allotments are awarded to the highest bidders subject to

a cut-off price set by the RBI. Winning bids are filled at

their bid level. T-bills are fully underwritten by PDs

committed to bid for a certain percentage of each issue.

MSS bills and bonds are issued for the RBI’s liquidity

management. The tenors and issue size are announced

on Fridays. MSS are not underwritten. The RBI sets an

annual ceiling for the outstanding amount of MSS. A

ceiling of INR500bn for FY10-11 ending March was set

by the RBI on April 2010.

Quasi-government sector includes Public Sector

Undertaking (PSU) bonds, and state and agency bonds.

Liquidity is generally thin but the PSU secondary

market is slightly more active.

PSU bonds are medium- to long-term obligations

issued by public sector organisations. Provident funds

are required to invest a minimum of 30% in PSU and

bank bonds. There are two forms of PSUs: 1) Taxable

bonds that carry a higher average yield than tax-free

Foreign investment in the Indian bond market

0

200

400

600

800

Jun-04 Sep-05 Dec-06 Mar-08 Jun-09 Sep-10

USD

bn

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Corp (LHS)G-Secs (LHS)FII holding, % total govt. and corp. debt (RHS)

Source: HSBC, SEBI

27


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bonds. Main investors are banks, corporate firms,

provident fund, retail investors, and mutual funds.

2) Tax-free bonds provide a fiscal advantage with the

coupon being at a discount to that for taxable bonds.

Bonds are issued in dematerialised form and freely

transferable. Main investors are corporates and retail

investors.

State and agency bonds are medium- to long-term

obligations issued by state governments and government

agencies. They typically possess a slightly higher yield

than GOI bonds. State bonds are auctioned similarly as

government bonds.

Corporate bonds contain private sector bonds, bank

bonds, CDs and CP. Private sector and bank bonds have

long maturities whereas CDs and CPs are short-term

securities.

Private sector bonds are mainly rated AAA/AA+/AA,

with the bulk in the AAA rating segment. There is

hardly any market for sub-AA rated paper.

Bank bonds are subordinated debt issued by banks to

meet their capital adequacy requirements. They may

only constitute up to 10% of their capital. Banks may

issue Upper Tier II and Hybrid Tier I instruments.

Hybrid Tier I (Perpetual) bonds also have a call option

10 years after issuance. Upper Tier II bonds have a

maturity of 15 years with a call option after 10 years.

Derivatives

An onshore and offshore market exists for INR interest

rate swaps (see table India: IRS and CCS markets).

Overnight Indexed Swaps (OIS) is extensively traded

by banks. The INR OIS curve uses overnight call money

as the floating leg fixing. Maturities range between 1

and 10 years, with liquidity concentrated at 1- to 5-year

tenors. As offshore investors cannot use the OIS curve

to hedge their long bond positions, a non-deliverable

OIS curve has passively developed offshore. This offers

liquid tenors up to 5 years and also uses the O/N rate as

the fixing rate. Liquidity, however, is less than its

onshore counterpart.

Cross currency swaps (CCS) are quoted off the

MIFOR IRS curve. The forward curve extends up to 10

years but is more liquid up to 12 months. The fixing rate

for the MIFOR curve is the 6 month. The longer dated

INR FX forward rates are also calculated using the

MIFOR curve. For non-resident investors, a non-

deliverable cross-currency swap curve (NDCCS) has

developed offshore, but is characterised by poor

liquidity and wide bid-offer spreads beyond one year.

Non-resident investors may also use USD/INR FX

forwards to hedge their FX exposure on long-bond

positions. The longer dated INR FX forward rates are

calculated using the MIFOR curve.

Bond futures for 91 day T-bills, notional 10-year

coupon bearing bonds and notional 10-year zero coupon

bonds were first introduced in 2003. While banks were

allowed to use futures only to hedge their government

sector investments in held-for-trading (HFT) and

available-for-sale (AFS) categories, PDs were allowed

to deal in interest rate derivatives (IRDs) for both

hedging and trading. These products, however, failed

after few weeks due to lack of market participation. In

August 2009, SEBI, in consultation with Fixed Income

and Money Market Derivatives Association (FINMDA),

reintroduced a future contract on the 10-year notional

India: IRS and CCS markets

Onshore OIS Offshore NDOIS Onshore CCS Offshore CCS

Non-resident access: Not allowed Existent Principal hedging allowed Existent Tenors 1-10 years 1-10 years 1mth-10 years 1mth-10 years Liquid tenors 1-5 years 1-5 years 1mth-5 years 1mth-1 year Average trade size INR250m-1bn USD5m INR250m USD5-10m Bid/offer spreads under normal conditions (bp)

3-4bp 2-4bp 30-50bp 30-50bp

Fixing rate Overnight rate Overnight rate 6mth MIFOR 6mth USD LIBOR Day count Actual/365 Actual/365 Actual/365 Actual/360 Effective date T+1 T+1 T+2 T+2 Fixing time (local time) 10:00am 9:40am 12:30pm 2:30pm Fixing page Reuters: MIBR=NS Reuters: MIBR=NS Reuters: INSWAP01 Reuters: RBIB Local market hours 9:00am-5:00pm 9:00am-5:00pm 9:00am-5:00pm 8am-5pm (HK/Sing) Main participants Interbank, corporates Interbank Interbank, corporates Interbank, corporates

Source: HSBC

28


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bond, which is priced on the basis of the cheapest to

deliver bond in a basket comprising of two to six GOI

bonds with maturity ranging from 9 to 11 years.

Furthermore, plans to introduce interest rate futures on

notional 5-year and 2-year coupon bearing bonds, and

91 day T-bills have also been announced during 2010.


Foreign individuals, corporates and hedge funds can

register directly as FIIs. Institutional investors,

including FIIs, are allowed to short-sell, lend and

borrow Indian securities.

The total FII limit on government securities is

USD10bn. For corporate debt investments, the limit is

USD20bn. Purchased bonds must have remaining

maturity of over 5 years and corporate bonds must be

issued by infrastructure companies.

Settlement

GOI securities are held in dematerialised form by

interbank counterparties with RBI. They are settled

through the Clearing Corp of India on a delivery vs.

payment (DvP) basis.

Corporate bonds are held in scripless form with the

National Securities Depository Ltd (NDSL). They are

settled through a custodian on a non-DvP basis because

the FII account is debited only after the securities are

delivered.

Taxation4

Foreign investors are subject to a 20% withholding tax

on interest payments. There is a capital gains tax of 10%

and 30% for holding periods less than and greater than

12 months, respectively. The above rates would have to

be enhanced by surcharge and education cess as

applicable

The Double Tax Avoidance (DTA) agreement may

reduce payable tax for FIIs. Please see

http://www.incometaxindia.gov.in for more

information.


Onshore daily average volume USD9bnOnshore spot transaction USD5mOnshore bid/ask spot spread 2 pip (0.02INR)Onshore forward transaction USD10mOnshore forward spread 2 pips (0.02INR)Offshore daily average volume* USD1.1bnNDF transaction* 1M USD5mNDF spread* 1M 3 pips (0.03INR)Onshore implied option volatility spread 0.7 volOffshore implied option volatility spread* 0.4 vol



Reserve Bank of India www.rbi.org.in Ministry of Finance finmin.nic.in Association of Mutual Funds in India (AMFI) www.amfiindia.com Fixed Income Money Markets and Derivatives Association (FIMMDA)

www.fimmda.org

Securities and Exchange Board of India (SEBI) www.sebi.gov.in Reuters Fixing page IN/CCIL Bloomberg Fixing page BBFD


guidance.

http://www.incometaxindia.gov.in/

29


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India: Bonds

Government of India bonds (GOIs)

Treasury bills State Government bonds Corporate bonds

Issuer Government of India (GOI) Government of India (GOI) State governments PSUs, banks, private sector Currency Indian Rupee (INR) Indian Rupee (INR) Indian Rupee (INR) Indian Rupee (INR) Form Scripless Scripless Scripless Scripless Minimum denomination INR 10,000 (market lot INR 5cr) INR 25,000 (market lot INR 5cr) - INR 10,000 (market lot INR 5cr)Tenors 1-7, 10, 30 years 91, 182, 364 days Up to 15 years Up to 20 years Coupon/discount Mostly fixed Zero, issued at discount Mostly fixed Mostly fixed Coupon frequency Semi-annual None Semi-annual Annual or specific to issuance Amortising schedule Bullet Bullet Bullet Bullet Day count 30/360 Actual/365 30/360 Actual/365 mostly Amount outstanding INR20.9trn (Sep-2010) INR1.2trn (Sep-2010) INR5.7trn (Sep-2010) INR1.6trn (Sep-2010)

Primary market Auction style Multiple price style auction Multiple price style auction,

non competitive tranche for special entities

Multiple price style auction Private placement or bilateral

Average issue size INR20-60bn INR10-80bn per tenor (INR30-100bn total)

INR20-60bn INR1-2bn

Auction frequency 2-4 auctions per month 91-day weekly, 182, 364-day fortnightly

2 auctions per month Ad hoc

Participants Banks, institutions, mutual funds

Banks, institutions, mutual funds

Banks, institutions Banks, institutions, mutual funds, corporates

Settlement T+1 or T+2 T+1 or T+2 T+1 or T+2 T+0 to T+2

Secondary market Trading mechanism OTC, exchange OTC, exchange OTC, exchange OTC, exchange Trading hours 9am-5:30pm 9am-5:30pm 9am-5:30pm 9am-5:30pm Quoting convention Price to 2 decimals Yield Price to 2 decimals Yield Average bid-offer spreads 2-3bp 5bp 2-3bp 2-3bp Average trade size INR100m INR250m INR100m INR270m Volume INR100-150bn per day INR20-30bn per day INR1bn per day INR2bn per day Settlement T+1 T+2 T+1 T to T+2 Clearing RBI's SGL system, CCIL RBI's SGL system, CCIL RBI's SGL system Principal to Principal, NSDL Main participants Fund managers, insurance

companies, banks Fund managers, insurance companies, banks

Fund managers, insurance companies, banks

Fund managers, insurance companies, banks, corporates


Eligible FIIs are permitted up to USD10bn total limit (G-Secs)1

Eligible FIIs are permitted up to USD5bn total limit (G-Secs)2

Eligible FIIs are permitted up to USD10bn total limit (G-Secs)

Eligible FIIs are permitted up to USD20bn total limit (corporate bonds)3

Custodian Local custodian required Local custodian required Local custodian required Local custodian required Interest income tax 20% interest, subject to Double

Taxation Agreement (DTA) 20% interest, subject to Double Taxation Agreement (DTA)

20% interest, subject to Double Taxation Agreement (DTA)

20% interest, subject to Double Taxation Agreement (DTA)

Capital gains tax 10% for long-term, 30% for short-term, subject to Double Tax Agreement (DTA)

30% for short-term, subject to Double Tax Agreement (DTA)

10% for long-term, 30% for short-term, subject to Double Tax Agreement (DTA)

10% for long-term, 30% for short-term, subject to Double Tax Agreement (DTA)

Entry/exit None None None None

Source: HSBC. 1GOIs must have greater than 5yr maturity. 2Until Sep-2010. 3Corporate bonds must be issued by infrastructure companies.

30

Asia-Pacific Rates Guide 2011 Indonesia December 2010

abc

Market developments During 2010, foreign investors purchased USD10bn in

Indonesian government bonds (IndoGBs), absorbing

approximately 125% of net issuance and raising total

holdings to USD22bn (vs. USD12bn at the end of 2009).

Most purchases by foreign investors centred at the long-

end of the IndoGB curve, which allowed the government

to extend the market capitalisation-weighted average

tenor to 10.4yrs, according to the HSBC ALBI index.

Avid foreign investment in IndoGBs and high carry has

made Indonesia a core holding in global emerging market

bond funds.

Bank Indonesia (BI) attempts to direct capital flows

from short-term central bank bills to longer-term

government bonds. Foreign investment in central

bank-issued Sertifikat Bank Indonesia (SBIs) increased

USD2.3bn year-to-October. In a bid to reduce foreign

investment in short-term instruments and prevent

market volatility associated with short-term flows, BI

has instituted several capital flow measures (June 2010),

including a 28-day minimum holding period for foreign

investment in SBIs. BI is gradually phasing in other

measures aimed at discouraging foreign investment in

SBIs, including a reduction in the frequency of SBI

auctions from weekly to ad hoc (based on SBI

maturities). To reduce the supply of SBIs, BI also began

to shift from tradable SBIs to term deposit SBIs (“TD-

SBIs”) that are neither tradable nor accessible to foreign

investors, beginning with an auction for 3mth TD-SBIs

on 11 November. BI also introduced a 9-month SBI in

August 2010.

Documentation requirements for double taxation

treaties are introduced (January 2010). New and

existing bond issuers must prove they do not hold

offshore units in eligible countries for the sole purpose

of reducing payable withholding tax. For bond

Ba2/BB/BB+Indonesia

During 2010, foreign investors purchased USD10bn in IndoGBs,

absorbing approximately 125% of net issuance

Foreign investment in short-term central bank-issued SBIs has been

discouraged through a variety of capital flow measures

Indonesia lengthened its maturity profile through increased issuance in the

10-20yr curve segment


0

20

40

60

80

100

120

Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

USD

bn

0

5

10

15

20

25

% G

DP


1-3 y ears,

19.7%Ov er 10 y ears,

39.2%

3-5 y ears,

13.3%

5-10 y ears,

27.9%


31


abc

investors, absent a tax liability reduction though a

Double Taxation Treaty Agreement (DTTA), a standard

20% withholding tax is applied to foreign investors on

interest income as well as capital gains for both

government and corporate bonds.

Monetary policy Bank Indonesia conducts monetary policy through the

establishment of monetary targets (such as money

supply or interest rates) with the primary goal of

keeping inflation at the government-prescribed level.

Since July 2005, the benchmark policy rate has been the

BI rate, which at the operational level is reflected in

movement in the Interbank Overnight Rate.

For liquidity management purposes, BI employs open

market operations, including issuance of SBIs, term

deposits by banks, buying and selling of securities,

prescribing a minimum reserve requirement and buying

and selling of FX versus the rupiah.

In June 2010, BI reduced the frequency of SBI auctions

from weekly towards monthly issuance. Liquidity

management in between SBI auctions will be more

reliant on shorter-term instruments such as the Standing

Facility and other instruments for temporary liquidity

absorption (Fine Tune Contraction/FTK, Reverse Repo

of Government Securities and Buying Swaps) and

injection (Fine Tune Expansion/FTE and Selling

Swaps). The Standing Facility includes overnight repos

(ceiling rate applied) for individual banks experiencing

liquidity shortages and overnight short-term deposit

facility (FASBI, floor rate applied) for banks carrying

excess liquidity.

Key policy rates:

BI overnight rate: The benchmark monetary policy

rate used by BI. Bloomberg: IDBIRATE Index.

Indonesia morning deposit facility overnight

discount rate/Fasilitas Simpanan Bank Indonesia

(FASBI): Rate set by BI for money market funds placed

overnight with BI. Bloomberg: IDINO/N Index.

SBI auction yields: Average yield on BI’s primary

auctions of SBIs, or Central Bank bills. The 3mth SBI

yield is also the fixing rate for a majority of

transactions. Bloomberg: SBI3AY3M Index (3mth),

SBI6AY6M Index (6mth).

Fixed income instruments The Indonesian bond market has grown to a market

capitalisation of USD112bn (September 2010) from

USD98bn at the end of 2009.

There are 18 primary dealers (PDs), including HSBC.

PDs are required to provide two-way quotations based

on an agreed maximum bid-offer spread.

Foreign investment has increased to 30.5% of total

Indonesian government bonds (December 2010) from

19.0% by end of 2009. In particular, holdings of SBIs

increased significantly from IDR43.9trn by end of 2009

to IDR63.2trn in November 2010. This prompted BI to

consider measures to increase limits on foreign investor

access to SBIs (e.g. 1-month holding period requirement

and shift to non-marketable term deposit SBIs) to limit

potential volatility in the IDR.

Indonesia: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? No- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? NoEligible collateral for repos - For CB repos SBIs, T-bills and T-bonds

(subject to 5% haircut)- For interbank repos T-bondsMark-to-market requirements - Banks? Yes- Insurance companies? No- Pension funds? No- Mutual funds? YesTaxation: Government bonds* - Onshore investors Interest and capital gains reported to BEI: 20%

withholding tax. Else, general income tax after initial 15% withholding tax deducted

- Offshore investors 20% withholding tax on interest income and discount upon sale**

Offshore investor access - Foreign ownership of government bonds IDR196trn (Dec-2010)- As % of outstanding 30.5% of IndoGBs (Dec-2010)- Direct purchase? No- Subject to cap? No- Registration requirement? Yes- Access to onshore funding? No- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? NoMarket liquidity statistics IndoGBs - Daily turnover (LCtr) IDR4-5trn (total for T-bonds,

T-bills, ZCs, ORIs)- Buying volume in a single day (USDm) (with minimal market impact)

USD5m

- Bid/offer spreads under normal conditions (bp) 10-20bpSBIs - Daily turnover (LCtr) IDR0.1-1trn- Buying volume in a single day (USDm) (with minimal market impact)

USD5-10m


Source: HSBC * HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance. **Reducible by DTTA

32


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Bonds

Government bonds are issued by the MoF and consist of

recapitalisation and treasury bonds. Recapitalisation bonds

were issued to 35 troubled banks following the late 1990s

financial crisis and are no longer issued. Tenors of

treasury bonds vary between 1 and 30 years, with auctions

held twice a month. There are two types of Treasury bond:

Fixed Rate bonds (FRs) and Variable Rate bonds (VRs).

FRs carry a pre-determined coupon paid semi-annually.

VRs have coupons that are set quarterly at the prevailing

3-month SBI rate. Government bonds are allowed to trade

on the Indonesia Securities Exchange.

Treasury bills (T-bills) are designed to gradually replace

SBI as the primary domestic liquidity management tool.

The current purpose remains government funding. The

only available maturity is 1 year.

Zero coupon (ZC) bonds are tax solutions for short-

term T-bills. They have the same tax treatment as

Treasury bonds. Issuance is held through a Dutch

auction. Maturities range between 1 and 5 years.

Retail treasury bonds are bonds issued by the MoF aimed

at retail investors (both national and non-nationals). They

are also known as Obligasi Ritel Indonesia (ORI). Two key

differences between ORIs and Treasury bonds are: 1)

coupons are paid on a monthly basis; 2) ORIs are issued

through non-competitive bidding.

Sukuk are the Islamic equivalent of bonds issued by the

MoF. Maturities typically range between 5 and 20 years.

They do not pay interest in compliance with Islamic law.

Instead, a sukuk replicates cash flows of conventional

bonds by representing partial ownership in a debt, asset,

project, business or investment. Liquidity in sukuk is

weak as the market requires further development, with

premiums reaching up to 50bp over non-Islamic bonds.

Sertifikat Bank Indonesia (SBI) are issued by BI to

absorb excess liquidity from the financial system. They

were previously issued weekly, but following changes in

June 2010, SBIs are expected to be issued on a monthly

basis. The SBI maturity profile has also been extended

from 3 months to 6 months with the intention of

improving the efficacy of liquidity management. BI also

introduced a 9-month SBI in August 2010. Yields on

3mth SBIs also serve as the fixing for a majority of IDR

IRS contracts. In June, BI imposed a 28-day holding

period on foreign investors. During 2H10, BI said it will

gradually shift into term-deposit SBIs that are neither

marketable nor accessible to foreign investors.

Corporate debt includes corporate bonds and medium-

term notes. They are issued by corporations or state-

owned companies and listed on the Indonesia Securities

Exchange.

Derivatives

An onshore and offshore market exists for IDR interest

rate swaps (see table Indonesia: IRS and CSS markets).

Interest rate and cross currency swap markets exist,

but liquidity is generally poor with bid-ask spreads of

50bp. The market convention for the floating rate index

in IDR IRS is the 3mth SBI. This has changed several

times because it depends mostly on the primary auction

frequency of SBI securities. Previously, when primary

auctions of 1mth SBI securities were frequent, the

convention was IRS vs. 1mth SBI.

Foreign holdings of IndoGBs and SBIs IndoGB investors by type (total: IDR642trn as of December 2010)

0

50

100

150

200

250

300

Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10

IDR

trn

0%

5%

10%

15%

20%

25%

30%

35%

SBI (LHS) IndoGBs (LHS)% of IndoGBs (RHS)

Non-

residents

30%

Insurance

12%Pensions

6%

Banks

34%

Mutual funds

8%

BI

3%

Others

7%


33


abc


Foreign investors can freely access the local bond

market. There are no limitations on foreign ownership.

Foreign investment in SBIs, however, is subject to a 28-

day holding period requirement.

Settlement

Government securities are settled via the BI’s Book

Entry Registry system on a delivery vs. payment (DvP)

basis. The settlement period is normally negotiated by

the counterparties and generally T+2 or T+3.

SBIs are settled T+1 in the primary market, whilst in the

secondary market it is between T+1 and T+3. This is

done on a DvP or Free of Payment (FoP) basis.

All corporate bonds are settled through Indonesia’s

Central Depository (KSEI) on a DvP or FoP basis. They

are mostly in scripless form as all corporate debt has

been issued scripless since 2000.

Taxation5

A standard 20% withholding tax is applied to foreign

investors on interest income. Whilst there is officially

no capital gain tax on Indonesian government bonds,

there is a ‘withholding tax on discount on the sale of

bond’ (‘discount’ meaning difference between the sale

and purchase price of the bond). However, these taxes

may be reduced through a Double Taxation Treaty

Agreement (DTTA) depending on jurisdiction (eg.,

Singapore, Netherlands, UK, US). Eligible non-


guidance.

residents must provide either a DGT-1 or DGT-2 form

to take advantage of the DTTA. See the Directorate

General of Taxes for more information.


Onshore average daily volume USD800mOnshore spot transaction USD2-5mOnshore bid/ask spread 5-10 pips (5-10IDR)Onshore forward transaction USD10mOnshore forward spread 0.2-30bp (0.2-30 IDR)Offshore average daily volume USD500mNDF transaction USD5mNDF spread 200 pips (20 IDR)Onshore implied option volatility spread 1.0 vol for all datesOffshore implied option volatility spread



Bank Indonesia (BI) www.bi.go.id/web Ministry of Finance (MOF) www.depkeu.go.id/Eng/ Debt Management Office (DMO) www.dmo.or.id/en/index.php?section=1Capital Market and Financial Institution Supervisory Board (BAPEPAM-LK)

www.bapepam.go.id/

Directorate General of Taxes www.pajak.go.id/eng/ PEFINDO (Credit Rating Indonesia) new.pefindo.com Indonesia Exchange (IDX) www.idx.co.id

Indonesia: IRS and CCS markets

Onshore IRS Onshore CCS Offshore CCS

Non-resident access: Illiquid Underlying documentation needed Existent Tenors 1-10 years 1-7 years 1-10 years Liquid tenors <6mth <6mth forward <6mth forward Average trade size IDR50bn USD5m USD5m Bid/offer spreads under normal conditions (bp) 50bp 50bp 50bp Fixing rate 3mth SBI rate 6mth USD LIBOR 6mth USD LIBOR Day count Actual/360 Actual/360 Actual/360 Effective date T+2 T+2 T+2 Fixing time (local time) 4:00pm USD Libor Fixing 11:00am Singapore time Fixing page BISBI LIBOR01 ABSIRFIX01 (Reuters) Local market hours 8:30-12:00pm, 2:00-4:30pm 8:30-12:00pm, 2:00-4:30pm 8:30-12:00pm, 2:00-4:30pm Main participants Interbank, corporates Interbank, corporates Interbank, corporates

Source: HSBC

http://www.pajak.go.id/eng/

http://www.pajak.go.id/eng/

34


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Indonesia: Bonds (1)

Sertifikat Bank Indonesia (SBI) Recapitalisation bonds Treasury bonds

Issuer Bank Indonesia (BI) Republic of Indonesia Republic of Indonesia Currency Indonesian Rupiah (IDR) Indonesian Rupiah (IDR) Indonesian Rupiah (IDR) Form Scripless Scripless Scripless Minimum denomination IDR1m IDR1m IDR1m Tenors 3 , 6, 9 months Fixed rate up to 6 years, variable rate

up to 13 years 1-10, 15, 20, 30 years

Coupon/discount Zero (issued at discount) Fixed or floating rate Fixed or floating rate Frequency None Semi-annual for fixed rate, quarterly for

floating rate Semi-annual

Amortising schedule Bullet Bullet Bullet Day count Actual/360 30/360 Actual/Actual Amount outstanding IDR252trn including term deposit (TD)

SBIs, offshore accessible IDR73trn (Sep-2010)

IDR203trn of which IDR65trn Fixed Rate, IDR138trn Variable Rate (Sep-2010)

IDR387trn (Sep-2010) or IDR590trn including Recaps

Primary market Auction style Dutch auction Private placement by government to

recap banks Dutch auction, non-competitive bidding and private placement

Average issue size IDR30-50trn total No longer issued IDR0.5-3.5trn Issuance cycle Monthly No longer issued Twice a month Participants Primary dealers, financial institutions,

investors Banks, pension funds, mutual funds, insurance, corporate firms and individuals

Primary dealers, banks, pension funds, mutual funds ,insurance, corporate firms and individuals

Settlement T+1 No longer issued T+2

Secondary market Trading mechanism OTC OTC, Indonesia Securities Exchange OTC, Indonesia Securities Exchange Trading hours 8am-5pm 9am-12pm, 2pm-5pm 9am-12pm, 2pm-5pm Quoting convention Annualised yield in one-eights Price Price Average bid-offer spreads 25-50bp 10-20bp 10-20bp Average trade size IDR50bn IDR10-50bn IDR10-50bn Volume IDR0.1-1trn per day IDR4-5tr per day (total for T-bonds,

T-bills, ZCs, ORIs) IDR4-5tr per day (total for T-bonds, T-bills, ZCs, ORIs)

Settlement T+1 to T+3 T+2 or T+3 T+2 or T+3 Clearing BI’s BER system, DVP settlement BI’s BER system, DVP settlement BI’s BER system, DVP settlement Main participants Banks Banks, mutual funds, pension funds and

insurance companies Banks, mutual funds, pension funds and insurance companies

Regulations for foreign investors Restriction on foreign investment Some possibility to be implemented in

2010 None None

Custodian Local custodian required Local custodian required Local custodian required Interest income tax 20% standard tax, reducible by Double-

Taxation Treaty Agreement (DTTA) 20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)

20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)

Capital gains tax 20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)



Entry/exit None None None

Source: HSBC

35


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Indonesia: Bonds (2)

Treasury bills Zero coupon bonds (ZC) Retail treasury bonds (ORI) Corporate bonds

Issuer Republic of Indonesia Republic of Indonesia Republic of Indonesia Local companies, state agencies

Currency Indonesian Rupiah (IDR) Indonesian Rupiah (IDR) Indonesian Rupiah (IDR) Indonesian Rupiah (IDR) Form Scripless Scripless Scripless Scripless (mostly) and bearer Minimum denomination IDR1m IDR1m IDR1m IDR10m-50m Tenors 1 year 1-5 years 1-5 years 3-10 years (mostly 5 years) Coupon/discount Zero (issued at discount) Zero (issued at discount) Fixed Fixed or floating rate Frequency None None Monthly Semi-annual for fixed rate,

quarterly for floating rate Amortising schedule Bullet Bullet Bullet Bullet (mostly), amortising

structure on auto-finance companies

Day count Actual/Actual Actual/Actual Actual/Actual 30/360 Amount outstanding IDR30trn (Sep-2010) IDR3trn (Sep-2010) IDR41trn (Dec-2010) IDR105trn (Sep-2010)

Primary market Auction style Dutch auction and non-

competitive bidding Dutch auction and non-competitive bidding

Non-competitive bidding Bookbuilding and underwritten

Average issue size IDR0.5-3.5trn IDR0.5-3.5trn IDR2-5trn IDR100bn-1trn Issuance cycle Twice a month Ad hoc, but approximately twice

a year Ad hoc, but approximately twice a year

Banks, fund manager, pension fund and insurance

Participants Primary dealers, banks, pension funds, mutual funds, insurance, corporate firms and individuals

Primary dealers, banks, pension funds, mutual funds, insurance, corporate firms and individuals

Primary dealers, banks, pension funds, mutual funds, insurance, corporate firms and individuals

FOP, investors need to pay 1 day in advance

Settlement T+2 T+2 T+2 T+5 up to 10

Secondary market Trading mechanism OTC and Indonesia Securities

Exchange OTC and Indonesia Securities Exchange

OTC and Indonesia Securities Exchange

OTC

Trading hours 9am-12pm, 2pm-5pm 9am-12pm, 2pm-5pm 9am-12pm, 2pm-5pm 9.30am-11.30am; 2pm-4pm Quoting convention Price Price Price Clean price to 2 decimal placesAverage bid-offer spreads 10-20bp 10-20bp 10-20bp 100-200bp Average trade size IDR10-50bn IDR10-50bn IDR10-50bn IDR1-2bn Volume IDR4-5tr per day (total for

T-bonds, T-bills, ZCs, ORIs) IDR4-5tr per day (total for T-bonds, T-bills, ZCs, ORIs)

IDR4-5tr per day (total for T-bonds, T-bills, ZCs, ORIs)

IDR20-50bn per day

Settlement T+1 to T+3 T+2 or T+3 T+2 or T+3 T+3 Clearing BI’s BER system, DVP

settlement BI’s BER system, DVP settlement

BI’s BER system, DVP settlement

KSEI for scripless settlement

Main participants Banks Banks, mutual funds, pension funds and insurance companies

Banks, mutual funds, pension funds and insurance companies

Mutual funds, pension funds and insurance companies


None None None None

Custodian Local custodian required Local custodian required Local custodian required Local custodian required Interest income tax 20% standard tax, reducible by

Double-Taxation Treaty Agreement (DTTA)




Capital gains tax 20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)





Source: HSBC

36

Asia-Pacific Rates Guide 2011 Korea December 2010

abc

Market developments The Ministry of Strategy and Finance (MoSF) has

announced its intention to repeal the tax exemption on

interest income and capital gains earned by non-

resident investors on Korean Treasury Bonds (KTBs) and

Monetary Stabilisation Bonds (MSB) purchased since 13

November 2010 (December 2010). Interest income earned

by non-residents from KTBs and MSBs purchased before

13 November would remain exempt. At the time of

writing, the National Assembly was in the process of

finalising the final applicable tax rates. The expected total

effective tax rates are 15.4% for the withholding tax on

interest income and 22% for the capital gains tax.

