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### Introduction — Overview and context
- Three broad factors influence the development of bond markets: the investor base, the issuer base, and financial intermediation.
- Paper focus: market infrastructure, monetary operations, and taxation — areas most immediately amenable to policy action; uses an IMF questionnaire completed by ASEAN5 countries.
- ASEAN5 refers to: Indonesia, Malaysia, Philippines, Singapore, and Thailand.
- Authors: Simon Gray, Joshua Felman, Ana Carvajal, and Andreas Jobst (IMF-MCM).
- Presented to an ASEAN5 Deputy Governors’ seminar held in Bangkok on November 5, 2010.
- Structure:
  - Section I: Developmental Issues (market infrastructure, disclosure, information providers, derivatives, central bank liquidity management and market development, taxation).
  - Section II: Lessons from the Crisis.
  - Section III: Conclusion.
- Key framing:
  - Policy can influence investor base, issuer base, and financial intermediation by reducing barriers to entry (information gaps, administrative controls, monopolistic behavior), though links between reforms and objectives may be indirect.
  - Paper draws out common themes and issues likely to be faced by ASEAN markets; it is not comprehensive or prescriptive.

### Developmental Issues — A. Physical Infrastructure (findings and observations)
- Market infrastructure in ASEAN5 compares well to other emerging markets following recent reforms.
- Dematerialization (or immobilization) of securities is now common practice in the region.
- Wholesale trading in all countries usually takes place on a delivery versus payment basis (DvP), reducing settlement risk.
- Public trading venues are being developed in some countries, but OTC markets remain the main venue for government and corporate bonds in the majority of countries.
- Post-trade transparency exists in all OTC markets in the region except for corporate bond markets in Singapore, mainly due to trade reporting obligations.
- Consolidation and standardization of depository and settlement systems at the local level would increase market efficiency:
  - Thailand: book entry system for both government and corporate bonds centralized in a single CSD.
  - Malaysia: a CSD captures unlisted bonds issued by both the government and corporates.
  - Some countries could explore further consolidation of book-entry systems.
- Philippines: could consider strengthening legal concepts in clearing and settlement (finality, novation, netting) by embedding these in law rather than recognizing them only in regulations.

Cross-border and regional issues
- Each country currently has its own market infrastructure; no linkages have been developed between CSDs in the region.
  - Only Malaysia and Singapore have local CSD links with international CSDs.
- Lack of cross-country linkages increases transactions costs and may deter resident and non-resident investors from investing across the region.
- Cross-border transactions expose investors to bond settlement risk and foreign exchange settlement risk; most FX deals in ASEAN are transacted against the U.S. dollar, which settles after Asia business hours, compounding timing differences.
- A cross-country clearing and settlement arrangement would likely yield major benefits for cross-border investors.
- Asian Bond Markets Initiative Group of Experts (2010) finds multiple legal and regulatory barriers would need to be removed for regional options (ICSD versus CSD linkages) to be operationally feasible.
- CCPs:
  - Most bond trading in the region is OTC and settles bilaterally without CCP intervention.
  - CCPs manage counterparty risk but have sizable fixed costs and economies of scale; a minimum settlement volume is needed for economic feasibility.
  - In each domestic ASEAN market, costs of CCPs might outweigh benefits; a stronger business case might exist for a regional CCP if regional market integration (including a regional CSD) is pursued.

### Developmental Issues — B. Disclosure (findings and suggestions)
- ASEAN5 markets fare well on disclosure requirements vis-à-vis international best practices.
- Timely and relevant information on corporate bonds is key for pricing and liquidity of secondary markets.
- All countries require a prospectus at registration and periodic information during the life of an issue.
- Malaysia, Singapore and Thailand have implemented the common set of standards developed by the ASEAN Capital Markets Forum (ACMF) in 2008; remaining countries could follow.
- Identified weaknesses and suggested improvements:
  - IOSCO assessments identified weaknesses in enforcement of securities regulation, including enforcement of disclosure obligations; such weaknesses could deter investors.
  - Thailand could consider strengthening disclosure obligations in connection with material events.
  - Many countries could explore reductions in deadlines for review of prospectuses to reduce regulatory costs associated with offerings.
  - Indonesia could consider developing “shelf registration” or similar streamlined procedures for “seasoned” issuers or “issue programs”.

