proposal on Asean+3 Multi-Currency Bond Issuance Framework

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proposal on Asean+3 Multi-Currency Bond Issuance Framework (Ambif) proposal on Asean+3 Multi-Currency Bond Issuance Framework (Ambif) 2014 Asian Development Bank All rights reserved. Published in 2014.
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proposal on Asean+3 Multi-Currency Bond Issuance Framework (Ambif) proposal on Asean+3 Multi-Currency Bond Issuance Framework (Ambif) 2014 Asian Development Bank All rights reserved. Published in Printed in Philippines. ISBN (Print), (PDF) Publication Stock No. RPT Cataloging-In-Publication Data Asian Development Bank. Proposal on ASEAN+3 Multi-Currency Bond Issuance Framework (AMBIF) Mandaluyong City, Philippines: Asian Development Bank, Regionalism 2. Subregional cooperation 3. Economic development 4. Asia I. Asian Development Bank. The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term country in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB. Note: In this publication, $ refers to US dollars. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel Fax For orders, please contact: Department of External Relations Fax This report is the outcome of a regional technical assistance project, RETA 8049:Harmonization of Bond Standards and Market Practices in ASEAN+3: Support for ASEAN+3 Bond Market Forum, Phase 2 under the ASEAN+3 Bond Market Initiative.The project was managed by Seung Jae Lee, Advisor and Shinji Kawai, Senior Financial Sector Specialist of the Office of Regional Economic Integration. The co-authors of the report are Seung Jee Lee and ADB Consultants Prof. Shigehito Inukai and Mr. Matthias Schmidt, together with ABMF members and experts. Contents Preface v Statement from SF1 Chairs vii Acronyms and Technical Terms viii Executive Summary Background Basic Approaches AMBIF Components Required for Implementation Implementation Process of AMBIF Other Issues for Consideration in the Context of AMBIF Conclusion and Recommendations I. Background Il. Basic Approaches III. Developing the Concept of Ambif Focus on Professional Markets Connecting the Markets Defining the AMBIF Proposal Professional Investor Concepts Professional Markets (Exempt Regimes) Most Suitable Professional Market (Segment) Significant Benefits from AMBIF Anticipated Benefits for Investors Anticipated Benefits for Issuers IV. Ambif Components Required for Implementation Overview of AMBIF Components AMBIF Investors LCY Issuance AMBIF Instruments AMBIF Issuers AMBIF Markets AMBIF Documentation iv Contents V. The Ambif Regulatory Process Need for Bottom-up Approach Review of Approaches for Regulatory Process Initial Approaches: Mutual Recognition and Mutual Agreement Expedited Review Framework (Substituted Compliance Approach) Application of AMBIF Regulatory Process AMBIF Information Platform Approach for the Definition of a Professional Market VI. Market Requirements and Components Selling Restrictions on AMBIF Investors Financial Reporting Standards Taxation Language and Legal Considerations Credit Rating Other Considerations VII. Conclusion Decision on AMBIF Recommendation for ABMF Phase Stakeholder Participation SF1 Work Plan Remainder of Phase VIII. Next Steps in Abmf Phase AMBIF Implementation Pilot Issues AMBIF Documentation Update of ASEAN+3 Bond Market Guide BCLMV Knowledge Support Increasing Convergence of SF1 Activities Appendixes : Proxy Approach : Substituted Compliance : AMBIF Documentation Recommendation Board (ADRB) on AMBIF Disclosure Items on Information Memorandum and Program Information : Financial Reporting Standards : Taxation : Abmf Sf1 Members and Observers in Phase Preface There have been significant developments in bond markets in Asia since the early 2000s. The volume of local currency (LCY) bonds outstanding in emerging East Asia has grown sharply from less than US$1.0 trillion at the end of 2001 to US$6.5 trillion at the end of LCY bond markets became an effective alternative source of financing for governments and corporations during the recent global financial crisis (GFC), with more diversified issuance and a broader investor base that included an increasing number of foreigners. The channeling of regional resources to regional investment needs improved from 2.8% of the total in 2001 to 8.4% in 2011, as measured by the relative share of debt portfolio outflows from the region that was re-invested into the region. However, there remain various issues to be addressed. For example, the region s bond market is still small given the dominance of the banking sector, regional resource channeling should be further enhanced, volatile capital flows should be appropriately managed, and there is a need to improve market efficiency with lower transaction costs by streamlining regulations and market practices. The ASEAN+3 Bond Market Forum (ABMF) is expected