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ASEAN+3 Bond Market Guide

2012 Asian Development Bank

All rights reserved. Published in 2012. Printed in Philippines.

ISBN 978-92-9092-633-7 (PDF)Publication Stock No. RPT124540 Cataloging-In-Publication Data

Asian Development Bank. ASEAN+3 Bond Market GuideMandaluyong City, Philippines: Asian Development Bank, 2012.

1. Regionalism 2. Subregional cooperation 3. Economic development 4. Asia I. Asian Development Bank.

The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent.

ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use.

By making any designation of or reference to a particular territory or geographic area, or by using the term country in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area.

ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB.

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This report is the outcome of a regional technical assistance project, RETA 6514 Harmonization of Bond Standards in ASEAN+3 under the ASEAN+3 Bond Market Initiative to support the ASEAN+3 Bond Market Forum (ABMF). The project was managed by Seung Jae Lee, Principal Financial Sector Specialist of the Office of Regional Economic Integration. The co-authors of the report are ADB Consultant Prof. Shigehito Inukai, Dr. Taiji Inui, and Mr. Matthias Schmidt, together with ABMF Members and Experts.

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The establishment of the ASEAN+3 Bond Market Forum (ABMF) was endorsed by the ASEAN+3 Finance Ministers at the 13th ASEAN+3 Finance Ministers Meeting on 2 May 2010 in Tashkent, Uzbekistan, as a common platform to foster standardization of market practices and harmonization of regulations relating to cross-border bond transactions in the region.

Since the first meeting in September 2010 in Tokyo, Japan, ABMF members and experts met quarterly: in December 2010 in Manila, Philippines; February 2011 in Kuala Lumpur, Malaysia; June 2011 in Jeju Island, Republic of Korea; September 2011 in Bali, Indonesia; and December 2011 in Beijing, Peoples Republic of China. The members and experts invested a lot of effort to produce the first outputs of ABMF as a regional framework to support collaboration between the public and private sectors in the region.

The report, titled ASEAN+3 Bond Market Guide, consists of two volumes; Volume1: Sub-Forum 1 - Comparative Analysis and Bond Market Guides, and Volume 2: Sub-Forum 2 - Information on Transaction Flows and Settlement. The report aims to dispel misunderstanding and misperception persistently existing against Asian markets. The report is expected to narrow information gaps and establish a common understanding on how markets in the regions operate.

The report was compiled by the Asian Development Bank (ADB) Team comprising Satoru Yamadera (Economist, ADB Office of Regional Economic Integration), Seung Jae Lee (Principal Financial Sector Specialist, ADB Office of Regional Economic Integration), Shinji Kawai (Senior Financial Sector Specialist [Banking], ADB Office of Regional Economic Integration), and with other ADB staff, Shigehito Inukai (ADB consultant), Taiji Inui (ADB consultant), and Matthias Schmidt (ADB consultant). However, the report should not be regarded as outputs of the team, but as a result of the collective work of ABMF members and experts. The international experts kindly shared their market guide information, as well as their expertise with the team to initiate the study. The information enabled the team to start the study from solid ground. The national members and experts provided answers to questionnaires prepared by the team, thoroughly reviewed the draft, and gave valuable comments.

Preface

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Preface

In addition, the team thanks all interviewees who gave useful comments and responses during the market consultations. Therefore, the report should be regarded as a crystallization of regional collaborative efforts and knowledge towards more harmonized and integrated ASEAN+3 bond markets. Without such strong support and cooperation from the ABMF members and experts, as well as from market experts in the region, the report could not have been be published.

Especially, leadership provided by Tokyo AIM and Tokyo Stock Exchange Group; CIMB Investment Bank; Korea Securities Depository (KSD); Japan Securities Depository Center (JASDEC); and Indonesian Central Securities Depository (KSEI) as the Chairs and Vice Chairs of SF1 and SF2, who facilitated very active discussions among members and experts. The team also thanks the national members and experts of Japan, Malaysia, Republic of Korea, Indonesia, and Peoples Republic of China for hosting the ABMF meetings. Smooth organization of the meetings made possible the conduct of intensive discussions at each meeting.

The efforts for harmonization and standardization of bond markets in the region have just begun. Given large differences in economic and market developments in the region, the task is not easy. The work is inevitably gradual and step-by-step. However, this unique regional initiative will create a momentum to push the region towards more harmonized and integrated markets in the future. ABMF continues to function as a regional platform to realize and institutionalize regionalism by helping formulate regional views and opinions into a common policy framework.

Finally, it should be noted that no part of the report represents the official views of any of the institutions, which participated as ABMF members and experts, and the ADB team is held responsible for the contents of the reports.

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PrefacePreface

A. ABMF Members, Experts, and Observers

Economy/Jurisdiction Membership InstitutionBrunei Darussalam SF1 National Member Brunei International Financial Centre (BIFC), Ministry of Finance

Brunei Darussalam SF2 National Member Autoriti Monetari Brunei Darussalam (AMBD)

Cambodia SF1 National Member National Bank of Cambodia

Cambodia SF1 and SF2 National Member Securities and Exchange Commission (SEC) of Cambodia

China, Peoples Rep. of SF1 and SF2 National Member Peoples Bank of China (PBOC)

China, Peoples Rep. of SF1 and SF2 National Member China Securities Regulatory Commission (CSRC)

China, Peoples Rep. of SF1 Observer National Association of Financial Market Institutional Investors (NAFMII)

China, Peoples Rep. of SF1 and SF2 National Expert China Securities Depository and Clearing Corporation (CSDCC)

China, Peoples Rep. of SF1 and SF2 National Expert China Central Depository and Clearing Corporation Limited (CCDC)

China, Peoples Rep. of SF2 National Expert Shanghai Clearing House (SCH)

China, Peoples Rep. of SF2 National Expert China Foreign Exchange Trade System/National Interbank Funding Center (CFETS)

Hong Kong, China SF1 and SF2 National Member Hong Kong Monetary Authority (HKMA)

Indonesia SF1 and SF2 National Member Ministry of Finance of Indonesia

Indonesia SF1 and SF2 National Member Indonesian Capital Market and Financial Institution Supervisory Agency (BAPEPAM-LK)

Indonesia SF2 National Member Indonesian Central Securities Depository (KSEI)

Indonesia SF1 and SF2 National Member Indonesia Stock Exchange (IDX)

Japan SF1 National MemberChair

Tokyo AIM, Tokyo Stock Exchange Group

Japan SF1 National Member Japan Securities Dealers Association (JSDA)

Japan SF1 National Member Japan Bankers Association (Sumitomo Mitsui Banking Corporation)

Japan SF1 National Expert Nomura Securities Co. Ltd.

Japan SF1 National Expert Daiwa Securities Capital Markets Co.Ltd.

Japan SF2 National Member Japan Securities Depository Center, Inc. (JASDEC)

Japan SF2 National Expert Mizuho Corporate Bank, Ltd.

Korea, Rep. of SF1 National Member Korea Financial Investment Association (KOFIA)

Korea, Rep. of SF2 National Member Korea Securities Depository(KSD)

Korea, Rep. of SF1 and SF2 National Expert Korea Capital Market Institute (KCMI)

Korea, Rep. of SF1 National Expert Korea Exchange (KRX)

Lao PDR SF1 and SF2 National Member Ministry of Finance of Lao PDR

Lao PDR SF1 and SF2 National Member Securities and Exchange Commission Office, Bank of the Lao PDR

Malaysia SF1 National MemberVice-chair

Financial Market Association of Malaysia CIMB Group and CIMB Investment Bank

Myanmar SF1 and SF2 National Member Central Bank of Myanmar

Philippines SF1 National Member Bureau of Treasury of the Philippines

Philippines SF1 National Expert Securities and Exchange Commission of the Philippines

Philippines SF2 National Member Philippine Dealing System Holdings Corp (PDS Group)

Philippines SF2 National Member Bankers Association of the Philippines (BAP)

Thailand SF1 National Member Securities and Exchange Commission

Thailand SF2 National Member The Stock Exchange of Thailand (SET)

Thailand SF1 National Member Thai Bond Market Association

Viet Nam SF1 National Member Vietnam Bond Market Association (VBMA)

Viet Nam SF2 National Member Vietnam Securities Depository (VSD)

