Statement by Financial Markets Committee: Roundtable Discussion on Bond Market DevelopmentRef No : 03/17/06 14 Mar 2017 Embargo : For immediate release
The Financial Markets Committee held a Roundtable Discussion on the Domestic Bond Market Development on 10 March 2017 at Sasana Kijang. The purpose was to assess the market developments with an update and discuss initiatives to further develop the bond market. The session was chaired by Adnan Zaylani Mohamad Zahid, Assistant Governor of Bank Negara Malaysia and Chairman of the Financial Markets Committee.
About 30 participants comprising domestic and institutional fund managers, sukuk and bond issuers, private and public asset managers, rating agency and Treasury Heads from financial institutions discussed the prospects and various issues confronting the development of the domestic bond market. The key highlights of the Roundtable discussion were on bond market liquidity, participation of non-resident (NR) holdings in Malaysian bonds, introduction of new initiatives and enhancing transparency and surveillance.
Malaysian bond market liquidity
The Malaysian bond market continues to grow with the current outstanding value of RM1.2 trillion or 90 percent of GDP and an average annual growth rate of 10.5 percent for the past ten years. In 2017, a net bond issuance of RM80 billion is expected. The size of Malaysia’s bond market relative to GDP remains the largest in Southeast Asia and the third largest in Asia. There is also a diverse range of investors in the Malaysian bond market comprising pension funds, asset management companies, banks, insurance companies and NR investors.
Participants at the Roundtable remained positive on the domestic bond market as it remained resilient despite experiencing various episodes of volatility in the regional and global financial markets in recent periods. With the presence of domestic investors and active market making initiatives by a number of principal dealers supported by the Financial Markets Association Malaysia, the secondary market liquidity has improved. The spreads between the buying and selling quotes for bonds are now relatively narrower at 20 to 50 sen compared to the peak of RM2 during the low liquidity period post US elections.
Non-resident holdings in bond market gradually declining
The participants of the Roundtable discussed issues relating to the readjustment of portfolios by NR fund managers pursuant to the recent US presidential election and the implementation of non-deliverable forward (NDF) measures by BNM
In 2016, NR holdings peaked at 34.7 percent and have been declining (post the US election and post NDF measures by the Bank) to 28.7 percent as at end February 2017. Participants of the Roundtable noted that the sell-down was largely from shorter term papers which are mainly attributed to unwinding of NDF positions by NR financial institution investors. NR holdings of less than three years maturity reduced by RM15.2 billion from November 2016 to-date, comprising 70 per cent of the reduction in NR holdings of government bonds. BNM shared that further granular data showed that, of these short term papers, the bulk of the reduction in NR holdings was in less than one-year maturities. This type of short-term flows has been destabilizing particularly when it reacts to global and regional developments. Nevertheless, the participants of the Roundtable are of the view that the market is able to withstand and absorb the changes in the short term NR holdings. This was evidenced by well supported Government securities auctions which recorded strong average bid-to-cover ratio of 2.5 times in 2017, which was above the 2-year average of 2.3 times. Secondary bond market yields have also recovered about 43 percent from its peak in November 2016.
The Roundtable also discussed whether such investors or flows would return to the Malaysia’s bond market. Given that the bulk of these fund flows were driven by short-term arbitrage that capitalized on the NDF market, a recurrence would be unlikely. In the future, the level of participation of NR investors could thus settle at a lower but more stable level.
Corporate bond market remained conducive
The Roundtable also discussed the prospects of corporate bond issuances in Malaysia. Corporate issuers had stayed away from the bond market towards the end of last year due to the uncertainty surrounding the overall financial market. Corporate bond yields have since stabilised. In the period Jan-Mar 2017, the corporate bond market was more conducive for issuers with RM8 billion raised and a number of corporate issuers are in the pipeline to access the market in 2017. The Roundtable also discussed the need to develop the Credit Default Swap (CDS) and Interest Rate Swap (IRS) market and alternative price reference mechanisms to facilitate both issuers and investors in the price discovery process. Continued participation and commitment by lead managers after the conclusion of issuances will also add vibrancy to the secondary corporate bond market. The Roundtable also deliberated on issues surrounding demand for unrated and lower rated bonds. An idea put forward was for the need of special purpose funds that invest in this space.