Foreign investor preference has generally shifted

towards longer-duration bonds as holdings of KTBs

have increased versus short term MSBs, which are

purchased predominantly for arbitrage trades. Foreign

bond holdings in KTBs expanded to KRW49trn from

KRW31trn between January and November 2010. On

the other hand, MSB holdings increased only slightly, to

KRW31trn. Nevertheless, inflows into MSBs were cited

as responsible for inducing KRW appreciation, prompting

consideration of FX-related measures.

Macro-prudential measures have been implemented

to curb KRW volatility arising from foreign bond

investments (June 2010). These measures include

(1) limits on the foreign exchange derivative positions

of domestic banks (50%) and foreign bank branches

(250%), (2) tighter prudential regulations on banks’

foreign currency liquidity, (3) tighter regulations on

foreign currency-denominated bank loans, and (4) more

stringent monitoring of these activities. In line with the

goals of expanding and enforcing macro-prudential

measures, the Bank of Korea (BoK) and Financial

Supervisory Service (FSS) conducted joint inspections

on banks during October-November 2010. The latest

A1/A/A+Korea

MoSF repeals tax exemption on interest income and capital gains earned

by non-residents on KTBs and MSBs purchased since 13 November 2010

Foreign investor preference has shifted towards longer-duration bonds as

holdings of KTBs have increased while those of MSBs have remained flat

Macro-prudential measures are implemented to curb KRW volatility arising

from foreign bond investments


0

200

400

600

800

1,000

1,200


USD

bn

0

20

40

60

80

100

120

% G

DP


1-3 y ears,

36%

Ov er 10 y ears,

10%

5-10 y ears,

21%

3-5 y ears,

33%

Source: HSBC, ADB Source: ADB

37


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inspection centred on banks’ FX forward positions such

as non-deliverable forwards (NDFs).

The MoSF is planning to issue short-term KTBs to

provide a benchmark for short-term rates. KTBs

with maturities of less than 1yr will be issued in 2011-

2012 following revisions to the National Finance Act.

Specific maturities have not been announced. The size

of MSB issuances has been rather irregular in 2010,

reflecting market liquidity. Instead, the MoSF is expected

to issue short-term KTBs according to a pre-announced

issuance schedule that will help to provide stable

benchmarks for the front end of the cash curve.

The BoK has introduced a new term deposit facility

to control liquidity (October 2010), which could

replace the conventional method of issuing short-term

MSBs to drain excess liquidity. Term deposits are

generally issued mainly in 14- and 28-day maturities,

though they can reach up to 91 days. Foreign investors

are excluded from accessing the new facility.

A new 10-year inflation-linked “KTBi” has been

issued (June 2010). This 2.75% June-20 KTBi is the

second inflation-linked issue, the other being the 2.75%

March-17. The 10yr KTBi was issued at an initial size

of KRW1.25trn, which exceeded expectations as a

result of a new issuance method of fixing the rate rather

than amount and the introduction of a deflation floor.

The inclusion of KTBs in the World Government

Bond Index (WGBI) has been delayed, but is still

under consideration by the index committee. The delay

may be attributable to Korea’s various policy responses

intended to mitigate bond inflows, such as the re-

imposition of withholding tax (WHT). Previous

qualifications, including Euroclear and Clearstream

settlement, have been met.

Settlement for 10yr KTB futures contracts has

changed from physical to cash delivery (October

2010). This change aims to stabilise price movements

by increasing liquidity generated by primary dealers.

Monetary policy The Bank of Korea’s primary objective is price stability,

with a target of 2-4% headline inflation for 2010-2012.

Monetary policy is managed through short-term rates.

The main policy rate is the 7-day repo rate, which is the

reference rate applied to transactions between the BoK

and financial institutions, such as repos and the BoK’s

lending and deposit facilities. The BoK conducts 7-day

repo transactions on a weekly basis at the BoK base rate

supplemented by shorter-term repos (generally 1- to 3-

day tenors) on an ad hoc basis. Eligible forms of collateral

are KTBs, MSBs, and bonds issued by the Korean Housing

Finance Corporation (KHFC). Reverse repo transactions

use the base rate as the minimum bid rate.

The BoK also uses open market operations such as

repos, lending/deposit facilities, and standing facilities.

Korea: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos KTBs, MSBs- For interbank repos KTBs, MSBs, triple-A bank bondsMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors Exempt once tax exemption application is

accepted by tax authority- Offshore investors Pending legislation (expected: 15.4% withholding

tax on interest, 22% tax on capital gains)Offshore investor access - Foreign ownership of government bonds

KRW79.8trn (of which KRW48.7tr KTBs, KRW31.1tr MSBs)

- As % of outstanding 14.9% of total government bonds (13.2% of KTBs, 18.8% of MSBs)

- Direct purchase? No- Subject to cap? No- Registration requirement? Yes- Access to onshore funding? Yes (up to KRW30bn with BoK approval)- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? Yes (IRS, futures)Market liquidity statistics KTBs - Daily turnover (LCtr) KRW7-9tr- Buying volume in a single day (USDm) (with minimal market impact)

USD100m

- Bid/offer spreads under normal conditions (bp) 1-2bpMSBs - Daily turnover (LCtr) KRW4-6trn- Buying volume in a single day (USDm) (with minimal market impact)

USD100m


*HSBC is not a qualified tax adviser. Consult a professional adviser for further guidance Source: HSBC

38


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Key policy rate

7-day repo rate: Considered as the BoK’s policy rate.

Bloomberg: KORP7D Index.

Key market rates

91-day Certificate of Deposit (CD): Rate applied to

91-day CDs submitted by local securities firms.

Bloomberg: KWCDC Curncy.

MSB yields: Secondary market yields on BoK-issued

sterilisation instruments. Bloomberg: KWMSB1 (1yr),

KWMSB2 Curncy (2yr).

Fixed income instruments The Korean bond market has grown to a market

capitalisation of USD1.1trn as of November 2010

(119.7% of GDP), making it the second-largest local

bond market in Asia outside of Japan. Approximately

40% of the bond market is composed of government

bonds, while the remainder is evenly split between

agency and corporate bonds.

There are 20 primary dealers (PDs). PDs have the right

to participate in non-competitive acquisitions of KTBs

at primary auctions from January to November of every

year. The value of KTBs to which PDs are entitled for a

non-competitive acquisition ranges between 10% and

25% of the amount acquired in the competitive auction.

Rights for non-competitively auctioned KTBs cannot be

accumulated and must be either used or forfeited each

month. In return, PDs are required to provide two-way

quotes in the exchange market.

Foreign investment has increased to 17% of total

Korean government bonds (KTBs plus MSBs) as of

November 2010, from 11.5% at end-2009, with virtually

all this growth due to increased holdings in KTBs.

KRW49trn of total foreign holdings is in KTBs (13.2%

of outstanding KTBs) and KRW31trn in MSBs (18.8%

of outstanding MSBs).

Bonds

Treasury bonds (KTBs) are issued by the Republic of

Korea primarily to manage the national treasury. KTBs

are issued in auctions that take place every Monday.

Maturities range between 3 and 20 years.

Monetary stabilisation bonds (MSBs) are issued by

the BoK for the purpose of managing liquidity including

sterilisation of FX interventions. MSBs are sold through

a Dutch auction every Monday. 2yr MSBs are sold on

every first and third Wednesday of each month. Maturities

range from 14 days to 2 years, with secondary market

liquidity greatest at the 1-2 year segment.

Inflation-linked Treasury bonds (KTBi) protect the

holder from inflation risks. The coupon and principal

are adjusted for CPI on each reference date (see table

KTBi calculations). Interest is paid semi-annually and

issued on a monthly basis. All KTBi’s issued thus far

have original maturities of 10 years. The 2.75% March

2017 KTBi was the first KTBi, issued from March 2007

to August 2008. Termination was due to limitations of

the issuance method, liquidity shortages, and contracting

demand.

The second KTBi (2.75% June 2010) has been issued

monthly since June 2010 with a new deflation floor that

protects its nominal face value. This feature was

introduced to stabilise investor sentiment, rather than

imposing an actual financial burden on the BoK. In

addition, the issuance method of the two KTBi’s is

different. While the earlier KTBi was issued at a fixed

amount per auction, the amount issued for the new

KTBi is 10-20% of 10yr KTB issued for that month.

Foreign holdings of KTBs and MSBs

10

20

30

40

50

60

70

80

90

Feb-09 Sep-09 Apr-10 Nov -10

KR

Wtr

n

0%

5%

10%

15%

20%

KTBs (LHS) MSBs (LHS)% of total gov. debt (RHS)

Source: HSBC

39


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KTBi calculations

Component Calculation Remarks

Index ratio CPI on payment date / CPI on issue date

-

Interest calculation Face value x index ratio x coupon rate / 2

Coupons are semi-annual

Principal calculation Maximum (face value, [face value x index ratio])

Deflation floor imposed

Source: Ministry of Strategy and Finance

Financial debentures are issued by financial institutions

and held mainly by local bond investors. They may be

zero coupon, compound or coupon bonds. As most

issues are from commercial banks, they can be regarded

as private. The main issuers are Korea Development

Bank (KDB) and other quasi-government banks.

Corporate bonds are issued by non-financial private

companies to the general public. Only companies listed

on the Korean Stock Exchange or registered with the

Securities and Exchange Commission may make public

offerings. The issuer must obtain at least two credit ratings

from domestic credit rating agencies before registration

with the Financial Supervisory Commission. This market

is not dominated by any particular group of firms.

Derivatives

Derivatives consist of onshore IRS and CCS as well as

offshore IRS (NDIRS) and CCS (NDCCS). See table

Korea: IRS and CCS markets for more information.

The interest rate swap (IRS) is widely used for hedging

and bond swap trades. The main participants in the IRS

market are banks, securities companies, and asset

managers. Historically, KRW IRS rates have been lower

than KTB cash bond yields. However, negative bond

swap spreads have recently reversed, particularly at the

front ends (2yrs and below), as arbitrage trades from

securities companies’ cash management accounts led to

paying interest in front-end swaps. A non-deliverable

IRS (NDIRS) also exists, but there is essentially no

spread between the IRS and the NDIRS, as onshore

banks can conduct trades in both swap curves.

The cross currency swap (CCS) closely reflects onshore

USD liquidity. It is used for asset/liability swaps by

onshore investors and arbitrage trades related to swap

basis by offshore investors. Specifically, at the front end

of the curve, receiving interest comes mainly from

exporters and onshore investors having USD positions

in FX forward and asset swaps. Paying interest is

usually from arbitrage investors from onshore (foreign

bank branches) and offshore (since 2009, Thailand-

based funds dedicated to short-term Korean bonds, so-

called “kimchi funds” have become key participants in

the CCS market). The long end of the curve, however, is

largely determined by onshore USD debt issuers

engaging in liability swaps.

The KRW swap basis (CCS minus IRS rates) remains in

negative territory and has shown volatile movement

throughout 2010. FX-related regulations in June 2010

and at year-end have led to a widening of the KRW

swap basis from limiting USD supply and increasing

funding costs for USD.

Korea: IRS and CCS markets

Onshore IRS Offshore IRS Onshore CCS Offshore CCS

Non-resident access: Not allowed, only NDIRS Existent Yes, for underlying investment

Yes

Tenors 1-20 years 1-20 years 1-10 years 1mth-20 years Liquid tenors 1-10 years 1-10 years 1-5 years 1-5 years Average trade size KRW10bn KRW10bn USD10m USD10m Bid/offer spreads under normal conditions (bp)

2-3bp 2-3bp 10-20bp 10-20bp

Fixing rate 91-day CD rate 91-day CD rate 6mth USD LIBOR 6mth USD LIBOR Day count Actual/365F Qtly Actual/365 Semi Actual/365F for

KRW, Act/360 for USD Semi Actual/365F for KRW, Act/360 for USD

Effective date T+1 T+1 T+2 T+2 Fixing time (local time) 3:30pm 3:30pm Seoul time for both

91-day CD and USD/KRW 11am London time 3:30pm Seoul time for USD/KRW,

11am London time for USD Libor Fixing page Bloomberg: KSDA4 Bloomberg: KSDA4 for 91-day

CD, KFTC18 for USD/KRW Reuters: Libor 01 Bloomberg: BBAM1

Reuters: KFTC18 for USD/KRW, Libor 01 for USD Libor Bloomberg: BBAM1 for USD Libor

Local market hours 9am-3:15pm 9am-3:15pm 9am-3:15pm 9am-3:15pm Main participants Interbank Interbank (offshore) Interbank Interbank (offshore)

Source: HSBC

40


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FRAs and IRS forwards are actively traded in the

NDIRS market. Whilst the actual FRAs are not traded

actively in the interbank market, short-dated IRS

forwards (notably 6m, 9m and 1yr) are used by banks to

hedge FRA positions from clients. Offshore investors

express their curve views via NDIRS forwards.

3yr KTB futures constitute the most actively traded

derivatives market. The notional value of this market is

KRW100m. It is widely used for hedging and arbitrage

trading. It is not rare for 3yr KTB futures to record a

daily trading volume of 100,000 contracts. 10yr KTB

futures were introduced in February 2008. Low liquidity

in this market led to revised specifications in October

2010 – namely, changes to cash settlement from

physical delivery as well as a reduction in the coupon

rate to 5% from 8%.


Foreign investors must obtain an Investment Registration

Certificate (IRC) from the FSS. Necessary documents

are (1) the Standing Proxy Agreement or Power of

Attorney from the foreign investor authorising a local

sub-custodian bank (which may be a local branch of a

foreign bank), (2) the certificate of incorporation issued

by the government or public institution of the relevant

country, (3) the IRC application form, providing a

detailed investor profile, and (4) the certificate of residency

document, to determine the investor’s tax residency. An

IRC is not required if foreign investors trade through a

Euroclear/Clearstream omnibus account.

Settlement

An omnibus account settles KTB and MSB investments.

This was introduced by Euroclear and Clearstream to

provide another channel by which foreign investors may

access these instruments. For bonds traded over the

counter (OTC), settlement dates can be negotiated

between T+1 and T+30. Foreign investors tend to use a

T+2 settlement cycle. Securities eligible for Korea

Securities Depository (KSD) are settled via KSD’s book

entry system. Foreign investors require a local custodian

to facilitate this settlement process.

Taxation6

At the time of writing, a re-imposition of taxes on interest

income and capital gains on foreign investor KTB and

MSB holdings was anticipated upon formal legislation

by the National Assembly. Foreign investors are expected

to be subject to three taxes: a 14% withholding tax on

interest income, 20% capital gains tax, and an additional

10% “resident tax”. The last of these effectively raises

the withholding and capital gains taxes to 15.4% and 22%,

respectively. These taxes may only apply to bonds

purchased since 13 November 2011. Interest income

earned by non-residents on KTBs and MSBs settled on

or before 12 November 2010 remain exempt. A bank

levy is also under consideration. Final tax rates and

treatment are pending a decision by the government and

the National Assembly.

These taxes may be reducible if the investor resides in a

jurisdiction that has a double tax treaty with Korea (the

US, Singapore, or Luxembourg). See National Tax

Service for more information.


Onshore average daily volume USD15bnOnshore spot transaction USD3-5mOnshore bid/ask spread 10 pips (0.10KRW)Onshore forward transaction USD50mOnshore forward spread 1M 10 pips (0.10KRW)Offshore average daily volume USD4bnNDF transaction USD5mNDF spread 1M 50 pips (0.50KRW)Implied option volatility spread 0.4 vol



Bank of Korea (BoK) www.bok.or.kr/eng Ministry of Strategy and Finance (MoSF) english.mosf.go.kr Futures Exchange (KTB futures) eng.krx.co.kr/ Korean Securities Dealers Association (KSDA) www.ksda.or.kr Financial Supervisory Service (FSS) english.fss.or.kr Korea Bond Web www.bondweb.co.kr/ National Tax Service www.nts.go.kr/eng/ Ministry of Knowledge Economy (MKE) www.mke.go.kr National Pension Service (NPS) www.nps.or.kr

Source: HSBC

______________________________________ 6 HSBC is not a qualified tax adviser. Consult a professional adviser for further

guidance

http://www.nts.go.kr/eng/

http://www.nts.go.kr/eng/

http://www.mke.go.kr/

41


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Korea: Bonds

Treasury bonds (KTBs)

Monetary Stabilisation Bonds (MSBs)

Inflation-linked Treasury Bonds (KTBi’s)

Financial debentures Corporate bonds

Issuer Republic of Korea Bank of Korea (BoK) Republic of Korea Financial institutions Korean corporations Currency Korean Won (KRW) Korean Won (KRW) Korean Won (KRW) Korean Won (KRW) Korean Won (KRW) Form Scripless Scripless Scripless Scripless Scripless Minimum denomination KRW 10,000 KRW 10,000 KRW 10,000 KRW10,000 KRW10,000 Tenors 3, 5, 7, 10, 20 years 14, 28, 63, 91, 140, 182,

362, 392, 546 days, 2 years10 year 1-7 years 1-5 years (mostly 3 years)

Coupon/discount Fixed Fixed rate for 1 and 2-year MSBs, zero for all others

Fixed (applied to an increasing/decreasing principal)

1-year (Fixed rate or zero coupon); 2-7 year (Fixed)

Fixed

Frequency Quarterly (all issues before 2003) or semi-annual (all issues since 2003)

Quarterly Semi-annual Quarterly Quarterly

Amortising schedule Bullet Bullet Bullet Bullet Bullet Day count Actual/Actual Actual/Actual Actual/Actual Actual/Actual Actual/Actual Amount outstanding KRW320trn (Nov-2010) KRW164trn (Nov-2010) KRW2.5trn (Nov-2010) KRW29trn (Oct-2010) KRW197trn (Oct-2010)

Primary market Auction style Dutch and conventional

auction (multiple price by 3bp grouping)

Dutch auction, Mozip (similar to window sale)

Dutch and conventional auction (multiple price by 3bp grouping)

Book-building Book-building, private placement

Average issue size KRW1-3tr KRW1-3trn KRW150bn KRW50-100bn per issuance

KRW50-100bn per issuance

Issuance cycle Weekly (Monday) Every Monday for 14-day to 1-year, first and third Wednesday for 2-year, Mozip sale on some Fridays

Monthly (2 days after 10-year KTB sale)

Ad hoc Ad hoc

Participants Primary Dealers (9 banks, 11 securities firms)

Banks and securities firms selected by BoK

Primary Dealers (9 banks, 11 securities firms)

Banks, securities firms, ITCs, insurance


Settlement T+1 T+1 T+1 T+0 T+0 to T+1

Secondary market Trading mechanism Mostly OTC or KRX Mostly OTC Mostly OTC Mostly OTC OTC or KRX Trading hours 9am-3.05pm 9am-3.05pm 9am-3.05pm 9am-3pm 9am-3pm Quoting convention Yield to 2 decimal places Yield to 2 decimal places Yield to 2 decimal places Yield to 2 decimal places Yield to 2 decimal places Average bid-offer spreads 1-2bp (up to 5y

benchmarks) 1-2bp 5-10bp 5-10bp 5-10bp

Average trade size KRW10bn KRW10bn KRW10bn KRW5-10bn KRW10bn Volume KRW7-9trn per day KRW4-6trn per day KRW0-20bn per day KRW0.5trn per day KRW0.5trn per day Settlement T+1 T+1 T+1 T+1 (OTC) T+1 or T+2 Clearing KSD KSD KSD Book-entry system Book-entry system Main participants Banks, securities firms,

ITCs, insurance Banks, securities firms, ITCs, insurance





None None None None None

Custodian Local custodian required, unless through ICSD (Euroclear)

Local custodian required, unless through ICSD (Euroclear)

Local custodian required, unless through ICSD (Euroclear)

Local custodian required Local custodian required

Interest income tax Pending legislation (15.4% to be expected, reducible by tax treaty and future legislation up to 0%)

Pending legislation (15.4% to be expected, reducible by tax treaty and future legislation up to 0%)


15.4%, reducible by tax treaty

15.4%, reducible by tax treaty

Capital gains tax Lower of 22% on capital gains or 11% of sales proceeds to be expected, reducible by tax treaty

Lower of 22% on capital gains or 11% of sales proceeds to be expected, reducible by tax treaty


Lower of 22% on capital gains or 11% of sales proceeds, reducible by tax treaty

Lower of 22% on capital gains or 11% of sales proceeds, reducible by tax treaty

Entry/exit None None None None None

Source: HSBC

42

Asia-Pacific Rates Guide 2011 Malaysia December 2010

abc

Market developments Government begins regular issuance of 7-year

government bonds (March, July and October 2010). In

December 2009, the government announced that it

would begin regular issuance of 7-year Malaysia

Government Securities (MGS). The benchmark 4.012%

9/17 benchmark was first issued in March 2010 and

then reopened in July and October.

Foreign investors absorbed a large portion of net

government issuance during 2010, attracted by

investment prospects and a liberal capital flow regime.

Malaysia possesses a developed bond market for an

economy of its size with virtually no restrictions on

capital flows. Foreign investors purchased MYR31bn in

MGS during 2010-to-October – absorbing roughly 75-

80% of net government bond issuance and raising total

foreign holdings by +75% to MYR72bn (USD22bn).

Malaysia is also a global leader in the area of sukuk – or

Islamic bond – financing, contributing to 60.5% of new

issuance in the first half of 2010 (USD10bn).

New criteria allow more companies to seek

assistance from the Corporate Debt Restructuring

Committee (CDRC) in restructuring debt

obligations. The four criteria for companies are: 1)

aggregate indebtedness of at least MYR30m, 2)

minimum of two financial creditors, 3) not in

receivership or liquidation unless receivers are

appointed over certain specified assets and control of

companies’ overall operations remain with directors, 4)

have not yet defaulted. Any company classified as PN17

or GN3 are eligible irrespective of total debt

outstanding. The CDRC was established in 1998 to

provide a platform for both borrowers and creditors to

work out feasible debt restructuring schemes without

having to resort to legal proceedings.

A3/A-/A-Malaysia

Government deepens bond curve with issuance of 7-year MGS

Foreign investors absorbed a large portion of net government issuance

during 2010, attracted by returns and a liberal capital flow regime

New criteria allow more companies to seek assistance from CDRC in

restructuring debt obligations


0

50

100

150

200

250


USD

bn

0

20

40

60

80

100

120

% G

DP


1-3 y ears,

32%

3-5 y ears,

24%

5-10 y ears,

35%

Ov er 10 y ears,

8%


43


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Monetary policy The board of the Bank Negara Malaysia (BNM) meets

six times a year to conduct monetary policy. The key

benchmark rate is the Overnight Policy Rate (OPR),

which is used as the target rate for the interbank

overnight rate, also known as the Kuala Lumpur Inter-

Bank Offered Rate (KLIBOR).

BNM has a number of monetary instruments at its

disposal to inject and withdraw funds to influence the

level of interest rates in the financial system. Examples

of these instruments include the purchase and sale of

central bank bills (Bank Negara Monetary Notes or

BNMNs), direct lending and borrowing in the interbank

market and FX forwards.

In addition, BNM manages liquidity and credit creation

in the banking system by requiring financial institutions

to maintain a Statutory Reserve Requirement (SRR)

equivalent to a certain proportion of their eligible

liabilities (EL) base consisting of MYR-denominated

deposits and non-deposit liabilities, net of interbank

assets and placements with BNM.

Key policy rate:

Overnight policy rate (OPR): The benchmark policy

rate for BNM, which sets a corridor of +/- 25bps for the

overnight interbank (KLIBOR) rate to fluctuate around

the OPR. Bloomberg: MAOPRATE Index.

Key market rate:

3-month Kuala Lumpur Interbank Offered Rate

(KLIBOR): The rate at which banks borrow and lend to

each other on the interbank market. The 3mth KLIBOR

rate also serves as the fixing rate for the IRS market.

The 3mth KLIBOR is the polled average of

contributions from 12 banks. KLIBOR rates are also

polled for 1, 2, 6, 9 and 12 months conducted daily at

11am. Bloomberg: KLIB3M Index.

Fixed income instruments The Malaysian bond market has grown to a market

capitalisation of USD234bn (96.6% of GDP) as of

September 2010 from USD185bn at the end of 2009.

The government sector – including quasi-government

entities – comprises a significant portion (69.9%) of the

Malaysian bond market.

There are 12 primary dealers, including HSBC. They

are obliged to provide two-way price quotations for

benchmark securities under all market conditions to

ensure liquidity in the secondary market. It is their

function to bid for the money market and repo auctions

conducted by BNM. During government bond auctions,

PDs are obliged to tender a minimum amount of the

issue size in order to ensure 100% subscription.

Foreign investors have been significant participants in

the MYR bond market and this intensified in 2010. As

of October 2010, foreign ownership of MGS has risen to

MYR72bn, or 27% of outstanding MGS. As a percent

of the government bond market, foreign ownership

stands at 21% as this figure includes Islamic MGIIs,

which typically see less foreign purchases. Foreign

holdings of short-term BNMNs and Treasury bills also

accelerated during 2011 to MYR40bn.

Malaysia: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? NoEligible collateral for repos - For CB repos As specified by RENTAS - For interbank repos As specified by RENTAS, PDS, NID, BAMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors None- Offshore investors NoneOffshore investor access - Foreign ownership of government bonds

MYR97.9bn of which MYR68.0bn in MGS, MYR29.9bn in BNM bills (Sep-10)

- As % of outstanding 31% of outstanding MGS (Sep-10)- Direct purchase? Yes- Subject to cap? No- Registration requirement? No- Access to onshore funding? No- Access to onshore FX hedging?

Yes

- Access to rates hedging (IRS, repo, futures)? Yes (IRS)Market liquidity statistics MGS/MGIIs - Daily turnover (LCbn) MYR0.5-0.9bn- Buying volume in a single day (USDm) (with minimal market impact)

USD40-60m

- Bid/offer spreads under normal conditions (bp) 3-5bpBNMNs - Daily turnover (LCbn) MYR0.7bn- Buying volume in a single day (USDm) (with minimal market impact)

USD60-80m


Source: HSBC *HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.

44


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Foreign investor holdings of MYR debt set to increase

0

20

40

60

80

100

120

Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

MYR

bn

0%

5%

10%

15%

20%

25%

BNMNs + Tbills (LHS) MGS + MGII (LHS)% of MGS/MGIIs (RHS)

Source: HSBC, Bank Negara Malaysia

Other key market participants include banks, finance

companies, insurance companies and provident funds.

The Employees Provident Fund (EPF), a social security

institution for private and public employees is the single

largest holder of MGS at 37% of outstanding holdings

as of June 2010. Insurance companies and commercial

banks also account for 25% of total MGS holdings.

Provident funds, insurance companies and financial

institutions have a statutory requirement to hold liquid

assets such as MGS. During government auctions, BNM

also has the option to participate for the purpose of

obtaining securities for its market operations at a

maximum allotment limit of 10%.

Foreign holdings of MYR bonds by type* (total: MYR127bn, as of October 2010)

BNMNs

27%

MTBs

1%

MGS

60%

MGII

0%

PDS

12%

Source: HSBC. *Bank Negara Malaysia Notes (BNMNs), Malaysia Treasury Bills (MTBs), Malaysia Government Securities (MGS), Malaysia Government Investment Issues (GII), Private Debt Securities & others (PDS)

Bonds

Malaysia Government Securities (MGS) are medium

to long-term bonds issued by the government for deficit-

funding purposes. Maturities extend from 3 to 20 years,

though liquidity is greatest at on-the-run 3, 5, 10yr

benchmarks. In 2010, the government began to issue 2yr

and 7yr MGS.

Ahead of an auction, details regarding the size and exact

date of the auction are announced at least 5 business

days in advance via the Fully Automated System for

Issuing/Tendering (FAST). Upon formal announcement

of MGS auction details, ‘when-issued’ (WI) trading

commences until the tender results are announced to the

market. A portion of government issuance may also be

issued via private placement.

Malaysia Government Securities (MGS) investors by type

EPF

37%

Public sector

2%

Social

security inst.

2%

Insurance

8%

Foreign

inv estors

23%

Financial

sector

28%

Source: HSBC, BNM

Malaysia Government Investment Issues (MGIIs) are

Islamic equivalents of MGS that do not bear coupons to

comply with Islamic law. Since March 2005, coupon

payments were introduced by operating on a profit-

sharing basis according to the “Bai Bithaman Ajil”

concept (sale of goods on a deferred payment basis).

Buyers of MGII include banks and dedicated Islamic

funds to meet their statutory liquidity requirements.

MGIIs also allow these funds to invest their liquid funds

in instruments based on Shariah principles as they

cannot invest in any interest-bearing instruments.

Treasury Bills (MTBs) finance the state’s short-term

funding requirements. They are discount securities

issued in 3, 6 and 12 month tenors by BNM on a weekly

basis. MTBs are traded OTC with two-way quotes. The

45


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Islamic equivalents of MTBs are MITBs (Islamic

Malaysia Treasury Bill).

Bank Negara Monetary Notes (BNMNs) are used for

liquidity management. Maturities range between 3

weeks to 3 years, but the usual tenors are 3, 6, 9 and 12

months. They are issued twice a week on a discount

basis like MTBs.

The Islamic equivalent is BNMN-Is, which adopt the

same market convention as MGIIs for profit-sharing

notes and MITBs for discount notes.

Private Debt Securities (PDS) are bonds issued by the

corporate and banking sector primarily to institutional

investors. Maturities range between short, medium and

long term debt. Top-rated PDS are typically purchased

at issuance and held to maturity given their scarcity. All

PDS issued since 1997 are scripless by regulation,

whilst physical forms issued before are allowed to

mature naturally. PDS include Cagamas bonds, MBS,

ABS, bank sub-debt, convertible bonds and various

Islamic bonds.

