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Lillian Leong Investment and Treasury Department Bank Negara Malaysia

Conference on Development of Indonesian Government Bond Market Jakarta, Indonesia July 25 - 26, 2000. MALAYSIA’S EXPERIENCE IN DEVELOPING THE GOVERNMENT BOND MARKET. Lillian Leong Investment and Treasury Department Bank Negara Malaysia. Outline. Brief Historical Perspective

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Lillian Leong Investment and Treasury Department Bank Negara Malaysia

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  1. Conference on Development of Indonesian Government Bond MarketJakarta, Indonesia July 25 - 26, 2000 MALAYSIA’S EXPERIENCE IN DEVELOPING THE GOVERNMENT BOND MARKET Lillian Leong Investment and Treasury Department Bank Negara Malaysia

  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 theLoan (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. Composition of Ringgit Bond Market 1987 1999

  10. Holders of Malaysian Government Securities 1987 1999

  11. Total Domestic Debt as % of GDP

  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. Chronological Development of Bond Market 1989 1990 1995 • 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)

  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

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