### Box 1 — Central Clearing Counterparties (CCPs): role, risks, and policy priorities
- Role and core functions:
  - CCPs reduce settlement risk by interposing themselves between every trade, performing multilateral netting, and centralizing collateral management.
  - CCPs guarantee fulfillment of contracts, net exposures, optimize collateral, and conserve economic capital.
  - Risk-management tools include capital requirements on members; posting and maintenance of collateral; loss sharing arrangements; daily valuation and margins (variation margin on mark-to-market valuations); monitoring of counterparty risk; initiating settlement on default.
- Concentration of risk and oversight imperatives:
  - CCPs concentrate credit and operational risk associated with their own failure; they must be subject to robust regulation and oversight by central banks and supervisors.
  - G-20 recommended clearing standardized OTC derivatives through CCPs and effective oversight of all CCPs; BIS and IOSCO are reviewing recommendations.
- Historical use and market coverage:
  - CCPs were developed for exchange-traded derivatives and expanded to equity, bond and repo markets (examples cited: FICC, NSCC, LCH.Clearnet).
- ASEAN region context:
  - CCPs exist where exchanges operate, but most bond trading in ASEAN is OTC and settles bilaterally; DvP implementation has reduced settlement risk but does not eliminate replacement cost risk or liquidity risk.
  - CCPs help manage replacement cost and liquidity risks beyond what DvP addresses.
- Derivatives, OTC markets, and implications for CCPs:
  - Crisis highlighted importance of CCPs for OTC derivatives and repo markets; OTC derivatives in ASEAN often concentrated among a few banks, implying substantial counterparty risk.
  - Improvements suggested: comprehensive netting law; introduction of CCPs to complement collateral provisions; use of standardized ISDA documentation; syndicated trading among investment-grade rated banks.
  - G-20 encouraged clearing standardized OTC derivatives through CCPs, trading derivatives on public venues, and reporting all OTC derivatives trades to a trade repository.
- Policy recommendations and market development priorities:
  - Consider standardizing and consolidating CSDs, while introducing CCPs for fixed income markets.
  - Tighten enforcement of securities regulation, including disclosure obligations and disclosure of material events.
  - Review disclosure obligations for private offerings, particularly for asset backed securities and other structured products.
  - Streamline registration procedures for offering securities.
  - Improve oversight of credit rating agencies and external auditors.
  - Develop legal and regulatory framework for expanding use of derivatives and adapt infrastructure systems accordingly.
  - Tighten reserve money management to reduce interest rate volatility and spur development of money markets.
  - Reform withholding taxation for non-resident income from bond holdings.
- Crisis lessons relevant to CCPs and market infrastructure:
  - Ensure liquidity risk taking does not become excessive by issuers, investors, or intermediaries; supervisors must identify liquidity risks and maintain a clear distinction between liquid bank deposits and investments with fluctuating values.
  - Repo borrowing should remain focused on securities likely to be liquid even during financial stress.
  - Cross-border, cross-currency links should not create risks that financial sector safety nets cannot absorb.

### Annex I — Market Infrastructure (trading venues, transparency, clearing, settlement, key stats)
- Trading venues:
  - Except for Philippines and Singapore (for government debentures), government and corporate bonds continue to be traded mostly OTC, usually telephone based.
  - Philippines: almost all transactions with government debt and corporate bonds take place in electronic platforms developed by PDEX.
  - Singapore: government bonds mostly traded through an electronic platform developed by Bloomberg.
  - Thailand: electronic system developed by the Stock Exchange used to trade both government and corporate bonds, but OTC trading remains most common.
  - Indonesia and Malaysia: electronic platforms exist but are not as frequently used as OTC.
- Market transparency and reporting specifics:
  - Indonesia:
    - Mandatory trade reporting for all trades executed.
    - Reporting agents: banks, securities firms, and custodians.
    - Reporting must be done to the exchange, with a 30 minutes delay.
    - Information available via a reporting terminal, dissemination to data vendors, and public via the exchange website.
  - Malaysia:
    - Pre-trade information available to market participants and the public.
    - Post-trade transparency requirements for both government and corporate bonds.
    - Information should be communicated to the exchange, within 10 minutes after concluding a transaction.
    - Information available via a bond website, the Bond Info Hub on the Central Bank’s website, and the exchange website.
  - Philippines:
    - PDEX platform provides pre-trade and post-trade transparency for participants and the public.
    - Information is updated on a 15 minutes delay basis.
  - Singapore:
    - E-Bond platform for government bonds provides pre-trade transparency to participants (primary dealers).
    - Post-trade reporting obligations exist vis-à-vis regulator and market participants.
    - Trade information accessible to participants in real time.
    - SGS website provides updated end of day prices for all SGS benchmarks to the public.
  - Thailand:
    - Pre-trade transparency vis-à-vis market participants.
    - Post-trade transparency obligations vis-à-vis market participants and the public.
    - Dealers required to report trade information to the Thai Bond Market Association with a 30 minutes delay; information made available almost in real time via Thai BMA website.
  - Regulatory trend: increasing emphasis on post-trade transparency in OTC markets (TRACE example: initial reporting delay of 75 minutes with delays shortened over time).
- Dematerialization and depositories:
  - Philippines and Malaysia: moved from scrip to dematerialized representation of securities.
  - Singapore: corporate bonds are not required to be dematerialized.
  - Indonesia: not all corporate bonds are dematerialized.
  - Thailand: legal requirements historically required paper form, but immobilization has largely eliminated paper risks.
  - Book entry systems are fragmented locally; potential synergies from consolidating into a single depository.
- Clearing and settlement risks:
  - Wholesale trading usually takes place in central bank money and under DvP; examples include Thailand via Thailand Clearing House.
  - Except for listed corporate bonds in Malaysia, clearing and settlement of government and corporate bonds do not involve a CCP.
  - Viability of CCPs depends on minimum trading volume; ASEAN might analyze CCP convenience in a regional context.
  - Legal framework: key concepts finality, novation and netting should be fully recognized by law; all countries except Philippines have such concepts embedded in law.
- Key statistics and operational parameters (exact values preserved):
  - Reporting delays and timing:
    - Indonesia: reporting must be done with a 30 minutes delay.
    - Malaysia: information communicated to the exchange within 10 minutes after concluding a transaction.
    - Philippines (PDEX): information updated on a 15 minutes delay basis.
    - Thailand: dealers required to report trade information to the Thai Bond Market Association with a 30 minutes delay; information made available almost in real time.
    - TRACE (U.S. example): initial delay of 75 minutes (delay shortened over time).
  - Settlement cycles (representative examples from jurisdictions):
    - t + 2 for bonds; t + 1 for short term bills.
    - t + 1 listed in several jurisdictions.
    - As agreed by parties listed in some jurisdictions.
  - Legal review timelines for prospectuses (examples from Table 2):
    - “45 days” (prospectus part of registration statement, becomes effective 45 days after receipt in complete form).
    - “60 working days for bonds listed on the main market and 40 working days for bonds listed on the ACE Market.”
    - “SEC has 45 days from the date of filing to complete the review.”
    - “21 days but may be extended by the Authority.”
    - “45 days upon completion of information.”
  - Prospectus validity and updates:
    - Prospectus validity example: valid for 6 months from the date of registration; supplementary prospectus required if materially adverse circumstances arise before closing.
  - Disclosure and filing frequencies examples:
    - Financial statements: semi-annual basis; quarterly basis in several jurisdictions.
    - Annual audited financial statements: example “105 days from the end of issuer's fiscal year” in one jurisdiction.
  - Credit rating requirements:
    - Credit rating mandatory in some jurisdictions with conditional exceptions (example: “except for issuance amounting to not more than 25% of the issuer's net worth or where there is an irrevocable credit line with a bank covering 100% of the proposed issuance”).
    - Obligation to update ratings examples: “annually” and “a CRA is obliged to monitor rating on a continuous basis.”