Viet Nam SF2 National Member Hanoi Stock Exchange (HNX)

continued on next page

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Preface

Economy/Jurisdiction Membership Institution SF2 International Expert Citibank

SF2 International Expert Deutsche Bank AG

SF2 International Expert HSBC Securities Services

SF2 International Expert J.P. Morgan

SF2 International Expert State Street Bank and TrustState Street Global Advisors

SF2 International Expert SWIFT

SF2 International Expert The Bank of Tokyo Mitsubishi UFJ Ltd

B. ADB Secretariat and Consultants

Institution Name PositionADB Secretariat Satoru Yamadera Economist, Office of Regional Economic Integration (Sept. 2011)

(currently Bank of Japan)

Seung Jae Lee Principal Financial Sector Specialist (June 2011)

Shinji Kawai Senior Financial Sector Specialist (Banking) (Sept. 2011)

ADB Consultant for SF1 Shigehito Inukai Professor, Faculty of Law, Waseda University

ADB Consultant for SF2 Taiji Inui Senior Manager, NTT DATA Corporation

ADB Consultant Matthias Schmidt Custody Business Specialist

Table A. continuation

IntroductionBackground of the ASEAN+3 Bond Market Forum and the Way Forward

A. Background

ASEAN+3 member countries (Association of Southeast Asian Nations plus PeoplesRepublic of China, Japan, and Republic of Korea) have been working to develop bond markets in the region under the Asian Bond Markets Initiative (ABMI) since 2003. Thanks to the regional efforts, as well as individual countries commitments, the bond markets have grown very rapidly, more than three times since 2003. In 2009 and 2010, after the 2008 financial crisis, the outstanding of emerging East Asias local currency (LCY) bonds in the region grew 16.2% and 13.6%, respectively, reaching $5.2 trillion in 2010. This clearly shows that the LCY bond markets can now function as another financial intermediary channel in the region in addition to the banking system. Now, the share of emerging East Asias LCY bonds in the worlds total has reached 8% in 2010, which clearly surpasses those of the United Kingdom (2.5%), Germany (4%), and France (4.8%). Emerging East Asia LCY bonds have become an important asset class, which cannot be overlooked by global investors.

While the LCY bonds are growing very rapidly, intra-regional financial flows are still comparatively small. Financial markets in the region are far less integrated compared to the trade linkages and supply chain network created in the region. Given the differences in levels of economic development, as well as social and cultural values such as language and other practices, it is understandable that each country may want to develop the markets based on their preference. However, it is desirable if market developments are in line with a common understanding of what needs to be harmonized and integrated in the region from the early stage of the market development. If efforts towards harmonization and integration succeed, markets will be able to benefit from a much larger scale of economy and will increase efficiencies. Besides, more integrated markets may be able to mitigate the mismatch of funds: vast savings on the one hand, and enormous needs for investments on the other. Therefore, effective linkage between the two should bring large benefits to the region. The regions investors and issuers should be able to gain substantially from regional cooperation towards more integrated markets. On this front, ASEAN+3 Finance Ministers urged in their 13th joint ministerial statement in 2010

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to explore ways to further promote cross-border bond transactions in the region along with the development of local currency-denominated bond markets, given the increasing importance of mobilizing regional savings for regional investments to sustain sound economic growth for ASEAN+3 countries.

To create more integrated markets, we may be able to learn from the European Union (EU). However, unlike Europe, there is no supra-national body in Asia, comparable to the European Commission, to coordinate among member countries and enact rules and regulations uniformly applicable across the region. Unlike in developed markets, the role of the private sector to set standards and common practices is still very limited; thus, national market practice groups are not yet prevailing in many markets in Asia. Therefore, the region needs to start institutionalizing a mechanism to harmonize and integrate markets.

As the first step in that direction, ASEAN+3 Finance Ministers endorsed the establishment of the ASEAN+3 Bond Market Forum (ABMF) in May 2010 as a common platform to foster standardization of market practices and harmonization of regulations relating to cross-border bond transactions in the region. The ABMF is expected not only to lead the region towards more harmonized and integrated markets, but also to act as the nexus between ASEAN+3 and the rest of the world in international standard setting and rule making. ABMF is expected to enhance dialogue between the private sector and ASEAN+3 officials to develop bond markets in the region and promote harmonization, standardization, and integration. Besides, ABMF provides opportunities to exchange knowledge, expertise, and experience between the private and public sectors. ABMF is expected to bridge gaps among regulators in ASEAN+3 for more harmonized regulations; among the private sector players in the region for more standardized market practices; and between the private and public sectors.

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Introduction Introduction

Figure 1. Development of Bond Market in Asia

31.31

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Source: AsianBondsOnline.

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LCY Bond Outstanding in the emerging East Asia

Government Corporate

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LCY Bonds Outstanding(USD billion)

% of World

TotalUnited States 25,349 38.8

Japan 11,723 17.94

France 3,170 4.8

Germany 2,616 4.0

United Kingdom 1,647 2.5

Emerging East Asia 5,210 8.0Note: Emerging East Asia comprises the Peoples Republic of China; Hong Kong, China; Indonesia; Republic of Korea; Malaysia; Philippines; Singapore; Thailand; and Viet Nam.

B. Studies prior to the ASEAN+3 Bond Market Forum

The establishment of ABMF was based on the two studies:1 ABMI Group of Experts (GoE) Report published in April 2010 and ABMI Harmonization of Bond Standards Report published in September 2010.

The GoE report consists of three parts: Part 1 contains survey results of estimated cross-border transaction costs in ASEAN+3, focusing on custodian fees. Survey result shows that cross-border bond transaction costs in the ASEAN+3 region were

1 Both studies are downloadable from the ABMF website: http://asean3abmf.adb.org

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Introduction

on average three times higher than those of the United States and the EU. Even within ASEAN+3 markets, considerable variation is found across markets. Part 2 discusses the feasibility of two options for RSI, namely Asian International Central Securities Depository and CSD Linkage in Asia, and presents recommendations for possible next steps. The study provides necessary legal and financial conditions for the establishment of a regional RSI. Finally, Part 3 presents the list of major barriers to cross-border bond investment and settlement, and a set of recommendations to address them. The study also finds perception gaps as significant impediments since market participants may not always be aware of the progress made by regulators in reforming or removing some of the impediments. The study recommends the establishment of a coordinating body to facilitate possible reduction of these barriers.

The Harmonization Report discusses how to promote the development of domestic and regional bond markets by: (i) harmonizing standards, including regulations, practices, and infrastructure in secondary government bond markets, including proposing measures to establish a bond market forum to support the process; (ii) harmonizing standards for corporate bonds to facilitate cross-border issuance; (iii) strengthening self-regulatory organizations (SROs) and/or establishing new ones, as appropriate, to facilitate the harmonization of corporate bond standards and regional bond market integration; and (iv) informing institutional investors of updates on bond market situation and initiatives undertaken to achieve an efficient bond market.

Based on the recommendations of the two reports, it was agreed that ABMF should take stock of the findings and recommendations by the GoE. First, ABMF should tackle improving information flows to narrow the information gap by facilitating access to information on regulations and market practices. In addition, harmonization and standardization may start from the settlement barriers identified by the GoE because settlement-related discussion can be initiated by the private sector and, unlike taxation and capital controls, politically sensitive discussion can be avoided. After the initial studies, the region can start harmonizing bond standards where possible, such as harmonization of corporate bond standards through discussions among SROs.

Table 1. List of Major Market Barriers Identified by the Group of Experts Report

Settlement barriers Messaging standards Securities numbering;Settlement cycle Trade and settlement matching; andPhysical certificates

Regulatory barriers Foreign investor quota Foreign investor registration;Currency exchange controls Cash controlscredit balances;Cash controlsover drafts Taxes;Omnibus accounts Regulatory framework; andLegal framework

GoE = Group of Experts.Source: Asian Bond Markets Initiative (ABMI) Group of Experts Report for Task Force 4 (TF4).

C. Structure of ASEAN+3 Bond Market Forum

The ABMF aims to: (i) assess existing regulatory frameworks and identify recommendations on how to foster harmonization of regulations and market practices that facilitate cross-border bond transactions in the region; (ii) enhance

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dialogue between the private sector and ASEAN+3 officials to develop bond markets in the region and promote harmonization, standardization, and integration; and (iii) provide opportunities to exchange knowledge, expertise, and experience between the private and public sectors in the region.

