Building a Favorable Regulatory Environment for Corporate Bond Market - The Malaysian Experience

1. ASEAN+3 Seminar on Developing Corporate Bond Markets in Asia Building a Favorable Regulatory Environment forCorporate Bond Market- The Malaysian Experience Loong Yeow Boon Securities Commission, Malaysia 27 September 2007 (Shanghai, P.R. China)

2. Outline • Importance of Favourable Regulatory Environment • Regulatory Framework Post Financial Crisis • Current State of Malaysian Corporate Bond Market • Continuous Enhancement of Regulatory Environment

3. 1997 Asian Financial Crisis Highlighted : • Over-reliance of bank loans for corporate funding, even for long-term infrastructure projects • Funding mismatches were aggravated in tight liquidity situation • Lack of well developed bond market meant a lack of alternative avenue for funding

4. Conducive Regulatory Framework is the Missing Link • Institutional investors sat on sizeable funds • Interest rates on downward trend • Key intermediaries had been established • Market infrastructure was in place • Issuers in need of funds

5. Fair, Efficient & Transparent for Well-Functioning Bond Market Investors Issuers • Conducive regulatory framework that ensures: • Fairness • Efficiency • Transparency • Investors’ protection • Market returns • Liquidity • Timely access to relevant information • Expeditious issuance process • Lower funding cost • Ability to borrow long • Clear and consistent rules

6. Outline • Importance of Favourable Regulatory Environment • Regulatory Framework Post Financial Crisis • Current State of Malaysian Corporate Bond Market • Continuous Enhancement of Regulatory Environment

7. Government’s Initiatives to Develop Bond Market Government’s Commitment National Bond Market Committee • Bond market-specific mandate : • Overall policy direction for orderly development • Study development issues • Identify and recommend implementation strategies • Inter-agency membership to ease implementation: • Ministry of Finance • Bank Negara • Securities Commission (SC) • Economic Planning Unit • Bursa Malaysia • Employees Provident Fund • Private sector Critical factors for successful implementation

8. Proper Sequencing of Regulatory Policies The 5 Pillars 1. Establish reliable and efficient benchmark yield curve 4. Improve liquidity in the secondary market 3. Widen issuers and investors base 5. Facilitate introduction of risk management instruments 2. Introduce efficient & facilitative issuance process for corporate bonds Priority actions 1. Designate M’sian Government Securities as benchmark bonds 2. Centralise approval of corporate bond market with the SC

9. Clear Delegation of Authorities • Ministry of Finance • Co-ordinate developmental efforts of Government agencies • (under the National Bond Market Committee) • Grant tax incentives – stamp duty exemption for primary and secondary market transactions, withholding tax for non-residents, real property gains tax for asset-backed securities and etc • Bank Negara Malaysia • Manage public debt and MGS issuance • Own and operate FAST, RENTAS and BIDS • Regulate involvement of financial institutions in bond market • Securities Commission • Sole approving authority for corporate bond issuance • Regulates primary and secondary bond market activities • Supervises market intermediaries such as rating agencies and trustees

10. Main Thrust of Regulatory Regimefor Government Bond Market • Introduction of auction calendar for Malaysian Government Securities (MGS) • Creation of benchmark yield curve with key tenures of 3, 5 and 10 years • Provide reliable pricing guidance for corporate bond issues • Review of principal dealers system • Introduction of long-dated MGS and MGS futures • Free up captive demand on MGS

11. Market-Driven Regulatory Frameworkfor Corporate Bond Market • Centralise approval process for issuance of bonds with the SC w.e.f 1 July 2000 • Introduce facilitative legal and regulatory framework: • (i) Provisions on investor protection • (ii) Fine and penalties on breaches and offences • Adopt disclosure-based regulation: • (i) Approval upon full submission of documents to SC • (ii) Ensure adequate disclosure to investors • (iii) Monitor quality of disclosure

12. Prior to 2000 Since 1 July 2000 Type of Submission Merit-based Disclosure-based Time frame for approval 1 to 3 months 14 & 28 working days for PDS & ABS issues upon full submission Utilisation of proceeds Subject to regulator’s internal criteria on productive purposes Transparent NBMC negative list (since been revoked) Underwriting requirement Must be fully underwritten Decided by issuer and adviser Minimum credit rating requirement BBB and P3/MARC3 No minimum investment grade (mandatory rating is still required) Disclosure requirements - • Stringent due diligence for investor protection • Posting of IM/TDs in SC’s website • Regulatory actions on false and misleading statement Facilitative approval process for corporate bonds

13. SC’s Major Guidelines on Bond Market • On Issuance of bonds, • Guidelines on the offering of private debt securities • Guidelines on the offering of Islamic securities • Guidelines on the offering of asset-backed securities • On investors protection, • Guidelines on minimum contents requirements for trust deeds