### Annex II — Disclosure Requirements for Corporate Bonds (practices, ACMF, information providers, derivatives considerations)
- Current disclosure practices across the five countries:
  - All five require submission of a prospectus for public offerings of corporate bonds.
  - Periodic update requirements:
    - Submission of financial statements:
      - semiannually in Indonesia and Singapore,
      - quarterly in Malaysia, Philippines and Thailand.
    - Audited annual financial statements are required in all five countries.
  - Communication of material events required in all five countries; Thailand uses quarterly reporting for unlisted securities.
  - Disclosure-based registration/review approach adopted by all five countries.
  - Prospectus review deadlines (all except Philippines have established deadlines):
    - 14 working days in Malaysia,
    - 21 days in Singapore,
    - 45 days in Indonesia and Thailand.
  - Shelf registration or similar streamlined procedures exist in all but Indonesia.
- ASEAN Capital Markets Forum (ACMF) initiative:
  - Two levels of standards: common ASEAN standards fully in line with IOSCO’s standards; additional “Plus Standards.”
  - Multi-jurisdictional offers would provide a common set of disclosure documents with appropriate wrap-around for Plus-Standards.
  - As of June 2009 Malaysia, Singapore and Thailand had announced implementation of the Scheme.
  - Expected outcomes: substantial shortening of approval time for registration; ensuring investors in different jurisdictions have access to the same information at the same time; progression toward convergence of disclosure requirements.
- Ratings and comparability challenges:
  - Mandatory rating for corporate bonds except in Singapore.
  - Local rating agencies exist in each jurisdiction but use different rating scales and methodologies, hindering cross-country comparability.
  - Association of Credit Rating Agencies in Asia has undertaken capacity building and established common terminology.
  - Policy options: encourage adoption of common methodology and rating scale; analyze benefits of establishing a regional credit rating agency.
  - Philippines-specific exception: rating mandatory except for issuances amounting to not more than 25 percent of the issuer's net worth or where there is an irrevocable committed credit line with a bank covering 100 percent of the proposed issuance.
- Regulation of information providers (Annex III summary):
  - IOSCO principles on “information service providers” recommend strengthened regulation and oversight of external auditors, CRAs and other evaluative service providers.
  - External auditors: subject to independent regulation and oversight (securities regulator or public accounting oversight boards preferred).
  - Credit rating agencies: oversight by a financial regulator based on registration regime following the IOSCO Code of Conduct; ensure quality and integrity, manage conflicts of interest, responsibilities to public and issuers.
  - Price vendors/pricing agencies: emerging to provide prices for illiquid securities; regulators starting to require registration to ensure methodology quality and address conflicts of interest.
  - Centralized data depositories / trade repositories: regulators imposing reporting obligations on OTC markets and seeking to centralize security information; CPSS-IOSCO working on recommendations.
- Derivatives (Annex IV summary of considerations):
  - Derivatives development linked to deep and liquid underlying cash markets and reliable benchmarks across the whole term structure.
  - Operational infrastructure, transparent rules, and well-structured clearing and settlement systems are key to efficient and stable derivative markets.
  - Exchange-based trading and central clearing reduce systemic risk; where absent, OTC derivative markets need greater disclosure, credit standing emphasis, position limits, and capital provisions.
  - Investor base and market access: participation from banks and insurance companies natural for interest risk transfer; institutional investor participation may be constrained by regulatory investment guidelines.
  - Risk management and legal framework: many ASEAN countries require further elaboration of regulatory and legal frameworks related to derivatives; restrictive cash market regulations (e.g., limits on short-selling, limited securities lending in Indonesia and Thailand) have constrained derivative trading.

*Source: INTRODUCTION, authors Simon Gray, Joshua Felman, Ana Carvajal, and Andreas Jobst; presented to an ASEAN5 Deputy Governors’ seminar held in Bangkok on November 5, 2010.*

### Introduction ...........................................................................................................

### INTRODUCTION

### Overview
- Three broad factors influence the development of bond markets: the investor base, the issuer base, and financial intermediation.
- The paper focuses on areas most immediately amenable to policy action, notably market infrastructure, monetary operations, and taxation, using an IMF questionnaire completed by ASEAN5 countries.
- This paper and a companion paper (“ASEAN Bond Market Development: Where Does it Stand? Where is it Going?”) provide an initial assessment of developments in the five ASEAN markets; they were presented to an ASEAN5 Deputy Governors’ seminar held in Bangkok on November 5, 2010.

