I personally witnessed this as chair of the Asia-Pacific Economic Cooperation finance ministers at that time. Asia learnt the important lesson of needing to wean itself from dependency on the West. Thus, the resulting establishment of the fledgling Asian bond market and the recent recognition of the Chinese yuan as an international reserve currency have become important elements upon which to build Asian finance.
Second: widespread development of infrastructure. Through its One Belt, One Road Asian infrastructure development programme, China will inevitably take the lead in transforming the economies of countries all along the ancient Silk Road from eastern China to Central Asia, all the way to Moscow. The effect on Asia could be similar to the transformation the US economy experienced via its building of the US interstate highway system and the expansion of its rural electrification programme that transformed its Dust Bowl states into progressive economies.
But it will also advance a geopolitical manoeuvre to expand the Chinese sphere of influence throughout Asia. Since this requires significant levels of financing, the China-led infrastructure bank AIIB as well as the establishment of the Asean Infrastructure Fund are steps in the right direction- but increased Asian influence on the leadership structure of the World Bank should its president always be American?
Figure 5. High synchronic-ity indicates that the returns on individual stocks Among a sample of economies worldwide, Singapore falls in the highest most stable quar-TABLE 5. Note: The composite index shown combines an index of the zero-return or stale-trading days, to represent transaction costs, and an index of stockmarket synchronicity that is, co-movement among individual stock returns , to represent the quality of information disclosure, as explained in the text.
Indonesia, the unstable and deliver large negative returns. Hence,Philippines, and Thailand fall in the bottom quar- continued improvements in disclosure shouldtile, as does Korea. Note: The stability indicator is a composite indicator, based on measures of volatility and the skewness of returns—that is, the extent to which marketsare more likely to deliver large negative returns.
Deepening the Securities Markets Bond markets liquidity for them to sell and exit easily when needed. Thus, as discussed in thein the corporate bond market. Moreover, because to address the factors that affect liquidity. They will also need to encourage the develop- ment of more diverse instruments to address theDeepening the Securities Markets needs of both investors and issuers. As noted in Chapter 4, most countries in the region allow banksIn East Asia the key reason for the small corporate to conduct investment banking and brokeragebond markets is the lack of liquidity in secondary mar- business.
In a competitive environment, this couldkets. Further, the adoption of Basel II couldity in the secondary market. Investors are generally make banks more interested in providing such instru-willing to invest in securities only if there is enough ments to economize on their capital, rather than just extending loans or warehousing them.
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Indonesia Thailand The bid-ask spread generally provides a good indication of liquidity if the outstanding bond issuance is large and if there are an adequate number of well-capitalized bond dealers. It may be a less accurate measure of liquidity for some of the markets in East Asia. Based on accurateritization can enhance access to securities markets. The shaded ovals in Figure 5.
First, there is the need to be ablefurther strengthening. The most common bench-Improving information to price securities accurately mark is the interest rate of a government bond. To be a valid comparator, the price of a government bondThe availability of accurate and timely informa- must be truly driven by supply and demand.
For thistion for investors is a key element in ensuring ef- to happen in China, for instance, the authorities would need to move away from price-controlledFIGURE 5. Note: shaded ovals indicate important areas that could benefit from further strengthening. Deepening the Securities Markets auctions. Ideally, there should be liquid benchmark bility of benchmark issues.
Buybacks—repurchasing governmentissuing a new long-dated line as appropriate. For bonds before they mature—can be used in conjunc-example, if the length of the yield curve is around tion with re-openings to eliminate bonds that areten years, a new ten- to eleven-year maturity should not being actively traded. Thus policymakers may facilitate switches by dealers East Asian economies have attempted to build who are seeking to trade in more liquid issues, reduc-benchmark yield curves in government bonds since ing problems relating to the fragmentation of issues.
Hong Kong China and, even more so, Sin- In China, for instance, instead of opening a new bondgapore, have succeeded in developing both short at every issue, tranches or slices of existing bondsand intermediate yield curves for up to 15 years.
In large liquid bond issues that bond holders could moreKorea, whose government does not issue short-term easily sell in the secondary market. The Philippinestrue market yield curve. Finally, while the Philippines has recently announced a consolidation programhas a yield curve for sovereign bonds, in practice the in which holders of two- to seven-year Philippinemarket is very illiquid and most of the trading takes Treasury bonds are invited to exchange them for anplace in bonds with maturities of less than one year.
China has no benchmark yield curve yet. Fragmentation hinders market conditions and the corresponding changessubstitutability among bonds, reduces the size and in the preferences of intermediaries and investors. Many forms of fragmen- market participants to formulate their strategies andtation can arise from the existence of different bonds, construct their portfolios, and thus is likely to increaseincluding coupon rates, maturities, issue sizes, and market interest in the bonds.
