ASEAN 3 Seminar on Developing Corporate Bond Markets in

ASEAN+3 Seminar on Developing Corporate Bond Markets in Asia Building a Favorable Regulatory Environment for Corporate Bond Market - The Malaysian Experience Loong Yeow Boon Securities Commission, Malaysia 27 September 2007 (Shanghai, P. R. China)

Outline • Importance of Favourable Regulatory Environment • Regulatory Framework Post Financial Crisis • Current State of Malaysian Corporate Bond Market • Continuous Enhancement of Regulatory Environment 2

1997 Asian Financial Crisis Highlighted : • Over-reliance of bank loans for corporate funding, even for longterm infrastructure projects • Funding mismatches were aggravated in tight liquidity situation • Lack of well developed bond market meant a lack of alternative avenue for funding 3

Conducive Regulatory Framework is the Missing Link ü Institutional investors sat on sizeable funds ü Interest rates on downward trend ü Key intermediaries had been established ü Market infrastructure was in place ü Issuers in need of funds 4

Fair, Efficient & Transparent for Well. Functioning Bond Market Investors Issuers Conducive regulatory framework that ensures: ü Investors’ protection Ø Fairness ü Expeditious issuance process ü Market returns ü Liquidity Ø Efficiency ü Lower funding cost ü Ability to borrow long ü Timely access to relevant information Ø Transparency ü Clear and consistent rules 5

Outline • Importance of Favourable Regulatory Environment • Regulatory Framework Post Financial Crisis • Current State of Malaysian Corporate Bond Market • Continuous Enhancement of Regulatory Environment 6

Government’s Initiatives to Develop Bond Market Government’ s Commitment National Bond Market Committee Bond market-specific mandate : 1. Overall policy direction for orderly development Critical factors for successful implementation 2. Study development issues 3. Identify and recommend implementation strategies Inter-agency membership to ease implementation: • Ministry of Finance • Bank Negara • Securities Commission (SC) • Economic Planning Unit • Bursa Malaysia • Employees Provident Fund • Private sector

Proper Sequencing of Regulatory Policies The 5 Pillars 1. 2. 3. 4. 5. Establish reliable and efficient benchmark yield curve Introduce efficient & facilitative issuance process for corporate bonds Widen issuers and investors base Improve liquidity in the secondary market Facilitate introduction of risk management instruments Priority actions 1. Designate M’sian Government Securities as benchmark bonds 2. Centralise approval of corporate bond market with the SC 8

Clear Delegation of Authorities Ministry of Finance • Co-ordinate developmental efforts of Government agencies (under the National Bond Market Committee) Grant tax incentives – stamp duty exemption for primary and secondary market transactions, withholding tax for non-residents, real property gains tax for asset-backed securities and etc • Bank Negara Malaysia Securities Commission • • Manage public debt and MGS issuance Own and operate FAST, RENTAS and BIDS Regulate involvement of financial institutions in bond market • • Sole approving authority for corporate bond issuance Regulates primary and secondary bond market activities Supervises market intermediaries such as rating agencies and trustees 9

Main Thrust of Regulatory Regime for Government Bond Market • Introduction of auction calendar for Malaysian Government Securities (MGS) ü Creation of benchmark yield curve with key tenures of 3, 5 and 10 years ü Provide reliable pricing guidance for corporate bond issues • Review of principal dealers system • Introduction of long-dated MGS and MGS futures • Free up captive demand on MGS 10

Market-Driven Regulatory Framework for Corporate Bond Market • Centralise approval process for issuance of bonds with the SC w. e. f 1 July 2000 • Introduce facilitative legal and regulatory framework: (i) Provisions on investor protection (ii) Fine and penalties on breaches and offences • Adopt disclosure-based regulation: (i) Approval upon full submission of documents to SC (ii) Ensure adequate disclosure to investors (iii) Monitor quality of disclosure 11

Facilitative approval process for corporate bonds Prior to 2000 Since 1 July 2000 Type of Submission Merit-based Disclosure-based Time frame for approval 1 to 3 months 14 & 28 working days for PDS & ABS issues upon full submission Utilisation of proceeds Subject to regulator’s internal criteria on productive purposes Must be fully underwritten Transparent NBMC negative list (since been revoked) BBB and P 3/MARC 3 No minimum investment grade (mandatory rating is still required) Underwriting requirement Minimum credit rating requirement Disclosure requirements - Decided by issuer and adviser • Stringent due diligence for investor protection • Posting of IM/TDs in SC’s website • Regulatory actions on false and misleading statement 12

SC’s Major Guidelines on Bond Market On Issuance of bonds, • Guidelines on the offering of private debt securities • Guidelines on the offering of Islamic securities • Guidelines on the offering of asset-backed securities On investors protection, • Guidelines on minimum contents requirements for trust deeds 13

