Country Case Presentation - MALAYSIA Kamilah Mohamad Gemloc Advisory Services Workshop- Debt Market Development June 3, 2011 Rabat, Morocco
Debt Management Policy Government debt management policy involves the establishment and execution of strategies for managing the Government debt portfolio in order to meet funding requirements and to achieve the following objectives: Lower cost and minimise risks promote investment for economic growth Develop the domestic bond markets Ensure level and growth of debt are fiscally 2
Policy Implementation Borrowing is merely to finance development project To borrow mainly from domestic sources and minimize foreign exchange exposure Assist Government in developing the domestic bond market and to promote Malaysia as the premier Islamic Centre 3
Operations of the Debt Management Federal Treasury Central Bank of Malaysia Accountant General Office Economic Planning Unit 4
Outline Primary Markets Placement Mechanisms Use of Liability Management tools Secondary Markets Trading Venues Market Makers Money Markets and Sterilization Strategies Repo Markets Monetary Policy Instruments Investor Base Non-Financial Institutions Foreign Investors Custody, Clearance and Settlement 5
Primary Markets Placement Mechanisms Use of Liability Management tools 6
BNM deals with Principal Dealers for most of its operations Principal Dealers 12 conventional, 6 Islamic Interbank Institutions 22 conventional, 17 Islamic, 15 Investments BNM 6 Money Brokers Cagamas/ 2 DFIs Dealing with Principal Dealers (PD) ensures efficiency PDs promotes a more active secondary trading in the money and capital markets For issuance of government and BNM papers, bids are submitted to BNM from all interbank players via Principal Dealers. Bids are transmitted electronically via our Fully Automated System for Tendering (FAST). Money-market tenders submitted to BNM directly by all participating members As the lender of last resort (liquidity support), BNM deals directly with financial institution As at end- Aug 09 7
Objectives of Principal Dealer System To create a well-functioning government securities market Providing a stable and dependable funding source of the Government securities Providing efficient distribution mechanism for government securities to investors Assisting Government in debt management strategy and keeping informed of market developments To support the development of liquid local bond markets Enhancing the liquidity in the secondary market through continuous two-way prices 8 8
Liability Management Tools Conduct switch auction i.e buy back or redeem a certain pre-determined MGS that is illiquid and replace them with a more liquid benchmark MGS Flexibility for the Govt to manage its liability through re-profiling of debts Ensure Govt consistently issue new MGS is all market conditions Able to cater for investors demand for securities of certain duration 9
Secondary Markets Trading Venues Market Makers 10
Government Bond Market infrastructure PRIMARY MARKET SYSTEMS SECONDARY MARKET Institutional Investors Issuers RENTAS Investors/ Interbank Players ISCAP FAST ETP Money Brokers & Principal Dealers BNM Investors/ Interbank Players Websites Investors/ Interbank Players Market players Intermediary channels Primary & Secondary Market Financial institutions, institutional investors, insurance companies, asset management companies and universal brokers 12 Conventional and 6 Islamic Principal Dealers that provide two way quotes while 6 money brokers as intermediaries Fully Automated System for Tendering (FAST) for issuance in the primary market Electronic Trading Platform (ETP) provides real-time prices Market information disseminated via BNM and Bondinfo Hub webpage Settlement DvP Model 1 settlement via Real-time Gross Settlement System (RENTAS) to reduce settlement risks 11
Key Challenges & Success Factors Trading Venue 1. OTC versus electronic trading platforms/exchanges 2. Monopolistic trading via electronic or multiples 3. Levels of pre and post trade transparency 1. Participants used OTC to arbitrage and to negotiate further, and for large amounts 2. Timing factor is critical. Effectiveness of price discovery via OTC may be achieved faster as compared to ETP 3. Able to match with desired stocks with the role played by money brokers 4. Centralised data to capture all concluded OTC deals on timely basis Market makers 1. To accord the right privileges/incentives to the PDs to commensurate their obligations Excessive privileges/incentives may impede overall market development Less incentives may lead to non-performance and possible no interest to become PDs 2. To have the optimal number of PDs Too many may lead to less quality bidding rates at primary issuance Too less may lead to higher cost of financing for the Government (PDs may collude among themselves and bid at non competitive rates); and lack of liquidity in secondary market affecting price discovery process 1. Having the necessary infrastructure for PDs to perform obligations and be accorded the incentives and privileges 2. Having a detailed assessment matrix to assess performance of PDs to ensure PDs duly perform their obligations 3. Addressing PDs concerns on market development and impediments in discharging their duties through consultative meetings and other forums 12