### Authors and context
- Authors: Simon Gray, Joshua Felman, Ana Carvajal, and Andreas Jobst (IMF-MCM).
- In this paper, ASEAN5 refers to Indonesia, Malaysia, Philippines, Singapore, and Thailand.

### Structure of the paper
- Section I: Developmental Issues (market infrastructure, disclosure, information providers, derivatives, central bank liquidity management and market development, taxation).
- Section II: Lessons from the Crisis.
- Section III: Conclusion.

### Key framing points
- Policy can influence the investor base, issuer base, and financial intermediation by reducing barriers to entry (e.g., information gaps, administrative controls, monopolistic behavior), though links between reforms and objectives may be indirect.
- The paper draws out common themes and issues likely to be faced by ASEAN markets; it is not comprehensive or prescriptive.

---

### H3: I. Developmental Issues — A. Physical Infrastructure

- Market infrastructure in ASEAN5 countries compares well to that in other emerging markets following a series of reforms in recent years (Annex I).
- An infrastructure that spreads risk to ensure market integrity and collective interest is important to market development.
- Enhanced disclosure standards, capital rules and other statutory and prudential provisions have helped address past infrastructural shortcomings.
- Dematerialization (or at least immobilization) of securities is now common practice in the region.
- In all countries, wholesale trading usually takes place on a delivery versus payment basis (DvP), reducing counterparty risk.
  - DvP means that buyer and seller fulfill their obligations simultaneously, eliminating settlement risk - the risk that the seller of securities delivers them but does not receive payment, or vice versa.

Findings and observations:
- Public trading venues are being developed in some countries, bringing benefits in transparency, although OTC markets remain the main venue to trade government and corporate bonds in the majority of countries.
- All OTC markets in the region, with the sole exception of corporate bond markets in Singapore, have post-trade transparency, mainly due to trade reporting obligations imposed by regulatory authorities.
- Consolidation and standardization of depository and settlement systems at the local level would increase market efficiency.
  - A central securities depository (CSD) reduces the number of securities accounts and connections required by an investor or trader, and economizes on the cash settlement leg.
  - Thailand has a book entry system for both government and corporate bonds centralized in a single CSD.
  - Malaysia has a CSD which captures unlisted bonds issued by both the government and corporates.
  - Some countries could explore further consolidation of book-entry systems.
- The Philippines could consider strengthening key legal concepts in clearing and settlement (such as finality, novation, and netting) by embedding these in the legal framework rather than having them recognized only in regulations.

Cross-border and regional issues:
- Each country currently has its own market infrastructure; no linkages have been developed between CSDs in the region.
  - Only Malaysia and Singapore have local CSD links with international CSDs.
- Lack of cross-country linkages increases transactions costs and may deter resident and non-resident investors from investing across the region.
- Cross-border transactions expose investors to both bond settlement risk and foreign exchange settlement risk.
  - Most foreign exchange deals in the ASEAN countries are transacted against the U.S. dollar, which settles after Asia business hours, compounding timing differences between securities and cash movements.
- A cross-country clearing and settlement arrangement would likely yield major benefits for cross-border investors.

Regional initiatives and feasibility:
- The final report of the Asian Bond Markets Initiative Group of Experts (2010) discusses options for addressing the foreign exchange risk of cross-border bond transactions, comparing an Asian International CSD (ICSD) versus CSD linkages and includes a high-level feasibility study.
  - The study finds that multiple legal and regulatory barriers would need to be removed for any option to be operationally feasible.
- What is needed is a development plan that combines both government and market efforts.
- Central Clearing Counterparties (CCPs):
  - CCPs exist in the context of markets operated by exchanges, but most bond trading in the region is OTC and settles bilaterally without CCP intervention.
  - CCPs can manage counterparty risk, but have sizable fixed costs and economies of scale; a minimum settlement volume is needed to make them economically feasible.
  - In each domestic ASEAN market, costs of CCPs might outweigh benefits; a stronger business case might exist for a regional CCP if regional market integration (including a regional CSD) is pursued.

---

### H3: I. Developmental Issues — B. Disclosure

- ASEAN5 markets fare well on disclosure requirements vis-à-vis international best practices (Annex II).
- Increasing complexity of capital markets and product diversity create challenges for efficient information dissemination.
- Timely and relevant information on corporate bonds is key for pricing and impacts liquidity of secondary markets.
- All countries require a prospectus at registration and periodic information during the life of an issue.
- Malaysia, Singapore and Thailand have implemented the common set of standards developed by the ASEAN Capital Markets Forum (ACMF) in 2008, which will increase efficiency and reduce costs of multi-jurisdictional debt offerings; remaining countries could follow.

Identified weaknesses and suggested improvements:
- IOSCO assessments in the region have identified weaknesses in enforcement of securities regulation, including enforcement of disclosure obligations; such weaknesses could deter investors.
- Thailand could consider strengthening disclosure obligations in connection with material events.
- Some countries could streamline procedures to reduce regulatory costs associated with the offering of securities.
  - Many countries could explore whether reductions in their respective deadlines for the review of prospectuses are feasible.
  - Indonesia could consider developing “shelf registration” or similar streamlined procedures for “seasoned” issuers or “issue programs” to allow issuers to take advantage of market windows and raise capital more quickly.