to contribute to market development as a regional platform to enhance standardization by incorporating both public and private entities. a To elevate the discussion on streamlining regulations and market practices, ABMF was established in 2010 and endorsed at the 13th ASEAN+3 Finance Ministers Meeting on 2 May 2010 in Tashkent, Uzbekistan as a common platform to foster standardization of market practices and harmonization of regulations relating to cross-border bond transactions in the region. The members of ABMF were appointed or endorsed by Asian Bond Market Initiative (ABMI) Task Force 3 and include regulatory bodies, stock exchanges, independent self-regulatory organizations (SROs), infrastructure SROs, market associations, and international market institutions. The Asian Development Bank (ADB) serves as the Secretariat. Since the first meeting in September 2010 in Tokyo, Japan, ABMF members and experts have met quarterly: December 2010 in Manila, Philippines; February 2011 in Kuala Lumpur, Malaysia; June 2011 on Jeju Island, Republic of Korea; September 2011 in Bali, Indonesia; December 2011 in Beijing, People s Republic of China (PRC); February 2012 in Hong Kong, China; April 2012 in Manila, Philippines; September 2012 in Seoul, Republic of Korea; November 2012 in Bangkok, Thailand; February 2013 in Singapore; April 2013 in Jakarta, Indonesia; July 2013 in Tokyo, Japan; and November 2013 on Jeju Island, Republic of Korea. ABMF consists of two forums: Sub-Forum 1 (SF1) and Sub-Forum 2 (SF2). The objectives of SF1 are to close the information gap with regard to regulations, market practices, and other areas in the region s bond markets. SF2 focuses on enhancing regional straight-through-processing (STP) by the harmonization of transaction procedures and standardization of messages. b In its first phase of activity in (Phase 1), SF1 collected legal and regulatory information on individual ASEAN+3 markets. SF2 identified and detailed bond transaction flows. As a key output of ABMF Phase 1, a comprehensive ASEAN+3 Bond Market Guide was published in April 2012 and comprised individual market guides for 11 economies. The guide consisted of Volume 1: Sub- Forum 1 Comparative Analysis and Bond Market a ASEAN+3 refers to the 10 members of the Association of Southeast Asian Nations (ASEAN) plus the People s Republic of China (PRC), Japan, and the Republic of Korea. b STP is generally recognized as a mechanism that enables trading and transactions to be conducted electronically without manual handling or intervention. vi Preface Guides and Volume 2: Sub-Forum 2 Information on Transaction Flows and Settlement. The guide aimed to (i) dispel common misunderstandings and misperceptions related to ASEAN+3 bond markets, and (ii) narrow information gaps and establish a common understanding of how markets in the region operate. The information and findings gathered during Phase 1 became the foundation of the next phase in (Phase 2). In Phase 2, SF1 has been working on developing a regionally standardized bond issuance framework known as the ASEAN+3 Multi-Currency Bond Issuance Framework (AMBIF), and SF2 on identifying bond transaction flows, including corporate bond delivery-versus-payment (DVP) flows and interest payment and redemption procedures, to provide policy recommendations to standardize the flows. After continued consultations, AMBF members finalized the interim reports for both SF1 and SF2 during the 12th ABMF Meeting on April 2013 in Jakarta, Indonesia, which included key policy recommendations on standardizing bond transaction flows. The interim reports were submitted to the ASEAN+3 Finance Ministers and Central Bank Governors Meeting (AFMCGM) on 2 May 2013 through ABMI TF3. This proposal on ASEAN+3 Multi-Currency Bond Issuance Framework (AMBIF) is the complete report for Phase 2 SF1 activities. The report was written by an ADB Team comprising Shigehito Inukai (ADB consultant), Matthias Schmidt (ADB consultant), and Seung Jae Lee (Advisor, Office of Regional Economic Integration [OREI], ADB). However, this report should not be regarded as an output of the team alone but as a result of the collective work of ABMF members and experts. International experts very kindly provided input on report topics and freely shared their knowledge and assessments, often from proprietary sources. National ABMF members and experts provided answers to questionnaires during the market visits and thoroughly reviewed the draft to help shape the report. In addition, the team thanks all interviewees who gave useful comments and responses during the Phase 2 market visits. Therefore, the report should be regarded as a crystallization of regional collaborative efforts and knowledge toward more harmonized and integrated ASEAN+3 bond markets. Without such strong support and cooperation from ABMF members and experts, as well as from market experts in