Currently, all issues, offers or invitations of PDS must

be rated by a rating agency recognised by the Securities

Commission (SC) – Rating Agency Malaysia Berhad

(RAM) or Malaysian Rating Corporation Berhad

(MARC) – unless exemptions were given by the

Securities Commission.

Derivatives

An onshore and offshore market exists for MYR interest

rate swaps (see table Malaysia: IRS and CCS markets).

Interest rate swaps (IRS) are developed with the curve

extending up to 10 years. Offshore investors are allowed

to participate for bond hedging purposes only.

Consequently, an offshore MYR NDIRS curve has

developed. The most liquid tenors are 1-5 years. During

2010, the estimated average daily volumes for the

onshore IRS market reached MYR250m. The fixing rate

is the 3mth KLIBOR.

Cross currency swaps (CCS) also have a curve

extending up to 10 years. Similarly, offshore investors

may only access the CCS market for bond hedging

purposes but liquidity is limited.

KLIBOR futures are based on the 3mth KLIBOR and

traded at the Bursa Malaysia. Their principal contract

size is MYR1m with bid and offer quoted in terms of an

index (100 minus the annual percentage yield to two

decimal places). The quarterly cycle contract months are

March, June, September and December up to five years

ahead and two serial months.


There are no restrictions on foreign investors other than

appointment of a local custodian.

Settlement

The Real Time Electronic Transfer of Funds and

Securities (RENTAS) acts as the central depository and

payment agency. It is a real-time gross settlement

(RTGS) system that processes and settles fund transfer

instructions continuously. The transfers are

instantaneous and irrevocable only if there are sufficient

funds in the respective bank’s BNM settlement account.

Hence, financial institutions need to manage their

Malaysia: IRS and CCS markets

Onshore IRS Offshore NDIRS Onshore CCS

Non-resident access Bond hedging allowed Existent Bond hedging allowed Tenors 1-10 years 1-10 years 1-10 years Liquid tenors 1-10 years 1-5 years 1-5 years Average trade size MYR50m MYR30-50m USD15-25m Bid/offer spreads under normal conditions (bp) 3-5bp 3-5bp 10-15bp Fixing rate 3mth KLIBOR 3mth KLIBOR 3mth USD LIBOR vs 3mth KLIBOR Day count Quarterly Actual/365 Actual/365 Actual/360 (USD) Effective date T T T+2 Fixing time (local time) 11am 11am 11am Fixing page Reuters: KLIBOR

Bloomberg: BNMF Reuters: KLIBOR Bloomberg: BNMF

Reuters: KLIBOR, LIBOR Bloomberg: BNMF

Local market hours 9am-5pm 9am-5pm 9am-5pm Main participants Interbank, corporates Interbank, corporates, hedge funds Interbank, corporates

Source: HSBC

46


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intraday funds and customers must ensure availability of

funds prior to issuing payment instructions to eliminate

the settlement risk.

Government bonds are auctioned scripless through

principal dealers. Subsequent trades are executed on an

OTC basis and settled by delivery vs. payment (DvP)

through RENTAS. Payment is by bank transfer from the

buyer’s bank to the seller’s bank in Kuala Lumpur. The

value date is normally T+2.

Securities settled via RENTAS are held by Authorised

Depository Institutions (ADIs). These are dealers who

are approved or appointed by BNM to hold securities on

behalf of non-RENTAS members.

The settlement of all PDS is conducted through

RENTAS. Physical form PDS are physically delivered

with payment. KLSE listed PDS are traded in the same

manner as listed equities.

Taxation7

There is neither withholding tax on interest income nor

is there capital gains tax.

Non-residents are exempt from income tax on all bonds

and securities (other than convertible loan stocks) issued

by the government, publicly-listed companies on the

KLSE, companies rated by Rating Agency Malaysia

Berhad and/or Malaysian Rating Corporation Berhad

and all other debentures approved by the Securities

Commission.

There is no stamp duty relating to the issuance and

transfer of Malaysian government or private debt

securities approved by the Securities Commission.


guidance.


Onshore average daily volume USD1.2bnOnshore spot transaction (market lot) Via brokers: USD3m

Via Reuters :USD5m Onshore bid/ask spread 20–30 pips (0.0020 – 0.0030MYR)Onshore forward transaction USD10mOnshore forward spread 1-6M: 3-20 pips (0.0003-0.0020MYR)Onshore implied option vol spread 0.8-1.5 vol for all spreads



Bank Negara Malaysia (BNM) www.bnm.gov.my BNM Bond Info Hub rmbond.bnm.gov.my/portal/server.ptSecurities Commission (SC) www.sc.com.my Treasury Malaysia www.treasury.gov.my Kuala Lumpur Stock Exchange (KLSE) www.klse.com.my Federation of Malaysian Unit Trust Managers (FMUTM)

www.fmutm.com.my

Employees Provident Fund (EPF) www.kwsp.gov.my Bloomberg fixing page BNMF Reuters fixing page NEGARA, HSBM01

47


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Malaysia: Bonds

Malaysia Government Securities (MGS)

Malaysia Government Investment Issues (MGIIs)

Treasury Bills (MTBs) Bank Negara Monetary Notes (BNMNs)

Private Debt Securities (PDS)

Issuer Government of Malaysia Government of Malaysia Government of Malaysia Bank Negara Malaysia (BNM)

Malaysian corporations, quasi-govt agencies

Currency Malaysian Ringgit (MYR) Malaysian Ringgit (MYR) Malaysian Ringgit (MYR) Malaysian Ringgit (MYR) Malaysian Ringgit (MYR) Form Scripless Scripless Scripless Scripless Scripless Minimum denomination MYR1,000 MYR1,000 MYR1,000 MYR1,000 MYR1,000 Tenors 3, 5, 7, 10, 20 years 3 to 10.5 years 3, 6, 9 months, 1 year 91 days up to 3yrs 1-20 years Coupon/discount Fixed at weighted

average yield at auction to 3 decimal places

Fixed at weighted average yield at auction to 3 decimal places

Zero (issued at discount) Zero, coupon-bearing, floating

Fixed rate, floating rate, zero coupon or structured

Coupon frequency Semi-annual Semi-annual None None/Semi-annual Semi-annual Amortising schedule Bullet Bullet Bullet Bullet Bullet Day count Actual/Actual Actual/Actual Actual/365 Actual/365 Actual/Actual or

Actual/365 Amount outstanding MYR253bn (Sep-10) MYR80.5bn (Sep-10) MYR4.32bn (of which

MYR2bn Islamic) (Sep-10)

MYR62.4bn (of which MYR 20bn Islamic) (Sep-10)

MYR 133.7bn (of which MYR70bn Islamic) (Sep-10)

Primary market Auction style US Treasury style auction

via FAST US Treasury style auction via FAST

US Treasury style auction via FAST


Book-building, private placement

Average issue size MYR3-5bn MYR2-4bn MYR80-200m MYR500m-3bn MYR250m-2bn Auction frequency Once or twice a month Once a month Weekly Twice-weekly Ad hoc Participants BNM appointed primary

dealers BNM appointed primary dealers

BNM appointed primary dealers

BNM appointed primary dealers

Banks, state pension funds, insurance companies (on book-building basis)

Settlement T+1 T+1 T+1 T+1 Usually 7 business days

Secondary market Trading mechanism OTC OTC OTC OTC OTC Trading hours 9am-12pm, 2-5pm 9am-12pm, 2-5pm 9am-12pm, 2-5pm 9am-12pm, 2-5pm 9am-12pm, 2-5pm Quoting convention Price to 2 decimal places Price to 2 decimal places Yield to 2 decimal places Yield to 2 decimal places Yield to 2 decimal places Average bid-offer spreads 5-10 cents (liquid issues),

50-100 cents (illiquid issues)

5-15 cents (liquid issues), 50-100 cents (illiquid issues)

3bp 3bp 5-10bp

Average trade size MYR5m MYR5m MYR5m MYR5m MYR5m Volume MYR600-900m per day MYR125-175m per day MYR25m per day MYR600m per day MYR500mn per month Settlement T+2 T+2 T+1 T+1 for discount and T+2

for coupon bearing T+2

Clearing RENTAS RENTAS RENTAS RENTAS RENTAS for unlisted bonds, CDS for listed

Main participants Banks, state pension funds, insurance companies

Banks, state pension funds, insurance companies

Banks Banks Financial institutions, asset managers, insurance, statutory bodies


None None None None None for most issues

Custodian Local custodian required Local custodian required Local custodian required Local custodian required Local custodian required Interest income tax None None None None None Capital gains tax None None None None None Entry/exit None None None None None

Source: HSBC

48

Asia-Pacific Rates Guide 2011 Philippines December 2010

abc

Market developments The Republic of the Philippines diversified and

deepened its investor base by issuing a maiden global

peso bond (GPB) in September 2010, the PHP44bn

4.95% ROP 1/21 sovereign bond. GPBs are US SEC-

registered bonds that are settled offshore in US dollars

but are peso-denominated, which minimises FX risk to

the Philippine government. In contrast to onshore

Treasury bonds (RPGBs), GPBs are not subject to 20%

withholding tax and this is the primary advantage for

overseas investors, which were balanced globally at the

time of issue (37% Asia, 30% Europe, 33% US).

Demand for the 10yr GPB has kept yields lower than

that for comparable onshore RPGBs net-of-tax. On

November 2010, Petron Corp became the first corporate

to issue a PHP20bn GPB.

Department of Finance (DoF) continues to lengthen

the government’s debt profile through debt exchange

programmes. The Philippine Bureau of the Treasury

(BTr) conducted bond swaps to replace existing RPGBs

with new, longer-tenor bonds to smoothen the

concentration of principal payments and extend the

maturity profile up to 25 years, which could be used to

benchmark loans for long-term infrastructure projects

under its private-public partnership programme.

The monetary board of the Bangko Sentral ng

Pilipinas (BSP) unwinds extraordinary monetary

stimulus provisions. In February 2010, the rediscount

rate rose by 50bp to 4.0%, aligning it with the

repurchase rate. The rediscounting facility is a standing

credit facility provided by the BSP to help banks meet

temporary liquidity needs by refinancing the loans they

extend to their clients. The rate was previously lowered

in response to global financials crisis threats against its

domestic financial markets. Also, the rediscounting

budget was decreased from PHP60bn to PHP40bn and

PHP20bn on March 2010 and May 2010, respectively.

Access to rediscounting facilities was also tightened.

The loan value of all eligible rediscounting paper was

restored to 80% from 90%.

Ba3/BB/BBPhilippines

The Philippines diversifies and deepens its investor base by issuing its

first-ever peso-denominated offshore bond, the first of its kind in Asia

Bond exchange programmes lengthen government debt profile

BSP monetary board unwinds extraordinary monetary stimulus provisions


0

10

20

30

40

50

60

70

80


USD

bn

32

34

36

38

40

42

44

% G

DP


Ov er 10 y ears,

6%

5-10 y ears,

42%

3-5 y ears,

24%

1-3 y ears,

29%


49


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Rules on failed trades and delayed settlements of fixed

income securities revised. The Philippine Dealing and

Exchange Corp (PDEx) revised its definition, reporting,

handling and penalties in May 2010.

Monetary policy Bangko Sentral ng Pilipinas’ primary objective is to

“promote a low and stable inflation conducive to

balanced and sustainable economic growth.” The BSP

has adopted an explicit inflation target since January

2002. Its target for 2011 is 4.0% ± 1.0%. The key

benchmark policy rates are the overnight borrowing

(OBR), or reverse repurchase (RRP), rate and the

overnight lending or repurchase (RP) rate.

The BSP has a number of monetary policy instruments

at its disposal to promote price stability. To increase or

reduce liquidity in the financial system, the BSP may

avail of open market operations (OMOs), accept fixed-

term deposits through 1 week-1 month Special Deposit

Accounts (SDAs), extend loans and advances (through

its rediscounting facility) and require banking

institutions to hold statutory and liquidity reserves.

OMOs consist of repurchase and reverse repurchase

transactions, outright purchase/sale of government

securities by the BSP as well as FX swaps.

Key policy rates:

Overnight repo rate: The overnight rate at which

banks can borrow from the BSP to accommodate

liquidity requirements. Bloomberg: PPCBBLR Index.

Overnight reverse repo rate: The overnight rate at

which banks can lend to the BSP. Bloomberg:

PPCBOND Index.

Key market rates:

PDEX rates: PDST-F (Philippine Dealing System

Treasury-Fixing Rates) are the average 60% of firm bid

rates posted by designated PDST Fixing Banks for the

12 benchmark tenors at 11:15am daily. PDST-R1 and

PDST-R2 are the weighted average yields of done

transactions (or best firm bid rates as the case may be)

for the 12 benchmark tenors at 11:15am and 4:15pm

daily, respectively. Bloomberg: PDEX.

91-day T-bill: Used as a floating rate benchmark by

some market participants. Bloomberg: PH91AVG Index.

Philippines Overnight Interbank Reference Rate

(Phiref): Implied overnight peso rate derived from all

executed USD/PHP swap and forward transactions.

Bloomberg: PREFON Index. The 3-month Phiref is a

floating rate index for onshore IRS. It is a weighted

average of done deals in 3-month FX swaps.

Bloomberg: PREF3MO Index.

Fixed income instruments The Philippine bond market has grown to a market

capitalisation of USD72bn as of September 2010 (38%

of GDP). Government bonds dominated the market,

constituting roughly 88%.

There are 42 primary dealers in the Philippines,

including HSBC. Bills and bonds are in scripless form

with its auction process automated. The BSP requires

daily revaluation of securities, increasing transparency

and efficiency in secondary markets. Primary dealers

are known as Government Securities Eligible Dealers

(GSEDs).

Philippines: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? No- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos RPGBs- For interbank repos n/aMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors 20% withholding tax at source- Offshore investors 20% withholding tax at sourceOffshore investor access - Foreign ownership of government bonds Est. PHP60-80bn (Oct-10)**- As % of outstanding Est. 4-5% of RPGBs**- Direct purchase? Yes- Subject to cap? No- Registration requirement? Yes- Access to onshore funding? No- Access to onshore FX hedging? No- Access to rates hedging (IRS, repo, futures)? Yes (IRS)Market liquidity statistics Global Peso Bonds (GPBs) - Daily turnover (LCbn) USD1-5m- Buying volume in a single day (USDm) (with minimal market impact)

USD5m

- Bid/offer spreads under normal conditions (bp) 6-10bpRPGBs - Daily turnover (LCbn) PHP20-30bn- Buying volume in a single day (USDm) (with minimal market impact)

USD5m


Source: HSBC * HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance. **Including 10yr Peso Global Bond.

50


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There is a clear distinction between securities dealers

and brokering participants. Securities dealers may only

buy and sell securities for their own accounts. Brokering

participants may only buy and sell for customer

accounts. All deals must pass through a SEC-license

broker, who posts the orders to the securities trading

platform or the Fixed Income exchange. This aims to

improve transparency and pricing in the secondary

market. No single individual may simultaneously act as

a securities dealer and brokering participant.

Foreigners held PHP61bn of government bonds (4.3%

of total) in October 2010. Specifically PHP44.0bn was

in GPB and PHP171.bn was allocated in onshore

RPGB, which is 2% of onshore total.

Bonds

Global peso bonds (GPBs) are US SEC-registered

bonds that are peso-denominated but settled offshore in

US dollars. In contrast to onshore Treasury bonds

(RPGBs), GPBs are not subject to 20% withholding tax

and this is the primary advantage for offshore investors.

For the sovereign, the GPB has assisted to extend the

debt maturity profile, lower borrowing costs as well as

diversify the investor base. Although there is no limit on

GPB holdings by domestic investors, domestic banks

must report their GPB holdings as part of their net short

USD/PHP position which is currently capped at

USD50m or 20% of unimpaired capital. Approval by

the BSP is required for GPB issuance.

Currently there are two GPBs: PHP44bn 4.95% ROP

1/21 sovereign bond issued in September 2010 and the

PHP20bn 7.00% PCOR 11/17 issued by Petron Corp in

November 2010.

Treasury bonds (RPGBs) are unconditional

obligations of the National Government (NG) issued by

the BTr. They are designed to extend the government’s

debt maturity profile, provide a benchmark yield curve

and improve trading liquidity in longer-term

instruments. Maturities range between 2 and 25 years

with auctions held twice a month. A tap facility allows

additional issuance of up to 50% the fully awarded

initial amount. The BTr may reject the entire auction.

The secondary market is regulated by the SEC. Only

SEC-licensed dealers may engage in the business of

buying and selling securities. The default settlement of

government securities is T+1, but can be agreed on T by

both counterparties.

Treasury bills (T-bills) are zero coupon debt issued

twice a month on Mondays by the BTr. There are three

available tenors: 91, 182 and 364 days.

Retail treasury bonds (RTBs) are small denomination

government securities (as low as PHP5,000) with fixed

rate coupon payments. Maturities range between 3 and 7

years. Coupons may be issued on a quarterly or semi-

annual basis. RTBs are aimed at individual investors but

open to institutional investors. The issuing process

spans over 1-2 weeks after the BTr has set a reference

yield. Although the BTr may provide an indicative issue

size, the actual issuance amount depends on orders

placed through selling agents.

Maturity profile of outstanding government bonds

0

100

200

300

400

500

600

2011 2014 2017 2020 2023 2026 2032 2035

Maturity date

PHPb

n

RPGBs ROP T-bills Global PHP

Source: HSBC, Bloomberg

Corporate debt is issued by firms to the public. It

consists of corporate bonds and commercial paper. The

market is generally illiquid with bid-offer spreads

ranging between 50-100bp. The BSP has issued

guidelines regarding mark-to-market benchmark pricing

to improve liquidity in this sector.

Derivatives

An onshore and offshore market exists for PHP interest

rate swaps (see table Philippines: IRS and CCS markets).

Interest rate swap (IRS) and cross-currency swap

(CCS) markets are generally illiquid. Liquidity is limited

to 1-5yr PHP IRS and up to 1yr FX forwards. Most

transactions are conducted bilaterally between banks and

corporate firms due to an inactive interbank market.

51


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BSP approval is required for offshore investors to access

onshore markets. For the IRS market, offshore investors

may only access for hedging purposes. In the FX market,

approval is required for both the offer-side FX swaps and

sale of foreign currency on a non-deliverable basis to

non-residents. Underlying documents are also required

for outright sales of foreign currency, including a sale in

the first leg of an FX swap or in the far leg of a currency

swap with non exchange of principal.

The offshore USD/PHP non-deliverable cross-currency

swap (NDS) curve is fairly liquid up to five years for

trading sizes up to USD10m at 20-30bp bid-offer spreads.


Non-residents must register with the BSP and obtain a

Bangko Sentral Registration Document (BSRD) to

repatriate capital. Registration documents must prove

that FX funding for the investment has been inwardly

remitted and sold to the banking system for PHP. A

local custodian, proof of purchase and sale (for bonds,

equities and 90-day deposits) are required.

Settlement

All GSEDs settle trades through the Registry of

Scripless Securities (RoSS). This system is managed by

the BTr. GSEDs are required to hold two accounts: 1) A

securities account with the BTr that must separate the

GSED’s portfolio securities from those under custody

on their clients’ behalf; and 2) A cash settlement

account with a settlement bank, typically with the BSP

or commercial banks. The RoSS uses a delivery vs.

payment (DvP) system to eliminate settlement risk.

Settlement in the government’s primary market is

automated. Upon a successful bid, the BTr

automatically credits the securities account and debits

the cash settlement account.

Settlement in the secondary market is dependent on both

parties involved. If both are GSEDs, the deal is entered

into the PDEx system. This matches the security’s

details and sends the deal through the RoSS settlement

process upon authorisation by both parties. The

securities and cash settlement accounts are then debited

and credited by the BTr and the BSP, respectively.

To settle trades between a GSED and a non-GSED

investor, a transfer is made through RoSS from the

GSED’s account to the investor’s third party custodian.

Cash settlement here is normally by means of a

cashier’s order (manager’s cheque) or cheque, but may

also be via the real time gross settlement Philippine

payment system (PhilPaSS).

On the coupon payment date and maturity date of the

security, the BTr automatically credits the cash

settlement account of the appropriate institution. The

cut-off time for RoSS transactions is 1330. Government

securities may also be settled through Euroclear.

Philippines: IRS and CCS markets

Onshore IRS Onshore CCS Offshore CCS (Non-deliverable swap, NDS)

Non-resident access: No Prior approval required. Non-residents can access CCS with back-end exchange only where HSBC buys the USD ( if non-deliverable, no restrictions)

Allowed

Tenors 1 to 10 years <1yr forward only 1-10 years Liquid tenors 1 to 5 years <1yr forward only 1-5 years Average trade size PHP50m (USD1m) USD10m USD5-10m Bid/offer spreads under normal conditions (bp) 10-20bp 40-50bp 50bp Fixing rate 3m PHIREF 6mth USD LIBOR 6mth USD LIBOR Day count Quarterly Actual/360 Semi Actual/365 Semi Actual/365 Effective date T+1 T (for overnight only until 11am), T+1 after 11am T+2 Fixing time (local time) 11:30am 11am 11am Fixing page Reuters: PHIREF

Bloomberg: PHRF Reuters: PHPFIX=PDSP Reuters: PHPFIX=PDSP

Local market hours 9am-12pm, 2:30-4pm 9am-12pm, 2:30-4pm 9am-12pm, 2:30-4pm Main participants Interbank, corporates Interbank, corporates Interbank, corporates

Source: HSBC

52


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Taxation8

Interest income from government, quasi-government, or

corporate bonds is subject to 20% tax withheld at

source, with the exception of bonds issued by issuers

that are exempted by law or charter such as National

Power Corp (Napocor) and supra-national issuers like

ADB and IFC.

There are no capital gains taxes on government bonds

and publicly issued corporate debt with maturities of

more than five years. Else, these gains are subject to

corporate income tax. Interest on corporate debt issued

to less than 20 investors is also subject to corporate

income tax. There are no entry or exit taxes.


guidance.


Onshore average daily volume USD1.7bnOnshore spot transaction USD1-3mOnshore bid/ask spread 2 pips (0.02PHP)Onshore forward transaction USD5-10mOnshore forward spread 10 pips (0.10PHP) 1 month forward 2 pips (0.02PHP) 12 months forward 30 pips (0.30PHP)Offshore average daily volume USD500-600mNDF transaction USD10-20mNDF spread 5-10 pips (0.05-0.10PHP)Onshore implied option volatility spread 2.0 volOffshore implied option volatility spread 1.0 vol



Bangko Sentral ng Pilipinas (BSP) www.bsp.gov.ph Department of Finance (DoF) www.dof.gov.ph Bureau of the Treasury (BTr) www.treasury.gov.ph Securities and Exchange Commission (SEC) www.sec.gov.ph Money Market Association of the Philippines (MART) www.mart.com.ph Philippine Dealing & Exchange Corporation (PDEx) www.pdex.com.ph Bankers Association of the Philippines (BAP) www.bap.org.ph

53


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Philippines: Bonds

Treasury bills Treasury bonds (T-bonds, or RPGBs)

Global Peso Bond (GPB) (sovereign)

Retail Treasury Bonds (RTBs)

Issuer Republic of the Philippines Republic of the Philippines Republic of the Philippines Republic of the Philippines Currency Philippine Peso (PHP) Philippine Peso (PHP) Philippine Peso (PHP)

denominated, US Dollar settledPhilippine Peso (PHP)

Form Scripless Scripless Scripless Scripless Minimum denomination PHP10m PHP10m PHP1m PHP5,000 Tenors 91, 182 and 364 day 2, 3, 4, 5, 7, 10, 20 and 25

years 10 years (sovereign) 3, 5 and 7 years

Coupon/discount Zero, issued at discount Fixed rate Fixed rate Fixed rate Frequency None Semi-annual Semi-annual Semi-annual or quarterly Amortising schedule Bullet Bullet Bullet Bullet Day count Actual/360 Actual/360 Actual/360 Actual/360 Amount outstanding PHP581bn (Jul-10) PHP1.6trn (Jul-10) PHP44bn (Dec-10) PHP291bn (Jul-10)

Primary market Auction style English; non-competitive bid

available Dutch for new issues; English auction for re-openings

Book building Dutch auction via selling agents

Average issue size PHP6-7bn PHP6-8bn Variable Variable Issuance cycle Every two weeks (Monday)

alternating with T-bonds Every two weeks (Tuesday) alternating with T-bills

Ad hoc Ad hoc

Participants Primary dealers (GSEDs) Primary dealers (GSEDs) Foreign investors Primary dealers (GSEDs) Settlement T+2 T+2 T+0 T+14

Secondary market Trading mechanism OTC OTC OTC OTC Trading hours 9am-12pm and 2pm-4pm 9am-12pm and 2pm-4pm (Same as USD denom RoPs) 9am-12pm and 2pm-4pm Quoting convention Yield basis Yield basis Price basis Yield basis Average bid-offer spreads 20-30bp 1-3bp for jumbos, 5-10 for

others 5 bp 15-20bp

Average trade size PHP50m PHP50m PHP50m PHP50m Volume PHP1bn per day PHP20-30bn per day USD1-5m per day PHP1-2bn per day Settlement T+1 T+1 T+2 T+1 Clearing Registry of Scripless Securities

(RoSS) Registry of Scripless Securities (RoSS)

Euroclear Registry of Scripless Securities (RoSS)

Main participants Local banks, government institutions

Local and foreign banks, institutional investors, government institutions

Foreign investors Local and foreign banks, institutional investors, corporate firms, retail investors


None None None None

Custodian Local custodian required Local custodian required None, Euroclearable Local custodian required Interest income tax 20% withholding at source

(applied to discount), applies equally to all market participants

20% withholding at source, applies equally to all market participants

None 20% withholding, applies equally to all market participants

Capital gains tax None Tax exempt if instrument has maturity of more than 5yrs. Otherwise, capital gain is subject to corporate income tax

None None


Source: HSBC

54

Asia-Pacific Rates Guide 2011 Singapore December 2010

abc

Market developments Monetary Authority of Singapore (MAS) announced

plans to issue short term MAS bills starting in 2Q11

(announced in June 2010). The move intends to increase

the availability of liquid securities to banks as well as

provide the MAS with a fourth instrument for its money

market operations in addition to FX swaps, borrowings

and repos. The bills will be negotiable, allowing banks

to sell or pledge them as collateral in the interbank repo

markets and the MAS Standing Facility as well as

constitute part of banks’ reserve requirements. To

prevent overlap with SGS T-bills, MAS bills will have

tenors of up to 3 months and be phased in gradually

with an initial size of SGD20bn.

MAS expands eligible securities that can be pledged

in the Standing Facility – the key liquidity facility for

banks – to include AAA-rated and zero risk-weighted

public sector entities. In 2009, the MAS accepted AAA-

rated SGD debt securities issued by supranationals,

sovereigns and sovereign-guaranteed companies for

both the Standing Facility as well as Tier 2 liquid assets

with the same haircut as SGS.

Singapore Exchange (SGX) introduces initiatives to

promote the listing and trading of fixed income

instruments on the exchange. In particular, corporates

are encouraged to issue bonds onto the SGX. The

duration of the approval process is aimed to be cut in half.

MAS is provided with more power to influence

government bond market. The Government Securities

(Amendment) Bill of 2009 provides the central bank

with the power to: 1) Inspect, suspend and revoke

appointments of primary dealers; 2) Redeem SGS at

market price before maturity; and 3) Use SGS in

lending arrangements with PD. The government may

issue new SGS for the MAS to lend overnight if there is

not enough to meet demand from primary dealers.

Aaa/AAA/AAASingapore

MAS plans to expand money market tools to include issuance of short-

term MAS bills, from 2Q11

MAS expands eligible securities that can be pledged in the Standing

Facility to include AAA-rated and zero risk-weighted public sector entities

SGX introduces initiatives to promote listing and trading of fixed income

instruments on the exchange


0

50

100

150

200


USD

bn

0

20

40

60

80

100

% G

DP


1-3 y ears,

32%

Ov er 10 y ears,

20%

5-10 y ears,

31%

3-5 y ears,

17%


55


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MAS and the People’s Bank of China (PBoC) agree on

a three-year bilateral currency swap on 23 July 2010.

Up to RMB150bn and SGD30bn of liquidity may be

provided, targeting direct investment and bilateral trade.

Monetary policy The Monetary Authority of Singapore is the central

bank. Singapore's monetary policy is centred on the

trade-weighted exchange rate monetary policy rather

than interest rate or monetary aggregate targets. In the

context of Singapore’s open capital account, this implies

that domestic interest rates are endogenous and market-

determined. The MAS manages the SGD against an

undisclosed trade-weighted basket of currencies of

Singapore’s major trading partners and competitors and

maintains it broadly within an undisclosed target band.

The MAS meets semi-annually in April and October to

review its policy stance including net appreciation or

depreciation vs. the NEER, rate of appreciation or

depreciation and potential re-centring or widening of the

NEER FX band.

HSBC Research has estimates for spot SGD NEER

(nominal effective exchange rate) as well as reference

midpoint and top/bottom range for the SGD NEER

trading band (see chart HSBC estimated SGD NEER,

trading band and 6mth SOR).

The MAS’ money market operations are aimed at

ensuring sufficient liquidity in the banking system to

meet banks' demand for reserve and settlement balances.

The main instruments for MAS liquidity management

operations include repo operations, FX swaps and direct

lending. Banks are also required to maintain reserve

requirement or Minimum Cash Balance (MCB) with the

MAS as a proportion of their liabilities base.

To facilitate the fine tuning of liquidity at the level of

the banking system and the level of the individual bank,

MAS operates the MAS Standing Facility (SF) and

Intra-day Liquidity Facility (ILF). The SF – the central

liquidity facility for banks – allows banks to: 1) initiate

SGD deposit or swap for SGD (using eligible foreign

currencies) or 2) borrow SGD (via repo of eligible

collateral) from MAS on an overnight and interest-

paying basis. The ILF is for participants that require

unusually large intra-day payments and funds.