Enhance breadth of the market to promote liquidity
The Roundtable also examined the use of repos as an alternative liquidity management tool and funding instrument for financial institutions. The annual trading volume has been growing since Bank Negara Malaysia liberalised short-selling and reverse repo operations in 2015. The trading volume of repos averaged RM195 billion per annum since 2012. The Roundtable highlighted the need to review existing regulatory frameworks to allow more diverse participants in the repo market.
The Roundtable also deliberated on improving market liquidity by introducing more hedging instruments. This included further expansion of the short selling framework as well as increasing participation in the repo, bond swap and Interest Rate Swap (IRS) market. The further development of onshore hedging will complement the liquidity in the secondary market, particularly on the longer end of the yield curve.
The participants also discussed the development of bond investment products for retail investors and noted the importance of educating retail investors on the basics of investing in bonds.
Enhanced surveillance mechanism to facilitate better risk management
The discussion also touched on the need for an enhanced surveillance mechanism to enable more effective macro and micro surveillance of financial markets. One of the key initiatives is to have financial institutions and investors maintain segregated accounts for their investments which will allow bond transactions and portfolio holdings to be monitored on real time basis. This also would allow more detailed analysis and release of macro or aggregate data on important investment trends to the market. The participants acknowledged and welcomed the efforts by regulators to provide greater transparency in particular with regard to bond market activities.
Engagement with Global Index providers
The Roundtable participants also noted the importance of engaging global index providers and providing them with up-to-date and accurate information on the domestic bond market to enhance their understanding of the situation. The participants will continue efforts to engage with the index providers as well as NR investors.
The participants found the Roundtable beneficial as well as a positive experience and supported plans to organise similar discussions in the near future.
“Proactive engagement with stakeholders of the bond market will definitely contribute positively towards domestic bond market development. Issuers’ concern on pricing reference was discussed and efforts towards enhancing the available pricing reference to promote a more vigorous and robust price discovery process were also deliberated. We look forward to collaborating with market players and regulators to develop the credit default swap (CDS) and alternative data references to promote continuous price discovery whilst enhancing liquidity in the secondary market,” said Datuk Chung Chee Leong, Chief Executive Officer of Cagamas Bhd.
"The Roundtable was a good platform where market participant views were heeded constructively to further develop the bond market. It has brought regulators, financial institutions and investors to come together to articulate their views and broaden the spectrum of issues discussed," said Michael Chang, Chief Investment Officer of RHB Asset Management.
“The next phase of development of the onshore bond market requires support and commitment from issuers, investors and market makers to improve liquidity, add breadth to financial market and support issuances for government and corporate bonds. The focus should be on diversifying the investor base, having a stable composition of investors and increasing transparency that will enhance market stability” said Adnan Zaylani Mohamad Zahid, Assistant Governor, Bank Negara Malaysia.
Attachment: Presentation Slides on the Roundtable Discussion on Bond Market Development
Financial Markets Committee
14 March 2017
About Financial Markets Committee (FMC)
The FMC is a committee established by BNM in May 2016 and comprises representatives from Bank Negara Malaysia, financial institutions, corporations, financial service providers and other institutions which have prominent role or participation in the financial markets. The Chair of the FMC is BNM Assistant Governor Adnan Zaylani.
The objective of FMC is to broaden the industry engagement with a focus in reviewing and formulating comprehensive strategies for the wholesale financial markets to meet the diverse and complex demands of a more developed and internationally integrated economy. For more information on the FMC, please refer to the following link: http://www.bnm.gov.my/index.php?ch=en_fxmm_mo&pg=en_fxmm_fmc&ac=451&lang=en
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