656 bond market
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A Brief Profile Of Bond Market• The bond market in Malaysia has developed significantly in terms of market
size, range of instruments and efficiency. • The development of the bond market centres on the need to establish a
well-diversified financial base to meet the changing needs of the Malaysian economy.
• Concerted measures to develop the bond market were taken by the Government, and success of these efforts are reflected in the significant growth of the bond market, marking Malaysian bond market as one of the fastest growing bond markets in Asia.
• Among the recent key initiatives are:– The Government issued its inaugural Callable MGS 5NC3 in December 2006
and followed by MGS 10NC5 in February 2007; – The Government introduced switch auction in January 2007 to improve the
overall market liquidity by replacing the off-the-run MGS with the on-the-run MGS;
– Bank Negara Malaysia issues its first Sukuk Ijarah Notes in February 2006, as an additional tools to manage liquidity in the banking system;
– Bank Negara Malaysia issued the inaugural Bank Negara Monetary Notes (BNMNs) to replace the Bank Negara Bills and Bank Negara Negotiable Notes in December 2006. BNMNs can be issued on discount-to-value, fixed-rate or floating rate coupon bearing bonds. In July 2007, the first floating rate BNMNs were issued
• As at end-July 2007, the size of the bond market reached RM527.3 billion, approximately 92.1% of GDP.
• The bond market has a balance mix of both public sector and private sector bonds each contributing 55.5% and 45.5% share of total bond outstanding respectively.
• Today, the corporate bond market makes up approximately a quarter of the total debt financing (including bank loans) to the economy compared with around 10% in 1997.
• Such rapid growth is a reflection of the expanding private sector financing needs, especially the considerable infrastructure development needs in Malaysia, which require more long-term financing, have provided a strong impetus to the market.
• A wide variety of debt securities products are available in the Malaysian bond market, such as fixed coupon bearing bonds, floaters, asset-backed securities, convertible bonds, callable bonds, etc. Bond issuers include, among others, the Government of Malaysia, Bank Negara Malaysia, quasi government institutions, corporations as well as multilateral development banks (MDBs).
• To date, a total of seven issuances of MDB bonds, totalling RM3.7 billion have been issued in Malaysia.
• More importantly, Malaysia, among the key Islamic financial centres, offers a wide variety of Islamic bonds that are based on Shariah compliant concept.
• As at end-July 2007, Islamic bonds accounted for 33% of total bond outstanding.
Government Debt Securities• Malaysian Government securities are marketable debt
instruments issued by the Government of Malaysia to raise funds from the domestic capital market to finance the Government's development expenditure and working capital.
• The central bank, Bank Negara Malaysia in its role as banker and adviser to the Government, advises on the details of Government securities issuance and facilitates such issuance through various market infrastructures that it owns and operates.
• Currently, the various forms of Government securities in Malaysia are:-– Malaysian Government Securities (MGS) - interest bearing long-
term bonds issued by the Government of Malaysia to raise funds from the domestic capital market for development expenditure.
– Malaysian Treasury Bills (MTB) - short-term securities issued by the Government of Malaysia for working capital.
– Government Investment Issues (GII) and Malaysian Islamic Treasury Bills (MITB) - long-term and short-term non-interest bearing Government securities, respectively, issued based on Islamic principles by the Government of Malaysia.
Objective of issuance • MGS were initially issued to meet the investment needs of
the Employees Provident Fund (EPF), local banks and insurance companies.
• In the late 1970s and early 1980s, MGS were issued to finance the public sector's development expenditure.
• In contrast, by the 1990s, the purpose of MGS issuance was extended to funding part of the Government's budget deficit and prepayment of some of the Government's external loans.
• The Government continued to issue MGS during the fiscal surplus of 1993-1997 to meet the market demand for MGS.
• GII and MITB, on the other hand, were issued to allow Islamic banks to hold liquid papers that meet their statutory liquidity requirements.
• The issuance of these papers also enabled them to invest their liquid funds in instruments that are issued based on Shariah principles as they are unable to purchase or trade in Malaysian Government Securities (MGS), Malaysian Treasury Bill (MTB) or other interest-bearing instruments.
