Implementation Progress of the New Road Map+ for the Asian Bond Markets Initiative and Proposed Medium-Term Activities

Implementation Progress of the New Road Map+ for the Asian Bond Markets Initiative and Proposed Medium-Term Activities I. Background 1. The Asian Bond Markets Initiative (ABMI) was launched in December 2002 by ASEAN+3 to foster the development of local currency bond markets as an alternative source of funding to short-term foreign currency loans and to promote regional financial cooperation and integration. 1 These objectives aim to help reduce the region s vulnerability to the sudden reversal of capital inflows, thereby strengthening the region s financial resilience. In 2008, to demonstrate its renewed commitment, ASEAN+3 developed the medium-term Road Map for ABMI. The Road Map, as agreed and endorsed by ASEAN+3, would be reviewed every 3 years and its scope and activities, designed to achieve the objectives of ABMI, would be modified to reflect the external environment and market developments in the region as deemed appropriate. 2. The 2008 Road Map focused on four activity areas: (1) promote the issuance (supply) of local-currency-denominated bonds, (2) facilitate the demand for local-currency-denominated bonds, (3) strengthen the regulatory framework, and (4) improve bond market infrastructure. Activities in each of these four areas are being implemented by four separate Task Forces. In addition, a Technical Assistance and Coordination Team (TACT) was established to facilitate technical assistance (TA) to selected ASEAN member countries in support of their individual initiatives to promote bond market development. 3. In 2012, policy makers underwent a review of the 2008 Road Map and agreed to implement a new set of policy measures and activities under the New ABMI Road Map+ (Appendix 1). The New Road Map+ was designed to be implemented from 2012 onward to advance the development of domestic bond markets and to facilitate regional bond market integration. It continues to focus on the four activity areas and includes nine priorities that range from launching a Credit Guarantee and Investment Facility (CGIF) to raising financial awareness and improving financial literacy in individual member countries. 4. At the request of the Co-Chairs of ABMI the People s Republic of China (PRC) and the Lao People s Democratic Republic (Lao PDR) the Asian Development Bank (ADB), as the Secretariat of ABMI, is assessing the implementation of the New Road Map+ over the past 4 years and, in consultation with ASEAN+3, is identifying priorities for ASEAN+3 to consider supporting over the medium-term. 5. Section I of this note provides background on ABMI. Section II discusses the implementation progress made under the New ABMI Road Map+. Section III assesses the downside risks of current financial market developments and the downside risks to local currency bond markets emanating from the external environment. Lastly, Section IV reiterates the objectives of ABMI and proposes activities for the Road Map over the medium-term, as well as an implementation approach and related arrangements. 1 ASEAN+3 refers to the Association of Southeast Asian Nations plus the People s Republic of China, Japan, and the Republic of Korea. 1

6. The note was prepared by A. Noy Siackhachanh, Senior Advisor, Sustainable Development and Climate Change Department (SDCC), ADB, with inputs and guidance from the Co-Chairs of ABMI and representatives of ASEAN+3 member countries. The note also benefits from the inputs of the SDCC Financial Cooperation and Integration Team. The views and opinions expressed in this note do not necessarily reflect those of ADB. II. The New Road Map+ and Implementation Progress and Arrangement A. The New Road Map+ 7. The priorities of the New Road Map+ are to (i) advance ongoing activities supported under ABMI to achieve tangible outcomes; (ii) include new activities to strengthen momentum in further developing local currency bond markets and facilitating regional financial integration; and (iii) address relevant issues to meet the changing global financial environment, including measures to mitigate the impact of capital flows on the region. 8. The areas of focus under the Road Map are subject to periodic reviews once every 3 years to assess and modify the agenda and activities in line with market developments and policy makers priorities. Given the different pace of progress for each of the four activity areas, the individual Task Forces are encouraged to set their own review schedules. 9. To promote tangible outcomes under Task Force 1, ASEAN+3 agreed to launch a CGIF guarantee program to lend impetus to its operations. Also under Task Force 1, concrete infrastructure financing schemes that tap into local currency bond markets are to be carried out. The Lao PDR s issuance of Thai baht-denominated bonds is to be promoted as a good example of cross-border infrastructure bonds. Under Task Force 2, ASEAN+3 is to continue fostering an enabling environment for institutional investors and to disseminate findings from ABMI-related work to investors. Support is to be provided to establish an information network among institutional investors through seminars and conferences. 10. Government bond markets are to be further developed under Task Force 2. As wellfunctioning government bond markets are crucial for the overall development of local currency bond markets, member countries are invited to share their experiences and lessons learned from developing their government bond markets. Measures are also to be undertaken to develop repurchase (repo) markets and securities borrowing and lending. 11. Under Task Force 3, the ongoing activities of the ASEAN+3 Bond Market Forum (ABMF), including the introduction of a common bond issuance program to facilitate the standardization of regulations, will continue. The securitization of loans to small and medium-sized enterprises (SMEs) and to consumers is to be advanced to improve access to finance. Under Task Force 4, the establishment of the regional settlement intermediary (RSI) is to be facilitated to reduce bond transaction costs and risks by enabling the cross-border settlement of bonds in major Asian currencies. An RSI feasibility study will be completed by the end of 2012 under Task Force 4 and thereafter will be brought for discussion to the next level. 12. Under Task Force 4, the foundation for a regional credit rating system is to be strengthened to promote investment in the region s local currency bonds by building the 2