the region, this report could not have been published. The Tokyo Stock Exchange and CIMB Investment Bank, as the Chair and Vice Chair of SF1, respectively, provided leadership and facilitated very active discussions among members and experts. The team also thanks the national members and experts of the PRC, Indonesia, Japan, the Republic of Korea, Singapore, and Thailand for hosting ABMF meetings during Phase 2. The smooth organization of the meetings made possible the conduct of intensive discussions through multiple sessions at each meeting. The efforts for the harmonization and standardization of bond markets in the region have just begun. Given large differences in economic and market developments in the region, the task will not be easy. The work inevitably requires a gradual, stepby-step process. However, this unique initiative will create momentum to push the region toward more harmonized and integrated bond markets in the future. ABMF is expected to continue to function as a regional platform to realize and institutionalize regionalism by helping formulate regional views and opinions into a common policy framework. Finally, it should be noted that no part of this report represents the official views of any of the institutions that participated as either ABMF members or experts; the ADB team is responsible for the contents of the report. ABMF Secretariat Statement from SF1 Chairs We wish to express our sincere appreciation and gratitude to the members and experts of the ASEAN+3 Bond Market Forum Sub-Forum 1 (ABMF SF1) for their work in developing the contents of this report. c Their support and unwavering dedication during the 2 years of ABMF Phase 2 have permitted us to deliver this report to the Chairs of Task Force 3 (TF3) of the Asian Bond Market Initiative (ABMI) as planned, in time for their early March 2014 meeting in Yangon, Myanmar. On the basis of the approval for the proposed ASEAN+3 Multi-Currency Bond Issuance Framework (AMBIF) contained in this report, we are looking forward to having the same strong support from members and experts for the implementation of AMBIF in ABMF Phase 3, which begins in On behalf of our members and experts, we are grateful to the Secretariat at the Asian Development Bank (ADB) and its consultants for their efforts that have brought this valuable report to fruition. February 2014 Mr. Shunzo Kayanuma Chair of ABMF SF1 Mr. Thomas Meow Yoke Nean Vice-Chair of ABMF SF1 (Alternate for Mr. Lee Kok Kwan) c ASEAN+3 refers to the 10 members of the Association of Southeast Asian Nations (ASEAN) plus the People s Republic of China (PRC), Japan, and the Republic of Korea. Acronyms and Technical Terms ABMF ABMI ADB ADRB AFMGM+3 AMBIF AMBIP ASEAN ASEAN+3 ASIFMA BCLMV BM BMG CGIF CGT CIP CMSA CSRC FATF FCY FIEA FII FSCMA FSS FX GFC GOE HKEx HKMA HNWI HNX LCY IBBM IFRS IFSA IIP ISIN J-FSA JSDA KCMI KOFIA KRX KYC ASEAN+3 Bond Market Forum Asian Bond Market Initiative Asian Development Bank AMBIF Documentation Recommendation Board ASEAN+3 Finance Ministers and Central Bank Governors Meeting ASEAN+3 Multi-Currency Bond Issuance Framework ASEAN+3 Multi-Currency Bond Issuance Program Association of Southeast Asian Nations Association of Southeast Asian Nations plus the People s Republic of China, Japan, and the Republic of Korea Asia Securities Industry and Financial Markets Association Brunei Darussalam, Cambodia, Lao PDR, Myanmar, and Viet Nam Bursa Malaysia Berhad ASEAN+3 Bond Market Guide Credit Guarantee and Investment Facility capital gains tax Common Information Platform Capital Market and Securities Act (Malaysia) China Securities Regulatory Commission Financial Action Task Force foreign currency Financial Instrument and Exchange Act (Japan) Foreign Institutional Investor(s) Financial Services and Capital Market Act (Republic of Korea) Financial Supervisory Service (Korea) foreign exchange global financial crisis Group of Experts Hong Kong Stock Exchange Hong Kong Monetary Authority high net worth individuals Hanoi Stock Exchange local currency Inter-Bank Bond Market (PRC) International Financial Reporting Standard Indonesian Financial Services Authority (also known as OJK) Individual Information Platform International Securities Identification Number Japanese Financial Services Agency Japan Securities Dealers Association Korea Capital Market Institute Korea Financial Investment Association Korea Exchange know-your-customer Acronyms and Technical Terms vii MAS Monetary Authority of Singapore MTN medium-term-note NAFMII National Association of Financial Market Institutional Investors (PRC) NMPG National Market Practice Group OJK Indonesian Financial Services Authority (also known as IFSA) OTC over-the-counter PBOC People s Bank of China PDEx Philippine Dealing and Exchange Corp. PDMO Public Debt Management Office, Ministry of Finance (Thailand) Phase 1 refers to the work of ABMF from