Private Debt Securities• In the late 1980s, Bank Negara Malaysia was the
Government agency responsible for the regulation of corporate bond issuance. In March 1993, the Securities Commission (SC) was established to act as the single regulatory body to promote the development of the capital market, in particular to rationalise securities market regulations.
• Spurred by strong economic growth, and supported by the efforts of regulators and market participants, the corporate bond market has expanded considerably over the years. The corporate bond market registered an average annual growth of 8% since 2000, reaching the size of RM209.7 billion as at end-June 2006. Corporations have turned their attention towards the bond market as a viable alternative to bank borrowings and the equity market. Investors are also able to adjust their risk-return profile through the trading of various securities available in the market.
Key Participants • Financial institutions are the key players in the bond
market, in bond originations and secondary market trading.
• The Principal Dealership system was introduced since 1989. Under this system, Bank Negara Malaysia appoints on an annual basis selected banking institutions as Principal Dealers (PDs) based on a set of criteria, including their capabilities to handle large volume transactions as measured by their shareholders' fund, their secondary market trading volume and the overall risk management capabilities. The PDs are obliged to participate actively in the primary and secondary market, to bid for at least 10% of the instruments specified in the primary auction (MGS, GII, MTB, MITB) and to provide reasonable two-way price quotations under all market conditions in order to ensure liquidity in the secondary market.
• There are six money brokers in the Malaysian market currently, in charge of arranging deals between two or more approved interbank institutions. Money brokers may also arrange deals between banking institutions and foreign counterparties in the international money market. Money brokers charge brokerage fees for services provided.
• Cagamas Berhad ("Cagamas"), the National Mortgage Corporation and leading securitisation house, was established in 1986 to promote the secondary mortgage market in Malaysia. Cagamas has, through the years, evolved and diversified its business model from that of a national mortgage corporation seeking to aid Malaysians with affordable housing, to becoming a leader in securitisation.
• Cagamas issues debt securities to finance the purchase of housing loans and other consumer receivables from financial institutions, selected corporations and the Government. The provision of liquidity, capital and risk management tools at a reasonable cost to the primary lenders of housing loans encourages further financing of houses at an affordable cost.
• Cagamas is the second largest issuer of debt instruments after the Government of Malaysia and its debt securities have been rated AAA by RAM Rating Services Berhad and Malaysian Rating Corporation Berhad.
• The role of Cagamas in today's market has evolved to include playing an important and active role as a catalyst for the Governments' and Bank Negara Malaysia's initiative for the economy and financial sector.
• To ensure all Islamic capital market products are in compliance with the Shariah principles, the Shariah Advisory Council (SAC) was established in 1996 by the SC for the onshore market. The SAC comprises prominent Shariah scholars, jurists and market practitioners and their role is to advise the SC on matters relating to the Islamic capital market and to provide Shariah guidance on Islamic capital market transactions and activities.
• Rating agencies provides independent opinions on the credit risks and potential default risk of specific issuers. To promote transparency in the bond market, information on ratings is widely disseminated to all existing and potential private debt securities investors on a timely manner. The first rating agency, Rating Agency Malaysia Berhad (RAM) was established in November 1990, while the second rating agency, Malaysian Rating Corporation Berhad (MARC) was incorporated in October 1995. Currently, all issues, offers or invitations of private debt securities must be rated by a rating agency recognised by the Securities Commission, unless exemptions were given the Securities Commission.
Types of Securities (Conventional) Bank Negara Monetary Notes (BNMN) Malaysian Treasury Bills (MTB)Malaysian Government Securities
(MGS)Khazanah Bonds
IslamicBank Negara Monetary Notes-i (BNMN-
i)Malaysian Islamic Treasury Bills (MITB)Government Investment Issue (GII)Sukuk Bank Negara Malaysia Ijarah
(SBNMI) Merdeka Savings Bonds
Comparison between Conventional and Islamic Government Securities • The conventional securities and the Islamic
securities differ only in its structure in terms of complying with Islamic principles in its issuance.
• Islamic Government securities are similar to conventional Government securities in terms of their effective cash flows, issuance structure, legal status in being a direct obligation of the Government, its holdings and nature of transaction as financial products.