capacity and credibility of domestic credit rating agencies and by exploring the conditions required for the establishment of an independent regional credit rating agency. To meet the challenges of a changing global financial market environment, Task Force 4 is to undertake measures to raise financial awareness. Specifically, attention should be given to raising financial awareness among supervisory authorities and investors by hosting educational programs and seminars with the support of ADB and the ASEAN Secretariat. Lastly, under TACT, activities are to be conducted to support individual ASEAN member countries to develop their domestic bond markets. 13. The above activities are considered to be the top priorities of the New Road Map+. Three other activities to be supported under ABMI, including the development of derivatives swap markets under Task Force 2 and the enhancement of cross-border bond transactions and the improvement of bankruptcy procedures related to bond transactions under Task Force 3, are considered secondary priorities. B. Implementation Progress of the Ongoing Road Map 14. Overall, significant progress has been made in the implementation of the ongoing Road Map by ASEAN+3 member countries. Nearly all nine priorities included in the Road Map have been implemented. Issues relevant to market development and the demand for long-term financing for infrastructure development have also been included for policy makers consideration for further studies. Implementation progress under each Task Force is summarized below: Task Force 1: Promoting the Issuance (Supply) of Local-Currency-Denominated Bonds 1. Launch CGIF guarantee operations: CGIF launched its first operation in 2013. To date, it has issued 10 credit guarantees ($870 million) for bonds issued by nine companies in six ASEAN member countries and its board approved two additional guarantees amounting to $164 million. Its leverage ratio was raised from 1:1 to 1:2.5, with its guarantee capacity rising from $700 million to $1.75 billion. Its guarantee capacity will likely reach its limit in 2017. To prepare for this, an operational review was conducted in mid-2014 to help the contributors form a consensus on CGIF s medium-term direction and capacity. This review, submitted to a meeting of contributors in May 2015, highlighted the need for contributors to reach a decision on CGIF capacity at their next meeting in May 2016. 2. Develop infrastructure-financing schemes. A regional TA funded under the Japan Special Fund and the Government of Luxembourg s Financial Sector Development Partnership Fund was provided to the Lao PDR in 2008 to explore the possibility of issuing debt instruments in Thai baht backed by revenues from the sale of electricity to Thailand. 2 The proceeds of the bond issuance were used for domestic infrastructure development. Based on the lessons learned from this exercise, authorities in Lao PDR issued the first batch of cross-border sovereign bonds in the Thai debt market in 2013. 2 ADB. 2008. Technical Assistance for Bond Financing for Infrastructure Projects in the ASEAN+3 Region. Manila. 3

This was made possible by the Thai authorities initiative to revise regulations to allow sovereign issuers without a rating to issue bonds in the Thai debt market. By the end of 2015, the Government of Lao PDR had issued four batches of bonds. The last batch was a THB12 billion triple-tranche issue and was the first issue to be rated. 3. To further develop infrastructure-financing schemes, the Co-Chairs of Task Force 1 sponsored a study on expanding the use of local currency bonds for infrastructure finance. 3 The study was completed in 2015 and a policy discussion for high-level policy makers from all member countries was held on 28 February to disseminate the policy recommendations. The study is available on www.asianbondsonline.adb.org (ABO). 4. Develop derivatives and swap markets. While these activities were not undertaken under Task Force 1, a study was conducted to examine cross-currency swaps under Task Force 2. 4 The study is available on ABO. Task Force 2: Facilitating Demand for Local-Currency-Denominated Bonds 1. Further develop government bond and repo markets, and securities borrowing and lending. To advance these objectives, the Co-Chairs of Task Force 2 organized a government bond workshop at the sideline of the ABMI Task Force meeting in Seoul in 2012 to bring together policy makers from ASEAN+3 to share and disseminate their lessons learned on developing government bond markets and to establish a regional network of government debt managers. However, work has not yet been undertaken under ABMI to develop repo markets and securities borrowing and lending. 2. Foster an enabling environment for institutional investors and disseminate findings under ABMI to investors. The Asian Bond Markets Summit has been held annually in Singapore for the past 11 years to bring together leading institutional investors, issuers, and other key participants to discuss the latest issues, challenges, and opportunities in Asia s financial markets. The last Asian Bond Markets Summit was held in Beijing in January 2016. The summit was organized and sponsored by Asset Magazine. An ADB representative participated and presented on developments in the region s domestic bond markets to promote investment in local currency bonds. The Government of Japan has funded the operations of ABO to provide information on local currency bond market developments since 2005. Activities include, among others, the publication of bond market guides for 11 ASEAN+3 member countries and the issuance of policy recommendations on measures to broaden the investor base. Recent studies, such as Local Currency Bonds and Infrastructure Finance in ASEAN+3 and Facilitating Foreign Exchange Risk Management for Bond Investment in ASEAN+3, are 3 ADB. 2015. Local Currency Bonds and Infrastructure Finance in ASEAN+3. Manila. Available at http://www.adb.org/publications/local-currency-bonds-and-infrastructure-finance-asean3 4 ADB. 2015. Facilitating Foreign Exchange Risk Management for Bond Investments in ASEAN+3. Manila. Available at http://www.adb.org/publications/facilitating-foreign-exchange-risk-management-bond-investments-asean3 4