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The information com- municated to the market may include an indicative. The establishment of a primary-dealer system The primary-dealer systems in Hong Kong China for government securities can help to foster liquidity and Singapore function well. The advantage of having a Korea to conduct monetary operations, and a largerdedicated group of market makers is that, in return group of dealers that auction government securitiesfor certain privileges such as exclusive rights or and participate in secondary markets. Malaysia hasadvantages in bidding at auctions, exclusive access recently taken steps to improve the functioning of itsto blind inter-dealer screens , they can ensure the primary-dealer system Box 5.
In Indonesia andsuccess of the auctions in the primary market and Thailand, primary dealers are not required to givepromote liquidity in the secondary market by provid- two-way quotes, and this somewhat reduces theiring two-way quotes. For primary-dealer systems to impact in enhancing liquidity. BOX 5. Use of repurchase agreementsTo further develop the repo market, BNM has started using repo operations as one of its monetary policy instrumentsto manage liquidity in the banking system.
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Securities lending facility for principal dealersA securities lending facility for the ten principal dealers has been introduced to facilitate market-making activities and pro-mote competitive pricing. This will enhance the ability of principal dealers to provide and quote continuous prices for MGS,improve the price-discovery process, and add to liquidity in the secondary market.
Theamount purchased in the secondary market will be limited to 10 percent of the outstanding amount issued. Deepening the Securities Markets Generally in the region, the obligations and priv- Trade reporting. Third, although more controver-ileges of primary-dealer systems need to be further sial since immediate disclosure could reduce theclarified.
There is also a need to buttress the priv- liquidity available for large trades , evidence suggestsileges of these systems to include funding through, that post-trade transparency encourages competitivefor example, repurchase agreements repos. As dis- pricing and helps to make markets more liquid. TRACE then publiclyprevent firms from taking unduly large risk posi- disseminates the trade data.
Malaysia has the Bondand contingent liabilities for example, agreements Information Dissemination System BIDS , whichto repurchase securities that have been used as collat- requires dealers to record price and volume infor-eral for repos ; 2 ensure that the requisite capital mation into the system within ten minutes of arequirements are met at all times and that appro- trade, and makes summary information availablepriate electronic record-keeping systems are devel- to the public with a ten-minute delay.
In Thailand,oped, installed, and used by brokers, dealers, and the Thai Bond Market Association requires tradersinstitutional investors to track positions and capital; to report over-the-counter trades within 30 minutesand 3 ensure that all participants in the market are and distributes the trade information to Associa-able to review the financial status of participants tion members four times a day. In Korea, the Koreawith whom they want to trade.
A second important element for disseminated to the public on a website on thethe pricing of bonds is the existence of good rating same day. Rating agencies play a very important rolein helping to determine the credit risk and thus the Some countries have also moved to provide in-spread pricing of corporate bonds. Local rating agen- vestors with better access to information and to fa-cies exist in all countries covered in this report94 and cilitate trading by encouraging it to take place ontheir penetration in the domestic markets is relatively trading platforms although the majority of bothhigh.
However, several of them are relatively new and government and corporate bonds in most of theneed more time to build a track record. The Internet-based tradingin Indonesia , large discrepancies in the rating stan- system of the new Korea Exchange is available todards across countries in the region have been doc- bond traders in Korea, but it has not been veryumented in the past.
In any event, rating agencies in popular thus far, as most bond traders still preferthe region still do not accept the ratings made by over-the-counter trading. Stock Exchange also provides an electronic tradingAnd, while the major international rating agencies do platform. Thailand has launched a Bond Electronicrate corporations in East Asia, they generally do not Exchange, whose experience to date has not beenprovide ratings across the full array of bond issuers very encouraging Box 5.
Clearly this can hamper cross- is now considering creating an inter-dealer tradingborder investments. In addition to providing better access to information, BEX expects to make it easier for bond investors to trade bonds. BEX currently uses the trade-by-price method. However, the committed price will be converted into an indicative yield to assist investors in their investment decisions. Although only publicly listed companies are currently allowed to trade on BEX, non-listed companies will soon be able to have their bonds traded there. FIFO follows the sequence of price and then time priority.
If the bid or offer price and volume can be matched, the orders are matched automatically. The counterparties can negotiate off the Exchange. Currently it takes two working days to complete the clearing and settlement once an order has been executed. Experience to date BEX is still at an introductory stage and almost all bond transactions continue to be conducted in the over-the-counter market.