---

*Source: INTRODUCTION, authors Simon Gray, Joshua Felman, Ana Carvajal, and Andreas Jobst; presented to an ASEAN5 Deputy Governors’ seminar held in Bangkok on November 5, 2010.*

### Box 1. Central Clearing Counterparties (CCPs)

### Box 1. Central Clearing Counterparties (CCPs)

### Role and core functions
- CCPs reduce settlement risk by interposing themselves between every trade, performing multilateral netting, and centralizing collateral management.
- CCPs act as clearinghouses between trading counterparties: after execution (confirmation) of a trade, they enforce the specific terms of the contract until maturity and guarantee fulfillment of the contract (including payment obligations and margin requirements) to ensure that a failure of a member does not affect other members.
- CCPs net exposures across multiple transactions of all clearing members, optimizing their use of collateral and conserving economic capital.
- Risk-management tools used by a CCP (footnote 1):
  - Capital requirements on members.
  - Posting and maintenance of collateral to prevent a build-up of market exposure (including position limits).
  - Loss sharing arrangements in case posted collateral proves insufficient.
  - Daily valuation of the contract, including determination/application of “haircuts” and adjustment of margins according to day-to-day changes in replacement cost (“variation margin on mark-to-market valuations”).
  - Monitoring of counterparty risk to ensure dealer compliance with contract terms.
  - If default or termination occurs, initiating settlement to recover net final payments.

### Concentration of risk and oversight imperatives
- While CCPs reduce bilateral counterparty and settlement risk, they concentrate credit and operational risk associated with their own failure, which could destabilize financial markets (see BIS (2004) reference in source).
- Consequently, CCPs must be subject to robust regulation and oversight by central banks and other supervisors to meet high standards in risk management, operational arrangements, default procedures, fair access and transparency.
- The G-20 recommended clearing standardized OTC derivatives through CCPs and that all CCPs be subject to effective oversight; BIS and IOSCO are reviewing recommendations to ensure application to CCPs that clear derivatives.

### Historical use and market coverage
- CCPs were initially developed for exchange-traded derivatives but their use has expanded to equity, bond and repo markets.
- Examples cited:
  - FICC in the United States (since 1986) and NSCC (since 1976) act as CCPs for government bonds, corporate and municipal bonds.
  - LCH.Clearnet (since 1998) offers a multi-market centralized clearing netting facility for the European government repo and cash bond markets.
  - CCPs exist in major equity markets including the NYSE, Euronext and the LSE.

### ASEAN region context
- CCPs exist in the context of markets operated by exchanges in the ASEAN region, but in the majority of countries bond trading takes place mostly OTC and settles bilaterally without CCP intervention.
- Delivery-versus-Payment (DvP) implementation in all countries has helped reduce counterparty risk, particularly settlement risk, but DvP does not eliminate:
  - Replacement cost risk (e.g., when market moves between initial failed trade and replacement trade).
  - Liquidity risk (e.g., buyer needing to borrow cash or liquidate assets; seller needing to borrow securities).
- A CCP helps manage replacement cost and liquidity risks beyond what DvP addresses.

### Derivatives, OTC markets, and implications for CCPs
- The crisis highlighted importance of CCPs for OTC derivatives and repo markets; OTC derivatives (particularly FX and interest rate swaps and forwards) in ASEAN are often concentrated among a few banks, implying substantial counterparty risk absent market-wide provisions.
- Improvements to OTC market infrastructure suggested where relevant:
  - Comprehensive netting law.
  - Introduction of CCPs to complement collateral provisions when assessing adequacy of margins and risk management.
  - Use of standardized contract documentation in compliance with ISDA standards and syndicated trading among investment-grade rated banks noted as risk mitigants.
- The G-20 encouraged:
  - Clearing standardized OTC derivatives through CCPs.
  - Trading derivatives on exchanges or other public venues to improve transparency, price formation and liquidity.
  - Reporting all OTC derivatives trades to a trade repository to improve transparency and price formation.

### Policy recommendations and market development priorities (from conclusion)
- Consider the potential benefits of:
  - Standardizing and consolidating CSDs, while introducing CCPs for fixed income markets.
  - Tightening enforcement of securities regulation, including disclosure obligations; strengthening disclosure of material events; reviewing disclosure obligations for private offerings particularly for asset backed securities and other structured products; streamlining registration procedures for offering securities.
  - Improving oversight of credit rating agencies and external auditors.
  - Developing the legal and regulatory framework for expanding the use of derivatives and adapting infrastructure systems accordingly.
  - Tightening reserve money management to reduce interest rate volatility and spur the development of money markets.
  - Reforming withholding taxation for non-resident income from bond holdings.

### Crisis lessons relevant to CCPs and market infrastructure
- The global financial crisis exposed weaknesses in liquidity and risk management, and the critical role of market infrastructure (including CCPs) in promoting resilience.
- Key lessons:
  - Ensure liquidity risk taking does not become excessive by issuers, investors, or intermediaries; supervisors must identify liquidity risks and maintain a clear distinction between liquid bank deposits and investments with fluctuating values.
  - Repo borrowing should remain focused on securities likely to be liquid even during financial stress.
  - Cross-border, cross-currency links should not create risks that financial sector safety nets cannot absorb (e.g., excessive reliance on foreign-currency funding that central banks cannot readily backstop).

*Source: Box 1. Central Clearing Counterparties (CCPs), _wp11135 - Box 1. Central Clearing Counterparties (CCPs)_*

### Annex I. Market Infrastructure

### Annex I. Market Infrastructure

### Trading venues
- In all countries with the exception of Philippines and Singapore (for government debentures) trading of government and corporate bonds continues to be done mostly OTC, usually telephone based.
- Philippines: almost all transactions with government debt and corporate bonds take place in electronic platforms developed by PDEX, the local exchange.
- Singapore: government bonds are mostly traded through an electronic platform developed by Bloomberg.
- Thailand: an electronic system developed by the Stock Exchange is used to trade both government and corporate bonds, but OTC trading continues to be the most commonly used venue.
- Indonesia and Malaysia: electronic platforms for the trading of government and corporate bonds exist, but are not as frequently used as OTC.