Key policy rate:

Nominal Effective Exchange Rate (NEER): An

estimated weight average value of the SGD relative to a

basket of currencies of its major trading partners and

competitors. The MAS does not disclose weights, but

HSBC provides estimates for the SGD NEER spot as

well as the midpoint and top/bottom range of the trading

Singapore: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes - Under MAS standing facility- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos SGS, T-bills, AAA-rated debt issued by sovereigns,

supranational, sovereign-backed corporates- For interbank repos Same as for CB reposMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors None- Offshore investors NoneOffshore investor access - Foreign ownership of government bonds SGD21-24bn- As % of outstanding Est. 16-18% of SGS (Oct-10)- Direct purchase? Yes- Subject to cap? No- Registration requirement? No- Access to onshore funding? Yes- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? Yes (IRS, repo)Market liquidity statistics SGS - Daily turnover (LCbn) SGD1.9bn- Buying volume in a single day (USDm) (with minimal market impact)

USD100m

- Bid/offer spreads under normal conditions (bp) 3bpT-bills - Daily turnover (LCbn) SGD1.2bn- Buying volume in a single day (USDm) (with minimal market impact)

USD50m



HSBC estimated SGD NEER, trading band and 6mth SOR

95

100

105

110

115

Nov -06 Nov -07 Nov -08 Nov -09 Nov -10

HSB

C S

GD

NEE

R

0

1

2

3

4

Rat

e (%

)

SGD NEER (LHS) Top (LHS)Mid (LHS) Bottom (LHS)6mth SOR (RHS)

Source: HSBC

56


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band. Bloomberg: ASFXSGD Index (SGD NEER),

ASFXSGT Index (range top), ASFXSGM Index (range

mid), ASFXSGB Index (range bottom).

Key market rates:

6-month SGD Swap Offer Rate (SOR): Implied 6-month

FX forward rate, which is also used as the IRS fixing rate.

Bloomberg: SORF6M Index. Reuters: ABSIRFIX01.

3-month SGD Singapore Inter-Bank Offered Rate

(SIBOR): Reference interest rate at which banks offer

to lend unsecured SGD funds in the inter-bank market.

Bloomberg: SIBF3M Index.

3-month USD SIBOR: Reference interest rate at which

banks offer to lend unsecured USD funds in the inter-

bank market. Bloomberg: SIBU3M Index.

Fixed income instruments The Singapore bond market has grown to a market

capitalisation of USD177bn as of September 2010.

Government bonds account for 55% of the market

whereas corporate bonds account for the remainder.

There are 11 primary dealers (PDs), including HSBC,

that are required to provide two way prices for repo

agreements, outright SGS and Treasury bill (T-bill)

transactions under all market conditions. The MAS

conducts money market operations exclusively with

PDs in recognition of their role as specialist

intermediaries in the SGS and money markets.

Official data on foreign participation in the Singaporean

bond market is not officially collected, but it is

estimated to be 16-18% for the SGS and T-bill market

(approximately SGD20bn-SGD25bn as of October

2010). The Central Provident Fund (CPF) is a major

holder of Singaporean bonds.

Bonds

Singapore Government Securities (SGS) are long-

term debt instruments that pay a coupon semi-annually

and are redeemable at par upon maturity. Maturities

range between 2 and 20 years. SGS are issued on a

monthly basis through a uniform price auction.

Both competitive and non-competitive auctions are open

to all investors, but non-PDs must bid through a PD.

Competitive auctions take the form of a uniform price

auction and whilst there is no limit on the number of

competitive bids, the maximum allotments are 30% for

PDs and 15% for non-PDs. The limit for non-

competitive bids is 1% of issue size for a PD and

SGD2m for non-PD. The government may also issue to

the MAS for its liquidity operations. The scheduled

auction dates are announced at the start of each year but

their individual sizes are only disclosed a week before.

Treasury bills are discount securities with maturities

ranging between 3 months and 1 year. 3-month bills are

issued every Monday whereas one-year bills are issued

semi-annually. They are sold through a uniform price

auction and the limit for non-competitive bids is 1% of

issue size for a PD and SGD1m for non-PD for T-bills.

Corporate bonds are issued by corporates to the

general public. A wide variety of bonds is available,

Singapore: Corporate bonds

Issuer Rating Tenors Typical issue size Secondary market

Statutory Board Big Four: Housing Development Board (HDB), Jurong Town Corporation (JTC), Land Transport Authority (LTA), Public Utilities Board (PUB)

Implicit AAA as guaranteed by government

5– 15 years Around SGD250m or more, with a preference to long-dated issues

Liquid, bid offer quotes: 10-50cents

Domestic issuers Property companies Not rated: investors compensated via higher yield

1– 20 years SGD100m-1500m for plain vanilla issues, SGD400m-1bn for securitised deals

Less liquid than Statutory board, bid-offer spreads 20-30bp depending on issuer and tenor

Non property companies Rated and non-rated available.

Up to 30 years SGD150m-300m Domestically very liquid and trades at slightly higher premium than Statutory Board. Bid-offer spread 25-50cents

Non-domestic/foreign issuers

KfW (German Development Bank), International Finance Corp. (IFC), African Development Bank (AfDB), Islamic Development Bank, International Bank of Reconstruction and Development

Rated: normally takes on parent’s rating

n/a SGD100m-300m Less liquid than Statutory Board paper, bid offer spread: 20-50cents

Source: HSBC

57


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including fixed coupon, floating rate, asset backed,

equity linked and mortgage backed securities. Issuance

is typically managed by bank panels and secondary

trading is conducted over-the-counter (OTC). Bonds are

quoted on a clean price basis. The market is divided into

three categories: 1) Statutory Board, 2) domestic

issuers, and 3) non-domestic/foreign issuers. See table

Singapore: Corporate bonds, for more information. Derivatives

An onshore market exists for SGD interest rate and

cross-currency swaps (see table Singapore: IRS and

CSS markets).

Interest rate swaps (IRS) and cross-currency swaps

(CCS) are accessible by offshore investors without

restriction. Tenors range from 1 to 20 years, with

liquidity concentrated in the 1 to 10-year segment.

Average trade sizes range from SGD10-25m (10-year

tenor) to SGD25-50m (2-year tenor). The 6mth SOR is

the floating rate fixing for SGD IRS.

SGS bond futures are based on the 5-year Singapore

Government Bond. This was established to facilitate

hedging in the SGS market. Eligible bonds include SGS

with 3-6 years remaining to maturity from the first

calendar day of the contract month. Liquidity in this

market remains low.


Foreign investors and issuers can access Singapore’s

financial markets with ease. No approval is required

from the regulatory authorities and non-residents may

obtain local funding to finance bond purchases.

Settlement

MAS Electronic Payment System (MEPS+) settles

scripless SGS and facilitates high-value fund transfers.

It is a real-time, gross settlement system (RTGS) that

irrevocably transfers SGS and funds between MEPS+

participants. All banks and MAS-approved non-banks

of systemic importance in Singapore are eligible to

access the MEPS+ facility. SGS transactions are cleared

electronically on a delivery versus payment (DvP) basis

over MEPS+ and MAS’ SGS book-entry clearing

system. Settlement of an SGS transaction is usually

T+1, though later settlement is also possible.

SGS trading accounts (or a custody account) are used by

non-bank investors to clear SGS. These accounts can be

opened with any of the local banks. Cross-border

delivery requires a foreign investor to appoint a

Depository Agent (DA) based in Singapore and take

custody of their SGD bonds in the CDP system. In

addition, international clearing systems, such as

Euroclear and Clearstream, can participate in the CDP

system via a DA. CDP now has indirect links with

Euroclear and Clearstream that allow for cross-border

trades for both SGD and non-SGD bonds. CDP has an

account with Clearstream, while both Euroclear and

Clearstream have an account with the DAs of CDP.

A DA who maintains a CDP account is able to transfer

SGD bonds to a designated Euroclear/Clearstream

account on the basis of free of payment but “for good

value”. For example, Euroclear has a cut-off time of

Settlement Date 03:55 CET for free of payment SGD

corporate bonds transfer. As such, secondary trades

Singapore: IRS and CCS markets

Onshore IRS Onshore CCS

Non-resident access: No restriction No restriction Tenors 1-20 years 1-20 years Liquid tenors 1-10 years 1-10 years Average trade size SGD25-50m (2 year), SGD20-30m (5 year),

SGD10-25m (10 year) SGD25-50m (2 year), SGD20-30m (5 year), SGD10-25m (10 year)

Bid/offer spreads under normal conditions (bp) 3bp 5-6bp Fixing rate 6 month SOR 6 month SOR, 6 month USD LIBOR (basis swap) Day count Actual/365 Actual/365 (SGD), Actual/360 (USD) Effective date T+2 or T+3 (after 11:30am) T+2 or T+3 (after 11:30am) Fixing time (local time) 11am 11am Fixing page Reuters: ABSIRFIX01

Bloomberg: ABSI1 Reuters: LIBOR01, ABSIRFIX01 Bloomberg: BBAM1

Local market hours 9am-4:30pm 9am-4:30pm Main participants Interbank, corporates, hedge funds Interbank, corporates

Source: HSBC

58


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involving cross-border transfer require T+3 days for

settlement, as opposed to T+1 in a straight CDP

clearing.

Central Depository (Pte) Ltd (CDP) settles corporate

bonds via a method akin to DvP. The seller inputs

transactions into the Debt Securities Clearing Settlement

System (DCSS) to pre-match securities. Cash payment

is initiated by the buyer via MEPS+, which bears a

specific payment reference. Upon receipt of the MEPS+

payment, the securities will be transferred from the

sellers’ to the buyer’s account. This settlement process

is generally T+3.

Taxation9

There are no capital gain taxes in Singapore.

Qualifying Debt Securities (QDS) are fixed income

instruments are eligible for tax incentives as determined

by the MAS. Interest from QDS is subject to a 10% tax

for corporate investors in Singapore. Individual

investors (resident and non-resident)10 and non-resident

corporate investors outside Singapore which did not

finance acquisition of QDS using funds from its

Singapore operations are tax exempt. SGS and T-bills

issued between 28 February 1998 and 31 December

2013 qualify as QDS.

Interest from non-QDS is subject to a 17% tax for

corporate investors in Singapore and withholding tax at

15% will be applicable to non-resident corporate

investors outside Singapore. Such income is tax exempt

to individual investors.

SGS/T-bills trading income derived by primary dealer is

tax exempt whilst such income will be subject to tax at

10% by FIs which have been awarded FSI incentive.

______________________________________ 9 HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance. 10 Under the Tax Exemption of Singapore-sourced Investment Income Derived by Individuals from Financial Instruments.


Onshore average daily volume USD9bnOnshore spot transaction USD10mOnshore bid/ask spread 2-5 pips (0.0002-0.0005SGD)Onshore forward transaction USD50mOnshore forward spread 1-4 pips (0.0001-0.0004SGD)Implied option volatility spread 0.3 vol



Monetary Authority of Singapore (MAS) www.mas.gov.sg Ministry of Finance (MoF) app.mof.gov.sg Ministry of Trade and Industry www.mti.gov.sg Central Provident Fund (CPF) mycpf.cpf.gov.sg Singapore Government Securities www.sgs.gov.sg

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Singapore: Bonds

Treasury bills (T-bills) Singapore Government Securities (SGS)

Corporate bonds

Issuer Republic of Singapore Republic of Singapore Statutory Board, domestic corporates, foreign issuers

Currency Singaporean Dollar (SGD) Singaporean Dollar (SGD) Singaporean Dollar (SGD) Form Scripless Scripless Physical or scripless Minimum denomination SGD1,000 SGD1,000 SGD10,000-250,000 Tenors 3-month and 1-year 2, 5, 7, 10 ,15 and 20 years 1- 20 years Coupon/discount Zero, issued at discount Fixed Fixed or floating Coupon frequency None Semi-annual Semi-annual or annual Amortising schedule Bullet Bullet Bullet Day count Actual/365 Actual/365 Act/365 for corporates; Actual/Actual for

Statutory Board Amount outstanding SGD53.1bn (Jun-10) SGD75.0bn (Jun-10) SGD97.9bn (Jun-10)

Primary market Auction style Uniform price auction Uniform price auction Public offer, private placement Average issue size SGD3.0-4.0bn (3 month T-bills),

SGD3.0-3.6bn (12 month T-bills) SGD1.5-3bn for new issues, SGD1-2.5bn for re-openings

SGD100m-500m

Auction frequency 91-day weekly, 365-day semi-annual Monthly (approximately, depending on SGS issuance calendar)

Ad hoc

Participants 13 primary dealers 13 primary dealers Banks, insurance companies, asset management companies

Settlement T+3 T+3 or 4 T+3

Secondary market Trading mechanism OTC OTC OTC or exchange traded Trading hours 9am-11:30am, 2pm-4:30pm 9am-11:30am, 2pm-4:30pm 9am-11:30am, 2pm-4:30pm Quoting convention Discount yield Price to 2 decimal places Price to 2 decimal places Average bid-offer spreads 3-5bp On-the-run: 5-40 cents,

Off-the-run: 5-30 cents; in yield terms, 3bp

10-50 cents

Average trade size SGD5-10m SGD5m SGD1m-5m Volume SGD1.2bn per day SGD1.9bn per day SGD20-50m per day Settlement T+1 T+1 T+3 Clearing DvP basis through the MEPS and MAS

SGS book-entry system DvP basis through the MEPS and MAS SGS book-entry system

Central Depository (Pte) Limited (CDP)

Main participants Primary dealers, secondary dealers, brokers, finance companies, insurance companies, fund managers, corporations and individuals

Primary dealers, secondary dealers, brokers, finance companies, insurance companies, fund managers, corporations and individuals


Regulations for foreign investors Restriction on foreign investment None None None Custodian Local custodian required Local custodian required Local custodian required Interest income tax None None Generally, none for QDS, otherwise 15-

17% Capital gains tax None None None Entry/exit None None None

Source: HSBC

60

Asia-Pacific Rates Guide 2011 Sri Lanka December 2010

abc

Market developments Planned reforms could open the corporate bond

market to foreign investors in 2011. These plans were

announced in November in conjunction with the 2011

budget with the aim of easing inward investment,

including allowing foreign investors to invest in Sri

Lankan rupee (LKR) denominated corporate debentures,

which was previously highly restricted. Foreign

participation in the corporate bond market would

diversify the investor base in private debt, accelerate

growth in the market, cheapen borrowing costs for long-

term funds, ease dependence on local bank funding and

improve liquidity in the secondary market which is still

considered to be in its developmental stages.

For foreign investors, it provides an alternative

investment channel in addition to the equities market

and government securities where total foreign holdings

are subject to an investment cap of 10% of outstanding.

Plans to open the corporate bond market to foreign

portfolio investors are among a host of other FX-related

liberalisation measures that are intended to facilitate

two-way (inward and outbound) capital flows, such as

allowing local firms to invest abroad.

Foreign investment in government bonds (SLGBs)

and Treasury bills (T-bills) reached the 10% debt

limit during 1H10. Foreign appetite for LKR

government securities has outstripped the supply of

bonds available under the aggregate debt limit of 10%

of total outstanding SLGBs and T-bills. Participation by

foreign investors in the government debt market has

enabled the government to raise FX reserves, deepen the

local bond market, extend the debt maturity profile,

diversify away from external debt and bring down

borrowing costs on total debt, which stood at 85% of

GDP.

Economic growth potential, improving fiscal

dynamics and political stability laid the groundwork

for debt consolidation. The end of a decades-long civil

conflict in 2009 and the following economic activity

highlights Sri Lanka’s long-term development potential,

B1/B+/B+Sri Lanka

Planned reforms could open the corporate bond market to foreigners

Foreign investment in SLGBs and T-bills reached the 10% debt limit

Economic growth potential, improving fiscal dynamics and political stability

lay the groundwork for debt consolidation

Government bonds outstanding Government debt composition (as of December 2009)

0

5

10

15

20

25

Dec-98 Dec-01 Dec-04 Dec-07 Dec-10

USD

bn

0

10

20

30

40

50

% G

DP

T-bills (LHS) Treasury bonds (LHS)Total (% of GDP) (RHS)

Foreign,

42%

Treasury Bonds,

36%

Rupee Loans,

3%Other,

8%

Treasury Bills,

11%

Source: ADB Source: Ministry of Finance

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whilst the IMF’s 20-month USD2.6bn Stand-By

Arrangement approved in 2009 and the increase in FX

reserve buffer imparted a degree of stability to attract

foreign investment and raise investor confidence.

Monetary policy The core objectives of the Central Bank of Sri Lanka

(CBSL) are economic and price stability. At present,

monetary management in Sri Lanka is based on a

monetary targeting framework, including announcement

of explicit targets for monetary aggregates and quarterly

reserve money targets, though there are plans in the

future to move away from this framework towards one

based on inflation targets.

The CBSL employs a variety of tools to conduct

monetary policy in line with monetary objectives. The

main monetary policy instruments currently used are:

benchmark policy rates (the repurchase and reverse

repurchase rates), open market operations (OMOs) and

Statutory Reserve Requirements (SRR) on commercial

bank deposit liabilities. The benchmark policy rates are

the repurchase and reverse repurchase rates, which form

an interest rate corridor. Under the CBSL’s OMOs,

liquidity is managed via daily repo and reverse repo

auctions to absorb or inject liquidity, standing facilities

at interest rates bounded by the policy rate corridor and

outright sales or purchases of government securities.

Recently, however, the CBSL has not used OMOs or

outright sale and purchases of government securities,

but reserve the right to do so.

To manage the liquidity of commercial banks, the

CBSL may also change SRRs – the proportion of the

deposit liabilities that commercial banks are required to

keep as a cash deposit with the CBSL.

Key policy rates:

Repurchase rate: Rate applied to overnight deposits

with the CBSL and also serves as the lower bound of

the policy interest rate corridor. Bloomberg:

SLMMREPO Index.

Reverse repurchase rate: Rate applied to overnight

borrowing from the CBSL and also serves as the upper

bound of the policy interest rate corridor. Bloomberg:

SLMMRVRT Index.

Key market rate:

Sri Lanka Interbank Offer Rate (SLIBOR):

Interbank lending rate computed on a daily basis by the

CBSL based on rates offered by commercial banks.

3mth SLIBOR, with 3mth T-bill yields, have been used

for the floating rate calculation for the IRS market.

Bloomberg: SLBR1DAY Index (overnight).

Fixed income instruments The Sri Lankan government bond market has expanded

to a market capitalisation of USD22bn as of November

2010. Approximately 24% of the bond market is

composed of T-bills, while the remainder are Sri

Lankan Government Bonds (SLGBs). In addition to

these debt instruments, the government also has

outstanding liabilities in the form of rupee loans from

domestic banks and external commercial and

concessional debt.

Sri Lanka: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos SLGBs, T-bills- For interbank repos SLGBs, T-billsMark-to-market requirements - Banks? Yes- Insurance companies? No- Pension funds? No- Mutual funds? YesTaxation: Government bonds* - Onshore investors 10% withholding tax, corporate tax on

interest income and capital gains- Offshore investors 10% withholding taxOffshore investor access - Foreign ownership of government bonds LKR183.3bn- As % of outstanding 8.8%- Direct purchase? Yes- Subject to cap? Yes- Registration requirement? Yes- Access to onshore funding? No- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)?

Yes (IRS, repo)

Market liquidity statistics T-bills - Daily turnover (LCbn) LKR0.5bn- Buying volume in a single day (USDm) (with minimal market impact)

USD2m

- Bid/offer spreads under normal conditions (bp) 20bpSLGBs - Daily turnover (LCbn) LKR0.5bn- Buying volume in a single day (USDm) (with minimal market impact)

USD2m



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There are 11 primary dealers registered with CBSL.

Among the major participants in the Sri Lankan debt

market are domestic private and state banks, CBSL and

the state Employees Provident Fund (EPF).

At 9.7% of outstanding T-bills and 10.0% of SLGBs

(LKR54bn and LKR183bn, respectively), foreign

investment in government securities is just below the

10% foreign investment limit, as of November 2010.

Foreign holdings of T-bills and SLGBs accelerated

sharply after the end of the civil conflict (see chart

Foreign holdings of T-bills and T-bonds). The

government last increased the foreign investment cap in

SLGBs in December 2007 from 5% to 10% currently –

extending this investment cap to T-bills in May 2008.

Bonds

Treasury bonds (SLGBs) are medium- or long-term

securities issued by the government. They carry a semi-

annual coupon at a fixed rate in scripless form.

Maturities range between 2 and 20 years. Three to five

SLGB auctions are held every month (usually on

Thursdays) based on the government's cash requirement

and are subject to competitive bidding. The 3yr and 5yr

bonds remain the most liquid tenors.

In 2005 and 2006, the government issued inflation

index-linked SLGBs.

Treasury bills (T-bills) are short-dated discount

securities issued by the government in maturities of 3, 6

and 12 months. The bills are auctioned on Wednesdays

and settled on Fridays. Only primary dealers approved

by CBSL can bid at primary auctions. Foreign investors

may invest up to a collective total of 10% of amount

outstanding.

Corporate debt is issued by corporate firms to both the

private and public sector. They consist mainly of

Commercial Paper (CP) and Floating Rate Notes

(FRNs). CP are the most liquid and defined as

promissory notes under provisions of the Bills of

Exchange Ordinance. Corporate debt securities are dealt

in the electronic trading system Debt Exchange (DEX)

of the Colombo Stock Exchange (CSE).

Corporate debt securities are settled only after CBSL’s

Real Time Gross Settlement (RTGS) system confirms

the availability of funds. This reduces settlement risk.

The market is, however, still relatively underdeveloped

as there has yet to be a market-driven long-term

benchmark yield curve.

The government revealed its intention to allow foreign

investors to invest in corporate bonds. In 2010, foreign

investors were allowed to purchase 30% of a bond

issued by a quasi-government entity.

Foreign holdings of T-bills and T-bonds

0

50

100

150

200

250

Nov -09 Feb-10 May -10 Aug-10 Nov -10

LKR

bn

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

T-bills T-bonds % of total gov. bonds

Source: HSBC

Sri Lanka: IRS and FX forward markets

Onshore IRS Onshore FX forwards

Non-resident access Yes Yes Tenors 1-5 years 1-5 years Liquid tenors 6 months 1 year Average trade size USD1-2m USD1-2m Bid/offer spreads under normal conditions (bp) 75bp 30 cents Fixing rate 3mth SLIBOR or 3mth T-bill - Day count Actual/360 - Effective date T+2 - Fixing time (local time) 11:00am - Fixing page Reuters: SLIBOR - Local market hours 8.30am-4pm 8.30am-4pm Main participants Interbank, corporates Interbank, offshore participants

Source: HSBC

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Derivatives

An interest rate swap (IRS) curve exists for non-

residents to hedge their exposure related to bill and

bond investments. The IRS curve is, however, illiquid

with infrequent transactions (see table Sri Lanka: IRS

and FX forward markets).

Non-residents can access the FX forward market to

hedge currency risk on underlying investments.


Offshore investors can hold up to 10% of Sri Lankan

government bonds and T-bills. The CBSL first

permitted foreign investor access to SLGBs in January

2007 at an initial debt limit of 5%, which was

subsequently raised to 10% in December 2007 and

extended to T-bills in May 2008.

Eligible foreign investors include foreign country funds,

mutual funds or regional funds approved by the

Securities and Exchange Commission of Sri Lanka,

corporate bodies incorporated outside Sri Lanka and

citizens of foreign states.

Settlement

Sri Lankan Government debt securities are scripless and

the securities transfer is done on an electronic basis. In

the Scripless Securities Settlement System (SSSS),

transfer instructions are carried out on a trade-by-trade

basis, with the transfer of securities and transfer of

funds for payment taking place simultaneously.

Foreign investors must open a Securities Investment

Account (SIA) to facilitate fund flows. A custody

account with LankaSecure is also required. All

commercial banks in Sri Lanka are dealer direct

participants. It is common for resident commercial

banks to provide both the SIA and custody services.

Taxation11

Foreign investors face a 10% withholding tax on interest

income collected at primary issue for SLGBs and T-

bills, but are exempt from capital gains or coupon

income.


Onshore average daily volume USD55mOnshore spot transaction USD1-1.5mOnshore bid/ask spread 8 pips (0.08LKR)Onshore forward transaction USD1-1.5mOnshore forward spread 20-35 pips (0.20-0.35LKR)


Useful information

______________________________________ 11 HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.

Information sources

Central Bank of Sri Lanka (CBSL) www.cbsl.gov.lk Ministry of Finance and Planning (MoF) www.treasury.gov.lk

http://www.treasury.gov.lk/

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Sri Lanka: Bonds

Treasury bonds Treasury bills Corporate bonds

Issuer Democratic Socialist Republic of Sri Lanka

Democratic Socialist Republic of Sri Lanka

Domestic corporates and quasi-government

Currency Sri Lankan rupee (LKR) Sri Lankan rupee (LKR) Sri Lankan rupee (LKR) Form Scripless Scripless Physical or scripless Minimum denomination LKR100,000 LKR100,000 LKR50,000,000 Tenors 2-5, 7, 10, 15 and 20 years 3, 6 months, 1 year 3 months - 5 years Coupon/discount Fixed Zero, issued at discount Fixed Coupon frequency Semi-annual None Semi-annual Amortising schedule Bullet Bullet Bullet Day count Actual/Actual Actual/364 Actual/365 Amount outstanding LKR1.8trn (Nov-10) LKR559bn (Nov-10) LKR3.7bn (Nov-10)

Primary market Auction style Multi-price, English auction Multi-price, English auction Public offer, private placement Average issue size LKR1-2bn LKR9-12bn (total for all tenors) LKR 500mn Auction frequency Approximately once every two weeks Weekly (Wednesday) Ad hoc Participants Primary dealers Primary dealers Commercial banks, institutional investors Settlement T+2 or T+3 T+2 T+2

Secondary market Trading mechanism Mostly OTC, limited Bloomberg

platform for PDs Mostly OTC Through DEX and OTC

Trading hours 9am-4pm 9am-4pm 9am-4pm Quoting convention Yield to 3 decimal places Yield to 3 decimal places Yield to 3 decimal places Average bid-offer spreads 20bp 20bp 75bp Average trade size LKR50m LKR50m LKR50m Volume LKR500m LKR250m No active Interbank market Settlement T+1 or 2 T+1 or 2 T+2 Clearing SSS (Scripless Securities System) SSS SSS through the DEX and in Script Main participants Primary dealers, local and foreign

banks, foreign investors, captive sources, insurance companies, fund managers, corporations and individuals

Primary dealers, local and foreign banks, foreign investors, captive sources, insurance companies, fund managers, corporations and individuals

Commercial Banks, Institutional Investors

Regulations for foreign investors Restriction on foreign investment Up to foreign investment total of 10% of

outstanding Up to foreign investment total of 10% of outstanding

Debentures will have to be listed on the Colombo Stock Exchange

Custodian Local custodian required Local custodian required Local custodian required Interest income tax 10% withholding tax deducted at

issuance 10% withholding tax deducted at issuance

10% withholding tax deducted at issuance

Capital gains tax None None None Entry/exit Investment via special accounts Investment via special accounts Investment via special accounts

Source: HSBC

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66

Asia-Pacific Rates Guide 2011 Taiwan December 2010

abc

Market developments Strong capital inflows during 2010 prompted

restrictions to cap foreign investment in Taiwan

government bonds and money market products at

30% of the investor’s total portfolio (announced by

authorities in November 2010). This rule had been

discarded since 1995. Prior to this, the 30% cap only

applied to debt maturing in less than 1 year – a

restriction imposed in November 2008. The 30% cap

does not apply to corporate bonds.

These curbs in fixed income instruments by foreign

investors began with a ban on foreign investment in

time deposits imposed in November 2009. As of

November 2010, foreign investment in the money

market totalled roughly TWD300bn and the Central

Bank of the Republic of China (CBC) vowed to further

reduce short-term capital inflows and a few legislators

have proposed other measures including a tax on

currency gains as well as a potential management fee on

foreign capital inflows. As of November 2010, about

30% of foreign investor holdings in Taiwan fixed

income were in short-term bonds.

Ministry of Finance (MoF) conducts an unsuccessful

buyback of government bonds in November 2010. An

initial target of TWD40bn in purchases of 5yr TGBs

was announced but only TWD2bn was achieved due to

strong demand for government paper. The MoF

intended to buy back bonds and issue more liquid bonds

to improve trading activity in its bond market.

CBC hikes policy rates twice in 2010. The discount

policy rate was raised twice in 12.5bp-increments to a

cumulative 25bp in the year to November. Higher rates

were aimed at calming Taiwan’s real estate market. The

CBC has asked commercial banks to regulate their

vacant-lot loans due to widespread land hoarding

activity.

Aa3/AA-/A+Taiwan

Foreign investors may only invest up to 30% of their total investment

portfolio in government bonds and money market products

Prior to this, the 30% cap only applied to debt maturing in less than 1 year

MoF conducts an unsuccessful buyback of government bonds

Bonds outstanding Taiwan local debt market, by type (total: TWD7.3trn, as of September 2010)

0

50

100

150

200

250


USD

bn

0

10

20

30

40

50

60

% G

DP


Corporate

16%

Local gov ernment

2%

Central

gov ernment

56%

Financial

debentures

11%

T-bills

2%

NCDs

3%

Bankers'

Acceptances

0%

CP

10%

Source: ADB Source: CEIC

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Monetary policy The Central Bank of the Republic of China is the

monetary authority of Taiwan. It typically meets

towards the end of the calendar quarter to set the

discount rate, the official benchmark policy rate. The

CBC may also change the rate applied to temporary

liquidity accommodations (with or without collateral)

under the discount window. Interest rates on CBC-

issued Negotiable Certificates of Deposits (NCDs)

offered in 1mth, 3mth, 6mth and 12mth tenors carry

monetary policy signals.

In addition, the CBC uses other policy instruments,

including open market operations, required reserve

ratios and deposits of financial institutions to directly

influence the level of interbank call-loan market interest

rates. Open market operation instruments include

government securities and CBC-issued NCDs, which

may be purchased (or issued) either on an outright basis

or under repurchase agreements to inject (or mop up)

domestic liquidity, respectively. The CBC can also

change the level of required reserves as well as accept

or release funds deposited by banks and the postal

savings system.