Clear Visions and Plans to Drive Development Direction from NBMC Securities Commission Capital Market Master Plan (CMP) 152 recommendations, of which 17 for bond market Objectives & Strategic Initiatives: 1. Fund-raising centre 2. Investment mgt industry 3. Market institutions 4. Intermediaries 5. Regulatory regime 6. Islamic capital market centre Phase 2 Phase 3 Phase 1 (2001 -2003) (2004 -2005) (2006 -2010) Strengthen domestic capacity Gradual liberalisation of market access Enhance international positioning

Tax incentives to widen issuers’ base • Stamp duty exemptions for bonds issues approved by SC • Tax deductions on expenses incurred in the issuance of ABS and Islamic bonds • Tax neutral framework for ABS and Islamic bond transactions • Real Property Gains Tax (RPGT) exemptions for securitisation transaction 15

Tax incentives to widen investors’ base Resident • Exemption of interest income received by individuals, close end funds and unit trust funds Non-resident • Blanket exemption from withholding tax for interest income derived by non-residents, w. e. f 11 September 2004 16

Outline • Importance of Favourable Regulatory Environment • Regulatory Framework Post Financial Crisis • Current State of Malaysian Corporate Bond Market • Continuous Enhancement of Regulatory Environment 17

Robust Growth in Domestic Bond Market As at end-June 2007, § Outstanding size including short-term instruments amounted to USD 150 billion § Local currency bond market as a % of GDP is currently 2 nd largest in Asia (ex. Japan) § Sukuk comprised 34% of outstanding bonds § Malaysia has the largest Sukuk market in the world 18

Sustainable Corporate Bond Issues § Corporate bonds as a % of total corporate financing increased to 57. 8% in 2006 (21. 2% in 1998) § Represents a significant source of long-term financing for private sector § Contributed to addressing maturity mismatches in private sector financing 19

Growing Liquidity In Secondary Market § Liquidity has increased significantly since 1997, and relatively high by regional standards § Government efforts to enhance investors base, including withholding tax exemption to attract foreign investment § Inclusion in major bond indices (e. g. Citibank WGBI) Average annual turnover ratio (as at end-2006) Source : ADB 20

Outline • Importance of Favourable Regulatory Environment • Regulatory Framework Post Financial Crisis • Current State of Malaysian Corporate Bond Market • Continuous Enhancement of Regulatory Environment 21

Our Aims as Significant Centre for Origination and Investment for Bonds » Eligible Foreign Issuers of Ringgit-denominated bonds: • Multilaterals • Sovereigns • Quasi-sovereigns • MNCs » Deemed approval for AAA-rated issuers, except MNCs » Facilitative foreign exchange rules » Malaysia as International Islamic Financial Centre (MIFC) 22

International Issuers of Ringgitdenominated Bonds Issuers ADB IFC IBRD ADB Kf. W Size RM 400 m RM 500 m RM 760 m RM 3. 8 b RM 2. 5 b Type Fixed Rate Bonds Islamic Bonds Medium Term Notes Fixed Rate /MTN Tenor Rating 5 yrs AAA 3 yrs AAA 5 yrs AAA 15 yrs programme AAA 7 yrs/ 10 yrs programmes AAA 23

Facilitative Regulatory Framework for Foreign-currencies Bonds » Eligible Issuers: • Multilaterals • Sovereigns • Quasi-sovereigns (domestic and foreign) • MNCs (domestic and foreign) » International documentation is acceptable » Deemed approval for min A-rated issues » Withholding tax exemption if structured as sukuk issue 24

Establishment of bond pricing agencies • Guidelines on the Registration of Bond Pricing Agencies (January 2006) • A bond pricing agency contributes to market liquidity by: Ø Providing independent and objective fair value for bonds Ø Adopting a systematic valuation approach which incorporates specific pricing methodologies, relevant market data and robust market feedback Ø Facilitating daily mark-to-market valuation of bond portfolios, especially unit trust schemes Enhance price transparency and discovery 25

Greater regulatory oversight over credit rating agencies • Practice Note on Recognition of Credit Rating Agencies (January 2006) Ø Incorporates IOSCO’s Code of Conduct Fundamentals for Credit Rating Agencies • The recognition system seeks to ensure that CRAs: Ø Exercise high standards of professionalism and due diligence in rating and monitoring corporate bonds Ø provide adequate and timely dissemination of rating information Enhance investor protection and investor confidence 26

Initiatives in the pipeline Introduction of electronic information dissemination and trading system by early 2008 • Real-time dissemination of pre and post-trade info • Enhance efficiency in trade execution • Improve price transparency and discovery • Facilitate market surveillance 27

Conclusion Building favourable regulatory environment requires: • Bold decisions by policy makers, taking into account prevailing market conditions Ø Market must be fair, efficient and transparent Ø Proper sequencing holds the key • Robust market consultation process • Constant review of policy decisions as market changes and develops 28

For further information on Malaysian Bond Market … Please visit following websites: http: //www. sc. com. my (Securities Commission Malaysia) http: //www. bnm. gov. my (Bank Negara Malaysia) https: //fast. bnm. gov. my/fastweb (Fully Automated System for Issuing/Tendering) http: //rmbond. bnm. gov. my (Ringgit Bond Market) Or contact me at ybloong@seccom. my 29