The ABMF will (i) provide in-depth analysis of bond markets in the region and make intra-regional comparisons to identify national differences, and target market characteristics required for harmonization and standardization; (ii) explore issues to promote harmonization of bond standards to facilitate cross-border issuance and investment; (iii) prepare a strategy and road map for the harmonization of regulations and market practices; and integration of bond markets across the region.

ABMF is a very unique regional initiative. Unlike Europe, there is no supra-national body in Asia comparable to the European Commission to coordinate the member countries and enact rules and regulations uniformly applicable across the region. Unlike developed markets, the role of the private sector to set standards and common practices is limited, thus, national market practice groups are not relevant in Asia. ABMF is expected to bridge such gaps, as well as the gap among the regulators in ASEAN+3 for more harmonized regulations; among private sector players in the region for more standardized market practices; and between the private and public sectors for more integrated markets in the region.

After the establishment of ABMF, national working groups were established in Japan, Republic of Korea, and the Philippines, called ABMF-Japan (ABMF-J), ABMF-Korea (ABMF-K), and ABMF-Philippines (ABMF-PH). The national working groups support information collection; gather opinions and comments in the market; and discuss among market players and help consolidate opinions. This is a very encouraging evolution because it shows how the region may be able to formalize regional voices into actions. Likewise, the other national members and experts are encouraged to form their national working groups. Though it is still at an early stage, ABMF can lead in the institutionalization of regionalism.

In terms of the governance, activities under ABMF will be closely reported to ASEAN+3 finance ministries and central banks. ABMF shall provide ASEAN+3 officials with viewpoints and recommendations of the regions bond market experts on issues that will be adopted by Task Force 3 (TF3) of the ABMI. Then, TF3 will decide the agenda to be discussed under ABMF. At this moment, there are two sub-forums. If TF3 wants to expand discussion to other areas, they can create another sub-forum under ABMF. In other words, ABMF will be an umbrella framework to facilitate regional discussion. It will consult with the co-chairs of TF3 from time to time in undertaking any regional activities and will report to TF3 on a regular basis regarding the progress of its activities.

ABMF participants are made up of financial experts from ASEAN+3. The experts are nominated as National Members by their respective governments and central banks. In addition, additional experts are invited as National Experts and International Experts based on the consent of the National Members. Members and experts should be selected from among those actively involved in bond markets in the region as they must have extensive knowledge on and expertise in the relevant issues.

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D. The Two Sub-Forums

As a first step, ABMF began discussions with two sub-forums. Sub-Forum 1 (SF1) was established to collate and compare regulations and market practices in the region, while Sub-Forum 2 (SF2) was established to harmonize and standardize transaction procedures and bond-messaging formats with a view to cut the cost of cross-border transactions. This arrangement was based on the GoE report,which recommends improving information flows to foreign investors by facilitating access to information on regulations, and to tackle major barriers from the settlement barriers among private sector experts.

Figure 2. Organizational Structure of Asian Bond Markets Initiative and ASEAN+3 Bond Market Forum

ASEAN+3 Finance Ministers

ASEAN+3 Deputy Finance Ministers

ABMI Steering Group

TASK FORCE (TF)

TF1

Promoting Issuance of Local Currency Denominated Bonds

TF2

Facilitating the Demand of Local Currency-Denominated

Bonds

TF3

Improving Regulatory Framework

TF4

Improving Related Infrastructure for the Bond

Market

ABMF

Figure 3. Barriers Identified by Group of Experts and Focus under Sub-Forum 1 and Sub-Forum 2

Improve information flows in the marketsTimely information, uniform disclosure, price transparency, market statistics, information on corporate actions and legal information such as

bankruptcy and insolvency laws.

Note: The left-hand side barriers can be discussed and changed by the private sector while the right-hand side barriers require regulatory changes.Source: Asian Bond Markets Initiative (ABMI) Group of Experts Report for Task Force 4 (TF4).

Private sector

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Pre-matchingSecurities numbering

Settlement cycle

SF1

Physical certificates

Physical certificates

Investor registration

Omnibus accounts

Quotas

Cash controlscredit balances,

overdrafts

FX controls conversion, repatriation

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1. Sub-Forum 1: Collecting Information on Regulations and Market PracticesSub-Forum 1 (SF1) aims to propose harmonization and standardization of regulations wherever possible. Before harmonizing regulations, it, first, collects all relevant information on regulations and practices as well as market structures, and,second, compares and analyzes the similarities and differences in the region. As the GoE report recommends, it started discussions from improving information flows by facilitating access to information on regulations and market practices. Therefore, information collected through SF1 is as comprehensive and comparable as possible. This information-collection exercise should benefit regional bond markets given the high level of information asymmetry that has led to hesitancy among many investors to participate in Asian bond markets, according to the study by the GoE.

SF1 members consist mainly of industry associations and exchanges in the region because they are often given a status of SRO by the regulators, are in the best position to represent the industry, and can communicate with regulators. In addition, other organizations such as research institutes, which play a role similar to the market associations and enjoy public recognition in the markets,were also qualified as part of the forum. If market associations and relevant industry associations in a countrys bond market are either not active or not appropriate for participating in the forum, then, public authorities such as securities commissions and central banks and/or financial institutions can be nominated as national members representing the opinion of the market.

The information collected by SF1 is compiled as market guides, which is available through the AsianBondsOnline, and distributed through members and experts, as well as institutions supporting ABMF.

Table 2. List of Information included in the Sub-Forum 1 Market Guides

Obligation for the Listing of BondMain Trading Places (Over-the-Counter or Exchange)Necessity of the Credit RatingMethods of Registration of BondsStatus of Bonds (Bearer or Registered)Form of the Bonds (Scripless or Physical)Status of the Scripless Bonds (Complete Dematerialised or Immobilised)Existence of the Exchangeability of Scripless Bond to Physical BondMethod of Transfer of Interest in BondsFinality of SettlementLegal Basis and Definition of Settlement and ClearingExistence of the Omnibus AccountsExistence of the Nominee ConceptRegulators Policy Related to the Necessity of Disclosure of Ultimate Beneficially OwnerDocumentation LanguageDefinition of the Payment DefaultBankruptcy ProceduresExistence of the Meeting of BondholdersThe Way of Trustee (Bond Representative or Commissioned Persons) SystemDefinition of Professional and/or Institutional InvestorsPublic Offering Market (Full Disclosure) Rules and RegulationPrivate Placement Rules and Definition of Professional (Institutional) Investor and High Net Worth Individuals.

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1. Sub-Forum 2: Enhancing Regional Straight-Through-Processing Sub-Forum 2 (SF2) aims to enhance regional straight-through-processing (STP) by harmonization of transaction procedures and standardization of messaging formats, hence, transaction costs can be reduced. The GoE report identifies various settlement barriers, such as messaging formats, securities numbering, and trade and settlement matching. ABMF addresses these problems to enhance regional STP.

To achieve the objective, SF2 clarifies all transaction procedures involved in cross-border bond transactions from a buyer to a seller. Ideally, it is desirable to execute a cross-border transaction without any manual processes or transaction-information conversion between the two systems. This ideal situation can materialize only if all transactions are operated through systems using common standards and the same messaging. This is not currently possible because individual countries have their own system and standards, which is inevitable because certain transaction procedures follow national requirements to account for unique circumstances. In addition, some segments of a market may prefer their own ways of handling transactions, which creates differences in transaction procedures, hence, requires additional conversions to international practices.

Market fragmentation is one of challenges the region is facing. High Asian savings should be recycled within the region but, at this moment, investing in neighboring countries is not easy due to various constraints. For example, unlike Europe where they agreed to use English as the common language for financial transactions, difference in languages in the region is one of the constraints. Chinese characters and Thai letters need to be converted into alphabets to execute cross-border transactions. This problem could be mitigated if all transactions were executed under the International Organization for Standardizations (ISO) new standard, ISO20022.2 ISO20022 incorporates technology that can process different national letters and characters. In addition, under the flexible framework of ISO20022, the region can develop regional standards, which conform with international standards.

Furthermore, SF2 may be able to help reducing cross-border transaction costs by increasing competition among financial telecommunications networks. The region needs a more efficient and cheaper money- and securities-transfer system for more integrated and harmonized financial markets. By clarifying various cross-border transaction procedures and enhancing STP, the costs involved in cross-border transactions can be reduced. The work under the forum is the first step to achieve the goal.