Key policy rates:

Official discount rate: Official benchmark policy rate

typically adjusted in 12.5bp increments and normally

decided during quarterly policy rate-setting meetings of

the CBC. Bloomberg: TAREDSCD Index.

Rate on accommodations with/without collateral:

Accommodations with and without collateral are set at a

certain spread above the discount rate. As of December

2010, these spreads were 37.5bp (with collateral) and

225bp (without collateral). See CBC website for the latest.

Rates on Negotiable Certificates of Deposit (NCDs):

Rate on NCDs issued by the CBC primarily to withdraw

excess liquidity. Rates are typically adjusted the day

after a CBC rate decision. Reuters: TWDC=R.

Key market rate:

90-day Commercial Paper (CP) rate: Floating rate

fixing for the IRS market. It is calculated daily at 11am.

The top and bottom quartile of submitted CP rates are

eliminated from calculation and the remainder averaged.

Bloomberg: CPTW90DY Index.

Fixed income instruments The Taiwan bond market has grown to a market

capitalisation of USD229bn (September 2010) from

USD216bn at end 2009. The market is primarily

composed of government bonds, constituting 58% of the

market. Corporate bonds account for 37% of the market

whilst the remaining 5% are quasi-government bonds.

There are 15 primary dealers who offer two-way price

quotations in the interbank market. HSBC is not a

primary dealer but a bond dealer. A primary dealer may

tender in the primary bond auction whereas a bond

dealer may not. Key local investors are Chunghwa Post,

domestic banks, insurance firms and securities

companies. Chunghwa Post is a government owned

postal service and the largest deposit-taking institution

(TWD5trn as of December 2009) in Taiwan, but cannot

extend loans as it is not a financial institution, which

makes it dependent on holdings of government debt for

investments (TWD1.4trn or 20.5% of total assets as of

March 2009).

Taiwan: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? No- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos TGBs- For interbank repos -Mark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors 10% - Offshore investors 15% withholding tax**Offshore investor access - Foreign ownership of government bonds TWD250bn (Aug-10)- As % of outstanding Approx. 9.9% of

TGBs/Tbills (Aug-10)- Direct purchase? No- Subject to cap? 30% of total investment

portfolio- Registration requirement? Yes (FINI/FIDI)- Access to onshore funding? No- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? Yes (NDIRS)Market liquidity statistics TGBs - Daily turnover (LCbn) TWD30-60bn- Buying volume in a single day (USDm) (with minimal market impact)

USD60m

- Bid/offer spreads under normal conditions (bp) 0.5-2bp on-the-run, (3-5bp off-the-run)

Source: HSBC *HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance. **Reducible by DTTA

http://www.cbc.gov.tw/lp.asp?CtNode=695&CtUnit=303&BaseDSD=32&mp=2

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Official statistics are not available, but foreign investors

held approximately USD8bn of total government bonds

in August 2010 (estimated 10% of total). As of

November 2010, about 30% of foreign investor holdings

in Taiwan fixed income were in short-term bonds.

Bonds

Government bonds (TGBs) are issued by the CBC on

behalf of the MoF to finance government spending and

develop a benchmark yield curve. They are issued by

the CBC monthly with maturities between 2 and 30

years and carry annual fixed rate coupons. Auction

schedules are fixed and a calendar is issued at the end of

the fiscal year (June).

Treasury bills (T-bills) are issued by the CBC on

behalf of the MoF for address short-term funding needs.

T-bills are divided into two classes: Class A bills

(issued at par and pay a coupon at maturity) and Class B

(discount securities). Maturities range between 3

months and 1 year. Foreign investors are only allowed

to buy T-bills maturing within 90 days and total

purchases must not exceed 30% of total cash inflows.

Negotiable Certificates of Deposits (NCDs) are

depository certificates issued by the CBC and

commercial banks. The CBC uses NCDs as a tool for

open-market operations, while commercial banks use

them as a short-term funding tool. The CBC issues

NCDs on a daily basis with maturities of 1, 3 and 6

months. The rate is set on the day following the

monetary board’s quarterly policy rate meeting.

Commercial banks may issue NCDs with maturities up

to 12 months.

Corporate debt consists of CP and corporate bonds.

CPs are discounted securities issued by corporates in the

form of short-term promissory notes guaranteed by

financial institutions. They must be certified by a

qualified underwriter or a bill house. Non-trade-related

CP dominates the market.

Corporate bonds are normally issued in fixed rate bullet

terms in physical form by both private and public sector

corporations. Most corporate bonds are issued via a

public auction. Secondary market liquidity is poor

because they are primarily purchased for buy-and-hold

accounts by banks.

Financial debentures are long-term financing sources

for qualified banks. They carry a fixed coupon and form

part of a bank’s capital reserves. The main buyers of

long-term debentures are insurance companies.

Derivatives

An onshore and an offshore market exist for TWD

interest rate swaps (see table Taiwan: IRS and CSS

markets). Offshore investors are not allowed to access

the onshore TWD cross currency swap (CCS) markets.

An offshore non-deliverable market for TWD IRS and

CCS, however, has developed.

Interest rate swap curves extend from 1 to 15 years

with liquidity being greatest in 1 to 10 years. The

average trade size is TWD500m, with a conventional

minimum size of TWD300m. All tenors use the 90-day

CP rate as the floating rate.

The TWD NDIRS curve is very liquid up to 5 years

(with trading size up to TWD1bn) and modestly liquid

up to 10 years (trading size up to TWD500m).

Cross currency swap curves extend from 1 to 10 years

with liquidity concentrated in 1 to 5 year tenors. The

average trade size is USD20m whilst the conventional

minimum size is USD10m. The TWD non-deliverable

CCS (NDCCS) curve is illiquid.

Futures contracts exist for the 10-year government bond

and 30-day CP interest rate. These are offered by the

Taiwan Futures Exchange (TAIFEX) quarterly and

monthly for the 10-year government bond and 30-day, CP

respectively. The government bond requires physical

delivery whilst the CP is cash settled. Trading volume and

Local investors in Taiwan government bonds (as of October 2010)

Banks

43%

Insurance

26% Bills finance

4%

Securities

serv ices

1%

Non-primary

dealers

26%

Source: CBC

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open interest in both contracts is minimal. The 10-year

bond futures have a notional value of TWD5m and a 3%

coupon rate with physical delivery of bonds. Underlying

bonds have a minimum maturity of 8.5 years and a

maximum maturity of 10 years. The 30-day CP interest

rate future is cash settled and based on 30-day financing

commercial paper with a face value of TWD100m.


Offshore investors in Taiwan are classified either as

Foreign Institutional Investors (FINIs) or Foreign

Individual Investors (FIDIs). FINIs enjoy an unlimited

investment quota, while FIDIs are subject to a

maximum of USD5m. FINIs must obtain an investment

ID via registration with the CBC and the Taiwan Stock

Exchange (TSE), while FIDIs are required to obtain an

investment ID only from the TSE.

Both FINIs and FIDIs must open a book-entry and fund

account with one of the approved clearing banks and a

trading account with a bond dealer. Investment products

available to both FINI and FIDI include listed stocks,

financial bonds, government bonds, debentures,

corporate bonds, open-ended bond funds and money

market instruments (e.g., CP, BEs). Investors may trade

government bonds and submit auction bids through

bond dealers. Neither may engage in short selling or

margin trading. Sub-accounts remaining inactive for 3

years from the date of ID approval and holding no assets

must be closed.

Foreign investors may only invest up to 30% of their

total investment portfolio in government bonds and

money market products, as announced by authorities in

November 2010.

Settlement

Government bonds, supranational bonds issued in

Taiwan and convertible bonds are stored with the

Taiwan Securities Central Depository (TSCD), which

uses a book-entry system. Delivery and settlement of

securities are handled by the TSE’s Computerised

Exchange Clearing Department.

Corporate bonds and money market instruments in

bearer form cannot be held at the TSCD. Instead they

are held by custodian banks that have main custody

accounts directly linked to the TSCD for settlement

purposes. Each custody client may have a sub-account

under the custodian’s main account.

Taxation12

Non-residents are subject to a 15% withholding tax on

interest. There is no official tax guideline on repos or

capital gains tax. Taiwan has entered double tax treaties

(DTT) with 11 countries that reduce withholding tax on

interest to 10%. There are no capital gains taxes.

Investment income can be repatriated freely after a tax

guarantor has been appointed and approves the

repatriation amount.

______________________________________ 12 HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.

Taiwan: IRS and CCS markets

Onshore IRS Offshore NDIRS Onshore CCS Offshore CCS

Non-resident access: Not allowed Existent Not allowed Existent Tenors 1-15 years 1-10 years 1-10 years 1-10 years Liquid tenors 1-10 years 1-5 years 1-5 years 1-5 years Average trade size TWD500m USD10m USD20m USD10m Bid/offer spreads under normal conditions (bp)

2-5bp 3-6bp 10-40bp 20-60bp

Fixing rate 90-day CP rate 90-day CP rate 6mth USD Libor 6mth USD Libor Day count Actual/365 Actual/365 Actual/365 (TWD),

Actual/360 (USD) Actual/365 (TWD), Actual/360 (USD)

Effective date T+2 T+2 T+2 T+2 Fixing time (local time) 11am 11am 11am 11am Fixing page Reuters: TWCPBA

Reuters: TAIFX1 Reuters: TWCPBA Reuters: TAIFX1

Reuters-Telerate successor page: 3750 Reuters: TAIFX1

Reuters-Telerate successor page: 3750 Reuters: TAIFX1

Local market hours 9am-12pm, 2pm-4pm 9am-12pm, 2pm-4pm 9am-12pm, 2pm-4pm 9am-12pm, 2pm-4pm Main participants Interbank, corporate firms Interbank, corporate firms Interbank, corporate firms Interbank, corporate firms

Source: HSBC

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Countries that entered DTT with Taiwan

Australia Belgium Denmark Gambia Indonesia Israel Macedonia Malaysia Netherlands New Zealand Paraguay Senegal Singapore South Africa Swaziland Sweden United Kingdom Vietnam

Source: Taxation Agency, MoF Foreign exchange Normal market conditions

Onshore average daily volume USD1.7-2.1bnOnshore spot transaction USD3-5mOnshore bid/ask spread 5 pips (0.005TWD)Onshore forward transaction USD20-30mOnshore forward spread 20 pips (0.020TWD)Offshore average daily volume USD2bnNDF transaction USD10mNDF spreads 10 pips (0.010TWD)Implied option volatility spread 0.3 vol for all dates



Central Bank of China (CBC) www.cbc.gov.tw Ministry of Finance (MOF) www.mof.gov.tw Financial Supervisory Commission (FSC) www.sfcey.gov.tw Reuters TAIFX1 Bloomberg APF1<go>

Taiwan: Bonds

Taiwan Government Bonds (TGBs) Treasury bills( T-bills) Corporate bonds

Issuer Ministry of Finance (MoF) Ministry of Finance (MoF) Taiwanese corporations Currency Taiwanese Dollar (TWD) Taiwanese Dollar (TWD) Taiwanese Dollar (TWD) Form Scripless Scripless Physical bearer form Minimum denomination TWD100,000 TWD 100,000 TWD100,000 Tenors 2, 5, 10, 15, 20 and 30 years 91, 182 ,273 and 364 days 2-15 years (typically 3-5 years) Coupon/discount Fixed Fixed Fixed, floating or structured Coupon frequency Annual None Semi-annual or annual Amortising schedule Bullet Bullet Bullet Day count Actual/365 Actual/365 Actual/365 Amount outstanding TWD4.0trn (Aug-2010) TWD165bn (Aug-2010) TWD1.2trn (Aug-2010)

Primary market Auction style Dutch auction Dutch auction Dutch auction Average issue size TWD30bn-70bn TWD20bn-30bn TWD2bn-15bn Auction frequency Monthly Monthly Ad hoc Participants Banks, bill finance cos., insurance

house and security firms Banks, bill finance, insurance company Banks, security house, insurance

company Settlement T+2 T+2 T+2

Secondary market Trading mechanism EBTS (mostly), OTC OTC OTC Trading hours 9am-1:30pm 9am-3pm 9am-1:30pm Quoting convention Yield to 4 decimal places Yield to 4 decimal places Yield to 4 decimal places Average bid-offer spreads On-the-run: 1-3bp; Off-the-run: 3-5bp 5-10bp 3-5bp Average trade size TWD50m TWD 10-30M n/a Volume TWD100-200bn per day TWD300-500m per day TWD3.8bn per day Settlement T+2 T+2 T+2 Clearing TDCC (Taiwan Depositary and

Clearing Corp.) TDCC (Taiwan Depositary and Clearing Corp.)

TDCC (Taiwan Depositary and Clearing Corp.)

Main participants Financial institutions Financial institutions Bond mutual funds, financial institutions

Regulations for foreign investors Restriction on foreign investment Restricted to investments in TGBs >1-

year; investments capped at 30% of cash inflows for FINIs

Restricted to investments in T-bills with >3mths residual maturity; investments capped at 30% of cash inflows for FINIs

None for registered FINIs

Custodian Local custodian required Local custodian required Local custodian required Interest income tax 15% withholding tax, reducible by tax

treaty 15% withholding tax, reducible by tax treaty

15% withholding tax, reducible by tax treaty

Capital gains tax None None None Entry/exit None None None

Source: HSBC

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72

Asia-Pacific Rates Guide 2011 Thailand December 2010

abc

Market developments The 15% tax exemption on capital gains as well as

discount income from zero-coupon bonds – afforded to

foreign investors since 16 November 2004 – was repealed

(October 2010). The re-imposition of withholding tax

(WHT) levels the playing field between domestic

investors and foreigners. Tax re-imposition is not

retroactive and only applies to bonds purchased since 13

October. There remains no tax on interest income.

The Thailand Futures Exchange launched new futures

markets for 5-year government bonds (ThaiGBs) and

short-term interest rates (6-month THB fix and 3-

month BIBOR). The 5yr ThaiGB futures began trading on

18 October 2010. The 6mth THB fix and 3mth BIBOR

were launched on 29 November 2010 and are accessible by

both local and foreign investors. These new instruments

may deepen the Thai bond market and help investors to

manage risk from interest rate movements at two different

points on the THB rates curve.

The ThaiGB curve may be extended to 50 years. At

the time of writing, the targeted issue amount for a

potential 50-year ThaiGB (to be issued in 1Q11) is

THB4-5bn, which is relatively small compared to the

initial FY10-11 gross issuance plan of THB709bn.

According to the FY10-11 preliminary government

borrowing plan, there are also plans to introduce index-

linked bonds, and floating rate notes (FRNs) may

continue to be issued.

Prohibition on sales of Bills of Exchange (BEs) to

foreign investors is extended to securities companies.

Banks have been prohibited by the Bank of Thailand

(BoT) from issuing BEs to foreign investors, but the

BoT has clarified that this restriction applies also to

securities firms. BEs are short-term money market debt

instruments that are issued by corporates or financial

institutions and considered as short-term borrowings of

THB from non-residents.

Baa1/BBB+/BBBThailand

Government repeals 15% tax exemption on capital gains on bonds held by

foreign investors

Futures markets for 5-year ThaiGBs, 6-month THB fix and 3-month BIBOR

launched

ThaiGB curve may be extended to 50 years in 2011


0

50

100

150

200

250


USD

bn

0

10

20

30

40

50

60

70

% G

DP


1-3 years,

39%

Ov er 10 y ears,

14%

5-10 y ears,

25%

3-5 y ears,

21%


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Capital outflow controls were loosened (February

2010). In an effort to increase two-way flows in the FX

market, the BoT liberalised outbound flows by Thai

entities, specifically: 1) Thai firms may freely make direct

investments overseas, 2) domestic individuals may

purchase up to USD10m of immovable properties

overseas per annum as opposed to USD5m previously, 3)

Thai companies may lend up to USD50m to non-affiliated

companies overseas, 4) firms may freely transfer foreign

currencies between a corporate treasury centre and

affiliate firms in Thailand, 5) FX hedging transactions no

longer require BoT approval, and 6) portfolio investments

allocated to investors and under the SEC's supervision

were expanded to USD50bn from USD30bn.

Korea Export-Import Bank, Industrial Bank of

Korea and Korea Development Bank increased

Korean issuance in THB bonds (June 2010). The

issuances by each firm are THB4bn, THB5bn and

THB3bn, respectively. In 2010, 18 separate applications

to issue THB bonds were approved of which five were

Korean. It is likely that Korean firms will be the first

among Asian markets to gain regular access into this

market as a counterweight to heavy investment in

Korean fixed income instruments by so-called “kimchi”

funds, which are Thailand-based bond funds dedicated

to short-term Korean debt investments.

More stringent issuance conditions are imposed on

state enterprises and government agencies. SEC

approval and a credit rating are now required for state

enterprise and government agencies to issue bonds,

reducing reliance on the government curve and

encouraging accountability.

Monetary policy Since May 2000, the Bank of Thailand (BoT) has

conducted monetary policy under a flexible core

inflation targeting framework (0.5-3.0% quarterly

average). Its primary roles are to preserve internal and

external stability of the THB, supervise financial

institutions and act as banker to the government and

state enterprises. The benchmark policy rate has been

the 1-day repo rate since January 2007, when the BoT

moved away from the 14-day repo rate. The BoT

conducts overnight bilateral repurchase agreements with

domestic banks at the policy rate.

The BoT also uses a variety of monetary policy

instruments to influence short-term money market rates

through open market operations, reserve requirements

and standing facilities. Open market operations include:

bilateral repurchase and reverse repurchase transactions

with primary dealers, outright purchase/sale of

government securities, issuance of BoT bills and bonds,

FX swaps and Electronic BoT Debt Security (e-PNs).

Key policy rate:

1-day repo rate: Benchmark policy rate of the BoT. It

is also used by banks to borrow THB from BoT.

Bloomberg: BTRR1DAY Index.

Key market rate:

6-month THB fix: The fixing rate for IRS markets. It is

partly determined by onshore USD/THB FX forward

rates, which could at times produce significant

Thailand: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos LBs, MoF SOEs- For interbank repos LBs, T-billsMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors 1% tax for institutions- Offshore investors 15% tax on capital gains**Offshore investor access - Foreign ownership of government bonds THB142bn (Nov-10)- As % of outstanding 5.8% (Nov-10)- Direct purchase? Yes- Subject to cap? No- Registration requirement? Yes- Access to onshore funding? No- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? Yes (IRS)Market liquidity statistics ThaiGBs a.k.a. Loan Bonds (LBs) - Daily turnover (LCbn) THB2-7bn- Buying volume in a single day (USDm) (with minimal market impact)

USD15m

- Bid/offer spreads under normal conditions (bp) 3-6bpBoT Bills/Bonds - Daily turnover (LCbn) THB10-88bn- Buying volume in a single day (USDm) (with minimal market impact)

USD40-60m

- Bid/offer spreads under normal conditions (bp) 10bpSOE bonds - Daily turnover (LCbn) THB0.7-3.5bn- Buying volume in a single day (USDm) (with minimal market impact)

USD10m


Source: HSBC *HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance **Reducible by DTTA

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divergence from the BoT’s 1-day repo rate. Reuters:

THBFIX.

Fixed income instruments The Thai bond market has expanded to a market

capitalisation of USD217bn as of September 2010.

Government and agency bonds each constitute

approximately 41% of the bond market, while the

remainder is comprised of corporate bonds.

There are 11 primary dealers (PDs), including HSBC,

which are required to quote two-way prices for all

benchmark bonds under normal market conditions,

particularly after the private repurchase market has been

activated. The Public Debt Management Office

(PDMO) is the office within the MoF charged with

government financing plans.

Foreign investment in ThaiGBs and BoT bills has

climbed to THB199bn as of November 2010 from

THB52bn at the end of 2009 (see chart Foreign

holdings of BoT bills and ThaiGBs). BoT bills

accounted for THB57bn of foreign holdings, whilst

investment in ThaiGBs stood at THB142bn (or 5.8% of

outstanding ThaiGBs).

Bonds

Thailand Government Bonds (ThaiGBs), also known

locally as Loan Bonds (LBs), are the primary

government bond instruments issued by the MoF to

finance Thailand’s budget needs. Maturities range

between 1 and 30 years, with a new 50yr planned to be

issued in FY11. Liquidity lies greatest in the 5 and 10

year tenors. Issuance of LBs is under the responsibility

of the PDMO and uses a US treasury style multiple

price auction process. The BoT provides a quarterly LB

auction schedule in the month before the start of each

quarter. The schedule specifies auction dates and bond

issuance tenors (or, in the case of a re-opening, the

specific issue), though it is subject to revisions.

Treasury bills (T-bills) are short-term discounted

government securities issued by the Ministry of Finance

(MoF) used for short-term treasury cash management.

Available tenors are 1, 3 and 6 months. They are sold

every Monday through US Treasury style multiple price

auctions. Thai Savings Bonds (TSBs) are issued by the

government. They carry a modest yield premium to

partially compensate retail investors for the 15%

withholding tax. The secondary market is illiquid as

most retail investors hold TSBs to maturity. TSBs are

allowed to trade as regular LBs one year after issuance

and only then are available for purchase by non-retail

and foreign investors.

Promissory notes (PNs) are primarily issued to address

market demand for long-term investment instruments by

the PDMO. They are open to long-term investors

although there is no fixed issuance plan. Bidding is

announced up to one month in advance and offers the

PDMO more flexibility. A new fixed rate PN with tenor

between 12 to 30 years and up to THB45m in size is

scheduled to be released next year.

BoT bills/bonds are used for BoT liquidity

management. Maturities range from one month to three

years. Foreign investment in BoT bills has increased

dramatically during 2010, which has spurred concerns

about speculative FX inflows.

State-owned enterprise (SOE) bonds are medium- to

long-term debt securities issued by corporates with

infrastructure projects. There are two types of SOE

bond: those guaranteed by the MoF (MoF SOEs) and

those not (non-MoF SOEs). Only MoF SOEs can

qualify for liquidity reserve requirements and BoT repo

transactions, but they may not exceed 10% of total

budget expenditure. Approximately 85% of SOEs are

MoF SOEs. Primary bids for SOE bonds are conducted

by a uniform price auction. Most secondary trading

Foreign holdings of BoT bills and ThaiGBs

0

50

100

150

200

250

Feb-09 Sep-09 Apr-10 Nov -10

THB

bn

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

BoT bills (LHS) ThaiGBs (LHS)% of ThaiGBs (RHS)

Source: HSBC, Thai Bond Market Association

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takes place in the repurchase market but the bonds are

relatively illiquid given their small size.

Corporate bonds are issued by corporates to the public.

All public issuance to more than 10 investors must

obtain a rating from an SEC-approved credit rating

agency (TRIS Rating Co. or Fitch). Debt with issuance

amount less than THB100bn or issued to creditors for

debt restructuring purposes is exempt from obtaining a

rating. A wide variety of potential structures are

available: straight, FRNs, amortising, convertible,

securitised, structured notes and credit-linked.

Derivatives

An onshore and offshore market exists for THB interest

rate swaps (see table Thailand: IRS and CCS markets).

Interest rate swaps (IRS) are liquid up to 5 years but

are available up to 10 years. An offshore non-

deliverable IRS (NDIRS) market has developed that is

closely aligned to the THB IRS curve. The THB fix,

which is partly derived from 6mth USD/THB forwards,

is used for floating rate calculation.

Cross currency swaps (CCS) are generally illiquid and

the curve trades below the THB IRS curve. Since

foreign investors may not access the onshore CCS

market, an offshore non-deliverable CCS (NDCCS)

curve has developed. The difference between onshore

and offshore CCS curve is largely accounted for by FX

restrictions.

5-year ThaiGB futures were launched in October

2010. Its basket of eligible bonds must have 4-6 years

time to maturity (on the first calendar day of the

contract month) and outstanding value of at least

THB5bn. With the 3-5yr segment of the ThaiGB curve

being the most liquid, the THB fix future allows both

local and foreign investors to express directional views

on ThaiGB yield. It also contributes to efficient price

discovery in this key segment of the ThaiGB curve.

Bloomberg: TOBA Cmdty.

6-month THB fix futures have a contract size of

THB10m and are cash settled. This market aids

management of very short-dated risk from THB IRS and

6-month FX forwards. Bloomberg: TXBA Cmdty.

3-month BIBOR futures have contract size of

THB10m and are cash settled. They will be calculated

from the 3-month BIBOR fixed at 11:00am Bangkok

time as announced by BoT on the last trading day (4

decimal points). The main users are likely to be banks

looking to hedge a portion of their balance sheet.

Bloomberg: TORA Cmdty.


Foreign investors must open a custodian account with a

local or foreign-based bank in Thailand. A power of

attorney (POA) must be prepared to allow the custodian

to buy and sell Thai government bonds and BoT

registered bonds on the investor’s behalf. The POA

must be presented every time the foreign investor buys

or sells. The POA application is verified by the BoT in

roughly a week.

Foreign participation in the onshore bond market was

severely impaired in December 2006. This was due to the

imposition of a 3mth holding requirement and capital

controls by way of a 30% unremunerated reserve

requirement (URR) on non-resident entities selling foreign

Thailand: IRS and CCS markets

Onshore IRS Offshore IRS Onshore CCS

Non-resident access: Not allowed Existent Not allowed Tenors 1-20 years 1-10 years 1-20 years Liquid tenors 2, 5, 10 years 2, 5, 10 years 2, 5 years Average trade size THB200-400m THB200-400m USD5m Bid/offer spreads under normal conditions (bp) 4-5bp 4-5bp 10-15bp Fixing rate 6mth SOR 6mth SOR 6mth USD Libor Day count Actual/365 Actual/365 Actual/365 Effective date T+2 T+2 T+2 Fixing time (local time) 11am 11am 11am Fixing page Reuters: THBFIX=TH Reuters: THBFIX=TH Reuters: THBFIX=TH Local market hours 8am-5pm 9am-5pm 8am-5pm Main participants Interbank, corporate firms Interbank, corporate firms, hedge funds Interbank, corporate firms

Source: HSBC

76


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currency for THB. In February 2008, both measures were

lifted and this has since led to the reappearance of foreign

investment in the Thai bond market.

There are three regulatory bodies in the Thai market.

The BoT supervises the operation of banking and

finance business; the SEC supervises the primary and

secondary market for securities business; the Thai Bond

Market Association (TBMA) supervises13 and aims to

be an information centre for the bond market.

Settlement

Scripless government and SOE bonds are settled

through the Post Trade Integration (PTI) system.

Physical government and state-owned enterprise bonds

are settled either at the Thailand Securities Depository

(TSD) or BoT. Cash settlement can be executed via the

BahtNet system or by cheque as agreed between buyer

and seller. The standard settlement period is T+2.

Taxation14

For government bonds, by virtue of the tax law to be

issued with retroactive effect from 13 October 2010,

interest income remains exempt, but capital gains and

discount income from non-interest bearing government

bonds (i.e., zero coupon bonds) purchased on or after 13

October 2010, would be subject to a 15% withholding

tax. Likewise, the tax may be reduced or exempt

according to a Double Taxation Treaty.

For Thai corporate bonds, foreign investors are subject

to a 15% tax on interest income, discount income (from

zero coupon bonds) as well as capital gains. The tax

may be reduced or exempt according to a Double

Taxation Treaty.

For domestic investors, tax implications vary according

to the status of investors and type of income. Focusing

on institutions, there will be 1% WHT on interest,

except for interest on bonds issued by financial

institutions and held by financial institutions. There is

no WHT on capital gains. However, domestic investors,

excluding mutual funds, are liable to include both

interest and capital gains in computation of corporate

income tax.

______________________________________ 13 Under the Securities and Exchange Commission Act BE 2535 14 HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.