also published on the website as part of its information dissemination. The website has provided market participants, think tanks, and the public at large with data and market analysis, as well as a guide on how to purchase local currency bonds. In 2015, the website had over 800,000 page views. To foster an enabling environment for institutional investors, the Co-Chairs of Task Force 2 requested ADB to undertake a study and develop a new investment tool to facilitate member countries efforts to harness capital flows into the region. The new investment tools which seek to invest foreign exchange reserves in government localcurrency-denominated bonds and to promote reforms to further develop financial markets were formulated and proposed for member countries consideration in 2015. 3. Enhance cross-border transactions. As indicated above, to enhance cross-border bond transactions, a study was commissioned to examine foreign exchange and foreign exchange hedging markets in ASEAN+3 as they relate to cross-border investments in local-currency-denominated bonds. The study provides recommendations for policy makers consideration for market development and effective foreign exchange risk management. Task Force 3: Strengthening the Regulatory Framework 1. Enhance ABMF Activities (Common Bond Issuance Program). ABMF consists of two forums: Sub-Forum 1 (SF1) and Sub-Forum 2 (SF2). SF1 conducted a study to provide policy recommendations for the development of the ASEAN+3 Multi-Currency Bond Issuance Framework (AMBIF), originally known as the Common Bond Issuance Framework, and pilot issuance under AMBIF. SF2 focuses on harmonization and standardization of transaction flows and message items, and the implementation of international standards for financial services. Under SF1, ABMF developed the AMBIF to allow bond issuance in any participating member country with standardized documentation and well-defined implementation procedures. 5 Under the AMBIF, issuance approval processes are likely to be expedited and issuance costs are expected to be reduced through standardized documentation. To date, implementation guidelines have been prepared for six markets: Hong Kong, China; Japan; Malaysia; the Philippines; Singapore; and Thailand. The first AMBIF pilot bond was issued on 28 September 2015 in Thailand by Mizuho Bank for a total of THB3 billion with a 3-year maturity and coupon rate of 2.33%. Since 2012, bond market guides for 11 markets have been published on ABO as an additional means of providing information on individual bond markets across the region and enhancing ABMI activities. 5 ADB. 2015. Implementation of the ASEAN+3 Multi-Currency Bond Issuance Framework: ASEAN+3 Bond Market Forum Sub-Forum 1 Phase 3 Report. Manila. Available at http://www.adb.org/publications/implementation-ambifasean3-bond-market-forum-sf1-p3 5

2. Harmonization and Standardization of Transaction Flows and Messages. Based on a survey of the region s transaction flows and settlement infrastructures under SF2, ABMF recommends that ASEAN+3 (i) enhance regional straight-through-processing of bond transactions through standardization, (ii) develop a delivery-versus-payment reference model, (iii) adopt globally established international standards, and (iv) develop a standardization road map. Most markets are expected to adopt the international standards by 2020. Studies completed under SF2 include: (i) Information on Transaction Flows and Settlement Infrastructure: ASEAN+3 Bond Market Forum Sub-Forum 2, 6 and (ii) Harmonization and Standardization of Bond Market Infrastructures in ASEAN+3: ASEAN+3 Bond Market Forum Sub-Forum 2 Phase 3 Report. 7 3. Enhance financial access for consumers and SMEs. Several securitization projects, including the securitization of auto loans based on Islamic principles and the securitization of consumer loans, were encouraged by the Co-Chairs. Securitization deals were completed in Malaysia, Indonesia, and Thailand in 2013. 4. Improve bankruptcy procedures related to bond transactions. This has yet to be addressed under ABMI but will be examined over the medium-term. Task Force 4: Improving Related Infrastructure for Bond Markets 1. Facilitate the establishment of the RSI. ASEAN+3 established an ASEAN+3 Cross- Border Settlement Infrastructure Forum (CSIF) in 2013 for policy makers and operators of cash and bond settlement to prepare a road map and an implementation plan for an RSI in the medium- and long-term. CSIF has agreed to choose Central Securities Depository Real Time Gross Settlement (CSD RTGS) linkages as the preferred RSI model. 8 2. Strengthen the foundation for a regional credit rating system. ASEAN+3 Research Group undertook three studies for the strengthening of the foundation for a regional credit rating system in 2012. Based on the outcome of these studies, two options were proposed for ASEAN+3 consideration: (i) establishing a regional credit rating agency, and (ii) improving comparability among credit rating agencies in the region. Members agreed that the first option could be considered in the long-run but not in the immediate future. 6 ADB. 2013. Information on Transaction Flows and Settlement Infrastructure. ASEAN+3 Bond Market Forum Sub- Forum 2. Manila. Available at http://www.adb.org/publications/asean3-information-transaction-flows-andsettlement-infrastructures 7 ADB. 2015. Harmonization and Standardization of Bond Market Infrastructures in ASEAN+3: ASEAN+3 Bond Market Forum Sub-Forum 2 Phase 3 Report. Manila. Available at http://www.adb.org/publications/harmonizationand-standardization-bond-market-infrastructures-asean3 8 ADB. 2015. Progress Report on Establishing a Regional Settlement Intermediary and Next Steps Phase 1 Report. Manila. Available at http://www.adb.org/publications/progress-report-establishing-regional-settlement-intermediaryand-next-steps 6