14. Phase 3 (2006-2010) Enhance international positioning Phase 2 (2004-2005) Gradual liberalisation of market access Phase 1 (2001-2003) Strengthen domestic capacity Clear Visions and Plans to Drive Development Direction from NBMC Securities Commission Capital Market Master Plan (CMP) 152 recommendations, of which 17 for bond market Objectives & Strategic Initiatives: • Fund-raising centre • Investment mgt industry • Market institutions • Intermediaries • Regulatory regime • Islamic capital market centre

15. Tax incentives to widen issuers’ base • Stamp duty exemptions for bonds issues approved by SC • Tax deductions on expenses incurred in the issuance of ABS and Islamic bonds • Tax neutral framework for ABS and Islamic bond transactions • Real Property Gains Tax (RPGT) exemptions for securitisation transaction

16. Tax incentives to widen investors’ base • Resident • Exemption of interest income received by individuals, close end funds and unit trust funds • Non-resident • Blanket exemption from withholding tax for interest income derived by non-residents, w.e.f 11 September 2004

17. Outline • Importance of Favourable Regulatory Environment • Regulatory Framework Post Financial Crisis • Current State of Malaysian Corporate Bond Market • Continuous Enhancement of Regulatory Environment

18. Robust Growth in Domestic Bond Market As at end-June 2007, • Outstanding size including short-term instruments amounted to USD150 billion • Local currency bond market as a % of GDP is currently 2nd largest in Asia (ex. Japan) • Sukuk comprised 34% of outstanding bonds • Malaysia has the largest Sukuk market in the world

19. Sustainable Corporate Bond Issues • Corporate bonds as a % of total corporate financing increased to 57.8% in 2006 (21.2% in 1998) • Represents a significant source of long-term financing for private sector • Contributed to addressing maturity mismatches in private sector financing

20. Growing Liquidity In Secondary Market • Liquidity has increased significantly since 1997, and relatively high by regional standards • Government efforts to enhance investors base, including withholding tax exemption to attract foreign investment • Inclusion in major bond indices (e.g. Citibank WGBI) Average annual turnover ratio (as at end-2006) Source : ADB

21. Outline • Importance of Favourable Regulatory Environment • Regulatory Framework Post Financial Crisis • Current State of Malaysian Corporate Bond Market • Continuous Enhancement of Regulatory Environment

22. Our Aims as Significant Centre for Origination and Investment for Bonds • Eligible Foreign Issuers of Ringgit-denominated bonds: • Multilaterals • Sovereigns • Quasi-sovereigns • MNCs • Deemed approval for AAA-rated issuers, except MNCs • Facilitative foreign exchange rules • Malaysia as International Islamic Financial Centre (MIFC)

23. International Issuers of Ringgit-denominated Bonds

24. Facilitative Regulatory Framework for Foreign-currencies Bonds • Eligible Issuers: • Multilaterals • Sovereigns • Quasi-sovereigns (domestic and foreign) • MNCs (domestic and foreign) • International documentation is acceptable • Deemed approval for min A-rated issues • Withholding tax exemption if structured as sukuk issue

25. Establishment of bond pricing agencies • Guidelines on the Registration of Bond Pricing Agencies (January 2006) • A bond bond pricing agency contributes to market liquidity by: • Providing independent and objective fair value for bonds • Adopting a systematic valuation approach which incorporates specific pricing methodologies, relevant market data and robust market feedback • Facilitating daily mark-to-market valuation of bond portfolios, especially unit trust schemes Enhance price transparency and discovery

26. Greater regulatory oversight over credit rating agencies • Practice Note on Recognition of Credit Rating Agencies (January 2006) • Incorporates IOSCO’s Code of Conduct Fundamentals for Credit Rating Agencies • The recognition system seeks to ensure that CRAs: • Exercise high standards of professionalism and due diligence in rating and monitoring corporate bonds • provide adequate and timely dissemination of rating information Enhance investor protection and investor confidence

27. Initiatives in the pipeline • Introduction of electronic information dissemination and trading system by early 2008 • Real-time dissemination of pre and post-trade info • Enhance efficiency in trade execution • Improve price transparency and discovery • Facilitate market surveillance

28. Conclusion Building favourable regulatory environment requires: • Bold decisions by policy makers, taking into account prevailing market conditions • Market must be fair, efficient and transparent • Proper sequencing holds the key • Robust market consultation process • Constant review of policy decisions as market changes and develops

29. For further information on Malaysian Bond Market … Please visit following websites: http://www.sc.com.my (Securities Commission Malaysia) http://www.bnm.gov.my (Bank Negara Malaysia) https://fast.bnm.gov.my/fastweb (Fully Automated System for Issuing/Tendering) http://rmbond.bnm.gov.my (Ringgit Bond Market) Or contact me at ybloong@seccom.com.my