Countries that have entered a Double Taxation Treaty with Thailand

Armenia France Malaysia South Africa Australia Germany Nepal Spain Austria Hong Kong Netherlands Sri Lanka Bahrain Hungary New Zealand Sweden Bangladesh India Norway Switzerland Belgium Indonesia Oman Seychelles Bulgaria Israel Pakistan Turkey Canada Italy Philippines Ukraine China, P.R. Japan Poland United Arab

Emirates Cyprus Republic of Korea Romania United Kingdom Czech Republic Kuwait Russian United States of

America Denmark Laos Singapore Uzbekistan Finland Luxemburg Slovenia Vietnam

Source: Thai Revenue Department

Foreign exchange Normal market conditions Normal market conditions

Onshore average daily volume USD1.1bnOnshore spot transaction USD3mOnshore bid/ask spread 1 pips (0.01THB)Onshore forward transaction USD30-50mOnshore forward spread 1M 3-5 pip (0.005THB)

12M 10-20 pips (0.010-0.020THB)Offshore average daily volume USD800mOffshore bid/ask spread 10 pips (0.010 THB)Onshore implied option volatility spread 0.5-1.0 vol for all datesOffshore implied option volatility spread 0.5-2.0 vol for all dates



Bank of Thailand (BOT) www.bot.or.th Ministry of Finance (MOF) www.mof.go.th/index_e.html Bureau of the Budget www.bb.go.th/bbhomeeng Public Debt Management Office (PDMO) www.mof.go.th/pdmo Thai Bond Market Association (TBMA) www.thaibma.or.th Bond Electronic Exchange (BEX) www.bex.or.th Securities and Exchange Commission (SEC) www.sec.or.th/index.jsp?lang=en Government Pension Fund (GPF) www3.gpf.or.th/english TRIS Rating Co. Ltd. www.trisrating.com

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Thailand: Bonds

Thailand Government Bonds (ThaiGBs, or Loan Bonds)

Treasury bills Bank of Thailand (BoT) bills and bonds

Corporate bonds 5yr ThaiGB futures 6mth THB fix futures

Issuer Ministry of Finance (MoF)

Ministry of Finance (MoF)

Bank of Thailand (BoT)

Corporations and finance companies

Thailand Futures Exchange

Thailand Futures Exchange

Currency Thai Baht (THB) Thai Baht (THB) Thai Baht (THB) Thai Baht (THB) Thai Baht (THB) Thai Baht (THB) Form Scripless Scripless Scripless Physical or scripless - - Minimum denomination

THB20-40m THB50-100m THB50-100m THB20-30m THB1m THB10m

Tenors 2, 3, 5, 7, 10, 15, 20, 30, 50 years

1, 3 and 6 months 14 days, 1, 3, 6, 12 months, 2-3 years

1-10 years, mainly 3-5 years

5 years 6 months

Coupon/discount Fixed Zero, issued at discount

Zero, issued at discount, except 2-year notes (fixed)

Fixed, floating or step-up

5% Floating

Coupon frequency Semi-annual None None (semi-annual for 2yr BoT bonds)

Quarterly/semi-annual

Semi-annual -

Amortising schedule Bullet Bullet Bullet Bullet or amortised - - Day count Actual/365 Actual/365 Actual/365 Actual/365 - - Amount outstanding THB2.4trn (Aug-

2010) THB162bn (Aug-2010) THB2.2tr (Aug-2010) THB1.2trn (Aug-

2010) THB9m (Oct-2010) Nil (Nov-2010)

Primary market Auction style US Treasury-style

auction US Treasury-style auction

US Treasury-style auction

Public offer, private placement

- -

Average issue size THB3bn-30bn per auction (issue sizes often exceed THB30bn through a series of auctions/re-openings)

THB1bn-5bn THB40-80bn for 14 days, THB10-50bn for other tenors

THB1bn-10bn - -

Auction frequency Weekly on Wednesdays

Weekly (Monday) Weekly on Tuesdays for 12-month bills and bi-weekly on Tuesdays for 2-year notes

Ad hoc - -

Participants Primary dealers and banks

Primary dealers and banks

Primary dealers and banks

Financial institutions, corporations and individuals

- -

Settlement T+2 T+2 T+2 T+2 - -

Secondary market Trading mechanism OTC OTC OTC OTC TFE TFE Trading hours 9am-12pm, 1:30-4pm 9am-12pm, 1:30-4pm 9am-12pm, 1:30-4pm 9am-12pm, 1:30-4pm 9:15am-12:30pm,

2pm-4pm 9:15am-12:30pm, 2pm-4pm

Quoting convention Yield to 2 decimal places

Yield to 2 decimal places



Percent of par value to 2 decimal places

In terms of index 100.00 - Yield (on annual basis to 3 decimal places)

Average bid-offer spreads

3-6bp 10-15bp 10bp 10-15bp 10-20bp None traded (Nov-2010)

Average trade size THB20-40m THB50-100m THB50-100m THB10-40m THB1m THB10m Volume THB2-7bn per day THB0.7-3.5bn per

day THB10-88bn per day THB300m-400m per

day THB1m None traded (Nov-

2010) Settlement T+2 T+2 T+2 T+2 T+2 T+2 Clearing BoT BoT BoT Thai Securities

Depository TFEX TFEX

Main participants Financial institutions, asset management companies

Financial institutions Financial institutions Financial institutions, corporations and individuals

Financial institutions Financial institutions


None None None None None None

Custodian Local custodian required

Local custodian required



Account with local broker required

Account with local broker required

Interest income tax None None None 15% withholding tax, reducible by treaty

None None

Capital gains tax 15% withholding tax, reducible by treaty

15% withholding tax, reducible by treaty

15% withholding tax, reducible by treaty

15% withholding tax, reducible by tax treaty

None None

Entry/exit None None None None None None

Source: HSBC

78

Asia-Pacific Rates Guide 2011 Vietnam December 2010

abc

Market developments Tax on foreign investment in government bonds

raised to 10% effective June 2010. Circular 64 is an

amendment to Circular 134 issued in 2008 by the

Ministry of Finance (MoF). The new rate of interest will

be calculated and paid after the sale or transfer of the

bond. Previously, foreign investment in bonds and

certificates of deposit (CDs) were taxed only at 0.1% of

the cumulative total of interest earned and the

instrument’s face value.

The VND corporate bond market continues to grow

in size and sophistication in 2010 as state enterprises,

commercial banks and private sector entities seek

medium- and long-term funding sources. Corporate

bonds now comprise about 10% of the total bonds in the

market.

The Vietnam Bond Market Association (VBMA),

formerly the Vietnam Bond Forum, was formally

launched in H2 2009 with the purpose of promoting the

development of the bond market, including establishing

a framework for standards and practices as well as a

benchmark yield curve. VBMA comprises 60 banks,

securities companies, investment funds, insurance, fund

management and financial companies.

Monetary policy The State Bank of Vietnam (SBV) is a ministerial

agency of the government that performs the state

management of monetary and banking activities and

acts as the central monetary authority. It has a dual

policy objective of keeping inflation below real GDP

growth and to support growth.

The SBV has three key benchmark policy rates — the

discount rate, the refinance rate and the base rate. In the

past, the SBV has also enforced a system of rate caps

and floors on lending and deposit rates. The SBV may

also adjust interest rates applied to both VND and USD

reserve deposits. In addition to interest rate guidance,

the SBV also engages in open market operations

through repo operations and lending/borrowing activity

with domestic banks.

B1/BB/B+Vietnam

Foreign investors of government bonds are now subject to a 10% tax on

interest income

VND corporate bond market continues to grow in size and sophistication

Vietnam Bond Market Association (VBMA) furthers bond development


0

5

10

15

20


USD

bn

0

5

10

15

20

% G

DP


1-3 y ears, 58%

3-5 y ears, 19%

5-10 y ears,

17%

Ov er 10 y ears,

7%


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The SBV sets a trading band for USD/VND transactions

in the spot market. The current trading band is +/-3%

from the official reference rate, which was widened in

August 2010. During 2010, the SBV devalued the VND

three times. In addition to the official exchange rate,

there exists a parallel gray market where market quotes

can significantly deviate from the daily fixing rate.

Offshore VND fixing vs. SBV official fixing

15,000

16,000

17,000

18,000

19,000

20,000

21,000

22,000

Jun-08 Feb-09 Sep-09 Apr-10 Dec-10

VND

Offshore fix SBV fix

Source: Bloomberg

The SBV cooperates with the MoF and the Ministry of

Planning and Investment. Ultimate responsibility for both

monetary and FX policy resides with the State Council,

which comprises the Monetary Policy Department and the

Foreign Exchange Control Department.

Key policy rates:

Base rate: Previously used as the reference rate for

commercial lending rates, which in the past have been

capped at 1.5x the base rate. The SBV removed this cap

in early 2010, but retains the right to reinstate this rule.

Bloomberg: VNDIBASE Index.

Discount rate: Interest rate imposed on loans from the

SBV to domestic banks. Bloomberg: VNDISC Index.

Refinance rate: Interest rate charged by the SBV on its

lending facilities to all credit institutions. Bloomberg:

VNREFINC Index.

USD/VND fixing rate: Official USD/VND fixing of

the SBV. Bloomberg: USDVND SBVN Curncy.

Key market rates:

Vietnam interbank rates: Rates applied to loans in the

interbank market. Reuters: VNIVNDOND =

(overnight).

VND offshore spot fixing: Offshore USD/VND spot

fixing rate as determined by the Association of Banks in

Singapore (ABS) at 11:30am. Bloomberg: VNDDFIX

Index.

Fixed income instruments The Vietnamese bond market has grown to a market

capitalisation of USD14bn (15.6% of GDP) as of

September 2010) from USD12bn (13.4% of GDP) at the

end of 2009.

There is no Primary Dealer system in Vietnam.

Institutions or enterprises wishing to participate in the

primary market must obtain a certificate of bond

bidding participating member from the Ha Noi

Exchange (HNX). Eligible primary auction participants

include credit institutions, insurance institutions,

securities companies and enterprises. Nearly all VGBs

and VDBs are listed on the HNX.

Vietnam: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos VGBs, SBV bills, VDBs, Municipal bonds- For interbank repos VGBs, SBV bills, VDBs, Municipal bondsMark-to-market requirements - Banks? No- Insurance companies? No- Pension funds? No- Mutual funds? NoTaxation: Government bonds* - Onshore investors 0.1% tax on all fixed income securities sold

and coupons from investment in bonds- Offshore investors 10% withholding tax on coupon, 0.1%

‘transfer tax’ upon saleOffshore investor access - Foreign ownership of government bonds

Est. USD50-100m (Oct-10)

- As % of outstanding Est. <1% (Oct-10)- Direct purchase? Yes- Subject to cap? No, only for bank bonds- Registration requirement? Yes (trading account, trading

code, custodian account)- Access to onshore funding? No- Access to onshore FX hedging? No- Access to rates hedging (IRS, repo, futures)? NoMarket liquidity statistics VGBs - Daily turnover (LCbn) VND100-400bn- Buying volume in a single day (USDm) (with minimal market impact)

USD5-10m

- Bid/offer spreads under normal conditions (bp) 20-30bpVDBs - Daily turnover (LCbn) VND100bn- Buying volume in a single day (USDm) (with minimal market impact)

USD5-10m



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As of October 2010, foreign investors held

approximately USD50-100m in government bonds,

equating to less than 1% of outstanding government

bonds. The largest participants in the bond market are

domestic banks, including state-owned, joint-stock,

joint-venture, foreign banks and state-owned

commercial banks (SOCBs) – Vietnam Bank for

Agriculture and Rural Development (Agribank), Bank

for Investment and Development of Vietnam (BIDV),

Vietnam Commercial Joint Stock Bank for Foreign

Trade (Vietcombank), Vietnam Commercial Joint Stock

Bank for Industry and Trade (VietinBank).

Bonds

Vietnam Government Bonds (VGBs) and Vietnam

Development Bank Bonds (VDBs) are the primary

instruments issued by the government to finance the

state budget deficit and meet state investment needs.

VGBs range between 2 and 15 years in terms of

maturity and may be issued either through auction or

underwriting. The MoF usually announces tentative

auction and underwriting dates at the start of every

quarter, but it may also announce auction details

regarding tenor and amounts within a week’s notice.

VDBs typically have longer duration and are issued by

the state-owned Vietnam Development Bank. They are

fully guaranteed by the government and thus carry the

same credit risk. VDBs trade at a modest spread of

around 10-50bps over T-bonds because there is no

haircut charge for a repo on a VGB, whereas VDB

repos face a 20% haircut charge.

In addition, the Vietnam Bank for Social Policy (VBSP)

may also issue bonds to finance government projects

and policy priorities.

Treasury notes (T-notes) are issued to finance the state

budget deficit. Maturities range between 1 week and 1

year. They are issued through the State Treasury or in

the open market. The former is normally for one year

tenors in physical form at fixed interest rate, whereas

the latter is for financial institutions.

SBV bills (T-bills) are short-dated discount instruments

used by the SBV to manage money market liquidity.

Face values are multiples of VND100m with maturities

ranging 1 to 9 months. T-bills are only issued to credit

institutions. The SBV has the authority to demand bank

subscription and redeem these bills before maturity.

Around VND8.5trn was issued in Q1 2010.

Municipal bonds are issued by local governments. The

largest municipal issuer is the Ho Chi Minh City

Investment Fund for Urban Development (HIFU),

which issues two types of bonds (at 5 and 10yr

maturities) to supplement the city’s investment budget.

Maturities range between 5 and 15 years and are

normally sold through agreements with commercial

banks and financial institutions (private placement).

Issuance via auctions has become more popular.

Corporate bonds are issued by corporate firms for

capital raising purposes. They include all bonds issued

by enterprises and banks, whether state-owned or

private. Issuance may be in bearer or registered form

with minimum face value of VND100,000 and tenor of

one year or more. Previously, bonds were issued mainly

by large state-owned enterprises such as Electricity of

Vietnam (EVN) and Vietnam National Oil and Gas

Group (PetroVietnam), though issuance by commercial

banks, other state enterprises and the private sector has

broadened the corporate bond issuer base in recent

years. In particular, corporate bond issuance by

commercial banks has accelerated in recent years as a

means to mobilise medium- and long-term capital.

Corporate issuers have also issued floating rate notes

and convertible bonds.

Public issuance of corporate bonds is regulated by

Circular 75/2004/TT-BTC dated 23 July 2004. Private

placement bonds are regulated by Decree 52/2006/ND-

CP dated 19 May 2006.


Foreign investors are allowed to invest in bonds in

Vietnam on the secondary market through brokers. To

trade bonds, foreign investors must have a trading code

at the STC, a trading account with one broker only and

custodian and cash accounts with a custodian bank.

81


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Settlement

Listed bonds

Trades executed through the HNX are settled on a

rolling T+1 basis for bonds for onshore and offshore

investors. The implementation of the Electronic-bond

trading system is considered delivery vs. payment (DvP)

by most banks in Vietnam. E-bond members place their

order into the system directly on T date. E-bond

members are responsible for ensuring there are enough

bonds and cash for trade before placing the order.

However, the Vietnam Securities Depository (VSD)

will double check if the seller has enough bonds,

otherwise it will terminate the trade. If the buyer does

not have sufficient funds, BIDV (a cash-settlement

bank) will lend to the buyer and charge a penalty fee.

For those that are not E-bond members, the process is

similar as before but through their brokers.

Unlisted bonds

Unlisted bonds are traded between two counterparties

directly. Upon confirmation of the deal, parties submit

all details and supporting documents to the registration

agent appointed by the issuer for interest and principal

payments and title transfer. Unlike listed bonds, the title

may be transferred to the buyer after the value date,

although the buyer will have already held ownership of

the bond since the settlement date.

Taxation15

Since June 2010, foreign investors have been subject to

a 10% withholding tax on coupon payments from all

bonds, including government bonds. Foreign investors

are also subject to a 0.1% tax on the par value of the

bond payable with transfer of ownership.

Prior to June 2010 for all bonds, foreign investors are

subject to a withholding tax of 0.1% of the par value

and coupon of the bonds, at the time of receipt of the

coupon. At the time of sale or transfer of bonds, they are

further subject to a tax of 0.1% of the prevailing total

value of the bonds, regardless of capital gains or losses.

The tax is payable with the transfer of ownership and

applies to all securities, except tax-exempt bonds (e.g.,

education development bonds issued to retail investors).

______________________________________ 15 HSBC is not a qualified tax advisor. Consult a professional advisor for

further guidance.


Onshore interbank average daily volume USD80-100mOnshore spot transaction USD2mOnshore bid/ask spread 20-50 pips (20-50VND)Onshore forward transaction USD1mOnshore forward spread 40-80 pips (40-80VND)Offshore average daily volume USD5mOffshore implied option volatility spread 5-10 vol for all dates



State Bank of Vietnam (SBV) www.sbv.gov.vn Vietnam Government Portal www.vietnam.gov.vn Ministry of Finance (MoF) www.mof.gov.vn

82


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Vietnam: Bonds

Vietnam Government Bonds (VGBs), Vietnam Development Bank bonds (VDBs)

Treasury Notes (T-notes) Municipal bonds (e.g. HIFU) Financial Institution bonds/ debentures

Issuer Ministry of Finance (MoF) Ministry of Finance (MoF) Ho Chi Minh City Investment Fund for Urban Development (HIFU)

Financial institutions/ corporations

Currency Vietnamese Dong (VND) Vietnamese Dong (VND) Vietnamese Dong (VND) Vietnamese Dong (VND) Form Scripless Scripless Scripless Scripless Minimum denomination VND100,000 VND1bn VND100,000 VND1bn (mostly) Tenors 2-3, 5, 7, 10, 15 years 7, 14, 28, 56, 84, 182, 364

days 5-15 years 2-15 years

Coupon/discount Fixed Zero, issued at discount Fixed Fixed, Floating or step up Coupon frequency Annual None Annual Annual Amortising schedule Bullet Bullet Bullet Bullet Day count Actual/Actual Actual/Actual Actual/365 Actual/365 Amount outstanding VND168trn (VGBs and VDBs)

(Dec-10) VND8.5trn (Dec-10) VND4tr (Oct-10) VND2.5trn (Sep-10)

Primary market Auction style Dutch auction, Underwriting Amount bidding (rates are

fixed, participants bid for amount)

Private placement Public offer, private placement

Average issue size VND200bn-1.0tr (dependent on SBV yield target)

VND 200-300bn VND200-300bn VND1trn (banks), VND200-300bn (corporates)

Auction frequency Usually weekly to bi-weekly Specific tenors available certain days of the week

Ad hoc Ad hoc

Participants Banks, financial institutions Banks Banks, financial institutions Banks, financial institutions Settlement T+1 (issuance date), up to

T+15 (HNX registration period) T or T+1 (depending on whether issued in morning or afternoon)

T+2 T+2

Secondary market Trading mechanism OTC, STC no market for T-notes at the

moment OTC, STC OTC

Trading hours 9am-12pm, 1:30pm-4pm n/a 9am-12pm, 1:30pm-4pm 9am-12pm, 1:30pm-4pm Quoting convention Price to 3 decimal places n/a Yield to 2 decimal places Yield to 2 decimal places Average bid-offer spreads 20-30bp n/a 20-30bp 50-70bp Average trade size VND50-100bn n/a VND10bn VND10bn Volume VND200-500bn (VND100-400bn

for VGBs, VND100bn for VDBs) per day

n/a VND10-30bn per day VND10-30bn per day

Settlement T+1 n/a T+2 T+2 Clearing BIDV n/a Registered and paying agent Registered and paying agent Main participants Financial institutions n/a Financial institutions Financial institutions

Regulations for foreign investors Restriction on foreign investment None Not allowed None None Custodian Local custodian required - Local custodian required Local custodian required Interest income tax 10% withholding tax - 10% withholding tax 10% withholding tax Capital gains tax 0.1% ‘transfer tax’ upon sale - 0.1% ‘transfer tax’ upon sale 0.1% ‘transfer tax’ upon sale Entry/exit None - None None

Source: HSBC

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84

Asia-Pacific Rates Guide 2011 Australia December 2010

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Market developments In contrast to other developed regions, Australia

remains firmly on a path of fiscal reconsolidation.

Gross bond issuance for FY10-11 (1 July 2010 – 30

June 2011) was revised down to AUD53bn-58.5bn

from AUD60bn announced in May 2010 (November

2010). The Australian Office of Financial Management

(AOFM) announced the change due to a smaller

expected budget deficit for FY09-10 despite a higher

forecast budget deficit in FY10-11 of AUD41.5bn

(-3.2% of GDP), compared with the May estimate of

AUD40.8bn. The budget deficit, however, is forecasted

to fall further to -2.4% of GDP in FY11-12 and shift to

a surplus in FY12-13. This implies negative net

issuance in a few years but the AOFM is committed to

maintaining a liquid benchmark issuance.

Issuance of a new T-bonds maturing in 2023 has been

deferred until 2011-12. Instead, a 2018 and 2025 bond

will be issued in FY10-11. Treasury notes (3 and 6

month discount instruments, see Fixed income

instruments), however, are not expected to constitute a

significant proportion of overall funding in FY10-11.

Only AUD10bn is planned to be issued in the financial

year.

Whilst gross issuance for FY10-11 is thus expected to

remain close to the AUD54bn issued in FY09-10, net

issuance is set to decrease to AUD12bn by FY11-12.

The frequency of Treasury indexed bonds issuance is

set to increase in FY10-11, as announced in November

2010. The total planned issuance for the financial year is

set at AUD3-3.5bn, with auctions taking place on a

monthly basis with the exception of December 2010.

New 2030 Treasury indexed bond launched (16

September 2010). The bond pays a 2.5% coupon and a

total of AUD1.25bn was issued via a syndicate offering.

Total Treasury indexed bond issuance for FY10-11 is

expected to be between AUD3bn and AUD3.5bn.

Government increases accessibility of retail investors

into corporate bond markets (May 2010). Under

ASIC Class Order C0 10/321, corporate issuers may

now issue “vanilla” bonds to retail investors using a

simple short form prospectus. This initiative aims to

increase the market value of Australia’s corporate bonds

Aaa/AAA/AA+Australia

Bond issuance for FY10-11 revised down to AUD53bn-58.5bn

Frequency of Treasury indexed bonds issuance increased

Government enhances accessibility of corporate bond markets

Bonds outstanding Government bond maturity profile (as of June 2010)

0

200

400600

800

1,000

1,2001,400

1,600

1,800

Sep-04 Mar-06 Sep-07 Mar-09 Sep-10

USD

bn

Government Financial corporations Non-financial corporations ABS

3-5 y ears

32%

5-10 y ears

24%

Ov er 10 y ears

14%

1-3 y ears

30%

Source: HSBC, RBA Source: RBA

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from AUD20bn in May 2010. For corporates to

participate in this scheme, at least AUD50m must be

issued and the issuer must be a listed company with a

good disclosure history.

This is the first step of structural reforms aimed at

developing Australia’s corporate market. Market

participants have indicated that tax breaks for bond

interest income, extension of the curve and a retail

market for bonds are required to advance the market.

Increased issuance of non-government guaranteed

bonds by banks to 85% in 1H10 from 15% in 1H09.

Since October 2008, bonds issued by eligible authorised

deposit-taking institutions were offered government

guaranteed status for a fee, ultimately affording them

the government’s AAA credit rating. Bonds constitute

about one-quarter of total bank funding, with about

three-quarters outstanding issued offshore.

Monetary policy The Reserve Bank of Australia (RBA) is responsible for

exercising its power that would best contribute to:

“1) the stability of the currency of Australia, 2) the

maintenance of full employment in Australia and 3) the

economic prosperity and welfare of the people of

Australia.” It has a medium-term inflation target of 2-

3% and in particular over each business cycle.

The main monetary instrument is the target ‘cash rate’,

which signals the RBA’s monetary stance. This is set by

the Reserve Bank Board who meets on the first Tuesday

of each month. The RBA can also employ open market

operations such as repo / reverse repo agreements, FX

transactions and investment in foreign asset markets.

Key policy rate:

Target cash rate: Interest rate on overnight funds held

at the RBA. Bloomberg: RBATCTR Index.

Key market rate:

90-day bank bill swap rate (BBSW): Floating rate

benchmark in an IRS swap. Bloomberg: BBSW3M

Index.

Fixed income instruments The Australian bond market has grown to a market

capitalisation of USD1.3trn as of September 2010

(120.7% of GDP). Financial corporations dominate the

bond market, constituting 65.3% of it. The government

sector (G-Sec) accounts for 23.1% whilst non-financial

corporate bonds only constitute 11.6% of the market.

There is no primary dealer system in Australia due to the

large number of active participants in the primary market

and competitive secondary market. An eligible

counterparty of the RBA must satisfy at least one of the

following conditions: “1) Be an Authorised Deposit-

Taking Institution (ADI) regulated by APRA, 2) Hold an

Australian financial service licence and regulated by ASIC,

3) Subject to an exemption from the requirement to hold an

Australian financial services licence, as determined by

ASIC and subject to any conditions specified by ASIC in

that exemption and 4) Where established under State or

Australia: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos Treasury bonds- For interbank repos Treasury bondsMark-to-market requirements - Banks? n/a- Insurance companies? n/a- Pension funds? n/a- Mutual funds? n/aTaxation: Government bonds* - Onshore investors None- Offshore investors NoneOffshore investor access - Foreign ownership of government bonds

AUD106bn (Jun-10)

- As % of outstanding 71.7% (Jun-10)- Direct purchase? Yes- Subject to cap? No- Registration requirement? No- Access to onshore funding? Yes- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? YesMarket liquidity statistics ACGBs - Daily turnover (LCtr) AUD3.5bn- Buying volume in a single day (USDm) (with minimal market impact)

USD20-50m (deal size)

- Bid/offer spreads under normal conditions (bp) 1bpTreasury bills - Daily turnover (LCtr) AUD200m- Buying volume in a single day (USDm) (with minimal market impact)

USD20m



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Territory legislation, subject to adequate controls as

deemed appropriate by the Reserve Bank.”

Foreign investment has increased to 71.7% of total

Australian government debt (June 2010) from 62.7% at

end 2009 (see chart Foreign holdings of Australian

government debt). This growth is solely from non-

Treasury notes (T-notes) as foreign investors have

stopped investing in T-notes since March 2003. The

value of foreign holdings of government debt was

AUD105.5bn in June 2010.

Foreign holdings of Australian government securities

0

20

40

60

80

100

Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10

USD

bn

0%

10%

20%

30%

40%

50%

60%70%

80%

90%

Foreign holdings (LHS) % of total gov. debt (RHS)

Source: HSBC, RBA

Bonds

Treasury fixed coupon bonds are medium- to long-

term debt used primarily to finance fiscal expenditure.

They pay a fixed coupon on a semi-annual basis.

Maturities range between 1 and 15 years. Competitive

bid auctions are held on Wednesdays and Fridays, with

details in a particular week announced at Friday noon of

the preceding week. The face value offered in each

tender is typically AUD500m to AUD1.2bn.

From July to November 2010, new T-bonds maturing in

2014 and 2016 have been issued. The total planned

issuance for 1 July 2010 – 30 June 2011 is between

AUD50bn-55bn, and will result in a net increase of

AUD31bn-36bn of T-bonds on issue.

In the past, the Australian government also issued

Australian Saving Bonds in 1976-87, with maturities of

around 7.5yrs and Treasury Adjustable Rate bonds since

1994. Treasury Adjustable Rate bonds are floating-rate

notes, where the coupon is reset periodically in line with

movements in the bank bill swap rate. They are now

infrequently issued on an ad-hoc basis.

Treasury notes are short dated discount instruments

issued via competitive bid auctions every Thursday by

the AOFM. They help the government's within-year

financing task with issuance decisions made weekly

based on daily cash position forecasts for the

forthcoming weeks. Details of the tenors and amounts to

be offered are provided at Friday noon of the preceding

week. Only 3- and 6-month tenors are available. The

AOFM aims to keep at least AUD10bn of T-notes

outstanding to ensure a liquid market.

Treasury indexed bonds are medium- to long-term

inflation linked bonds that pay a fixed coupon rate on a

quarterly basis. Maturities range from 5 to 20 years. As

the face value of the bond is adjusted for inflation

calculated via the Consumer Price Index (CPI), the

nominal coupon payable is adjusted each year. At

maturity, bond holders are repaid the adjusted principal

value of the bond.

Competitive bid auctions are held on Tuesdays with

details of the issuance announced at noon on the Friday

of the preceding week.

Financial bonds are issued by banks and other financial

corporations to the public. The four big banks of

Australia have been ranked Aa1 by Moody’s since

2007, and are amongst the highest rated banks by global

credit rating agencies. They account for AUD620.2bn of

debt collectively: Westpac (28.0%), Australia and New

Zealand Banking Group (ANZ) (17.1%),

Commonwealth Bank of Australia (28.6%), and

National Australia Bank (NAB). Maturities range from

1 to 30 years, but are typically concentrated in the 2-6yr

segment, with an average of 3.5yrs. The distribution of

Australian banks bond issuance has shifted towards

shorter-term tenors since the financial crisis.

Corporate debt markets are relatively undeveloped in

Australia, accounting for 11.6% of the bond market.

This is due to household savings being invested by fund

managers via superannuation accounts and costly

disclosure requirements making it easier for issuers to

raise funding from institutions.

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Derivatives

An onshore and offshore market exists for AUD interest

rate swaps (see table Australia: IRS and CCS markets).

Interest rate (IRS) and cross-currency swaps (CCS)

extend out to 40 years but liquidity is greatest up to 30

years. There are no restrictions on non-resident investor

access to the AUD IRS and CCS markets for AUD

funding, or to either hedge or take positions in AUD

forwards, IRS and CCS.


Foreign and domestic investors face the same

requirements to access the Australian government bond

market. An application requires two completed forms:

the Purchase Form and an Identification Release Form16

sent to the Registry for Commonwealth Government

Inscribed Stock at the Reserve Bank in Sydney or

Canberra. If the application is signed under power of

attorney, then the original power or its certified copy

must be provided in the application.

Settlement

The Reserve Bank Information and Transfer System

(RITS) settles high value payments on a real-time gross

settlement (RTGS) basis. Settlement risk is eliminated

as the Exchange Settlement Accounts (ESAs) of both

counterparties are credited and debited simultaneously.

ESAs are held at the RBA and membership of RITS is

compulsory for their holders.

______________________________________ 16 In compliance with the Anti-Money Laundering and Counter-Terrorism

Financing Act (2006).

Taxation17

Foreign investors are exempt from Australian interest

withholding tax for bonds issued in a manner which

qualifies for interest withholding tax exemption,

including passing a relevant "public offer test".

Otherwise, a 10% interest withholding tax applies.

Non resident bondholders who do not hold their bonds

on revenue account should be exempt from Australian

capital gains tax on the disposal of their bonds. Those

who hold their bonds on revenue account may be taxed

in Australia on profits on disposal, although residents of

a country that holds a treaty with Australia may be

entitled to income tax relief. Resident bondholders may

be taxable on profits on disposal of their bonds.

Countries that have entered a tax treaty with Australia

Argentina Italy Slovakia Austria Japan South Africa Belgium Kiribati South Korea Canada Malaysia Spain China Malta Sri Lanka Czech Republic Mexico Sweden Denmark Netherlands Switzerland Fiji New Zealand Taipei Finland Norway Thailand France Papua New Guinea United Kingdom Germany Philippines United States Hungary Poland Vietnam India Romania Indonesia Russia Ireland Singapore

Source: Australian Taxation Office


further guidance.