3. Raise financial awareness. A few member countries such as Thailand had undertaken initiatives to raise financial awareness prior to 2012. However, a full-scale discussion has yet to take place at the regional level. Technical Assistance Coordinating Team 15. TACT continues to assist interested member countries with technical assistance in developing their local currency bond markets. To date, a number of TAs has been completed to provide support for bond market development in the following member countries: six TAs for Cambodia, six for Indonesia, five for the Lao PDR, two for Myanmar, and four for the Philippines. A new TA is currently being implemented in Indonesia and Vietnam. C. Current Implementation Arrangement 16. Activities supported under Task Force 1 are co-chaired by the PRC and Thailand, under Task Force 2 by Japan and Singapore, under Task Force 3 by Japan and Malaysia, and under Task Force 4 by the Republic of Korea and the Philippines. Activities supported under TACT are co-chaired by Brunei Darussalam, the Lao PDR, and Viet Nam (Appendix 1). While the Co- Chairs of the individual Task Forces have remained unchanged over the past 4 years, the Co- Chairs for ABMI rotate annually among member countries. This arrangement makes it possible for member countries to share the responsibilities of hosting meetings as the Co-Chairs of ABMI while also keeping the Co-Chairs of individual Task Forces in place to ensure that the work program under each Task Force can be carried forward without changes. 17. There has been no overlap of activities among Task Forces and the number and complexity of activities under each Task Force are well balanced. Nevertheless, activities under Task Force 1 and Task Force 2 tend to complement each other and have benefited from close coordination between the Co-Chairs. III. Developments in Financial Markets and Downside Risks 18. In June 2013, local currency debt markets came under heavy selling pressure following the United States (US) Federal Reserve s announcement of a tapering plan for its highly accommodative monetary policy. The benchmark 10-year US Treasury yield rose, equity markets in the region fell, and the share of foreign ownership of local currency bonds receded. Asian currencies depreciated as international investors shifted their capital from the region back to the advanced economies, where the economies appeared to be showing signs of recovery. In mid-september 2013, however, these trends were partly reversed when the Federal Reserve announced that it would keep its accommodative monetary policy in place in light of expected lower growth in the US. In August 2015, most financial markets in emerging East Asia were again under selling pressure as the region s growth prospect has weakened (Figure 1, Figure 2, and Figure 3). 7

Figure 1: Weekly Exchange Rates (LCY/USD), 4 January 2013 to 11 March 2016 Source: Bloomberg. 8

Figure 2: 10-Year Government Bond Yield, 4 January 2013 to 11 March 2016 Source: Bloomberg. 9

Figure 3: Weekly Credit Default Swap Spread (senior 5-Year), 4 January 2013 to 11 March 2016 Source: Bloomberg. 10

19. The prospect of higher interest rates in the US, lower global liquidity, and lower growth in emerging East Asia resulted in net outflows of capital and a deterioration of trading and liquidity conditions. There were concerns that liquidity was tightening because banks were cutting back on their bond inventories. Limited liquidity in the region s bond markets could mean there are few buyers at a time when investors are looking to sell their bonds, which could make the bond market look riskier and reinforce outflows. Slowing economic growth in emerging East Asia, despite declining oil prices, could also lead to weaker fiscal conditions for governments and shrinking corporate profits. These factors could lead to ratings downgrades for some of the region s bonds. Increased risk perception could also push up yields and make it harder for corporates to raise funds through the bond market. 9 20. In December 2015, the Federal Reserve raised the interest rate in what was viewed as the start of its gradual tightening cycle. This, however, did not create significant market volatility as the interest rate lift-off was in line with market expectation and, as such, had been priced in. Moreover, the Federal Reserve has reassured investors that future interest rate hikes would be gradual and contingent on economic growth and financial market stability. Nevertheless, since the beginning of 2016, volatility has again increased in global financial markets. The Standard & Poor s 500 index fell as much as 11% in January 2016 before recovering to end the month down 5%, while crude oil prices had a net decline in the first month of the year over concerns of weaker-than-expected global economic growth and excess supply of commodities. 21. At its Federal Open Market Committee meeting on 27 January 2016, the Federal Reserve kept interest rates unchanged and indicated that it is closely monitoring global economic and financial developments in determining the future course of its interest rate policy. As confirmed in a recent study by the International Monetary Fund, monetary policies in advanced economies, especially the US, are key determinants of exchange rate and bond market volatility. In anticipation of eventual tightening by the Federal Reserve once the economic recovery in the US is on more solid ground, it is essential that ASEAN+3 member countries step up efforts to accelerate the development and integration of local currency bond markets in order to reduce the region s sensitivity to external developments. More developed and integrated local currency bond markets will provide a more reliable alternative source of funding for the investment of the public and private sectors necessary to sustain growth amid rising funding costs for foreign-currency-denominated debt. IV. Proposed Implementation Approach and Activities for the Road Map over the Medium-Term A. The Objectives of the Medium-Term Road Map 22. The objectives of the Road Map over the medium-term are to continue fostering the development of local currency bond markets to promote financial stability and meet the longterm investment needs of the region by expanding the use of local currency bonds to address three key areas of financing gaps in the region: SMEs, housing, and infrastructure. Activities 9 ADB. 2015. Asian Bond Monitor November 2015. Manila. Available at https://asianbondsonline.adb.org/documents/abm_nov_2015.pdf 11