### Market transparency
- More formal venues, such as electronic platforms, can enhance market transparency and support broader investor participation.
- OTC markets in the ASEAN region (except Singapore corporate bond market) have enjoyed additional transparency mainly due to trade reporting obligations imposed by regulatory authorities; OTC markets in the region fare well in transparency vis-à-vis international best practices.
- Country-specific post-/pre-trade transparency features:
  - Indonesia:
    - Mandatory trade reporting for all trades executed.
    - Reporting agents: banks, securities firms, and custodians.
    - Reporting must be done to the exchange, with a 30 minutes delay.
    - Information available to market participants via a reporting terminal with dissemination to all data vendors, and to the public via the exchange website.
  - Malaysia:
    - Pre-trade information available to market participants and the public.
    - Post-trade transparency requirements for both government and corporate bonds, on the seller of securities (approved interbank institutions usually report on behalf of clients).
    - Information should be communicated to the exchange, within 10 minutes after concluding a transaction.
    - Information available to participants and the public through a bond website, the Bond Info Hub on the Central Bank’s website, and through the exchange website.
  - Philippines:
    - PDEX platform provides pre-trade transparency and post-trade transparency for both market participants and the public, through its website.
    - Information is updated on a 15 minutes delay basis.
  - Singapore:
    - The E-Bond platform for government bonds provides pre-trade transparency to participants (primary dealers).
    - Post-trade reporting obligations in relation to government bonds vis-à-vis the regulator and market participants.
    - Trade information can be accessed by participants on real time.
    - The SGS website provides updated end of day prices for all SGS benchmarks and is available to the public.
  - Thailand:
    - Pre-trade transparency requirements vis-à-vis market participants.
    - Post-trade transparency obligations vis-à-vis other market participants and the public.
    - Dealers required to report trade information to the Thai Bond Market Association with a 30 minutes delay.
    - Information made available to both participants and the public through the Thai BMA website, almost in real time.
- Regulatory trend: increasing emphasis on post-trade transparency in OTC markets to improve price formation and monitor unfair practices (example: TRACE in the United States, initial reporting delay of 75 minutes with delays shortened over time).

### Box 2 — Trading of Corporate Bonds: OTC versus Exchanges (summary of analysis)
- Traditional distinction:
  - Corporate bonds and other fixed income products historically traded OTC; equities mostly on exchanges.
  - Rationale: corporate bond markets viewed as for professional investors.
- Characteristics of OTC markets:
  - Largely informal and unregulated.
  - Parties agree terms over the phone, including clearing and settlement; counterparties manage risks bilaterally.
  - Usually opaque vis-à-vis the public and other participants; some pre-trade transparency possible via screens.
- Characteristics of exchanges:
  - Regulated markets with rules of access, trading, and transparency set by market operator and approved by regulator.
  - Operate on electronic platforms with higher pre- and post-trade transparency.
  - Often work with a central clearing counterparty assuming counterparty risk.
- Convergence and regulatory response:
  - Differences narrowing: some OTC markets now have screens and electronic platforms where trades can be completed, increasing pre- and post-trade transparency.
  - Regulators imposing post-trade transparency requirements in OTC markets; G-20 recommended encouraging OTC derivatives markets to move to public venues.
  - TRACE (U.S.) example: SEC imposed reporting obligations for government and corporate debt; initial delay 75 minutes; delay shortened over time.
  - Crisis highlighted importance of transparency for structured products and derivatives.

### Dematerialization of securities and central securities depositories
- Dematerialization or immobilization has eliminated risks of paper-based securities (loss, destruction, theft), facilitating trading and trade settlement.
- Country status on scrip/dematerialization:
  - Philippines and Malaysia: moved from scrip to a dematerialized system of representation of securities.
  - Singapore: corporate bonds are not required to be dematerialized.
  - Indonesia: not all corporate bonds are dematerialized.
  - Thailand: both government and corporate debt have to be issued in paper form due to legal requirements; immobilization has largely eliminated paper risks.
- Book entry systems remain fragmented locally:
  - Indonesia and Philippines: book entry system for government securities controlled by a governmental body (the Treasury in Philippines, and the central bank in Indonesia); corporate bond book entry entrusted to a central securities depository under the securities regulator.
  - Malaysia: government bonds and all other unlisted corporate securities are deposited in RENTAS, operated by MyClear Sdn Bhd (a wholly owned subsidiary of the Central Bank of Malaysia); listed corporate bonds deposited at Bursa Malaysia Depository.
  - Thailand: book entry for both government bonds and corporate bonds centralized into one depository, the Thailand Securities Depository.
- Potential benefit: local synergies from consolidating book entry systems into a single depository.