Australia: IRS and CCS markets

IRS CCS

Non-resident access: Allowed Allowed Tenors 1-40 years 1-40 years Liquid tenors 1-30 years 1-30 years Average trade size AUD20k market parcel AUD20k market parcel Bid/offer spreads under normal conditions (bp)

2-3bp 2-3bp

Fixing rate 1-3yrs: 3mth BBSW, 4-40yrs: 6mth BBSW 3mth BBSW vs. 3mth LIBOR Day count Actual/365 3mth BBSW: Actual/365, 3mth LIBOR: 30/360 Effective date T+1 T+2 Fixing time (local time) 11am 11am Fixing page SWAPREF SWAPREF Local market hours 8:30am – 4:30pm 8:30am – 4:30pm Main participants Interbank Interbank

Source: HSBC

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Reserve Bank of Australia www.rba.gov.au Australian Taxation Office (ATO) www.ato.gov.au Australian Financial Markets Association (AFMA) www.afma.com.au Australian Securities Exchange (ASX) www.asx.com.au Australian Office of Financial Management www.aofm.gov.au

Australia: Bonds

Treasury fixed coupon bonds

Treasury notes Treasury indexed bonds

Financial bonds Corporate bonds

Issuer The Commonwealth of Australia

The Commonwealth of Australia

The Commonwealth of Australia

Financial institutions Private sector

Currency Australian Dollar (AUD) Australian Dollar (AUD) Australian Dollar (AUD) Australian Dollar (AUD) Australian Dollar (AUD) Form Scripless Scripless Scripless Scripless Scripless Minimum denomination AUD1m AUD1m AUD1m AUD0.1m AUD0.1m Tenors 1-7, 9, 10, 15 years 3, 6 months 5, 10 15, 20 years 1-30 years 1-30 years Coupon/discount Fixed Zero, issued at discount Fixed (applied to an

increasing/decreasing principal)

Fixed, floating Fixed, floating

Coupon frequency Semi-annual None Quarterly Mainly semi-annual Mainly semi-annual Amortising schedule Bullet Bullet Bullet Bullet Bullet Day count Actual/Actual Actual/365 Actual/Actual Actual/Actual Actual/Actual Amount outstanding AUD30.3bn (Sep-10) AUD277.4bn (Sep-10) AUD12.6bn (Sep-10) AUD905.3bn (Sep-10) AUD422.6bn (Sep-10)

Primary market Auction style Competitive-bid Competitive-bid Competitive-bid Syndicated Syndicated Average issue size AUD500m-1.2bn AUD400-600m AUD225-300m AUD500-750m AUD300-500m Auction frequency Weekly Wednesdays and

Fridays Weekly (Thursday) Monthly (Tuesday) Ad hoc Ad hoc

Participants Eligible counterparties Eligible counterparties Eligible counterparties Financial institutions, corporations and individuals

Financial institutions, corporations and individuals

Settlement T+3 T+1 T+3 T+3 T+3

Secondary market Trading mechanism OTC OTC OTC OTC, ASX OTC, ASX Trading hours 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm Quoting convention Semi-annual yield to

maturity Semi-annual yield to maturity

Semi-annual yield to maturity



Average bid-offer spreads 1bp 1bp 2bp 5bp 7bp Average trade size AUD20m AUD20m AUD5m AUD5m AUD5m Volume AUD3.5bn AUD200m AUD100m AUD50-100m AUD25-50m Settlement T+3 T+3 T+3 T+3 T+3 Clearing Austraclear/Euroclear Austraclear/Euroclear Austraclear/Euroclear Austraclear/Euroclear Austraclear/Euroclear Main participants Banks Banks Banks Banks Banks



Custodian Local custodian required Local custodian required Local custodian required Local custodian required Local custodian required Interest income tax No No No 10% withholding tax 10% withholding tax Capital gains tax No No No No No Entry/exit None None None None None

Source: HSBC

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90

Asia-Pacific Rates Guide 2011 New Zealand December 2010

abc

Market developments Demand for longer maturity bonds increased over

2010. In response to this, new 15 March 2019

government bond was issued to develop the yield

curve further. The new bond was announced on 28

September 2010 and was designed to fill in the gap

between bonds maturing in 2017 and 2021. It pays a 5%

semi-annual coupon.

New 2025 inflation-indexed bond (IIB) announced

(10 September 2010), becoming the first inflation linked

issuance since 1999 and set to be a new benchmark. The

timing of the launch was scheduled to be in November

2010, conditional on market conditions and will

constitute part of the NZD12.5bn domestic bond

programme announced at the FY10-11 (1 July 2010 –

31 June 2011) budget. At the time of writing (December

2010), however, the bond has yet to be issued with no

further indication by the New Zealand Debt

Management Office (NZDMO).

Demand for New Zealand inflation-indexed bonds

jumped in September 2010. This is largely a result of an

increase in the Goods and Services Tax (GST) to 15%

from 12.5% on 1 October 2010, creating broad inflation

expectations.

NZDMO announces a decrease in issuance of bonds

(May 2010). Total issuance over FY10-11 will fall by

NZD2bn to NZD12.5bn due to an improved fiscal

outlook. Planned issuance for FY11-12, FY12-13 and

FY13-14 are NZD10.5bn, NZD10bn and NZD6bn

respectively.

NZDMO remains committed to deepen bond market

liquidity (May 2010). The NZDMO has signalled

intentions to participate in the secondary market,

providing the option for bond switches and offering

bond repurchase agreements.

Direct secondary market participation allows the

NZDMO to buy and sell government bonds and match

demand with supply. Yields will be stabilised in the

event of low demand.

The bond switch facility allows investors to switch

between bonds, promoting liquidity and investor

participation. In particular, it is aimed at moving investors

Aaa/AA+/AA+New Zealand

New 15 March 2019 government bond develops yield curve further

New 2025 inflation-indexed bond announced

NZDMO announces a decrease in issuance of bonds

Government bonds outstanding Government bond issuance maturity profile (January – October 2010)

0

5

10

15

20

25

30

35

Sep-04 Mar-06 Sep-07 Mar-09 Sep-10

USD

bn

Gov. bonds T-bills

Ov er 5 y ears

33%

2-5 y ears

29%

3-6 months

6%

6 months -2 y ears

21%

Less than 3 months

11%

Source: HSBC, RBA Source: RBA

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from the February 2016 IIB and nominal bonds into the

new 2025 IIB, and moving investors from the November

2011 bond into other government bonds.

Repo agreements help lengthen the term that bonds can

be borrowed from overnight to up to 1 month and also

providing access to IIBs.

NZDMO reintroduces 12-month Treasury bill (T-

bill) (April 2010) to increase the range of available

funding options. Investors are provided with an

additional short-term government security. The 12-

month bill follows the same structure in terms of

issuance procedures as other T-bills.

Monetary policy The Reserve Bank of New Zealand is responsible for

delivering “stability in the general level of prices,”

currently defined as between 1% and 3% on average

over the medium term. The target is specified in the

Policy Targets Agreement (PTA).

The main monetary instrument is the Official Cash Rate

(OCR), determined by the Bank but with responsibility

resting solely on the Governor. The OCR is reviewed

eight times a year and Monetary Policy Statements are

released on four of those occasions. The Bank also

employs open market operations (OMO) such as reverse

repo, repo transactions and Reserve Bank Bills (RBBs),

and standing facilities to manage liquidity in the

financial system.

Key policy rate:

Official Cash Rate: Interest rate on overnight funds

held at the Reserve Bank of New Zealand. Bloomberg:

NZOCRS Index.

Key market rates:

3m Bank Bill Rate: Rate on a 3-month bank bill, which

is a short-term money market investment of which the

acceptor or endorses is a bank. Bloomberg: NDBB3M

Curncy.

Overnight London Inter-Bank Offered Rate

(LIBOR): Reference interest rate at which banks offer

to lend in the interbank market. Bloomberg: NZ00S/N

Index.

Fixed income instruments The New Zealand government bond market has grown

to a market capitalisation of USD32.6bn as of October

2010. Approximately 82% of the bond market is

composed of T-bonds, with the remainder as T-bills.

There is no primary dealer system in New Zealand. For

institutions to register as a tender counterparty with the

NZDMO, they must 1) have a minimum credit rating of

A0/A3, 2) have their obligations guaranteed by a parent

entity with a minimum credit rating of A0/A3 or 3) be a

crown financial institution.

Foreign investment has increased to NZD24.7bn (56.3%

of total New Zealand government debt) as of October

2010 from 51.3% at end 2009 (see chart Foreign

holdings of Australian government debt). This growth is

driven by holdings in Treasury bonds, increasing 43.6%.

Specifically, foreign holdings of Treasury bonds was

NZD23.5bn (64.6% of total) whilst holdings of

Treasury bills was NZD1.2bn (15.8% of total).

New Zealand: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos Government bonds- For interbank repos Government bondsMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors No- Offshore investors 15% withholding tax**Offshore investor access - Foreign ownership of government bonds NZD43.9bn- As % of outstanding 54.7%- Direct purchase? Yes- Subject to cap? No- Registration requirement? Yes- Access to onshore funding? Yes- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? YesMarket liquidity statistics New Zealand Government Bonds - Daily turnover (LCtr) AUD500m- Buying volume in a single day (USDm) (with minimal market impact)

USD25m

- Bid/offer spreads under normal conditions (bp) 2bpTreasury bills - Daily turnover (LCtr) AUD50-100m- Buying volume in a single day (USDm) (with minimal market impact)

USD20m


Source: HSBC *HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance. **Reducible by DTA

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Foreign holdings of New Zealand government securities

0

2

4

6

8

10

12

14

16

18

Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

USD

bn

0%

10%

20%

30%

40%

50%

60%

70%

80%

Gov. bonds T-bills % of total gov. bonds

Source: HSBC, RBA

Bonds

New Zealand Government Bonds are issued by the

NZDMO on the Crown’s (Her Majesty the Queen in

right of New Zealand) behalf to finance fiscal

expenditure. They pay a fixed coupon on a semi-annual

basis. Maturities range between 1 and 10 years. In the

event of oversubscription of a certain bond, the

NZDMO may offer up to an additional 50% of amount

offered for tender in that maturity. This is subject to the

total amount of bids (or offers) accepted in all maturities

does not exceed the total amount offered for tender,

notwithstanding the provision made to exceed the total

amount available in the allocation of bids (or offers).

The issuance process uses a competitive bid auction.

Bidders pay different prices for the securities according

to the yield at which they bid and sealed because

bidders are unaware of the other bidder’s bids when the

auction closes.

Treasury bills are discount securities issued by the

NZDMO on behalf of the Crown. Maturities range

between 3 months and 1 year. Auctions are held weekly

every Tuesday and only accessible to registered tender

counterparties. In the event of oversubscription of a

certain bond, the procedures are identical to government

bonds.

Inflation-Indexed Bonds (IIB) were first introduced in

1996 and not issued since 1999. Prior to the new

scheduled 2025 IIB bond, there is only one available IIB

bond expiring on 15 February 2016, the NZGB4.5 2/16.

This can only be purchased if a holder decides to sell it on.

Corporate bonds are issued by the private sector,

encompassing state-owned enterprises (SOEs), local

authority bonds, mortgage-backed securities, rated

bonds and lower-grade hybrids issued by corporates.

Maturities range between 1 and 15 years, with liquidity

focused between 3 and 10 years. Corporates seeking

short-term funding with maturity of less than 3 years

tend to approach banks, rather than the bond market.

In the past the yield curve has been flat, concentrating

supply at short-end tenors and consequently limiting

liquidity in the corporate bond market. Recently the

curve has been reverting, making it more attractive for

suppliers to lend further out in the curve (see Recent

yield curve reversion).

Recent yield curve reversion

3.0

3.54.0

4.5

5.0

5.56.0

6.5

7.0

1 2 3 4 5 6 7 8 9 10

Years

%

Nov-10 Nov-08 Nov-06 Nov-04

Source: HSBC, Bloomberg

Yet liquidity may still be constrained by: 1) slow

growth in the New Zealand fund management industry

and 2) a well developed and actively traded FX market

allowing domestic companies to access offshore capital

markets and hedge currency risks using currency and

interest rate swaps.

Major players are retail investors, top fund managers,

institutional investors and banks.

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Derivatives

An onshore and offshore market exists for NZD interest

rate swaps (see table New Zealand: IRS and CCS markets).




access to the NZD IRS and CCS markets for NZD

funding, or to either hedge or take positions in NZD



Foreign investors may purchase government bonds from

registered tender counterparties that bought government

bonds from the NZDMO from primary auctions. The

minimum amount that may be offered is NZD10,000 in

the secondary market, compared to NZD1m in the

primary market.

Settlement

NZClear is the primary real-time settlement system in

New Zealand. It is operated by the Reserve Bank of

New Zealand, who considers application for

membership of the system. A necessary condition is the

Reserve Bank of New Zealand must believe the

applicant is “of good standing and has the necessary

resources to meet its obligations as a member.”

Bonds are settled via delivery vs. payment (DvP) on a

Real Time Gross Settlement basis.

Taxation18

Government securities are subject to a 15% withholding

tax on interest but may be reducible if the foreign

investor resides in a country that entered a Double Tax

Agreement (DTA) with New Zealand. There is no

capital gain tax.

Useful information


further guidance.

New Zealand: IRS and CCS markets

IRS CCS

Non-resident access: Allowed Allowed Tenors 1-20 years 1-20 years Liquid tenors 1-10 years 1-10 years Average trade size NZD15k market parcel NZM15k market parcel Bid/offer spreads under normal conditions (bp) 3-4bp 3-4bp Fixing rate 3mth BKBM 3mth BKBM vs. 3mth LIBOR Day count Actual/365 3mth BBSW: Actual/365, 3mth LIBOR: 30/360 Effective date T+2 T+2 Fixing time (local time) 11am 11am Fixing page n/a n/a Local market hours 8:30am – 4:30pm 8:30am – 4:30pm Main participants Interbank Interbank

Source: HSBC

Countries that entered a DTA with New Zealand

Australia India Russia Austria Indonesia Singapore Belgium Ireland South Africa Canada Italy Spain Chile Japan Sweden China Korea Switzerland Czech Republic Malaysia Taiwan Denmark Mexico Thailand Fiji Netherlands Turkey Finland Norway United Arab Emirates France Philippines United Kingdom Germany Poland United States of America

Source: Inland Revenue

Information sources

Reserve Bank of New Zealand www.rbnz.govt.nz/ New Zealand Debt Management Office (DMO) www.nzdmo.govt.nz/ Inland revenue www.ird.govt.nz/

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New Zealand: Bonds

New Zealand Government Bonds

Treasury bills Inflation-indexed bonds Corporate bonds

Issuer The Crown The Crown The Crown Private sector Currency New Zealand Dollar (NZD) New Zealand Dollar (NZD) New Zealand Dollar (NZD) New Zealand Dollar (NZD) Form Scripless Scripless Scripless Scripless Minimum denomination NZM1m NZD1m NZD1m NZD1,000 - 100,000 Tenors 1, 3, 5, 7, 10 years 3, 6, 12 months 2016 1-15 years Coupon/discount Fixed Zero, issued at discount Fixed (applied to an

increasing/decreasing principal) Fixed, floating or step-up

Coupon frequency Semi-annual None Quarterly Mainly semi-annual Amortising schedule Bullet Bullet Bullet Bullet Day count Actual/Actual Actual/365 Actual/Actual Actual/Actual Amount outstanding NZD36.4bn (Oct-10) NZD7.5bn (Oct-10) NZD1.5bn (Oct-10) NZD5bn (Dec-10)

Primary market Auction style Competitive-bid Competitive-bid Competitive-bid Public offer, private placement Average issue size NZD50-110m NZD100-200m NZD50-100m NZD50-100m Auction frequency Weekly (Thursday) Weekly (Tuesday) Ad hoc Ad hoc Participants Banks Banks Banks Banks Settlement T+2 T+2 T+2 T+2

Secondary market Trading mechanism Austraclear/Euroclear Austraclear/Euroclear Austraclear/Euroclear Austraclear/Euroclear Trading hours 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm Quoting convention Semi-annual yield to maturity Semi-annual yield to maturity Semi-annual yield to maturity Semi-annual yield to maturity Average bid-offer spreads 2bp 2bp 5bp 10bp Average trade size NZD5-10m NZD5-10m NZD5m NZD5m Volume NZD500m NZD50m NZD20m NZD20m Settlement T+2 T+2 T+2 T+2 Clearing NZClear NZClear NZClear NZClear Main participants Banks Banks Banks Banks


None None None None

Custodian Local custodian required Local custodian required Local custodian required Local custodian required Interest income tax 15% withholding tax 15% withholding tax 15% withholding tax 15% withholding tax Capital gains tax None None None None Entry/exit None None None None

Source: HSBC

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96

Asia-Pacific Rates Guide 2011 Japan December 2010

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Market developments During 2010, the front end of the curve has been

pushed down by further quantitative easing by the

Bank of Japan (BoJ). As a result of additional

liquidity, this has prompted aggressive purchases of

medium-dated government bonds by Japanese city

banks. According to the Japanese Securities Dealers

Association (JSDA), the city banks purchased a total of

JPY12.6trn medium-dated bonds from January 2010 to

October 2010, dwarfing the JPY5.3trn in purchases

made during the same period during 2009. It is probable

that demand for longer-dated securities will filter along

the curve across time. city banks have national networks

across Japan, differentiating them from regional banks,

which do not. Examples of city banks are Bank of Tokyo-

Mitsubishi UFJ, Mizuho Corporate Bank, Mizuho Bank,

and Sumitomo Mitsui Bank.

Foreign JGB holdings have constantly remained

under 10%. Significant attention has centred on Chinese

purchases of JGBs in 2010. Until October 2010, it was

widely believed that China was significantly increasing

its stake in JGBs, with year purchases by July 2010

reaching seven times their previous overall record high

in 2005. These observations prompted Japanese Finance

Minister Yoshihiko Noda to announce an investigation

by the Japanese government of the motives behind the

purchases in September 2010.

In October 2010, however, data from the Japanese

Ministry of Finance (MoF) showed that China had sold

back a significant amount of JGB in August. Specifically,

China sold a net JPY2.0trn JGBs in August, neutralising

the net JPY583bn purchase in July and a majority of the

JPY2.3trn it bought in the first half of 2010, of which

96% of debt had maturities less than one year.

First issuance of 10-year inflation indexed bond

(JGBi) announced since August 2008. The JGB

issuance plan for FY10 included a one-time auction of

JPY0.3trn JGBi. Issuance was initially suspended due to

poor market liquidity, with the break-even inflation rate

reaching -3.8% on 9 December 2008. In March 2010,

the targeted buy-backs of JGBi also fell to JPY3trn from

JPY4trn. The decision to scale down the buyback was to

prevent intervention from being an excessive and

potentially detrimental response to the crisis.

Aa2/AA/AAJapan

Aggressive purchases of medium-term government bonds by city banks

Foreign JGB holdings have constantly remained under 10%

New issuance of 10-year JGBi announced since August 2008

Bonds outstanding Government bond maturity profile (as of June 2010)

0

2,000

4,000

6,000

8,000

10,000

12,000

Jun-04 Jun-06 Jun-08 Jun-10

USD

bn

0

50

100

150

200

250%

GD

P


1-3 y ears

29%

Over 10 y ears

17%

5-10 y ears

32%

3-5 y ears

22%


97


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In June 2010, Japan announced a sharp 4.9%

increase to JPY144.3trn in JGB market issuance and

total net issuance of JPY44.3trn for FY10-FY11.

Towards the end of December 2010, the MoF is due to

announce issuance plans for the next fiscal year. Unlike

FY10-FY11, the prospect of a sharp rise in JGB market

issuance is less likely for FY11-FY12. There are

indications that the Kan administration will try and

stabilise the recent annual increases in new JGB

issuance and keep new financial resource bonds at

around JPY44trn. Meeting the original JPY44.3trn

target will be tough given a weak economy requiring

further fiscal stimulus and constraining tax revenues. By

the end of 2010, Japan’s public debt is expected to reach

227% of GDP, the highest amongst the G-7 countries.

Consequently, the ruling Democratic Party may be

required to reconsider the large promised spending

plans during its election campaign when drafting its

budget for FY11-FY12.

Monetary policy The Bank of Japan (BoJ) aims to achieve “price stability,

thereby contributing to the sound development of the

national economy.” It does not, however, have an explicit

inflation target. Monetary policy decisions are made by

the Bank’s Policy Board in Monetary Policy Meetings

(MPMs) and disclosed immediately. MPMs are held

once or twice a month for one or two days.

The main monetary policy is the uncollaterised overnight

call rate, although money market operations (MMOs) have

become dominant. This is because the uncollaterised

overnight call rate has been near zero since December

2008. MMOs consist of repo and reverse repo transactions

of Japanese Government Securities (JGSs).

Key policy rate

Uncollaterised overnight call rate: Bloomberg:

BOJDTR Index.

Key market rates

Japan money market call rate (MUTAN): Unsecured

overnight call rate in the short-term money market.

Bloomberg: JYMUON Curncy.

6-month JPY London Inter-Bank Offered Rate

(LIBOR): Fixing rate for Japanese IRS. Bloomberg:

JY0006M Index.

1-year LIBOR (USD JPY): Fixing rate for Japanese

CCS market. Bloomberg: JYBS1 Currency.

1-week Tokyo Inter-Bank domestic yen Offered Rate

(TIBOR): Fixing rate used for banks to lend unsecured

funds in wholesale money market. It reflects the rate in

the unsecured call market. Bloomberg: TI0001W Index.

1-week Euroyen TIBOR: Another form of the TIBOR

rate but reflecting the offshore market. Bloomberg:

EUYN01W Index.

Fixed income instruments The Japanese bond market has grown to a market

capitalisation of USD10.5trn as of October 2010 (194.5%

of GDP). The government sector (G-Sec) dominates the

bond market, constituting 90.3%. Corporate bonds

account for the remaining 9.7% of the market.

There is no primary dealer system in Japanese due to the

large number of active participants in the primary market

and competitive secondary market.

Japan: Bond market technicals & liquidity

Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? n/aEligible collateral for repos - For CB repos T-bills, JGBs- For interbank repos T-bills, JGBsMark-to-market requirements - Banks? Yes- Insurance companies? No- Pension funds? Passive fund: No, Active fund: Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors None- Offshore investors NoneOffshore investor access - Foreign ownership of government bonds JPY23.1trn (Jun-10)- As % of outstanding 5.9% (Jun-10)- Direct purchase? Yes- Subject to cap? n/a- Registration requirement? n/a- Access to onshore funding? Yes- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? YesMarket liquidity statistics JGBs - Daily turnover (LCtr) JPY500bn-1trn- Buying volume in a single day (USDm) (with minimal market impact)

Mid USD200mSuper Long USD 50m

- Bid/offer spreads under normal conditions (bp) 0.5-2.0bpTreasury bills - Daily turnover (LCtr) JPY300bn-600bn- Buying volume in a single day (USDm) (with minimal market impact)

USD500m

- Bid/offer spreads under normal conditions (bp) 0.5bp

*HSBC is not a qualified tax adviser. Consult a professional adviser for further guidance **Reducible by DTA Source: HSBC

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Foreign investment increased between December 2009

and June 2010 in nominal value, to JPY23.1trn from

JPY17.2trn. As a percentage of total JGBs, however,

foreign ownership decreased to 5.9% from 6.1% over

the same period (see chart Foreign holdings of Japanese

government debt).

Foreign holdings of Japanese government securities

0

5

10

15

20

25

30

Jun-04 Jun-06 Jun-08 Jun-10

JPYb

n

0

1

2

3

4

5

6

7

8

9

%

JGBs (LHS) % of total JGBs (RHS)

Source: HSBC

Bonds

Treasury discount bills (T-bills) are discount securities

issued by the MoF to manage liquidity. Maturities

typically range from 3 to 12 months but occasionally 2-

month T-bills are also available. Competitive bid and

non-competitive bid auctions are held once to twice on a

weekly basis. Up to 10% of the total planned issue

amount may be issued in this format.

Coupon bearing bonds are typically referred to as

Japanese Government bonds (JGBs). They carry a semi-

annual coupon and maturities range between 2 to 40

years. Issuance frequency depends on the bond's

maturity and conducted by the MoF. Bonds with

maturities of 2, 5, 10 and 20 years are issued every

month. 30-year bonds are issued every other month

whilst 40-year bonds are issued on a quarterly basis.

Issuance is primarily conducted via competitive bid and

non-competitive bid auctions. There are two types of

non-competitive bid. In non-competitive bid auction I,

up to 10% of the total planned issuance may bid issued.

In non-competitive auction II, only JGB market special

participants are eligible to bid. Each participant is

allowed to bid up to 15% of their total successful

bidding in the competitive auction and non-competitive

auction I.

JGBs can be divided into two main categories: general

bonds and fiscal loan bonds (FILP bonds). As of 30

September 2010, general bonds and FILP constituted

82.8% and 16.6% of JGBs respectively. The difference

between the two is how their repayments are financed.

The interest and principal repayment of general bonds

are financed by tax revenues, whilst FILP bonds are

funded by loans made to FILP agencies. Eligible FILP

agencies encompass local governments, institutions

eligible for enterprise financing support, education,

welfare and medical services.

Other JGBs include subsidy bonds, subscription and

contribution bonds and government bonds converted

from government-guaranteed bonds issued by

organisations such as the Japanese National Railways

(JNR). Subsidy bonds are typically issued for

condolence payments and compensations.

10 year inflation index bond (JGBi) protects the investor

against inflation risk. The principal fluctuates with the

CPI figure (CPI excluding fresh food) and interest is

paid at a fixed coupon rate of the principal. The

adjustment is carried out using an indexation coefficient,

computed by taking the reference index for the day

divided by the reference index at the time of issuance

(which is the 10th day of the issue month). JGBis are

issued in competitive and non-competitive auctions.

15 year floating-rate JGBS (CMT) have a floating

coupon rate. The coupon rate is determined by a

reference rate minus a constant. The constant is set in

the morning of the auction date and stays constant till

maturity. The reference rate varies over time and is the

compound yield of average accepted bid from the 10-

year JGB auction held 6 months before the coupon

payment month. The rate is the yield rounded off to 2

decimal places.

Government agency bonds are issued by government

agencies and special corporations. They carry a semi-

annual coupon, which is generally a fixed rate. Maturities

range between 1 and 35 years, but most bonds are

concentrated in 10-year tenors. Key issuers include

housing and highway (Kodan) and Electric Power

Development Co., Ltd. The average issue size is

JPY30bn.

99


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Bank debentures consist of Zenshinren bonds and

Kinko bonds. Zenshinren bonds are issued by the

Shinkin Central Bank, who act as the Central Bank for

credit associations, community banks, municipal banks,

and town banks. Kinko bonds are issued by credit

banks. Maturities range between 1 and 10 years. They

may be issued at discount but most carry a coupon. The

average issue size is JPY15bn.

Corporate bonds are issued by private firms. They

typically carry a fixed semi-annual coupon with

maturities ranging between 1 to 30 years. Key issuers

are Japan Railways Co., Ltd, Nippon Telegraph and

Telephone Corporation (NTT) and Nippon Hoso Kyokai

(NHK) (Japan Broadcasting Corporation). The average

issue size is JPY25bn.

Samurai bonds are issued by foreign entities such as

international organisations and foreign corporations.

Maturities range between 5 and 20 years. They normally

carry a fixed semi-annual coupon with an average issue

size of JPY30bn.

Derivatives

An onshore and offshore market exists for JPY interest

rate swaps (see table Japan: IRS and CCS markets).




access to the JPY IRS and CCS markets for JPY

funding, or to either hedge or take positions in JPY


Financial institutions that can sell JGBs

City banks Long-term credit banks Regional banks Foreign banks in Japan Trust banks Member banks of the

Second Association of Regional Banks

Shinkin Central Bank Shinkin Banks The Shinkumi Federation Bank

Credit cooperatives The Rokinren Bank Labor credit associations The Norinchukin Bank Credit federation of

agricultural cooperatives Agricultural cooperatives

The Shoko Chukin Bank Securities companies Foreign securities companies in Japan

Life insurance companies

Non-life insurance companies

Japan Post Bank

Source: Ministry of Finance


Foreign and domestic investors can purchase government

bonds from an eligible financial institution, who will

provide step-by-step procedures once contacted. Only

foreign corporations may hold T-bills.

To invest in corporate bonds, prospective investors must

first register with a bond management company, which

is an agency designated by the MoF. Bond management

agencies vary among issuers. Once registered, investors

must use financial institutions approved by the Financial

Supervisory Agency and members of the issue’s

underwriting syndicate to apply for new bonds.

Settlement

Government bonds traded on the secondary market via

exchanges and over-the-counter (OTC) through securities

companies. The trades are recorded in accounts of the BoJ

Financial Network System (BoJ-NET) and settlement is

conducted on a delivery vs. payment (DvP) basis.

Japan: IRS and CCS markets

Onshore IRS Offshore IRS Onshore CCS Offshore CCS

Non-resident access: Yes Yes Yes Yes Tenors 1-40 years 1-40 years 1-40 years 1-40 years Liquid tenors 1-10 years 1-10 years 1-10 years 1-10 years Average trade size JPY10bn JPY10bn JPY10bn JPY10bn Bid/offer spreads under normal conditions (bp) 1bp 1bp 1.5bp 1.5bp Fixing rate 6mth JPY LIBOR 6mth JPY LIBOR 3mth LIBOR (USD JPY) 3mth LIBOR(USD JPY) Day count Actual/365F Actual/365F Actual/360 Actual/360 Effective date T+2 T+2 T+2 T+2 Fixing time (local time) 11:00am (London) 11:00am (London) 11:00am (London) 11:00am (London) Fixing page Reuters: Libor 01

Bloomberg: BBAM1 Reuters: Libor 01 Bloomberg: BBAM1

Reuters: Libor 01 Bloomberg: BBAM1

Reuters: Libor 01 Bloomberg: BBAM1

Local market hours 9am-6pm 9am-6pm 9am-6pm 9am-6pm Main participants Interbank Interbank Interbank Interbank

Source: HSBC

100


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Corporate bonds can also be traded on securities

exchanges or OTC. Bonds traded via securities

exchanges with enter a multilateral netting system via

Japan Securities Depository Centre, Inc. (JASDEC).

Investors must open a safe-keeping account with

JASDEC participant securities companies and other

institutions approved by the securities exchanges. Bonds

traded OTC are settled on a delivery vs. payment (DvP)

basis via JASDEC.

Taxation19

For foreign investors, JGBs and local government bonds

in book entry form are tax exempt, subject to certain

procedural requirements. Under the new system for 2010,

interest and profits from the redemption of corporate

bonds in book-entry form (issued on or before 31 March

2013) received by non-residents are also exempt from

tax, subject to certain procedural requirements.

Interest and profits from (1) redemption of profit-linked

bonds among corporate bonds in book-entry form, and

(2) from redemption of corporate bonds in book-entry

form received by entities in a special relationship with

the issuer are outside the scope of the tax exemption

scheme and remain subject to a 15% withholding tax.

Before the 2010 tax reform, interest on corporate bonds

in book-entry form received by non-resident was subject

to withholding tax at the rate of 15%.


further guidance.