SF2 members are mainly comprised of national CSDs, local, regional and global custodians. SF2 is envisioned to become a regional market practice group, and the nexus to ISO and other international standard setting forums for settlement.

2 International Standard Organization (ISO) is a worldwide federation of national standards bodies. ISO20022 provides the financial industry with a common platform for the development of messages in a standardized XML syntax using (i) a modeling methodology (based on UML) to capture, in a syntax-independent way, financial business areas, business transactions, and associated message flows; and (ii) a set of XML design rules to convert the messages described in UML into XML schemas.

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The information collected by SF2 is compiled as market information on transaction flows and settlement infrastructures, which is published through the AsianBondsOnline and distributed through the members and experts, as well as institutions supporting ABMF.

E. Next Step Under the Phase 2

Theoretically, there are two approaches to harmonize regulations and market practices in the region: one is the bottom-up approach and the other is the top-down approach.

The bottom-up approach is to harmonize regulations one by one, step by step, or mutually recognize regulations among member countries. The ASEAN Capital Market Forum (ACMF) has been working to establish the ASEAN and Plus Standards, which aim to establish harmonized standards in the ASEAN. They are also working to agree on mutual recognition on certain areas of securities market regulations. Once they can create harmonized standards and mutually recognize certain rules, these can be extended to the Plus Three countries under the ASEAN+3 framework.

The top-down approach is to create commonly applicable rules based on the regions common values and vision. For example, the Eurobond market is self-regulated by the common rule set by the International Capital Market Association (ICMA), not by regulators, because Eurobond market is an offshore market; hence, it is not under any jurisdictions.

Figure 4. Two-Way Approach for Harmonization

Country A

Country B

Country C

Bottom up

Topdown

Harmonization of standards

Mutual

recognit

ionMutual recognition

Topdown

Asian Standards

Asian ValueAsian Vision

Source: ADB Consultant.

As the next step of SF1, a common bond issuance program will be discussed as an example of the top-down approach. More issuers will need harmonized bond issuance rules to facilitate timely and easier access to LCY funding. However, it would be very time consuming to fully harmonize domestic regulations. Allowing the LCY Eurobond

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issue is another approach, but there is legitimate regulatory concern not to allow offshore issue in Asia. To satisfy market needs and regulatory requirements, it is necessary to consider an Asian version of the Eurobond market to meet the regions financial environment. To address the issue, the discussion can start from a narrowly focused area such as private placement by the qualified issuers, qualified investors, and qualified bond traders. By doing so, governments may be able to consider some flexibility. To discuss the common issuance program and make a proposal to governments, establishing a new forum that consists of SROs in the region will be discussed under SF1. The new forum is expected to discuss self-regulations and codes of conduct to create a common issuance scheme.

As the next step for SF2, it will continue to harmonize market practices step by step and message by message, adopting the bottom-up approach. Identifying transaction flows will be extended to issuance, redemption, and interest payment. Also, the scope should be expanded to corporate bonds, which may include some corporate actions. Then, fit-and-gap analysis will be made to clarify areas where harmonization efforts are required. After the analysis, SF2 will propose a road map to standardize and harmonize messaging and market practices.

Volume 1: Sub-Forum 1- Comparative Analysis and Bond Market Guides

Overview of Sub-Forum 1Part 1: ASEAN+3 Bond Markets Comparative Analysis and Implication

for the Next Phase of ABMF Sub-Forum 1 (20122013)Part 2: Bond Market Guides in 11 Economies

Volume 2: Sub-Forum 2- Information on Transaction Flows and Settlement

Overview of Sub-Forum 2Part 1: Bond Markets and Their Infrastructures in ASEAN+3Part 2: Bond Markets and Their Infrastructures in Each EconomyPart 3: Bond Market Infrastructure Diagrams, Domestic Bond Transaction Flows,

and Cross-border Bond Transaction Flows

Structure of the Report

Volume 1Sub-Forum 1- Comparative Analysis and Bond market Guides

Overview of Sub-Forum 1

ASEAN+3 Bond Market Guide | Volume 1 | Overview of SF1

Statement from SF1 Chairs

We wish to express our sincere appreciation to all members and experts of the ASEAN+3 Bond Market Forum Sub-Forum 1 (ABMF SF1) for their contributions towards completing this important research project within the mandated timeframe.

Going forward, we hope to seek continuous support from the members and experts on the second phase of ABMF, which will be critical to our efforts in realizing the vision and objectives of ABMF, i.e., promoting issuance and investment activities within the ASEAN+3 bond markets.

On behalf of our members and experts, we are grateful to the secretariat in the Asian Development Bank (ADB) and its consultants for their efforts that have brought this valuable report into fruition.

February 2012

Mr. Tetsutaro Muraki *1 Mr. Lee Kok Kwan Chair of ABMF SF1 Vice-chair of ABMF SF1

* Mr. Tetsutaro Muraki took over as Chair in September 2011, replacing Mr. Yutaka Ito.

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Contents

Statement from SF1 Chairs .......................................................................................................................i

Preface ....................................................................................................................................................1A. ASEAN+3 Bond Market Forum ......................................................................................................................1B. ABMF Sub-Forum 1 ........................................................................................................................................1C. Scope of Markets Covered ..............................................................................................................................1D. Economies Covered under Comparative Analysis and Market Guides ............................................................2E. Configuration of this SF1 Report ...................................................................................................................2

Executive Summary of SF1 ......................................................................................................................3A. Overall AssessmentSound and Robust Market Infrastructure ......................................................................4B. Summary of Findings .....................................................................................................................................4

1. Over-the-Counter Market ...................................................................................................................4 2. Regulatory Vacuum in Private Placement ...........................................................................................4 3. Bondholder Representative and/or Trustee .........................................................................................4 4. DifferentRequirementsforIdentifyingInvestorsandBeneficialOwners ...........................................4 5. Public Offering ...................................................................................................................................4 6. DefinitionofProfessionalInvestors ....................................................................................................4 7. Common Law Tradition and Civil Law Tradition..................................................................................5 8. Documentation Language ...................................................................................................................5 9. DefiningSelf-RegulatoryOrganizations .............................................................................................5 10. Greater Use and Acceptance of Islamic bond (or Sukuk) Structure ...................................................5

C. Activities for the Next Phase of ABMF SF1 .....................................................................................................5

Member List of SF1 .................................................................................................................................7A. National Members, National Experts, and Observers ....................................................................................7B. Observing Authorities ....................................................................................................................................8C. ADB Secretariat and Consultants ...................................................................................................................8

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Preface

A. ASEAN+3 Bond Market Forum

The Association of Southeast Asian Nations plus Peoples Republic of China, Japan, and Republic of Korea (ASEAN+3) established a forum called ASEAN+3 Bond Market Forum (ABMF) in September 2010 as a common platform to foster standardization of market practices and harmonization of regulations relating to cross-border transactions in the region. ABMF reports its activities to the Task Force 3 (TF3) of the Asian Bond Markets Initiative (ABMI) under the institutional framework of ASEAN+3 Finance Ministers Meeting (AFMM+3).

B. ABMF Sub-Forum 1

ABMF consists of two sub-forums. Sub-Forum 1 (SF1) researched, collated, and compared regulations and market practices in the region; Sub-Forum 2 (SF2), on the other hand, looked to harmonize transaction procedures and bond messages with a view of cutting the cost of cross-border deals. This report focuses on the activities of SF1.

Members and experts participated in the ABMF SF1 conducted a survey on regional bond markets and the legal and regulatory infrastructures in ASEAN+3 with support from the Asian Development Bank (ADB) secretariat and consultants. The participants have engaged in fruitful discussions and produced this report, which was submitted to the ASEAN+3 Finance Deputies Meeting (AFDM+3) through TF3 of the ABMI in December 2011.

C. Scope of Markets Covered

The ASEAN+3 region is composed of 14 economies. These include: (1) Brunei Darussalam, (2) Cambodia, (3) Peoples Republic of China, (PRC) (4) Hong Kong, China, (5) Indonesia, (6) Japan, (7) Republic of Korea, (8) Lao Peoples Democratic Republic (Lao PDR), (9) Malaysia, (10) Myanmar, (11) Philippines, (12) Singapore, (13) Thailand, and (14) Viet Nam.