under the Road Map will also advance regional market integration by building on achievements made to date. B. Proposed Activities over the Medium-Term 23. Activities proposed for the ABMI Road Map over the medium-term are categorized into two groups. The first group includes advancing ongoing activities for the achievement of more concrete results by building on achievements made to date. The second group of activities is those that are newly introduced to address existing challenges in local currency bond markets in the region. Similar to the implementation approach of the New ABMI Road Map+, where possible, activities proposed for the medium-term will be flexible and updated from time to time to take into account financial market developments within and outside of the region. Given the important role of the private sector in developing bond markets, the private sector s participation in the implementation of the ongoing Road Map will be encouraged. The following activities are proposed for the four Task Forces over the medium-term: Task Force 1: Promoting Issuance of Local-Currency-Denominated Bonds 1. Explore various options to expand CGIF guarantee capacity, and broaden its operations to meet the financing needs of the region. In light of CGIF s guarantee capacity rapidly approaching its limit, the meeting of contributors is considering options such as the CGIF entering into joint guarantees with other entities, collaborating with the private sector, bringing in risk-sharing partners for guaranteeing infrastructure project bonds, providing a capital increase for CGIF, raising its leverage ratio, or other effective solutions to make it possible for CGIF to expand its guarantee operations in the future. 2. Should its capacity be increased as expected, CGIF could consider providing credit enhancement for (i) project and green bonds; (ii) bonds issued by enterprises engaging in supply chain systems; and (iii) securitized loans to SMEs and households. Investment in supply chain systems is crucial for cross-border business linkages in support of regional economic integration. On the other hand, credit enhancement for securitized loans to SMEs and households would make it possible for them to tap bond markets to meet their financing needs. 3. Green bonds for infrastructure development. Green bonds are fixed-income financial instruments for raising long-term funds through debt markets. The difference between green bonds from regular bonds is that the issuers state publicly that they are issuing bonds to finance green projects, assets or business activities with environmental benefits such as renewable energy, low carbon transport or forestry projects. 10 Green infrastructure bonds, on the other hand, are rated assetbacked bonds issued to refinance built and operating low-carbon infrastructure, such 10 KPMG. 2015. Sustainable Insight: Gearing up for Green Bonds. Available at https://www.kpmg.com/global/en/issuesandinsights/articlespublications/sustainable-insight/documents/gearingup-for-green-bonds-v2.pdf 12

as offshore wind turbines and grid connections. As a continuation of the work done on expanding the use of local currency bonds for infrastructure finance or infrastructure financing mechanism, green local currency denominated bonds will be explored for member countries and infrastructure project sponsors in the region to raise long-term funds for green infrastructure projects. Task Force 2: Facilitating the Demand for Local-Currency-Denominated Bonds 1. Continue support for the operation of ABO and participation in the annual Asian Bond Markets Summit. To further promote demand for local currency bonds over the medium-term, ASEAN+3 will continue to support ABO in providing market information and analysis, as studies on new activities to be promoted by ASEAN+3 under the medium-term ABMI Road Map. At the request of member countries, ABO will be further improved to make the website more investor friendly providing information on bond transactions including that on bond yields and bond pricing. For the annual Asian Bond Markets Summit, arrangements will be made for representatives of ASEAN+3 member countries to participate, together with ADB representatives, in the Annual Asian Bond Markets Summit to disseminate information on developments in domestic debt markets to market participants and potential investors to promote the demand for local currency bonds. 2. Continue reforms to strengthen financial market resilience and facilitate investment in local currency bonds. To continue with efforts to strengthen financial market resilience by adopting reforms proposed under Option B of New Investment Tools, member countries at an advanced stage of market development are encouraged to provide a list of reforms they are planning to undertake over the medium-term and indicate whether they would like to avail of assistance with these reforms. For Brunei Darussalam, Cambodia, the Lao PDR, Myanmar, and Viet Nam, subject to the availability of resources and needs of member countries, ADB could assist with the coordination with TACT to ensure that the needed reforms are addressed by TACT taking into account TACT s ongoing support for reforms in the member countries. 3. Continue to develop government bond markets. To ensure member countries could share lessons learned in developing government bond markets, a regional network of government debt managers which was established in 2012 will be further updated on a regular basis and provided to member countries on request. Meetings could be organized from time to time for debt managers from member countries to discuss and exchange information on issues and challenges in developing government bond markets. 4. Promote covered bonds to meet housing needs and explore options to develop municipal finance for infrastructure development in selected member countries. To meet the growing demand for long-term funding for housing, a study will be conducted to expand the use local currency bonds and covered bonds for housing finance for member countries consideration. In addition, a study will be undertaken to explore further options to finance infrastructure projects and disseminate measures to 13