Countries that entered DTA with Japan

Armenia Australia Austria Azerbaijan Bangladesh Belarus Belgium Brazil Bulgaria Canada China Czech Republic Denmark Egypt Finland Fiji France Germany Georgia Hungary India Indonesia Ireland Israel Italy Korea Kyrgyzstan Luxembourg Malaysia Mexico Moldova Netherlands New Zealand Norway Pakistan Philippines Poland Romania Russia Singapore Slovakia South Africa Spain Sri Lanka Sweden Switzerland Tajikistan Thailand Turkey Turkmenistan Ukraine UK USA Uzbekistan Vietnam Zambia

Source: HSBC


Bank of Japan (BoJ) www.boj.or.jp/en/ Ministry of Finance (MoF) www.mof.go.jp Japan Securities Depository Centre, Inc. (JASDEC)

www.jasdec.com/en/

Japan Securities Dealers Association www.jsda.or.jp/html/eigo/index.html

http://www.jasdec.com/en

101


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Japan: Bonds

Treasury discount bills (T-bills) Coupon bearing bonds (JGBs) Private corporate bonds

Issuer Japanese Government Japanese Government Private sector Currency Japanese Yen (JPY) Japanese Yen (JPY) Japanese Yen (JPY) Form Scripless Scripless Scripless Minimum denomination JPY10m JPY50,000 JPY100,000 for individual investors,

JPY100, for institutional investors Tenors 2, 3, 6 months, 1 year 2, 5, 10, 20, 30, 40 years 1-30 years Coupon/discount Zero, issued at discount Fixed Generally fixed Coupon frequency None Semi-annual Semi-annual Amortising schedule Bullet Bullet Bullet Day count Actual/365 Actual/365 30/360 Amount outstanding JPY43.1trn (Jun-10) JPY686.5trn (Jun-10) JPY11.5bn (Jun-10)

Primary market Auction style Competitive bid, non competitive bid Competitive bid, non competitive bid Public offer, private placement Average issue size n/a n/a JPY25bn Auction frequency Once or twice weekly 2, 5, 10, 20 years: monthly. 30 year:

every other month, 40 year: quarterly Ad hoc

Participants Corporates, banks, financial institutions Individuals, corporates, banks, financial institutions

Individuals, corporates, banks, financial institutions

Settlement n/a n/a n/a

Secondary market Trading mechanism OTC, exchange OTC, exchange OTC, exchange Trading hours Tokyo Stock Exchange:

9am-11am, 12:30pm-3pm, Osaka Stock Exchange: 9am-11am, 12:30pm-3:10pm, Nagoya Stock Exchange: 9am-11am, 12:30pm-3:30pm

Tokyo Stock Exchange: 9am-11am, 12:30pm-3pm, Osaka Stock Exchange: 9am-11am, 12:30pm-3:10pm, Nagoya Stock Exchange: 9am-11am, 12:30pm-3:30pm

Tokyo Stock Exchange: 9am-11am, 12:30pm-3pm, Osaka Stock Exchange: 9am-11am, 12:30pm-3:10pm, Nagoya Stock Exchange: 9am-11am, 12:30pm-3:30pm

Quoting convention Yield to 3 decimal places Yield to 3 decimal places Yield to 3 decimal places Average bid-offer spreads n/a n/a n/a Average trade size n/a n/a n/a Volume n/a n/a n/a Settlement T+3 T+3 T+3 Clearing BoJ-NET BoJ-NET BoJ-NET for OTC, JASEC for exchanges Main participants Corporates, banks, financial institutions Individuals, corporates, banks, financial

institutions Financial institutions, corporations and individuals

Regulations for foreign investors Restriction on foreign investment Only corporates None None Custodian Local custodian required Local custodian required Local custodian required Interest income tax None None None or 15% withholding tax* Capital gains tax None None 18% tax rate applied to redemption

profit for discount-issued bonds Entry/exit None None None

*See “Regulatory, settlement and tax issues” for further guidance Source: HSBC

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103


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Appendices

Asia-P

acific Rates G

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c Region-at-a-glance: Bond market technicals & liquidity (1)

China Hong Kong India Indonesia Korea Malaysia

Available repo facilities - Onshore banks with central bank? Yes Yes Yes Yes Yes Yes - Onshore interbank? Yes Yes Yes No Yes Yes - Offshore investors with onshore? No Yes No No Yes No - Onshore nonbank investor (e.g. custodian) with onshore?

No Yes No No Yes No

Eligible collateral for repos - For CB repos T-bonds EFB/EFNs GOIs, T-bills SBIs, T-bills and T-bonds (subject to 5%

haircut) KTBs, MSBs As specified by RENTAS

- For interbank repos T-bonds, PBOC bills, financial bonds Government bonds, EFB/EFNs, high-grade corporate bonds

GOIs, Oil bonds, T-bills, corp. bonds (>AA) T-bonds KTBs, MSBs, triple-A bank bonds As specified by RENTAS, PDS, NID, BA

Mark-to-market requirements - Banks? Yes Yes Yes Yes Yes Yes - Insurance companies? No Yes Yes (Unit-Linked Insurance Plans only) No Yes Yes - Pension funds? No Yes No No Yes Yes - Mutual funds? Yes Yes Yes Yes Yes Yes Taxation: Government bonds* - Onshore investors Tax exempt if held to maturity, else 5%

business tax None Capital gains: 10% (if maturity <12mths),

30% (if maturity >12mths) Interest and capital gains reported to BEI: 20% withholding tax. Else, general income tax after initial 15% withholding tax deducted

Exempt once tax exemption application is accepted by tax authority

None

- Offshore investors Same as onshore** None 20% withholding tax, capital gains tax same as onshore**

20% withholding tax on interest income and capital gains**

Pending legislation (expected: 15.4% withholding tax on interest, 22% tax on capital gains)

None

Offshore investor access - Foreign ownership of government bonds CNY106bn (Oct-10) n/a Approx. INR210bn (Nov-2010) IDR196trn (Dec-2010) KRW79.8trn (of which KRW48.7tr KTBs,

KRW31.1tr MSBs) MYR97.9bn of which MYR68.0bn in MGS, MYR29.9bn in BNM bills (Sep-10)

- As % of outstanding 0.6% of bond market (Oct-10) n/a Approx. 1% of GOIs (Nov 2010) 30.5% of IndoGBs (Dec-2010) 14.9% of total government bonds (13.2% of KTBs, 18.8% of MSBs)

31% of outstanding MGS (Sep-10)

- Direct purchase? Yes (for QFIIs) Yes Yes (for FIIs) No No Yes - Subject to cap? Yes No Yes (FII limits: USD10bn government,

USD20bn corporate) No No No

- Registration requirement? Yes No Yes Yes Yes No - Access to Onshore funding? No Yes No No Yes (up to KRW30bn with BoK approval) No - Access to Onshore FX hedging? No Yes Yes Yes Yes Yes - Access to rates hedging (IRS, repo, futures)?

Yes (NDIRS) Yes Yes (NDOIS) No Yes (IRS, futures) Yes (IRS)

Market liquidity statistics Instrument #1 Treasury bonds EFB/Ns GOIs IndoGBs KTBs MGS/MGIIs - Daily turnover (LCbn) CNY20-30bn HKD300bn INR100-150bn IDR4-5trn (total for T-bonds, T-bills, ZCs, ORIs) KRW7-9tr MYR0.5-0.9bn - Buying volume in a single day (USDm) (with minimal market impact)

USD10m USD100m (1yr), USD20m (10yr) USD100m USD5m USD100m USD40-60m

- Bid/offer spreads under normal conditions (bp)

8bp 3-5bp (EFB), 5-10bp (EFN) 1-2bp 10-20bp 1-2bp 3-5bp

Instrument #2 PBoC bills HK SAR Government bonds Corporate bonds SBIs MSBs BNMNs - Daily turnover (LCbn) CNY30-40bn HKD0.5bn INR2bn IDR0.1-1trn KRW4-6trn MYR0.7bn - Buying volume in a single day (USDm) (with minimal market impact)

USD20m USD10-20m USD6-20m USD5-10m USD100m USD60-80m


8bp 5-10bp 2-3bp 25-50bp 1-2bp 2-5bp

Source: HSBC *HSBC is not a qualified tax adviser. Consult a professional advisor for further guidance **Reducible by a double tax treaty

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c

Region-at-a-glance: Bond market technicals & liquidity (2)

Philippines Singapore Sri Lanka Taiwan Thailand Vietnam Australia New Zealand Japan

Available repo facilities - Onshore banks with central bank?

Yes Yes - Under MAS standing facility

Yes Yes Yes Yes Yes Yes Yes

- Onshore interbank? No Yes Yes No Yes Yes Yes Yes Yes - Offshore investors with onshore?

No Yes Yes No No No Yes Yes Yes

- Onshore nonbank investor (e.g. custodian) with onshore?

Yes Yes Yes Yes Yes Yes Yes Yes n/a

Eligible collateral for repos - For CB repos RPGBs SGS, T-bills, AAA-rated debt

issued by sovereigns, supranational, sovereign-backed corporates

SLGBs, T-bills TGBs LBs, MoF SOEs VGBs, SBV bills, VDBs, Municipal bonds

Treasury bonds Government bonds T-bills, JGBs

- For interbank repos n/a Same as for CB repos SLGBs, T-bills - LBs, T-bills VGBs, SBV bills, VDBs, Municipal bonds

Treasury bonds Government bonds T-bills, JGBs

Mark-to-market requirements - Banks? Yes Yes Yes Yes Yes No n/a Yes Yes - Insurance companies? Yes Yes No Yes Yes No n/a Yes No - Pension funds? Yes Yes No Yes Yes No n/a Yes Passive fund: No, Active fund:

Yes - Mutual funds? Yes Yes Yes Yes Yes No n/a Yes Yes

Taxation: Government bonds* - Onshore investors 20% withholding tax at source None 10% withholding tax, corporate

tax on interest income and capital gains

10% 1% tax for institutions 0.1% tax on all fixed income securities sold and coupons from investment in bonds

None No None

- Offshore investors 20% withholding tax at source None 10% withholding tax 15% withholding tax** 15% tax on capital gains** 10% withholding tax on coupon None 15% withholding tax** None

Offshore investor access - Foreign ownership of government bonds

Est. PHP60-80bn (Oct-10)*** SGD21-24bn LKR183.3bn TWD250bn (Aug-10) THB142bn (Nov-10) Est. USD50-100m AUD106bn (Jun-10) NZD43.9bn JPY23.1trn (Jun-10)

- As % of outstanding Est. 4-5% of RPGBs*** Est. 16-18% of SGS (Oct-10) 8.80% Approx. 9.9% of TGBs/Tbills (Aug-10)

5.8% (Nov-10) Est. <1% (Oct-10) 71.7% (Jun-10) 54.70% 5.9% (Jun-10)

- Direct purchase? Yes Yes Yes No Yes Yes Yes Yes Yes - Subject to cap? No No Yes 30% of total investment

portfolio No No, only for bank bonds No No n/a

- Registration requirement? Yes No Yes Yes (FINI/FIDI) Yes Yes (trading account, trading code, custodian account)

No Yes n/a

- Access to Onshore funding?

No Yes No No No No Yes Yes Yes

- Access to Onshore FX hedging?

No Yes Yes Yes Yes No Yes Yes Yes

- Access to rates hedging (IRS, repo, futures)?

Yes (IRS) Yes (IRS, repo) Yes (IRS, repo) Yes (NDIRS) Yes (IRS) No Yes Yes Yes

Market liquidity statistics Instrument #1 Global Peso Bonds (GPBs) SGS T-bills TGBs ThaiGBs a.k.a. Loan Bonds

(LBs) VGBs ACGBs New Zealand Government

Bonds JGBs

- Daily turnover (LCbn) USD1-5m SGD1.9bn LKR0.5bn TWD30-60bn THB2-7bn VND100-400bn AUD3.5bn AUD500m JPY500bn-1trn - Buying volume in a single day (USDm) (with minimal market impact)

USD5m USD100m USD2m USD60m USD15m USD5-10m USD20-50m (deal size) USD25m Mid USD200m


6-10bp 3bp 20bp 0.5-2bp on-the-run, 3-6bp 20-30bp 1bp 2bp 0.5-2.0bp

Instrument #2 RPGBs T-bills SLGBs BoT Bills/Bonds VDBs Treasury bills Treasury bills Treasury bills - Daily turnover (LCbn) PHP20-30bn SGD1.2bn LKR0.5bn THB10-88bn VND100bn AUD200m AUD50-100m JPY300bn-600bn - Buying volume in a single day (USDm) (with minimal market impact)

USD5m USD50m USD2m USD40-60m USD5-10m USD20m USD20m USD500m


5-15bp 5bp 20bp 10bp 30-50bp 1bp 2bp 0.5bp

Source: HSBC *HSBC is not a qualified tax adviser. Consult a professional advisor for further guidance **Reducible by a double tax treaty ***Including 10yr Peso Global Bond.

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cRegion-at-a glance: Government bonds (1)

China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Treasury bonds Exchange Fund Notes

(EFNs) Government of India bonds (GOIs)

Treasury bonds Treasury bonds (KTBs)

Malaysia Government Securities (MGS)

Treasury bonds (T-bonds)

Singapore Government Securities (SGS)

Issuer People's Republic of China (PRC) Hong Kong Monetary Authority (HKMA)

Government of India (GOI) Republic of Indonesia Republic of Korea Government of Malaysia Republic of the Philippines Republic of Singapore

Currency Renminbi (CNY) Hong Kong Dollar (HKD) Indian Rupee (INR) Indonesian Rupiah (IDR) Korean Won (KRW) Malaysian Ringgit (MYR) Philippine Peso (PHP) Singaporean Dollar (SGD) Form Scripless Global bearer (CMU, Euroclear,

CEDEL) Scripless Scripless Scripless Scripless Scripless Scripless

Minimum denomination CNY100-1,000 HKD50,000 INR 10,000 (market lot INR 5cr) IDR1m KRW 10,000 MYR1,000 PHP10m SGD1,000 Tenors 3 months, 1-10, 15, 20, 30, 50 years 2-5, 10, 15 years 1-7, 10, 30 years 1-10, 15, 20, 30 years 3, 5, 7, 10, 20 years 3, 5, 7, 10, 20 years 2, 3, 4, 5, 7, 10, 20 and 25 years 2, 5, 7, 10 ,15 and 20 years Coupon/discount Fixed rate, floating rate or zero

coupon Fixed Mostly fixed Fixed or floating rate Fixed Fixed at weighted average yield at

auction to 3 decimal places Fixed rate Fixed

Coupon frequency Annual or semi-annual Semi-annual Semi-annual Semi-annual Quarterly (all issues before 2003) or semi-annual (all issues since 2003)

Semi-annual Semi-annual Semi-annual

Amortising schedule Bullet Bullet Bullet Bullet Bullet Bullet Bullet Bullet Day count Actual/ 365 Actual/ 365 30/360 Actual/Actual Actual/Actual Actual/Actual Actual/360 Actual/365 Amount outstanding CNY6.4trn (Oct-2010) HKD70.2bn (Jun-10) INR20.9trn (Sep-2010) IDR387trn (Sep-2010) or

IDR590trn including Recaps KRW320trn (Nov-2010) MYR253bn (Sep-10) PHP1.6trn (Jul-10) SGD75.0bn (Jun-10)

Primary market Auction style Dutch auction Multiple price, competitive tender

on bid-price basis, (small portion for non-competitive tender)

Multiple price style auction Dutch auction, non-competitive bidding and private placement

Dutch and conventional auction (multiple price by 3bp grouping)


Dutch for new issues; English auction for re-openings

Uniform price auction

Average issue size CNY26bn-35bn HKD600m-1200m INR20-60bn IDR0.5-3.5trn KRW1-3tr MYR3-5bn PHP6-8bn SGD1.5-3bn for new issues, SGD1-2.5bn for re-openings

Auction frequency Weekly Quarterly (2, 3, 5-year), semi-annual (10, 15-year)

2-4 auctions per month Twice a month Weekly (Monday) Once or twice a month Every two weeks (Tuesday) alternating with T-bills

SGD100m-500m

Participants Underwriting group members only Eligible Market Makers (EMMs) only

Banks, institutions, mutual funds Primary dealers, banks, pension funds, mutual funds ,insurance, corporate firms and individuals

Primary Dealers (9 banks, 11 securities firms)

BNM appointed primary dealers Primary dealers (GSEDs) 13 primary dealers

Settlement T+3 T+1 T+1 or T+2 T+2 T+1 T+1 T+2 T+3 or 4

Secondary market Trading mechanism OTC, Stock exchange OTC OTC, exchange OTC, Indonesia Securities

Exchange Mostly OTC or KRX OTC OTC OTC

Trading hours 9-12am, 1:30-4:30pm; 9:30-11:30am and 1-3pm

9-11am, 2-4pm 9am-5:30pm 9am-12pm, 2pm-5pm 9am-3.05pm 9am-12pm, 2-5pm 9am-12pm and 2pm-4pm 9am-11:30am, 2pm-4:30pm

Quoting convention Yield to 2-4 decimals Clean price to 2 decimal places Price to 2 decimals Price Yield to 2 decimal places Price to 2 decimal places Yield basis Price to 2 decimal places Average bid-offer spreads 10bp HKD5-10bp (depending on tenor) 2-3bp 10-20bp 1-2bp (up to 5y benchmarks) 5-10 cents (liquid issues), 50-100

cents (illiquid issues) 1-3bp for jumbos, 5-10 for others On-the-run: 5-40 cents, Off-the-

run: 5-30 cents; in yield terms, 3bp Average trade size CNY30-100m HKD20-100m INR100m IDR10-50bn KRW10bn MYR5m PHP50m SGD5m Volume CNY7bn per day HKD83bn per day INR100-150bn per day IDR4-5tr per day (total for T-bonds,

T-bills, ZCs, ORIs) KRW7-9trn per day MYR600-900m per day PHP20-30bn per day SGD1.9bn per day

Settlement T or T+1 in inter-bank market, T for bonds, T+1 for cash in stock market

T+1 T+1 T+2 or T+3 T+1 T+2 T+1 T+1

Clearing CDC or CSDCC Central Moneymarket Unit (CMU) RBI's SGL system, CCIL BI's BER system, DVP settlement KSD RENTAS Registry of Scripless Securities (RoSS)

DvP basis through the MEPS and MAS SGS book-entry system

Main participants Members and domestic investors if listed

Mainly held by banks to meet liquidity ratio requirement

Fund managers, insurance companies, banks

Banks, mutual funds, pension funds and insurance companies


Banks, state pension funds, insurance companies

Local and foreign banks, institutional investors, government institutions



Generally closed to foreigners, open to QFIIs

None Eligible FIIs are permitted up to USD10bn total limit (G-Secs)***


Custodian Local custodian required None Local custodian required Local custodian required Local custodian required, unless through ICSD (Euroclear)

Local custodian required Local custodian required Local custodian required

Interest income tax* Government bonds generally exempt from 25% income tax

None 20% interest, subject to Double Taxation Agreement (DTA)



None 20% withholding at source, applies equally to all market participants

None

Capital gains tax* 5% business tax. Related capital gain/loss will be included in 25% profit tax

None 10% for long-term, 30% for short-term, subject to Double Tax Agreement (DTA)



None Tax exempt if instrument has maturity of more than 5yrs. Otherwise, capital gain is subject to corporate income tax

None

Entry/exit (SAFE) PBoC and CFETS approval required

None None None None None None None

Source: HSBC *HSBC is not a qualified tax adviser. Consult a professional advisor for further guidance **Reducible by a double tax treaty ***GOIs must have greater than 5yr maturity

Asia-P

acific Rates G

uid

e 2011 G

lob

al Fixed

Inco

me S

trategy

Decem

ber 2010

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cRegion-at-a glance: Government bonds (2)

Sri Lanka Taiwan Thailand Vietnam Australia New Zealand Japan Treasury bonds Taiwan Government Bonds

(TGBs) Thailand Government Bonds (ThaiGBs), Loan Bonds (LBs)

Vietnam Government Bonds (VGBs), Vietnam Development Bank bonds (VDBs)

Treasury fixed coupon bonds

New Zealand Government Bonds

Coupon bearing bonds (JGBs)

Issuer Democratic Socialist Republic of Sri Lanka Ministry of Finance (MoF) Ministry of Finance (MoF) Ministry of Finance (MoF) The Commonwealth of Australia The Crown Japanese Government Currency Sri Lankan Rupee (LKR) Taiwanese Dollar (TWD) Thai Baht (THB) Vietnamese Dong (VND) Australian Dollar (AUD) New Zealand Dollar (NZD) Japanese Yen (JPY) Form Scripless Scripless Scripless Scripless Scripless Scripless Scripless Minimum denomination LKR 100,000 TWD100,000 THB20-40m VND100,000 AUD1m NZM1m JPY50,000 Tenors 2-5, 7, 10, 15 and 20 years 2, 5, 10, 15, 20 and 30 years 2, 3, 5, 7, 10, 15, 20, 30, 50 years 2-3, 5, 7, 10, 15 years 1-7, 9, 10, 15 years 1, 3, 5, 7, 10 years 2, 5, 10, 20, 30, 40 years Coupon/discount Fixed Fixed Fixed Fixed Fixed Fixed Fixed Coupon frequency Semi-annual Annual Semi-annual Annual Semi-annual Semi-annual Semi-annual Amortising schedule Bullet Bullet Bullet Bullet Bullet Bullet Bullet Day count Actual/Actual Actual/365 Actual/365 Actual/Actual Actual/Actual Actual/Actual Actual/365 Amount outstanding LKR1.8trn (Nov-10) TWD4.0trn (Aug-2010) THB2.4trn (Aug-2010) VND168trn (VGBs and VDBs) (Dec-10) AUD30.3bn (Sep-10) NZD36.4bn (Oct-10) JPY686.5trn (Jun-10)

Primary market Auction style Multi-price, English auction Dutch auction US Treasury-style auction Dutch auction, Underwriting Competitive-bid Competitive-bid Competitive bid, non competitive bid Average issue size LKR1bn-2bn TWD30bn-70bn THB3bn-30bn per auction (issue sizes

often exceed THB30bn through a series of auctions/re-openings)

VND200bn-1.0tr (dependent on SBV yield target) AUD500m-1.2bn NZD50-110m n/a

Auction frequency Approximately once every two weeks Monthly Weekly on Wednesdays Usually weekly to bi-weekly Weekly Wednesdays and Fridays Weekly (Thursday) 2, 5, 10, 20 years: monthly. 30 year: every other month, 40 year: quarterly

Participants Primary Dealers Banks, bill finance cos., insurance house and security firms

Primary dealers and banks Banks, financial institutions Eligible counterparties Banks Individuals, corporates, banks, financial institutions

Settlement T+2 or T+3 T+2 T+2 T+1 (issuance date), up to T+15 (HNX registration period)

T+3 T+2 n/a

Secondary market Trading mechanism Mostly OTC, limited Bloomberg

platform for PDs EBTS (mostly), OTC OTC OTC, STC OTC Austraclear/Euroclear OTC, exchange

Trading hours 9am-4pm 9am-1:30pm 9am-12pm, 1:30-4pm 9am-12pm, 1:30pm-4pm 8:30am-4:30pm 8:30am-4:30pm Tokyo Stock Exchange: 9am-11am, 12:30pm-3pm, Osaka Stock Exchange: 9am-11am, 12:30pm-3:10pm, Nagoya Stock Exchange: 9am-11am, 12:30pm-3:30pm

Quoting convention Yield to 3 decimal places Yield to 4 decimal places Yield to 2 decimals places Price to 3 decimal places Semi-annual yield to maturity Semi-annual yield to maturity Yield to 3 decimal places Average bid-offer spreads 20bp On-the-run: 1-3bp; Off-the-run: 3-5bp 3-6bp 20-30bp 1bp 2bp n/a Average trade size LKR50m TWD50m THB20-40m VND50-100bn AUD20m NZD5-10m n/a Volume LKR500m TWD100-200bn per day THB2-7bn per day VND200-500bn (VND100-400bn for VGBs,

VND100bn for VDBs) per day AUD3.5bn NZD500m n/a

Settlement T+1 or 2 T+2 T+2 T+1 T+3 T+2 T+3 Clearing SSS (Scripless Securities System) TDCC (Taiwan Depositary and Clearing

Corp.) BoT BIDV Austraclear/Euroclear NZClear BoJ-NET

Main participants Primary dealers, local and foreign banks, foreign investors, captive sources, insurance companies, fund managers, corporations and individuals

Financial institutions Financial institutions, asset management companies

Financial institutions Banks Banks Individuals, corporates, banks, financial institutions

Regulations for foreign investors Restriction on foreign investment Up to foreign investment total of 10% of

outstanding Restricted to investments in TGBs >1-year; investments capped at 30% of cash inflows for FINIs


Custodian Local custodian required Local custodian required Local custodian required Local custodian required Local custodian required Local custodian required Local custodian required Interest income tax* 10% withholding tax deducted at

issuance 15% withholding tax, reducible by tax treaty

None 0.1% withholding tax No 15% withholding tax None

Capital gains tax* None None 15% withholding tax, reducible by treaty 0.1% withholding tax No None None Entry/exit Investment via special accounts None None None None None None

Source: HSBC *HSBC is not a qualified tax adviser. Consult a professional advisor for further guidance **Reducible by a double tax treaty

108


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Notes

109


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Notes

110


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Notes

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: André de Silva, Virgil Esguerra and Ki Yong Seong

Important Disclosures This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures 1 This report is dated as at 20 December 2010. 2 All market data included in this report are dated as at close 16 December 2010, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer * Legal entities as at 31 January 2010 'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. - Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank Argentina S.A., HSBC Saudi Arabia Limited., The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch.

Issuer of report The Hongkong and Shanghai Banking Corporation Limited Level 19, 1 Queen's Road Central Hong Kong SAR

Telephone: +852 2843 9111

Telex: 75100 CAPEL HX Fax: +852 2801 4138

Website: www.research.hsbc.com

The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) has issued this research material. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Hong Kong Monetary Authority. This material is distributed in the United Kingdom by HSBC Bank plc. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch. This material is distributed in Japan by HSBC Securities (Japan) Limited. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. 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Rates

Europe Keerthi Angammana, CFA +44 20 7991 6701 [email protected]

Subhrajit Banerjee +44 20 7991 6851 [email protected]

Theologis Chapsalis +44 20 7991 6735 [email protected]

Wilson Chin +44 20 7991 5983 [email protected]

Fredrik Dahlqvist +44 20 7992 3706 [email protected]

Leandro Galli +44 20 7991 5979 [email protected]

R Gopi +91 80 3001 3692 [email protected]

Johannes Rudolph +49 211 910 2157 [email protected]

Sebastian von Koss +49 211 910 3391 [email protected]

Asia André de Silva, CFA Head of Rates Research, Asia-Pacific +852 2822 2217 [email protected]

Virgil Esguerra +852 2822 4665 [email protected]

Ki Yong Seong +852 2822 4277 [email protected]

Americas Larry Dyer +1 212 525 0924 [email protected]

Pablo Goldberg Head of Global Emerging Markets Research +1 212 525 8729 [email protected]

Gordian Kemen +1 212 525 2593 [email protected]

Alejandro Mártinez-Cruz +52 55 5721 2380 [email protected]

Jae Yang +1 212 525 0861 [email protected]

Hernan M Yellati +1 212 525 6787 [email protected]

Credit

Europe Ben Ashby Head of Credit Research, Europe +44 20 7991 5475 [email protected]

Lior Jassur +44 20 7991 1287 [email protected]

Zoe Duong Vu +44 20 7991 5915 [email protected]

Olga Fedotova +44 20 7992 3707 [email protected]

Dominic Kini +44 20 7991 6717 [email protected]

Philippe Landroit, CFA +44 20 7991 6864 [email protected]

Paul Lee +44 20 7991 5912 [email protected]

Laura Maedler +44 20 7991 6790 [email protected]

Ksenia Mishankina +44 20 7992 3703 [email protected]

Remus Negoita +44 20 7991 5975 [email protected]

Rodolphe Ranouil, CFA +44 20 7991 6855 [email protected]

Peng Sun, CFA +44 20 7991 5427 [email protected]

Asia Dilip Shahani Head of Global Research, Asia-Pacific +852 2822 4520 [email protected]

Zhiming Zhang +852 2822 4523 [email protected]

Devendran Mahendran +852 2822 4521 [email protected]

Mary Ellen Olson +852 2822 4524 [email protected]

Keith Chan +852 2822 4522 [email protected]

Sheldon Chan +852 2822 3232 [email protected]

Becky Liu +852 2822 4392 [email protected]

Louisa Lam +852 2822 4527 [email protected]

Yi Hu +852 2996 6539 [email protected]

Americas Van Hesser Head of Credit Research, US Financial Institutions +1 212 525 3114 [email protected]

Robert J Schmeider Head of Latam Corporate Credit +1 212 525 4829 [email protected]

John Kollar +1 212 525 3118 [email protected]

Anthony McCutcheon +1 212 525 4198 [email protected]

Monica A Parekh +1 212 525 4117 [email protected]

Catherine Shinyoung Yim +1 212 525 0191 [email protected]

Global Fixed Income Research Team

Steven Major, CFA Global Head of Fixed Income Research +44 20 7991 5980 [email protected]

mailto:[email protected]

mailto:[email protected]

André de SilvaGlobal Fixed Income Strategy Deputy HeadThe Hongkong and Shanghai Banking Corporation Limited (HK)+852 2822 [email protected]

André de Silva is currently a Managing Director of Global Fixed Income Research and has been Head of Asia-Pacifi c Rates Research since July 2010when he relocated to Hong Kong. Prior to that, he was based in London as Global Deputy Head of Rates Strategy. He has a wealth of experience in implementing strategy, quantitative techniques, asset allocation, derivative analysis and trade orientated Fixed Income research across various regions. He has a Masters in Financial Economics from Cambridge University, is a Chartered Financial Analyst, a qualifi ed technical analyst (MSTA) and is highly ranked in several Fixed Income Strategist/Analyst surveys.

Documents

HSBC Asia-Pacific Rates Guide 2011