### Clearing and settlement risks
- Wholesale trading usually takes place in central bank money, and under a delivery versus payment (DvP).
  - Example: Thailand achieves such conditions for trades cleared through the Thailand Clearing House.
  - Implementation of DvP has helped reduce settlement risk (risk that seller delivers but does not receive payment, or vice versa).
- Central clearing counterparties (CCPs):
  - Except for transactions with listed corporate bonds in Malaysia, clearing and settlement of transactions with government and corporate bonds do not involve a central clearing counterparty.
  - Consideration could be given to moving towards clearing of fixed income markets through central counterparties to eliminate settlement risks altogether.
  - Viability of CCPs depends on the existence of a minimum trading volume; ASEAN countries might analyze the convenience of CCPs in a regional context.
- Legal framework:
  - Key concepts for clearing and settlement—finality, novation and netting—should be fully recognized by law.
  - In all countries except Philippines such concepts are already embedded in the legal framework, along with relevant regulations.

### Key statistics and operational parameters (selected exact values preserved)
- Reporting delays and timing:
  - Indonesia: reporting must be done with a 30 minutes delay.
  - Malaysia: information communicated to the exchange within 10 minutes after concluding a transaction.
  - Philippines (PDEX): information updated on a 15 minutes delay basis.
  - Thailand: dealers required to report trade information to the Thai Bond Market Association with a 30 minutes delay; information made available almost in real time.
  - TRACE (U.S. example): initial delay of 75 minutes (delay shortened over time).
- Settlement cycles (from table entries; representative examples):
  - t + 2 for bonds; t + 1 for short term bills (listed as settlement cycle in multiple jurisdictions).
  - t + 1 (listed in several jurisdictions).
  - As agreed by parties (listed in some jurisdictions).
- Settlement systems:
  - RTGS used for settlement in multiple jurisdictions; cash settlement often in central bank money.
- Legal review timelines for prospectuses (from Table 2):
  - Prospectus review example durations:
    - “45 days” (prospectus part of registration statement, becomes effective 45 days after receipt in complete form).
    - “60 working days for bonds listed on the main market and 40 working days for bonds listed on the ACE Market.”
    - “SEC has 45 days from the date of filing to complete the review.”
    - “21 days but may be extended by the Authority.”
    - “45 days upon completion of information.”
  - Prospectus validity and updates:
    - Prospectus in one jurisdiction valid for 6 months from the date of registration; if materially adverse circumstances arise before closing, issuer must lodge a supplementary prospectus.
- Disclosure and filing frequencies (from Table 2):
  - Issuer required to submit financial statements: semi-annual basis; quarterly basis in several jurisdictions.
  - Issuer required to submit annual audited financial statements: examples include “105 days from the end of issuer's fiscal year” in one jurisdiction.
  - Accounting principles: IFRS referenced; full implementation expected by 2012 in multiple jurisdictions; local standards/US GAAP also mentioned.
  - Communication of material events: examples include “within 2 working days,” “as soon as possible,” “as soon as the event happens.”
- Credit rating requirements:
  - Credit rating mandatory in some jurisdictions with conditional exceptions (example: “except for issuance amounting to not more than 25% of the issuer's net worth or where there is an irrevocable credit line with a bank covering 100% of the proposed issuance”).
  - Obligation to update ratings: examples include “annually” and “a CRA is obliged to monitor rating on a continuous basis.”

*Source: Annex I. Market Infrastructure (IMF document).*

### Annex II. Disclosure Requirements for Corporate Bonds

### Annex II. Disclosure Requirements for Corporate Bonds

### Emphasis and importance
- Significant emphasis on disclosure and transparency has been made in the context of equity markets, however it is also critical for corporate bond markets and even for more complex products, such as asset backed securities (ABS)—as the recent financial crisis has highlighted.
- The availability of timely and relevant information on corporate bonds and ABS is key for pricing and has an impact on liquidity of secondary markets.
- International best practices are moving towards strengthening disclosure in the context of corporate bonds and ABS —in some cases even beyond public offerings.

### Current disclosure practices across the five countries
- All five countries require the submission of a prospectus for public offerings of corporate bonds.
- Securities regulatory agencies have issued specific guidelines on the content of such prospectus to assist issuers.
- Periodic update requirements:
  - Submission of financial statements:
    - semiannually in the case of Indonesia and Singapore,
    - quarterly in the case of Malaysia, Philippines and Thailand.
  - Audited annual financial statements are required in all five countries.
- Communication of material events is required in all five countries; in Thailand (for unlisted securities) such communication is enacted through quarterly reporting.
- Disclosure-based approaches to registration/review are adopted by all five countries.
- Prospectus review deadlines (all except Philippines have established deadlines):
  - 14 working days in Malaysia,
  - 21 days in Singapore,
  - 45 days in Indonesia and Thailand.
- Shelf registration or similar streamlined procedures exist in all but Indonesia to facilitate seasoned issuers or issue programs.

### ASEAN Capital Markets Forum (ACMF) initiative
- ACMF developed two levels of standards:
  - a set of common ASEAN standards fully in line with IOSCO’s standards for international debt offerings,
  - additional standards known as the “Plus Standards.”
- Under the Scheme an issuer making a multi-jurisdictional offer would provide a common set of disclosure documents based on the ASEAN standards with appropriate wrap-around for the Plus-Standards to investors in each jurisdiction.
- The timeframe for implementation of the Scheme depends on the readiness of each ASEAN member on an opt-in basis.
- As of June 2009 Malaysia, Singapore and Thailand had announced the implementation of the Scheme in their respective jurisdictions.
- Members agreed to work towards reducing the number of Plus standards over time and on harmonization of distribution rules and timelines for approval of registration of offering documents.
- Expected outcomes:
  - substantial shortening of approval time for registration in many ASEAN jurisdictions,
  - ensuring investors in different jurisdictions have access to the same information at the same point in time,
  - progression toward overall convergence of disclosure requirements.