develop municipal finance for urban infrastructure projects in member countries with no regulatory restriction. Task Force 3: Strengthening the Regulatory Framework 1. Advance achievements made under AMBIF. ASEAN+3 will advance achievements made under AMBIF by promoting greater bond issuance and increasing the number of participating member countries to as many as possible. Efforts will be undertaken to increase a variety of bonds and to promote inter-asean bond issuance under AMBIF. 2. Advance cross-border bond transactions and promote regional bond market integration. Identify through transactions, regulatory and tax hurdles, and challenges relating to collateral in the repo markets and securities lending and borrowing for policy makers consideration. 3. Promote adoption of international standards, including ISO20022, and standardization of regulatory and tax procedures for cross-border bond transactions. This activity has been initiated and will be carried forward over the medium-term. In addition, a study will be carried out to assess the feasibility of establishing an information platform and identify key factors that impede the success of an attempt to establish electronic trading platform by member countries. Task Force 4: Improving Related Infrastructure for Bond Markets 1. Further improve market infrastructure for cross-border transactions. Under CSIF, central banks and central securities depositories in ASEAN+3 will continue to work toward implementing CSD-RTGS linkages over the medium-term. These linkages have been successfully tested by a desktop study conducted by the Bank of Japan and the Hong Kong Monetary Authority. 2. Review the potential for expanding prime collateral for cross-border repo markets in the region. A study will be undertaken to improve access to funds via increased collateralization of all investment grade bonds in ASEAN+3. With the objective of gaining global recognition for these bonds as prime collateral, the study will be carried out in close coordination with Task Force 3 and involve a broad, diversified group of market participants. The findings will also contribute to global financial stability by facilitating access to secure and stable funding, and mitigating the challenges associated with the problem of "capital flows uphill." 3. Advance comparability of credit ratings by domestic credit rating agencies within the region. A study under the ASEAN+3 Research Group to improve comparability of credit ratings by domestic credit rating agencies will be undertaken in 14

consultation with market participants to promote greater cross-border bond investment. Technical Assistance Coordinating Team 24. Over the medium-term, activities supported under TACT will be advanced by building on the progress made under ongoing TAs to strengthen market foundations and address constraints to bond market development in selected member countries. Support will be provided on an as-needed basis and subject to availability of resources. C. Implementation Arrangement for ABMI Activities over the Medium-Term 25. As indicated in para. 5, the current implementation arrangement for ABMI activities is effective and as such has raised no immediate issues or concerns for member countries to address. Over the medium-term, it may not be necessary for ASEAN+3 to introduce changes to the current implementation arrangement (Appendix 3). Nevertheless, changes could be considered as appropriate should there be new issues arising over time with the current implementation arrangement. The implementation arrangement for activities proposed for the medium-term Road Map is in Appendix 4. D. Conference to Celebrate the 15 th Anniversary of ABMI 26. As the launch of ABMI is approaching its 15 th anniversary, a conference will be organized to disseminate information on the progress made to date by member countries in developing local currency bond markets and promoting regional financial integration and cooperation to support financial stability and sustainable growth. High-level policy makers from ASEAN+3 will be invited to participate in the conference for discussion on the remaining challenges faced by member countries and steps to undertake to advance the objectives of ABMI. The conference will be held at the sideline of the ADB annual meeting in May 2017. 15

Appendix 1 Current Asian Bond Markets Initiative (ABMI) New Roadmap+ The Republic of Korea and Cambodia, as the ASEAN+3 Co-Chairs, proposed the ABMI New Roadmap+ to reinvigorate this Initiative and provide a future direction to deepen the ABMI discussion. 1. Three Basic Directions: Prioritizing the ABMI issues and taking a step-by-step approach To produce tangible outcomes, current and critical ongoing issues need to be further developed. (F: Follow-up issue) To strengthen the momentum for the ABMI discussion, important but undiscussed issues related to bond markets should be added. (A: Added issue) To meet and accommodate the changing global financial needs, including mitigation of volatility in the capital flows, relevant issues need to be addressed. (R: relevant issue) New Roadmap+ will be subject to periodical reviews, for example 3 years of time, to reprioritize the agendas and/or introduce new items. Given the different pace of progress, each TF is encouraged to set its own review schedule. 2. Overview of New Roadmap+ Follow-up issues that need to be addressed to produce tangible Direction 1(F) outcomes (1) Launching CGIF guarantee programs (TF1) (2) Developing infrastructure-financing schemes (including Lao-Thai pilot project) (TF1) (3) Fostering an investment-friendly environment for institutional investors & transmitting ABMI's knowledge to institutional investors (TF2) (4) Enhancing ABMF activities (including Common Bond Issuance Program ) (TF3) (5) Facilitating the establishment of the RSI (TF4) Additional issues to be addressed to strengthen the momentum for the ABMI Direction 2(A) discussion (1) Further developing the government bond markets (TF2) (2) Enhancing financial access to consumers and SMEs (TF3) (3) Strengthening the foundation for a regional credit rating system(tf4) Direction 3(R) New issues to be raised to meet the demands of a changing global financial market (1) Raising financial awareness (TF4) 16