Money Markets and Sterilization Strategies Repo Markets Monetary Policy Instruments 13
Repo operations as monetary policy instrument Repurchase agreement (repo) where the repo seller agrees to buy back the stock at the end of repo period. Protected by Global Master Repurchase Agreement Exchange of ownership during the repo period 1 st Leg BNM (repo seller) MGS Cash Bank A (repo buyer) Liquidity absorb from the market to BNM 2 nd Leg BNM (repo seller) Cash MGS Bank A (repo buyer) Liquidity return from BNM to market Reverse repo is used in standing facility when lending funds to FIs 14
BNM s ISCAP Institutional Lenders / FIs 1 2 Lend securities Explicit guarantee 4 Securities lending fees Introduced Institutional Securities Custodian Programme (ISCAP) to act as a catalyst in developing repo market and releasing government bonds from captive holdings. Cash Driven Repo is conducted mainly for liquidity management tool whilst Securities Driven Repo helps to supply specific securities ie the benchmarks MGS for securities lending and short selling activities ISCAP mechanics as follows: 1 Institutional investors will entrust BNM as restricted custodian for selected scripless securities (currently MGS only). Collateral via repo 3 Funds 2 All securities lending transactions will be subject to minimum risk as lenders will assume Bank Negara s credit risk. Interbank Institutions 3 4 BNM borrows these securities for a predetermined short-term period to be used as collateral in its repo operations with interbank institutions. In return, lender of securities will receive lending fees 15
Monetary Policy Instruments Various instruments used to absorb liquidity in monetary operations Conventional Islamic Bank Negara Monetary Notes (BNMNs) Foreign Currency Swaps Average duration: 29 days Repo Average duration: 23 days Money Market Borrowings Average duration: 11 days Up to 1-month Up to 3-months Up to 6-months Wadiah Acceptance Average duration: 9 days Commodity Murabahah Programme (CMP) Average duration: 14.25 days Bank Negara Monetary Notes Islamic (BNMN-i) Average duration: 3 mths Up to 3-year Sukuk BNM Ijarah Remaining maturity: 6 mths Average duration: 2 mths Common Instruments to both Conventional and Islamic Money Market Outright Sales & Purchases of Securities Statutory Reserve Requirement Frequency of operations: Daily: Money market borrowings, Wadiah Acceptance, Repo, Commodity Murabaha Programme Twice a week: BNMN & BNMN-i 16
Investor Base Non-Financial Institutions Relatively high Pension fund assets Rising assets of life insurance Financial institutions makes 50% of the bondholders Foreign Investors Surge in bond purchases by the foreigners after global crisis Emerging market assets as favorable investment Increased foreign participation, increase inflows into bond market Impact on or complicate the conduct of monetary policy 17
Custody, Clearance and Settlement Malaysia is working towards Pan-Asian CSD Alliance for a Common Platform Model in Asia Allow a set of harmonised procedures and shared technology to foster the development of the Asian bond market 18
RENTAS Development Link between RENTAS and USD CHATS, Hong Kong (Nov 2006) Addressing FX settlement risk for Ringgit/USD trades in Malaysia through PvP settlement Establishment of MyClear as operator of RENTAS (Jan 2009) RENTAS system Depository and clearing system for non-ringgit denominated Islamic securities Able to cater for USD denominated securities Multiple currencies in future 19 19
PD Tendering Process done online through FAST 1. Invitation to tender for Government & BNM papers BNM will invite tender to all PDs on t-5 2. Tender information Accessible to all financial institutions who are FAST members 3. Submission of tender Submission of bids by PDs on t-1 PDs may submit bids for own or/and on behalf of non-pds 4. Tender processing on t-1 Automatic sorting of price/yield submitted by the PDs best price/yield will be allotted the tender (capped at 30% of issue size for each PD) 5. Tender results General results will be broadcast in FAST; own result will be sent individually to each PD 6. Settlement on t (on issue date) Interface file to RENTAS system will be generated where PDs account at RENTAS will be debited and securities will be automatically allotted to PDs via delivery versus payment basis (DvP) Submit bids Submit own bids or/and on behalf of customers Interface file to RENTAS RENTAS Non-PDs / Investors PDs Reallotment of securities from PDs to customers (non-pds / investors) Processing in FAST & tender results broadcast in FAST Allotment of securities to PDs via DvP basis 20