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2


This report covers comparative analyses for bond markets in only ten economies as shown in the following table. On the other hand, 11 economies were covered for the bond market guides that include Lao PDR. Lao PDR, which is in the process of developing a bond market, have voluntarily produced and submitted the Laos Bond Market Guide as a reference for members and interested parties.

D. Economies Covered under Comparative Analysis and Market Guides

Economy

Economies Subject to Comparative Analysis

(Ten Scripless Securities Markets)Economies Covered Under

Bond Market Guides 1 China, Peoples Rep. of

2 Hong Kong, China

3 Indonesia

4 Japan

5 Korea, Rep. of

6 Malaysia

7 Philippines

8 Singapore

9 Thailand

10 Viet Nam

11 Lao PDR (voluntary submission for reference)1

1 At the outset, it is understood that the bond markets in Brunei Darussalam, Cambodia, Lao PDR, and Myanmar are planned to be created or in the early stages of development; therefore, as discussed in ABMF Meetings in the past, the ADB secretariat did not ask these developing markets to provide market information. Instead, ABMF members and experts focused more on sharing the information collected from the developing markets to support their actions. This is the reason why the mission was organized to hold workshops in Brunei Darussalam and Lao PDR in May and June 2011. However, this did not entirely prevent the three economies from providing any market information to be included in the market guides. Thus, Lao,PDR proactively made a voluntary submission of their Bond Market Guide for reference.

Ten economies included in the research have developed sound and robust bond markets, while four economies are planning and trying to develop their markets.

This report mainly discusses the harmonization and standardization of bond markets of the 10 economies with existing bond markets.

E. Configuration of this SF1 Report

Overview of SF1

Part 1: ASEAN+3 Bond Markets Comparative Analysis and Implication for the Next Phase of ABMF Sub-Forum 1 (2012-2013)

Part 2: Bond Market Guides in 11 Economies

ASEAN+3 Bond Market Guide | Volume 1 | Overview of SF1 ASEAN+3 Bond Market Guide | Volume 1 | Overview of SF1ASEAN+3 Bond Market Guide | Volume 1 | Overview of SF1

A. Overall AssessmentSound and Robust Market Infrastructure

All of the 10 scripless securities markets covered under this research project have built robust market infrastructures including legal and operational systems to secure transactions in the domestic bond market over the past 10 years. In almost all markets, key legal and operational frameworks are in place. Trades can be executed efficiently in a secure manner; operations and practices in the markets seem comparable to other developed bond markets in the world. Notwithstanding, some still have room for further improvement. Regulators in these markets are encouraged to further eliminate legal and regulatory uncertainty, and to maintain transparency of rules and practices in each domestic market. Markets in the region are distinct in many ways, such as in governing laws and responsible regulators based on their legal tradition and their own market needs. For instance, transfer of ownership of bonds and rules providing the finality of settlement may not be the same; almost all of the markets have established their specific market practices.

Although actual conditions regarding default recognition may be different in the terms and conditions of the bonds and by jurisdiction, default procedures are usually well disclosed in the bonds issuance documentation in many jurisdictions in the region.

These default procedures do not usually deviate from the documentation standards on international bonds issuance. However, in some cases, there are still uncertainties regarding default recognition and procedures.

On the other hand, the status of bankruptcy-related legislation in the region is varied from one jurisdiction to another. Generally, laws on companies, bankruptcy and/or related laws, where applicable, are quoted in the trust deed or similar documents to guide investors in making informed decisions. But in some jurisdictions in the region, bankruptcy-related law and procedures are thought to be in the development stage. It is important to consider the need for greater understanding and further analysis of bankruptcy-related laws and procedures across regional markets in the future.

Executive Summary of SF1

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B. Summary of Findings

1. Over-the-Counter MarketBonds could be listed on the stock exchanges in many markets, but most of the instruments are traded on the over-the-counter (OTC) market. The OTC market remains the main trading place for the bond markets, but selected exchanges have begun to establish new market segments.

2. Regulatory Vacuum in Private PlacementThe regulatory vacuum in private placement in some of the markets can be seen as a place of improvement of the securities law to be put properly as a regulated and exempted private placement market. That sort of clearly stipulated private placement scheme will be an opportunity to propose a common self-regulatory framework for qualified market players in the future.

3. Bondholder Representative and/or TrusteeThe concepts of bondholder representative, commissioned bank, and trustee are gaining popularity and are evolving. For example, the new Commercial Code in Republic of Korea, which will come into effect in 2012, is re-defining the role of commissioned banks.

4. Different Requirements for Identifying Investors and Beneficial OwnersRequirements for identifying investors and beneficial owners are different in several countries. For instance, PRC does not allow omnibus accounts under the International Central Securities Depository (ICSD) while the Republic of Korea recently revised its regulation to allow omnibus accounts for ICSDs only. This, on the other hand, is allowed in Japan and in ASEAN. However, there is a growing tendency or desire among regional regulators to increase monitoring.

5. Public OfferingTwo general approaches are observed in the markets when it comes to public offering: (1) Full disclosure with specific exemptions and (2) a clearly defined disclosure regime. Markets united in those public offerings meant specified disclosure to all potential investors, whereas private placement or private offerings limited disclosure to only a specific investor group. However, a private offer does not mean no disclosure or no underlying regulations. In some markets there exists a regulatory vacuum in private placement as stated above. In the near future, a specific offering within professional market(s) could cover elements of both concepts of public and private offering. Among the markets covered in the research, Hong Kong and Singapore are closer to international markets while many of the ASEAN+3 markets are still developing.

Generally speaking, creating a common platform for issuance and investment of bonds among ASEAN+3 countries may not be that difficult since the necessary underlying concepts are already in place. This may also negate the discussion on whether to pursue onshore or offshore access to such a market.

6. Definition of Professional InvestorsDefining professional investors is critically important in view of the next phase of ABMF discussions, as described in section C. Currently, there are varying definitions

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ASEAN+3 Bond Market Guide | Volume 1 | Overview of SF1 ASEAN+3 Bond Market Guide | Volume 1 | Overview of SF1

of professional investors where they exist. For instance, Indonesia acknowledges the concept but does not define it by law. In the case of Japan, the concept is clearly defined in recent legislation to create the TOKYO PRO-Bond Market. Malaysia does not have a direct definition, but the Capital Markets and Services Act of 2007 (CMSA) contains relevant provisions on how excluded offerings of bonds could be made to institutional and high net worth investors. Thailand has specific definitions for institutional investors.

7. Common Law Tradition and Civil Law TraditionAlthough market regulations in the region vary in many ways, this does not mean that harmonization is impossible. Markets can be categorized into different groups if regulations are viewed from certain angles. For instance, markets with common law tradition such as Singapore, Malaysia, and Hong Kong share the same trustee concept. Markets with civil law tradition like PRC, Indonesia, Japan, Republic of Korea, Thailand, and Viet Nam, while they may not have the concept of trustee, support the concept of an entity acting for bondholders; names, roles, fiduciary duties, and type of institutions, though, may differ (bondholders representative or commissioned bank, etc.). Generally, if the details are looked into, the differences may not be as significant as they appear.

8. Documentation LanguageDocumentation language is important to add more details. Some jurisdictions have added other languages for documentation. One such case is in Hong Kong, China where Chinese is now an acceptable documentation language in the Hong Kong market.

9. DefiningSelf-RegulatoryOrganizationsDefinitions of self-regulatory organizations (SROs) may differ by market but their functions may still be comparable.

10. Greater Use and Acceptance of Islamic bond (or Sukuk) Structure A growing number of jurisdictions now allow or promote the use of Islamic structure in the issuance of bonds in the region. In addition to Malaysia which has the largest Islamic bond market, Indonesia, Thailand, Singapore Hong Kong, and Japan will also launch their own regulatory framework for the issuance of Islamic bonds or Sukuk in their respective bond markets. In general, an issuers obligations under a Sukuk issue and the risk exposure of investors are not materially different from a conventional bond issue. If at all such material difference exists, it is usually well disclosed in the offering documents.

C. Activities for the Next Phase of ABMF SF1

Through these market guides and comparative analysis, it is highly expected that the information asymmetry evident in many places will be improved with the intention to attract more attention from investors outside and within the region.