Appendix 1 3. Timeline for New Roadmap+ categorized by Task Force (F: Follow-up Issue, A: added issue, R: relevant issue) Roadmap Issues to be addressed First Second < TF 1 > Promoting Issuance of Local Currency-Denominated Bond (China, Thailand) 1) Launching CGIF guarantee programs (F) 2) Developing infrastructure-financing schemes (F) - Including Lao-Thai pilot project 3) Developing derivatives and swap markets < TF 2 > Facilitating the demand of Local Currency-Denominated Bonds (Japan, Singapore) 1) Further developing the government bond markets (A) - Developing repo markets and securities borrowing and lending 2) Fostering an investment-friendly environment for institutional investors & transmitting ABMI's knowledge to institutional investors (F) 3) Enhancing cross-border transactions < TF 3 > Improving Regulatory Framework (Malaysia, Japan) 1) Enhancing ABMF activities (F) - Common Bond Issuance Program 2) Enhancing financial access to consumers and SMEs (A) 3) Improving bankruptcy procedures related to bond transactions < TF 4> Improving Related Infrastructure for the Bond Markets (Korea, Philippine) 1) Facilitating the establishment of the RSI(F) 2) Strengthening the foundation for a regional credit rating system (A) 3) Raising financial awareness (R) < TACT> Technical Assistance and Coordination Team (Brunei, Laos, Vietnam ) 1) Facilitating technical assistances (TA) to ASEAN member countries to strengthen their capacities in the bond market 17

Appendix 1 Explanatory Notes for New Roadmap+ I. Follow-up issues that need to be addressed to produce tangible outcomes (F) A. Launching CGIF guarantee programs To ensure seamless operation of the CGIF, follow-up research tasks should be identified in its initial stage. Early launch of a pilot CGIF program will lend impetus to its successful operation. B. Developing infrastructure-financing schemes (including Lao-Thai pilot project) Establishing bond markets could play an important role in facilitating financing for infrastructure development in the region. The early issuance of Thai Baht-denominated bonds by Lao PDR can be promoted as a good example of cross-border infrastructure bonds. C. Fostering an investment-friendly environment for institutional investors & transmitting the ABMI's knowledge to institutional investors For the development of a regional bond market, it is important to nurture institutional investors and foster an investment-friendly environment for them. Support should be provided to establish an information network among institutional investors through seminars and conferences. D. Enhancing ABMF activities ABMF is the venue through which market participants, SROs (Self-Regulatory Organizations) and the public officials interact with one another to disseminate the results of ABMI. Common Bond Issuance Program could be introduced to facilitate standardization of regulations. E. Facilitating the establishment of the RSI The establishment of the RSI is an important initiative: it would contribute to reducing the bond transaction risks in the region and enable cross-border settlement in major Asian currencies. To facilitate the establishment of the RSI, ABMI TF should finish reviewing the RSI s feasibility by the end of this year and take the discussion to the next level. 18

Appendix 1 II. Additional issues to be addressed to strengthen the momentum for the ABMI discussion (A) A. Further developing the government bond markets Up until now, the ABMI discussions have focused on developing the corporate bond market. However, well-functioning government bond markets are crucial for the development of overall bond market. To this end, New Roadmap+ will include discussions on how to further develop the government bond markets. It would be useful to share the members experiences in developing the government bond markets and seek the best practices. To this end, establishing a working group under TF2 will be necessary. B. Enhancing financial access to consumers and SMEs In order to reduce overdependence on export as the regional growth engine, domestic consumption should be facilitated as a viable alternative. ABMI could help develop consumer loans through the securitization scheme. Structured bonds that are closely linked to stocks (e.g. convertible bonds, bond with warrant) may help reduce cost of corporate financing, especially for SMEs, and provide a wider array of investment instruments for the investors. C. Strengthening the foundation for a regional credit rating system To encourage greater participation of investors in the region s bond markets, it is necessary to strengthen the capacity and the credibility of the regional credit rating agencies. In particular, the need for a reliable regional credit rating has become even more apparent with the recent establishment of Credit Guarantee Investment Facility (CGIF). To strengthen the capacity and reliability of regional credit rating agencies, their financial foundation and the competency of professional analysts need to be developed with the support of ACRAA. Furthermore, credible data for quantitative analysis and mutual recognition among the regional agencies would enhance cooperation among them. Lastly, conditions required to establish a separate, independent regional credit rating agency need to be explored in the long run. A regional credit rating system is a regional financial infrastructure; as such it makes sense for TF4 to address this issue; to that end, a working group will be formed. 19

Appendix 1 III. Relevant issues to be raised to meet the demands of a changing global financial market (R) A. Raising financial awareness Attention should be given to raising financial awareness among the government officials, regulatory authorities and investors in the region. Hosting an educational program or a seminar with the support of the ADB and ASEAN Secretariats under TF4 is recommended. 20