its inception in October 2010 through publishing of the Phase 1 report in April 2012 Phase 2 refers to the work of ABMF since January 2012 through the expected publication of the Phase 2 report in December 2013 Phase 3 refers to possible future phase for ABMF on the basis of the approval of ABMF Phase 2 outcomes and the commitment of the regulatory bodies QFII Qualified Foreign Institutional Investor (PRC) QIB Qualified Institutional Buyer (professional investor concept) SCA Substituted Compliance Approach SC MY Securities Commission Malaysia SEC Securities and Exchange Commission SF1 Sub-Forum 1 of ABMF SF2 Sub-Forum 2 of ABMF SFC Securities and Futures Commission (Hong Kong, China) SGX Singapore Exchange Ltd. SME small and medium-sized enterprises SRO self-regulatory organization SSC State Securities Commission (Viet Nam) SSE Shanghai Stock Exchange Sukuk refers to Islamic fixed-income instruments TF3 Task Force 3 of ABMI ThaiBMA Thai Bond Market Association TSE Tokyo Stock Exchange, Inc. VBMA Vietnam Bond Market Association. Executive Summary 1 Executive Summary Background The ASEAN+3 Bond Market Forum (ABMF) 1 was established in September 2010 and endorsed by the ASEAN+3 Finance Ministers Meeting as a common platform to foster the standardization of market practices and regulations in bond markets. 2 The ABMF consists of two forums: Sub-Forum 1 (SF1) and Sub-Forum 2 (SF2). The mandate of SF1 has been to address the persistent information asymmetry surrounding ASEAN+3 bond markets and to foster harmonization of the region s bond market regulations. Phase 1 ( ) of SF1 saw the compilation of the ASEAN+3 Bond Market Guide, a comprehensive set of descriptions of the 11 bond markets already established or under development in ASEAN+3 economies, including an overview of their individual regulations and practices. 3 The ASEAN+3 Bond Market Guide was 1 ASEAN+3 refers to the 10 members of the Association of Southeast Asian Nations (ASEAN) plus the People s Republic of China (PRC), Japan, and the Republic of Korea. 2 Currently, ASEAN+3 Finance Ministers and Central Bank Governors Meeting. 3 The full report in PDF format is available at the ABMF Home Page and AsianBondsOnline. published in April 2012 and is increasingly being referenced in the public domain. A key finding of Phase 1 was that while individual ASEAN+3 bond markets are heterogeneous in nature, a number of common elements allows opportunities for connecting the markets domestic bond markets across the region. This is based on the fact that in almost all markets, key legal and operational frameworks are already in place. SF1 members, hence, agreed to develop an intraregionally standardized bond issuance framework, which would ultimately allow bond issuers in ASEAN+3 to issue bonds in all participating economies with one set of standardized documentation and information disclosure requirements, subject to compliance with the legal and regulatory requirements of each economy. The framework will aim at (i) facilitating intra-regional, cross-border bond issuance and investments; (ii) channelling and circulating regional resources within ASEAN+3 economies; and (iii) helping further develop regional bond markets, considering the high levels of domestic savings in ASEAN+3 economies. 2 Proposal on ASEAN+3 Multi-Currency Bond Issuance Framework (AMBIF) As a result of its work in Phase 2 ( ), SF1 is now proposing the establishment of the ASEAN+3 Multi-Currency Bond Issuance Framework (AMBIF) 4 as a measure to support local currency (LCY) bond issuance and investment in the domestic markets of ASEAN+3. The intention is to establish AMBIF in a flexible manner to allow as many regional economies as possible to participate in AMBIF at the earliest possible stage. In doing so, SF1 would initially focus more on an expedited regulatory process and a standardization of the AMBIF Disclosure Documentation Framework. The benefits of AMBIF would be significant and include a new and flexible avenue for regional LCY financing, complemented by limited but focused disclosure requirements via defined documentation. Through agreement among participating economies, the ultimate benefit from AMBIF would be an expedited or fast-track regulatory process for multiple bond issuances by an issuer or issuer groups in ASEAN+3. More immediate benefits would be access to a wider base of investors and a shorter time to market that results in more reasonable issuance costs. From an investor and market perspective, AMBIF is expected to create significant opportunities for additional LCY-denominated investments and issuances as a distinct asset class. These issuances would broaden and deepen overall market offerings. Investors would also clearly benefit from a common approach across participating markets. A number of challenges may lie ahead during an AMBI
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