In the future, ASEAN+3 may consider establishing a common framework similar to Eurobond market, possibly modeled on the experiences from the Eurobond markets


6


professionals. However, it will be important to understand that the current version of European Union (EU) rules or framework may not be directly applicable to Asia; hence, it may be necessary to establish an Asian version of such marketplace. Thus, the key objectives for ABMF Phase 2 will be to facilitate cross-border or inter-regional initiatives of issuance and investment of bonds. Two standard approaches come to mind: a bottom-up approach as in the ASEAN and a top-down approach driven by the private sector. The preferred approach might focus on private placements or exempted market from full-disclosure requirement for ordinary public offerings across jurisdictions. This might create a professional marketplace populated only by qualified investors. The key outcome would be an organized, well-documented common regional private placement marketthis is where the SRO concept would come in as part of discussions on effective governance.

Creating an offshore market remains a consideration as it will attract a set of regulatory concerns. Hence, the emphasis should clearly be on efforts to allow cross-border transactions within the domestic bond markets, with a target to arrive at a common or commonly accepted framework for these transactions.

With qualified issuers and investors currently restricted to access to many domestic bond markets in the region, it will be possible to establish common rules with reasonable efforts. This could possibly lead to a common regional medium-term note (MTN) program within jurisdictions that are committed to open up their markets to qualified issuers and investors in the region. For this proposal to be accepted, it is important to achieve a common understanding among regulatory authorities on the viewpoints expressed above. Meanwhile, activities for the next phase of ABMF SF1, where possible, should take into account the relevant experience from the International Capital Markets Association (ICMA) and SROs from Europe and other regions. In this regard, it will be relevant for members and experts to reach out to investment banks, institutional investors, and lawyers in their respective markets since their input will be important to gauge the actual demand and supply situation in the second phase of ABMF SF1.

ASEAN+3 Bond Market Guide | Volume 1 | Overview of SF1 ASEAN+3 Bond Market Guide | Volume 1 | Overview of SF1ASEAN+3 Bond Market Guide | Volume 1 | Overview of SF1

A. National Members, National Experts, and Observers

Economy/Jurisdiction InstitutionBrunei Darussalam National Member Brunei International Financial Centre (BIFC), Ministry of Finance

Cambodia National Member National Bank of Cambodia

Cambodia National Member Securities and Exchange Commission (SEC) of Cambodia

China, Peoples Rep. of National Member Peoples Bank of China (PBOC)

China, Peoples Rep. of National Member China Securities Regulatory Commission (CSRC)

China, Peoples Rep. of Observer National Association of Financial Market Institutional Investors (NAFMII)

China, Peoples Rep. of National Expert China Securities Depository and Clearing Corporation (CSDCC)

China, Peoples Rep. of National Expert China Central Depository and Clearing Corporation Limited (CCDC)

Hong Kong, China National Member Hong Kong Monetary Authority (HKMA)

Indonesia National Member Ministry of Finance of Indonesia

Indonesia National Member Indonesian Capital Market and Financial Institution Supervisory Agency (BAPEPAM-LK)

Indonesia National Member Indonesia Stock Exchange (IDX)

Japan National MemberChair

Tokyo AIM, Tokyo Stock Exchange Group

Japan National Member Japan Securities Dealers Association (JSDA)

Japan National Member Japan Bankers Association (Sumitomo Mitsui Banking Corporation)

Japan National Expert Nomura Securities Co. Ltd.

Japan National Expert Daiwa Securities Capital Markets Co.Ltd.

Korea, Rep. of National Member Korea Financial Investment Association (KOFIA)

Korea, Rep. of National Expert Korea Capital Market Institute (KCMI)

Korea, Rep. of National Expert Korea Exchange (KRX)

Lao PDR National Member Ministry of Finance of Lao PDR

Lao PDR National Member Securities and Exchange Commission Office, Bank of the Lao PDR

Malaysia National MemberVice-chair

Financial Market Association of Malaysia CIMB Group and CIMB Investment Bank

Myanmar National Member Central Bank of Myanmar

Philippines National Member Bureau of Treasury of the Philippines

Philippines National Expert Securities and Exchange Commission of the Philippines

Thailand National Member Securities and Exchange Commission

Thailand National Member Thai Bond Market Association

Viet Nam National Member Vietnam Bond Market Association (VBMA)

Member List of SF1

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B. Observing Authorities

Economy InstitutionCambodia Ministry of Economy and Finance

Cambodia National Bank of Cambodia

Indonesia Bank Indonesia

Indonesia Ministry of Finance

Japan Ministry of Finance

Japan Bank of Japan

Korea, Rep. of Bank of Korea

Lao PDR Ministry of Finance

Malaysia Bank Negara Malaysia

Malaysia Securities Commission Malaysia

Philippines Bangko Sentral ng Pilipinas

Singapore Monetary Authority of Singapore

Thailand Bank of Thailand

Viet Nam Ministry of Finance of Viet Nam

Viet Nam State Bank of Viet Nam

C. ADB Secretariat and Consultants

Institution Name PositionADB Secretariat Satoru Yamadera Economist, Office of Regional Economic Integration (Sept. 2011)

(currently Bank of Japan)

Seung Jae Lee Principal Financial Sector Specialist (June 2011)

Shinji Kawai Senior Financial Sector Specialist (Banking) (Sept. 2011)

ADB Consultant for SF1 Shigehito Inukai Professor, Faculty of Law, Waseda University

ADB Consultant for SF2 Taiji Inui Senior Manager, NTT DATA Corporation

ADB Consultant Matthias Schmidt Custody Business Specialist

Part 1Comparative Analysis and Implication for the Next Phase of ABMF Sub-Forum 1 (20122013)

ASEAN+3 Bond Market Guide | Volume 1 | Part 1

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Contents

Economies Covered in the Comparative Analysis ....................................................................................1

Summary of Findings ...............................................................................................................................2A. Overall Assessment Sound and Robust Market Infrastructure ................................................................2B. Sub-Forum 1: Summary of Findings ........................................................................................................10

Implications for the Next Phase of the ASEAN+3 Bond Market Forum Sub-Forum 1 (20122013) .......21

Details of SF1 Contents of Findings .......................................................................................................29I. Legal Tradition in the Domestic Capital Markets ....................................................................................30II. Governing Law for Domestic Bond Issuance ..........................................................................................30III. Competent Authority (Regulator) and Self-Regulatory Organizations of

Domestic Bond Markets ........................................................................................................................35IV. Role of the Self-Regulatory Organizations in Domestic Bond Markets ...................................................36V. Definition of Securities (Bonds) .............................................................................................................44VI. Event of Default and Payment Default ....................................................................................................48VII. Existence of the Meeting of Bondholders System ....................................................................................51VIII. The System of Commissioned Company, Bond Representative and Trustee .............................................52IX. Bankruptcy Procedures ...........................................................................................................................53X. Form of Bonds (Settlement Method) and Status (Bearer/Registered) ......................................................56XI. Exchangeability of Scripless Bonds to Physical Bonds .............................................................................57XII. Transfer of Securities (or Property Rights) and Finality of Settlement of Scripless Bonds ........................58XIII. Legal Basis and Definition of Settlement and Clearing .......................................................................63XIV. Registration and Issuing Approval Procedures of Bonds .........................................................................66XV. Necessity of Disclosure of Ultimate Beneficial Owner ...........................................................................77XVI. Foreign Exchange and Currency-Related Restrictions .............................................................................78XVII. Omnibus Securities Account and Nominee Concept ..............................................................................79XVIII. Main Trading Places (Over the Counter or Exchange) and Existence of Exchange trading .....................80XIX. Listing of Bonds and Obligation for Market Listing (Domestic Market) ..................................................80XX. Necessity of Credit Rating for the Issuing of Bonds ................................................................................81XXI. Documentation Language .......................................................................................................................82XXII. Concept/Definition of Professional or Institutional investors .................................................................83XXIII. Definition of Public Offering (and Private Placement or Exempt Regime) ..............................................86

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XXIV. Existence of Professional Investors-Only Market ....................................................................................89XXV. Market Capitalization Size of the Local Currency Bond Market (as of March 2011) ............................90XXVI. Size of Foreign Currency Bond Market (as of March 2011) ....................................................................90XXVII. Islamic Finance related Issues .................................................................................................................90

Appendix ...............................................................................................................................................93

Reference ..............................................................................................................................................94

Figures and TableFigures

Figure 2.1 ASEAN+3 Government Bond Market Infrastructure Diagram .....................................................11Figure 2.2 Regional Standardization of Documentation ............................................................................22Figure 2.3 Exempted Market versus Full Disclosure Market ......................................................................22Figure 2.4 Comparative Structure of US Domestic and Offshore Markets ...................................................23Figure 2.5 Status Quo of Asean+3 Bond Markets ...................................................................................24Figure 2.6 Connecting the Professional Market Elements in the Region .....................................................24Figure 2.7 Creation of an Intra-Regional Bond Market ..............................................................................25Figure 2.8 Mutual Recognition Examples (1), (2), (3) ..............................................................................26

TablesTable 1.1 Economies Covered in the Comparative Analysis ........................................................................1Table 1.2 Existence of a Clear Definition of Securities (Bonds) ..................................................................2Table 1.4 Forms and Status of Bonds across Economies ..........................................................................4Table 1.5 Exchangeability of Scripless Bonds to Physical Bonds .................................................................5Table 1.6 Existence of a Concept of Bondholder Meeting ..........................................................................6Table 1.7 Existence of Concepts of Commissioned Company, .....................................................................