Appendix 2 Proposed Activities for the ABMI Road Map for the Medium-Term The People s Republic of China and Lao, PDR co-chair the preparation and discussion on the proposed the medium-term Road Map. Objectives of the Medium-term Road Map: Continue to foster the development of local currency bond markets building on progress date to strengthen regional financial stability and meet the long-term investment needs of the region. Expand the use of local currency bonds to address three key areas of financing gaps in the region: SMEs, housing, and infrastructure. Further advance regional market integration. Implementation Approach The Road Map will be periodically reviewed every 3 years and the areas of focus and/or activities reprioritized in line with the priorities of the policy makers and market development inside and outside of the ASEAN+3 region. Activities proposed for the medium-term will be flexible and updated from time to time to take into account financial market developments within and outside of the region Given the importance of the private sector in developing local currency bond markets, the private sector s participation in activities will be encouraged. Conference on 15 th Anniversary of ABMI As the launching of ABMI is approaching its 15 th anniversary, a conference will be organized to disseminate information on the progress made to date by member countries in developing local currency bond markets and promoting regional financial integration and cooperation to support financial stability and sustainable growth. High-level policy makers from ASEAN+3 will be invited to participate in the conference for discussion on the remaining challenges faced by member countries and steps to be undertake to advance the objectives of ABMI. The conference will be held at the sideline of the ADB annual meeting in May 2017. 21

Appendix 2 Overview of the Proposed Medium-term Road Map Direction 1(C) Continuing activities (1) Explore various options to expand CGIF guarantee capacity, and broaden its operations to meet the financing needs of the region (Task Force 1) (2) Continue support for the operations of www.asianbondsonline.adb.org (ABO) and participation in the Annual Asian Bond Market Summit (Task Force 2) (3) Continue reforms to strengthen financial market resilience and facilitate investment in local currency bonds (Task Force 2) (4) Continue to develop government bond markets (Task Force 2) (5) Advance achievement made under AMBIF (Task Force 3) (6) Advance cross border bond transactions and promote regional bond market integration (Task Force 3) (7) Promote adoption of international standards, including ISO20022, and standardization of regulatory and tax procedures for cross-border bond transactions (Task Force 3) (8) Further improve market infrastructure for cross-border transactions (Task Force 4) (9) Advance comparability of credit ratings by domestic credit rating agencies within the region (Task Force 4) Direction 2(N) New activities (1) Green bonds for infrastructure development (Task Force 1) (2) Promote covered bonds to meet housing needs and explore options to develop municipal finance for infrastructure development in selected member countries (Task Force 2) (3) Assess the feasibility of establishing an information platform (Task Force 3) (4) Review the potential for expanding prime collateral for cross-border repo markets in the region (Task Force 4) 22

Appendix 2 Proposed implementation schedule of the activities by Task Force Issues to be addressed Implementation Period 2016-2018 2017-2018 Task Force 1: Promoting Issuance of Local Currency-Denominated Bonds (China, Thailand) 1) Explore various options to expand CGIF guarantee capacity and broaden its operations to meet the financing needs of the region. i. Continue support to CGIF by considering entering into joint guarantees with entities, collaborating with the private sector, bringing in risk-sharing partners for guaranteeing infrastructure project bonds, and exploring options of a capital increase or higher leverage ratio. ii. Guarantee consideration could be for (i) project bonds and green bonds for infrastructure investment; (ii) bonds issued to finance investment that supports regional integration such as bonds to finance investment to expand supply chains; and (iii) securitized SME loans, and loans to households. 2) Expand local currency bonds for green financing of infrastructure projects. Task Force 2: Facilitating the demand for Local-Currency-Denominated Bonds (Japan, Singapore) 1) Continue support to disseminate information on local currency bond markets through ABO and Annual Bond Markets Summit. Further improve ABO to make it investor friendly 2) Support reforms proposed under Option B of New Investment Tools: Work with TACT to further accelerate LCBM development. 3) Continue to develop government bond markets. 4) Promote covered bonds to meet housing needs and explore options to develop municipal finance for infrastructure development in selected member countries Task Force 3: Strengthening Regulatory Framework (Malaysia, Japan) 1) Promote greater bond issuance and increase the number of participating member countries and variety of bonds under ASEAN+3 Multi-Currency Bond Issuance Framework (AMBIF). 2) Advance cross-border bond transactions and promote regional bond market integration. 3) Promote adoption of international standards, including ISO20022, and standardization of regulatory and tax procedures for cross- 23

Appendix 2 border bond transactions. 4) Assess the feasibility of establishing an information platform. Issues to be addressed Implementation Period 2016-2018 2017-2018 Task Force 4: Improving Related Infrastructure for Bond Markets (Korea, Philippines) 1) Implement CSD-RTGS linkages among central banks and CSDs within the region to promote cross-border transactions. 2) Review the potential for expanding prime collateral for cross-border repo markets in the region 3) Advance comparability of credit ratings by domestic credit rating agencies within the region TACT: Technical Assistance and Coordination Team (Brunei, Laos, Vietnam ) 1) Continue with technical assistances (TA) to strengthen market foundations and address constraints to bond market development in selected member countries. 24

Appendix 3 Current Implementation Arrangement 25

Appendix 4 Proposed Implementation Arrangement over the Medium-Term 26