Retail investors have shown little interest in it thus far. Source: Bond Electronic Exchange, Thailand. The Philippines executed. Both market infrastructure and supporting infra- structure can affect transaction costs. In its marketReducing transactions costs infrastructure the region is well placed, with almost all jurisdictions having fairly advanced clearing and set-High transaction costs deter investors from trading tlement systems with recommended features to min-and can exacerbate problems of efficiency.
As dis- imize the various risks associated with pre-settlementcussed above, transaction costs cover the explicit and settlement of securities Table 5. The lack of these instruments and facilities reduces both short and long positions or margin purchasesliquidity and increases the transaction costs of trad- and short selling. An argument against margin trading is that it can Perhaps the most debated of these elements is fuel feedback trading and thus destabilize the market.
Thomas Murray produces ratings of post-trade risk exposures according to various criteria of clearing and settle-ment, safekeeping, and asset servicing. The ratings follow a standard alpha scale from AAA to C. Repo transactions are carried out to transfer particular securities between counterparties or to facilitate col- lateralized cash loans or funding transactions. Outside the United States, there is also a growing market in repos for equity.
Securities lending. This describes the market practice by which, for a fee, securities are transferred temporarily from one party the lender to another the borrower who is obligated to return them either on demand or at the end of an agreed period. Securities lending provides liquidity to money, bond, and equity markets.
Securities lending enables market participants, especially dealers, to sell securities that they do not own, knowing that they can borrow prior to settlement. The ability to borrow and lend securities relatively freely enables securities broker-dealers to service a broad range of their clients including asset man- agers, hedge funds, and other broker-dealers.
There are several motivations for borrowers, including to cover short sales either as a stand-alone transaction or as part of a larger trading strategy such as convertible bond arbitrage, pair trading, or merger arbitrage. On the lending side, securities lending has become an important and growing part of revenues for institutional investors pension funds, insurance companies, and other plan sponsors , custodian banks, and the prime brokerage arms of major investment banks.
A further argument is that margin trading, especially mental value, reducing liquidity in a declining marketshort selling, can make the market too susceptible to and delaying the market recovery. As shown in since it is hard to tell whether the funds used forTable 5.
East Asian Finance: The Road to Robust Markets
In contrast, restrictionsnounced a partial lifting of the ban in short sales on short selling are easier to enforce, since to borrowthat was imposed at the time of the crisis. Thus, when margin trading ising and repo markets. Asymmet- ing within reasonable bounds of safety are in place. Information True yield curve Limited liquidity in Limited li yet to emerge. No obligation to Two sets of dealers. T- bills make markets. Max bid- securit offer 10 basis points. Most trading PDs required to with maturity Needs PDs required to make 2-way of less than strengthening make 2-way quotes on one year.
Needs Fund notes. Yes allowed? Repo markets in China are available for government bonds but not enterprise bonds. The new amendments to the securities law in China leave open the possibility of margin trading but do not specify purcc. Malaysia has just announced a partial lifting of the ban on short sales that was imposed during the crisis. Short selling w. CGT: None. WHT on on inter- transactions on government WHT on interest income:come: on the ex- bonds or certain interest None for govern- change.
WHT quasi-govern- income: ment and certain y devel- on interest in- ment bonds.
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WHT on interest bonds. Yes Yes and 30 days. Yes Yes Underdeveloped Yes but available with maturities Yes up to 6 months. Deepening the Securities Markets that the regulator; the intermediaries, including credit pension funds. Wide participation by stock lenders in a stock-lending sys- Margin accounts. Investors conduct margin trading tem will reduce the risk of a short squeeze by makingin a margin account opened by their stockbrokers. The responsibilities of the stockbroker include ex- Since stock lending and borrowing expose the trans-plaining the risks of margin trading to the investor.
The legal,and to enforce them. Trading in a margin account is regulatory, and supervisory framework of stock lend-usually subject to margin requirements. The regulator needs to address Margin lending. Regulators need to ensureMargin lending is normally regulated by the margin- that stock lenders have the necessary risk-managementaccount regulations that govern both margin pur- processes in place. The second pertains to the scopechases and short sales.
If stock lenders—individuals and institutions—are under dif- Margin lending increases trade size as well as ferent supervisory jurisdictions, the coherence andvolumes, and hence the settlement amounts. Thus coordination of risk-management regulation applic-the smooth running of a margin-lending facility where able to different categories of stock lenders could bedaily rolling settlement occurs requires a deeper a challenge. Trades must be settledon a daily basis, thus resulting in a smaller netting It is important to note that though the componentseffect on settlement amounts.
A margin purchase of short selling have some standard features, theirlocks up money until the margin purchaser closes design and operation will need to be country- orhis position. For instance,essential. Whether institutional investors or retail investors dominate will be of importance in the design of a Stock lending system.
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