Bond Representative and Trustee ............................................................................................6Table 1.8 Obligation to Acquire Credit Rating upon Bond Issuance .............................................................6Table 1.9 Main Market Authorities across covered Economies ...................................................................7Table 1.10 Self-Regulatory Organizations across ASEAN+3 Bond Markets ....................................................7Table 1.12 Foreign Exchange and Currency-Related Restrictions ..................................................................8Table 2.1 Over-the-Counter Market versus Exchange Market ...................................................................10Table 2.2 Existence of Exempt Regimes ................................................................................................12Table 2.3 Status of Concepts of Commissioned Company, Bondholder Representative and Trustee ............12Table 2.4 Legal Tradition .....................................................................................................................13Table 2.5 Requirements for Identifying Investors and Beneficial Owners ....................................................14Table 2.6 Existence of Omnibus Accounts or Nominee Concept ...............................................................14Table 2.7 Existence of Exempt Regimes ................................................................................................15Table 2.8 Existence of the Concept of Professional Investor ...................................................................16Table 2.9 Existence of Professional Investor-Only Market ........................................................................17Table 2.10 Definitions of Self-Regulatory Organizations ............................................................................17Table 2.11 Existence of the Islamic Finance Market .................................................................................20

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Details of SF1 Contents of Findings: Tables Table 1. Legal Tradition in the Domestic Capital Markets .......................................................................30Table 2. Governing Law for Domestic Bond Issuance ............................................................................30Table 3. Competent Authority (Regulator) and Self-Regulatory Organizations of Domestic Bond Markets ....35Table 4. Role of Self-Regulatory Organizations in Domestic Bond Markets ...............................................36Table 5. Definition of Securities (Bonds) ..............................................................................................44Table 6. Event of Default and Payment Default ....................................................................................48Table 7. Existence of Bondholders Meeting System ..............................................................................51Table 8. The System of Commissioned Company, Bond Representative and Trustee .................................52Table 9. Bankruptcy Procedures .........................................................................................................53Table 10. Form of Bonds (Settlement Method) and Status (Bearer/Registered) .........................................56Table 11. Exchangeability of Scripless Bonds to Physical Bonds ...............................................................57Table 12. Transfer of Securities (or Property Rights) and Finality of Settlement of Scripless Bonds ...............58Table 13. Legal Basis and Definition of Settlement and Clearing ...........................................................63Table 14. Registration and Issuing Approval Procedures of Bonds ............................................................66Table 15. Necessity of Disclosure of Ultimate Beneficial Owner................................................................77Table 16. Foreign Exchange and Currency-Related Restrictions ................................................................78Table 17. Omnibus Securities Account and Nominee Concept .................................................................79Table 18. Main Trading Places (Over the Counter or Exchange) and Existence of Exchange Trading ..............80Table 19. Listing of Bonds and Obligation for Market Listing (Domestic Market) .........................................80Table 20. Necessity of Credit Rating for the Issuing of Bonds ..................................................................81Table 21 Documentation Language .....................................................................................................82Table 22. Concept and Definition of Professional or Institutional investors ................................................83Table 23. Definition of Public Offering (and Private Placement or Exempt Regime) .....................................86Table 24. Existence of Professional Investors-Only Market ......................................................................89Table 25. Market Capitalization Size of Local Currency Bond Market (as of March 2011) ($ billion) .........90Table 26. Size of Foreign Currency Bond Market (as of March 2011) ($ billion) .........................................90Table 27. Islamic Finance-Related Issues ..............................................................................................90


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This report mainly discusses the harmonization and standardization of bond markets of 10 economies with existing bond markets in the Association of Southeast Asian Nations, Peoples Republic of China, Japan and Republic of Korea (ASEAN+3).

Table 1.1 Economies Covered in the Comparative Analysis

Economy

Economies Subject to Comparative Analysis

(Ten Scripless Securities Markets)Economies Covered Under

Bond Market Guides 1 China, Peoples Rep. of

2 Hong Kong, China

3 Indonesia

4 Japan

5 Korea, Rep. of

6 Malaysia

7 Philippines

8 Singapore

9 Thailand

10 Viet Nam

11 Lao PDR (voluntary submission for reference)aa At the outset, it is understood that the bond markets of Brunei Darussalam, Cambodia, Lao Peoples Democratic Republic (PDR),

and Myanmar are in the planning stage for creation or in the early stages of development; therefore, as discussed in the ASEAN+3 Bond Market Forum (ABMF) in the past, the ADB secretariat did not ask these developing markets to provide market information. Instead, ABMF members and experts focused on sharing the information collected from these developing markets to support their initiatives to establish or develop their respective bond markets. This is the reason the ABMF secretariat held workshops in Brunei Darussalam and Lao PDR in May and June 2011. However, this did not entirely prevent the two economies from providing any market information to be included in the market guides. Lao PDR proactively and voluntarily submitted their bond market guide as reference.

Source: ADB Consultants, based on research materials and market visit information.

Economies Covered in the Comparative Analysis

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A. Overall Assessment Sound and Robust Market Infrastructure

All of the 10 securities markets covered under this research project have built robust market infrastructures, including legal and operational systems to secure transactions in the domestic bond market over the past 10 years.

In almost all markets, key legal and regulatory frameworks and related systems are in place. The following tables detail some of the features of these key bond-market infrastructures.

For instance, a clear definition of securities (bonds) is considered to be a fundamental base and condition for the sound development of the bond market. Most of the jurisdictions have a specific definition of securities, or are striving to further improve or clarify the definition of securities.

Table 1.2 Existence of a Clear Definition of Securities (Bonds)

Jurisdiction Existence of a Clear Definition of Securities (Bonds)Peoples Republic of China

Securities concepts may differ by industry or by competent authority in China. The Corporation Law and Enterprise Law co-exist and, hence, either may set rules for issuance of securities, depending on the industry, issuer, and type of security.

The official definition of securities is provided in the Securities Law of PRC, which was revised in 2005.

The present law shall be applied to the issuance of and transactions in stocks, corporate bonds, as well as any other securities lawfully recognized by the State Council within the territory of the PRC. However, some bonds do not fall under the Securities Law.In case where there is no such provision in the present law, the provisions of the Corporation Law and other relevant laws and administrative regulations shall be applied.

Hong Kong, China For bonds to be listed on the Hong Kong Stock Exchange or cleared through the Central Moneymarkets Unit (CMU), they must satisfy the criteria as set out in, among others, the Listing Rules and CMU Service Reference Manual (which is accessible to CMU members only), respectively. Also, a definition of securities is laid down in the Securities and Futures Ordinance (SFO) of the Securities and Futures Commission (SFC).

Indonesia The definition of securities is not confined to a single law. Original relevant definitions found in the commercial code left by the Dutch, and remaining in force are the following: Promissory note (PN), cheque, and bill of exchange.

There is no mention of corporate bonds and debt instruments in the Company Law; however, they are often described or covered in the Articles of Association of companies.

