1 Conference on Development of Indonesian Government Bond Market Jakarta, Indonesia July 25 - 26, 2000 Lillian Leong Investment and Treasury Department.

1

Conference on Development of Indonesian Government Bond Market

Jakarta, Indonesia

July 25 - 26, 2000

Lillian Leong

Investment and Treasury Department

Bank Negara Malaysia

MALAYSIA’S EXPERIENCE IN DEVELOPING THE

GOVERNMENT BOND MARKET

2

Outline• Brief Historical Perspective

• Overview of Malaysian Government Bond Market

• Key Issues• Lack of Supply • Absence of Deep and Liquid Secondary Market

• Measures Taken So Far• Market Liquidity• Market Infrastructure

• Measures Going Ahead• Regulatory Framework• Inter-Agency Co-ordination

3

Historical Perspective…….

4

Legislation on Issuance of Government Securities

• Issuance of MGS by the government is governed

under the Loan (Local) Ordinance 1959

• BNM acts as an agent to the Government under

Section 30 (1) (s) of Central Bank Act, 1958 where, “The bank (BNM) may undertake the issue and management of loans publicly issued -

(i) by the government;(ii) by the government of any state;(iii) by any public authority; or(iv) with any approval of the MOF, by any corporation ”

5

A Little Bit of History…..

• Malaysian Govt. Bond Market evolved at a slow

pace from 1950s

• Pace picked up in 1970s in line with

government’s plan for economic diversification

• Malaysian Govt. Bond issuance then was

dictated by the need for development financing

• Early 1980s, Government Bond Market expanded

due to the recession following downturn in global

economy

6

• From 1988-1997 gross MGS issued reduced

from RM45.9 to RM39.7 billion due to the

success of the government privatisation

programme

• Strong economic performance in 1990-1997

led to a decline in Government Bonds

issuance

7

Dilemma

With a fiscal surplus position, there was a dilemma between 2 objectives :

i) The need to issue MGS for bench- marking purposes to develop the domestic bond market ; and

ii) The associated issuance cost despite a fiscal surplus position

8

Market Overview

9

Other PDS1%

GII1% MGS

98%

MGS46%

Danamodal7%

Cagamas9%Khazanah

4% Danaharta6%

GII1%

Other PDS27%

Composition of Ringgit Bond Market

19991987

10

Holders of Malaysian Government Securities

19991987

Insurance Co.2%

Banking Institutions

27%

Others14%

EPF57%

Insurance Co.8%

EPF66%

Others10%

Banking Institutions

16%

11

Total Domestic Debt as % of GDP

58.8

54.5

50.5

44.4

40

35.1

31.2

27.3

31 31.3 31.9

0

10

20

30

40

50

60

70

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 June-00

Year

%

HEALTHY GOVERNMENT FINANCIAL POSITION DUE TO PROMOTION OF PRIVATISATION

12

Issues

13

Absence of Deep and Liquid Secondary Market

1.“Captive” Market Created a “Holding” Bias

• Legal and Mandatory Requirements for

most institutions

• EPF - 50% of its investible fund

• Insurance Companies - 20% in low

risk assets including MGS

• Banking Institutions - 15 % of their EL

to be invested in liquid asset including

MGS

14

Absence of Deep and Liquid Secondary Market

2. Lack of Market Makers due to :

• Holding cost and lack of MGS issuance

• The fear of being caught in a “short”

situation

• No mechanism to cover short position

such as securities borrowing and lending

programme

15

Measures Undertaken

1. Market Liquidity

(a) MGS Issuance Process

• Basis of pricing MGS primary issue : From

coupon fixing to market-determined auction

system

• A system of principal dealers (PD) was

introduced to promote a more active secondary

market

16

Measures Undertaken

(b) Interest Rate Liberalisation

• 1991 - Banking Institutions were allowed to

determine their Based Lending Rate

• Less distortion on interest rate structure

and yields curves - facilitate more active

secondary trading of MGS

17

Measures Undertaken

(c) New Liquidity Framework (NLF)

Reduces the captive holding of MGS and the

Liquid Asset Ratio premium

18

Measures Undertaken

(d) Code of Conduct for Principals and Brokers in the wholesale Money and Forex

Markets

• To maintain high level of professionalism

• To protect the credibility of oral contract

19

Measures Undertaken

(e) Announcement of MGS Auction Calendar

To enhance market transparency

20

Measures Undertaken

(f) Re-opening of MGS

To improve liquidity of the issue size

21

Measures Undertaken

2. Market Infrastructure

(a) Clearing and Settlement System

• Implementation of RTGS settlement system

known as RENTAS

• RENTAS is a real time electronic settlement

and Delivery versus Payment system to further

enhance efficiency and mitigate settlement risk

22

Measures Undertaken

(b) Automated Tendering System

Fully Automated System for Tendering (FAST)

was introduced to replaced the manual process

of tendering for MGS

23

Measures Undertaken

(c) Bond Information Dissemination System

Bond Information Dissemination System (BIDS)

was introduced to provide market information on

domestic bond market

24

Measures Going Ahead

3. Regulatory Framework

(a) Establishment of National Bond Market Committee

• 1999 - The formation was to focus on policy

direction, to rationalise regulatory framework and to

recommend appropriate implementation strategies

• Three sub-committees were formed;

– Product Institutional and Development Committee (PIDC)

– Infrastructure and Operations Working Group (IOWG)

–Legal and Regulatory Reforms Committee (LRCC)

25

Measures Going Ahead

(b) Centralisation of regulatory function for

fund raising activities

July 2000 - Securities Commission (SC)

made sole regulator for the securities

market

26

• Principal Dealers System was introduced with main role

to make market

• Implementation of SPEEDS, a fully automated cash and

securities settlement transactions

• Code of Conduct and Market Practices for trading in

Malaysian Securities Market was introduced

• The setting up of first rating agency - RAM

• The setting up of second rating agency - Malaysian Rating

Corporation Bhd (MARC)

Chronological Development of Bond Market

1989

1990

1995

27

Chronological Development

1996

1997

1999

• Incorporation of Malaysian Institute of Bond Dealers to

represent the interest participants in bond market

• Implementation of FAST, a fully automated system of

tendering for securities at the primary issue

• Issuance of Khazanah Benchmark Bond to create a

benchmark yield curve for the Ringgit Bond market

• The setting up of the BIDS to promote awareness of the

bond market to support primary and secondary trading

• The formation of NBMC, to provide policy directionand

to rationalise the regulatory framework for the

development of bond market

• The Capital Market Master Plan was initiated to chart

the strategic positioning and future direction in the next

ten years

28

Chronological Development

1999

2000

• Code of Conduct and Market Practices for RENTAS was

introduced to facilitate the conversion from SPEEDS to

RENTAS (RTGS Settlement system)

• The Government Securities Auction Calendar was

announced to enhance market transparency

• Re-opening MGS of the less liquid issue to build up the

size in order to enhance market liquidity

• Securities Commission become the sole regulator for

the bond market in Malaysia

29

End of Presentation

Thank You