Summary of Findings


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ASEAN+3 Bond Market Guide | Volume 1 | Part 1 ASEAN+3 Bond Market Guide | Volume 1 | Part 1ASEAN+3 Bond Market Guide | Volume 1 | Part 1

Jurisdiction Existence of a Clear Definition of Securities (Bonds)The clearest definition of securities can be found in the Capital Market Law No. 8 (1995). Pursuant to the Capital Market Law, securities are classified as PNs, commercial paper (CP), shares, bonds, evidences of indebtedness, participation units of collective investment contracts, futures contracts related to securities, and all derivatives of securities. Today, the distinction of debt instruments can be divided into the capital market and the money market: (1) the capital market covers bonds, (2) the money market covers PN, medium-term notes (MTN), CP, Certificate of Central Bank (SBI, Sertifikat Bank Indonesia); most instruments have been introduced by foreign bank participants in recent years. MTN and CP are synonymous for all intents and purposes; legal treatises exist but there are no statutory definitions of these instruments.

Japan The Companies Act defines corporate bonds.

A uniform legal framework for all types of securities exists.

Distinctions between dematerialization or immobilization and physical securities are clear.

Legal ownership structure of dematerialized or immobilized securities is clearly stipulated.

Republic of Korea The revised Commercial Act (to take effect in 2012) provides a basis for corporate bonds diversity.

This should resolve the discrepancy in the definition of securities between the Commercial Act and the Financial Investment Services and Capital Markets Act (FSCMA).

Malaysia Under section 2(1) of the Capital Markets and Services Act 2007, securities are defined as: (a) debentures, stocks or bonds issued or proposed to be issued by any government; (b) shares in or debentures of, a body corporate or an unincorporated body; or (c) unit trusts or prescribed investments, and includes any right, option or interest in respect thereof, but does not include futures contracts.

Debentures are also stipulated in article 125 of the Companies Act 1965.

Philippines Under section 3 of the Securities Regulation Code (SRC), securities are shares; participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate; contract; or instrument, whether written or electronic in character.

The Philippine Dealing and Exchange (PDEx) Rules for the Fixed Income Securities Market, as amended (PDEX Rules), define securities as fixed-income securities, including government securities.

Singapore Securities are defined in the Securities and Futures Act (SFA) in sections 2(1), 196A, 214, and 239.

Thailand Section 4 of the Securities and Exchange Act B.E. 2535 stipulates the definition of securities.

Viet Nam Pursuant to article 3 of the amended and supplemented Securities Law No. 62/2010/QH12 and article 6 of Securities Law No. 70/2006/QHll, securities mean evidence from an issuing organization certifying the lawful rights and interest of an owner with respect to assets or capital portion. Securities may take the form of certificates, book entries or electronic data, and shall comprise the following types: 1) shares, bonds and investment fund certificates; 2) share purchase rights (rights issue), warrants, call options, put options, future contracts, groups of securities and securities indices; 3) investment capital contribution contracts; and 4) other types of securities stipulated by the Ministry of Finance.


Trades can be executed efficiently in a secure manner; operations and practices in the markets are comparable to other developed bond markets. All of the 10securities markets now have a scripless securities system. Notwithstanding, some still have room for further improvement in maximizing the benefits available from such systems.

Table 1.3 Existence of Scripless Securities System

Jurisdiction Existence of Scripless Securities SystemPeoples Republic of China Yes

Hong Kong, China Yes

Indonesia Yes

Japan Yes

Republic of Korea Yes

Malaysia Yes

Table 1.2 continuation


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Jurisdiction Existence of Scripless Securities SystemPhilippines Yes

Singapore Yes

Thailand Yes

Viet Nam YesSource: ADB Consultants, based on research materials and market visit information.

The introduction of scripless securities led to the issuance, keeping and transfer of bonds on a book-entry basis in these markets. This reduces operational risk significantly. In this context, it is noteworthy that the Peoples Republic of China (China) and Japan have implemented a registered notes only policy. In addition, from the viewpoint of exchangeability of scripless bonds to physical bonds, it is observed that scripless bonds can no longer be exchanged to physical bonds in China and Japan. It seems that these two countries are pursuing the same policy direction.

Table 1.4 Forms and Status of Bonds across Economies

JurisdictionForm of the Bonds(Settlement Method)

Status (Bearer/Registered)

Peoples Republic of China

Book-entry Registered.(Bonds are generally getting scripless in a central register and registered in an account holders or bondholders name; some older bearer bonds may still exist. As for China Central Depository and Clearing (CCDC)-settled bonds in the China Inter-bank Bond Market, CDCC centralized the management of the bearer bond library in 1998, and 2001 saw the end of bearer bonds in this market.)

Hong Kong, China Book-entryform(dematerialized)forExchangeFundpaper,and Globalnoteformforcorporatebonds

Bearer/Registered

Indonesia Bookentry(from2000) Physicalcertificatestillexist(issuedpriorto2000)

Bearer/Registered

Japan Book-entry(Completelydematerialized,exceptforafewnon-centralsecurities depository [CSD] settled private placed notes)

Registered

Republic of Korea Book-entry Dematerialized securities: Securities which are not issued in paper

form and where ownership is held and is transferable by book entry in a ledger maintained by a CSD or account management institution.

Immobilized securities: Physical securities and non-certificated securities held and transferred by book entry in a ledger maintained by a CSD or account management institution.

Bearer/Registered

Malaysia Listedbonds:BookentryatBursaMalaysiaDepository Unlisteddebtsecurities:BookentryatBankNegaraMalaysia(BNM)

Basically, registered.Cagamas papers are unsecured bearer bonds issued by Cagamas, the national mortgage corporation established in 1986 to promote the secondary mortgage market in Malaysia.

Philippines GovernmentSecurities:BookentryintheRegistryofScriplessSecurities (RoSS) or in the Philippine Depository and Trust Corporation (PDTC)

ScriplessCorporateBonds:BookentryinPDTC PhysicalCorporateBonds:Endorsementandactualdeliveryof

physical certificates with duly notarized Deed of Assignment

Bearer/Registered. Dematerialization/immobilization versus physical securities: both equities and debt securities are legally recognized in physical and dematerialized forms. In the organized market for debt securities, however, debt securities must be in dematerialized form and cannot be listed if the same are still in physical form, even if immobilized.



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ASEAN+3 Bond Market Guide | Volume 1 | Part 1 ASEAN+3 Bond Market Guide | Volume 1 | Part 1

JurisdictionForm of the Bonds(Settlement Method)

Status (Bearer/Registered)

Singapore Bookentryforgovernmentbonds TheCentralDepositoryPte.(CDP)holdsuniversalcertificatesfor

physical bonds

Bearer/Registered.A foreign issuer is normally required to appoint a paying agent in Singapore while debt securities are quoted on the Exchange and upon the issue of debt securities in definitive form. The Exchange may accept other arrangements to enable definitive certificate holders of the bearer debt securities in Singapore to be paid promptly.

Thailand Bookentry Promissorynotes(PNs)andcommercialpapersarephysical,bearer

instruments

In accordance with sections 225 to 228 of the Securities and Exchange Act (SEA), immobilization in the Thailand Securities Depository (TSD) system has been arranged through the transfer of securities by book entry.

The transfer of securities by book entry shall be deemed to be the delivery of securities, which constitutes the legal basis for the validity of securities transfer under section 199 and section 51 of the SEA. Moreover, securities transferred into the name of the TSD shall be presumed to be securities held by the TSD on behalf of its members or for any customers of its members.

However, there is no explicit legislation for the dematerialization of securities.

Bearer/Registered.PNs are physical, bearer instruments issued by banks and other financial institutions.

Viet Nam Bookentry Municipalbondsarephysical,bearerinstruments. Corporatebondsandstate-ownedenterprises(SOE)bondscanbe

held in bearer or registered form. ListedcorporatebondshavetobedepositedattheVietnam

Securities Depository to be eligible for trading on the Exchanges.

Bearer/Registered


Table 1.5 Exchangeability of Scripless Bonds to Physical Bonds

Jurisdiction Exchangeability of Scripless Bonds to Physical BondsPeoples Republic of China No

Hong Kong, China Yes

Indonesia Yes

Japan No

Republic of Korea Yes

Malaysia Yes

Philippines Yes

Singapore Yes

Thailand Yes

Viet Nam YesSource: ADB Consultants, based on research materials and market visit information.

A bondholder meeting concept is one of the typical indicators of the maturity of a bond market. Ten out of Eleven jurisdictions already feature the bondholder-meeting concept as a basic infrastructure of their respective bond markets.


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Table 1.6 Existence of a Concept of Bondholder Meeting

Jurisdiction Existence of a Concept of Bondholder Meeting Peoples Republic of China YesHong Kong, China YesIndonesia YesJa

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