### Ratings and comparability challenges
- Current practice: rating for corporate bonds is mandatory in countries except Singapore.
- General principle: issuers should get the rating from a local rating agency registered in the jurisdiction.
- Local rating agencies exist in each jurisdiction but use different rating scales and methodologies, hindering comparability across countries.
- Positive steps:
  - Association of Credit Rating Agencies in Asia has undertaken capacity building and established common terminology (e.g., definition of default event).
- Policy options suggested:
  - authorities could encourage adoption of a common methodology and rating scale to facilitate cross-country comparability,
  - analyze the benefits of establishing a regional credit rating agency.
- Philippines-specific exception:
  - rating is mandatory except for issuances amounting to not more than 25 percent of the issuer's net worth or where there is an irrevocable committed credit line with a bank covering 100 percent of the proposed issuance.
- Market practice note:
  - many local ratings have ties with global rating agencies (for example, the global rating agency is a shareholder in the local rating agency);
  - global rating agencies only rate issues of foreign issuers, issuers affiliated with foreign companies, or issues simultaneously placed in more than one jurisdiction.

### Box 3 — Best Practices on Disclosure in Corporate Bond and Fixed Income Markets
- For public offerings international best practices require a system of registration under a disclosure-based approach: regulators ensure issuers provide all material information necessary to understand issuer and issue characteristics and risks, but do not decide whether an issue is “too risky.”
- Prospectus requirements:
  - IOSCO guidelines exist for bond offerings and asset-backed securities.
  - Financial statements are key components and should be produced in accordance with high quality accounting standards; IFRS recognized as such standards.
- Timeliness of review:
  - Best practices point to establishing deadlines for prospectus review; non-compliance with deadlines should not amount to approval.
  - Example: the E.U. Prospectus Directive deadlines — 20 working days for a new issuer, 10 days for other prospectuses.
- Streamlined registration procedures (e.g., shelf registration) are encouraged for seasoned issuers and securities programs.
- Periodic filings:
  - financial statement and management report at least on a semiannual basis,
  - audited financial statements on an annual basis,
  - material events should be disclosed under tight schedules (usually, at the most within a couple of days of their occurrence).
- Private offerings:
  - Many countries exempt offerings directed only to professional/sophisticated investors from general public disclosure requirements; exact levels vary by country.
  - Crisis experience has prompted recommendations for additional disclosure for structured products even if privately offered.
- Ratings:
  - Mandatory rating common in emerging markets; voluntary in industrialized countries though market/prudential norms often make them effectively required.
  - The crisis highlighted conflicts of interest in the issuer-pays model and over-reliance on ratings; regulators are reevaluating regulatory reliance on ratings.

### Annex III — Regulation of Information Providers
- IOSCO finalized a new set of principles on “information service providers” aimed at strengthening regulation and oversight of external auditors, credit rating agencies (CRAs) and other evaluative service providers.
- External auditors:
  - Play a key gatekeeping role ensuring reliability of issuer financial information.
  - Should be subject to independent regulation and oversight to address conflicts of interest and ensure service quality.
  - Independent oversight can be by the securities regulator or specialized entities (e.g., public accounting oversight boards); oversight by professional associations alone is no longer sufficient.
- Credit rating agencies:
  - Reduce information asymmetries by providing measures of default probabilities; many emerging markets require mandatory rating of corporate bonds.
  - Crisis highlighted issuer-pays conflict of interest and over-reliance on ratings, especially in ABS contexts.
  - Recommendation: CRAs be subject to oversight by a financial regulator based on a registration regime following the IOSCO Code of Conduct, ensuring:
    - quality and integrity of the rating process,
    - independence and adequate management of conflicts of interest,
    - responsibilities of CRAs vis-a-vis the public and issuers.
- Price vendors/pricing agencies:
  - Emerging in some jurisdictions to provide prices for illiquid securities and develop pricing methodologies.
  - Regulators are starting to subject them to registration regimes to ensure methodology quality, pricing integrity, and to address conflicts of interest.
  - Malaysia example: Bondweb Malaysia Sdn Bhd was registered by the Securities Commission in April 2006.
- Centralized data depositories / trade repositories:
  - Regulators are imposing reporting obligations on OTC markets and seeking to centralize security information in “data depositories.”
  - Specialized entities are appearing to collect and disseminate price information; in some jurisdictions registration with the regulator is required.
  - Main regulatory concerns: fair access to information and conflicts of interest.
  - CPSS-IOSCO group working on recommendations for trade repositories in connection with OTC markets.

### Annex IV — Derivatives (summary of key considerations)
- Macroeconomic fundamentals:
  - Well-functioning derivative trading tends to be associated with deep and liquid underlying cash markets.
  - Limited equity market turnover constrains introduction and expansion of derivatives in ASEAN countries.
  - Development of interest derivatives contingent on reliable benchmarks and sufficient liquidity of government bond yield curve across the whole term structure.
  - Limited asset supply leads to liquidity-induced market risks (e.g., difficulties in executing securities margin requirements).
  - The relationship is reciprocal: derivatives development supports cash market depth and liquidity.
- Operational infrastructure:
  - Transparent derivative markets with orderly rules are generally deeper, more liquid and more efficient than unregulated trading.
  - Well-structured clearing and settlement systems facilitate efficient trading and market stability.
  - Exchange-based trading reduces systemic risk via margin requirements, position limits, market surveillance, loss-sharing arrangements, capital deposits, and international excess-of-loss insurance.
  - OTC derivative markets, where exchanges/central clearing are absent, require greater disclosure and transparency and higher emphasis on credit standings, position limits, and capital provisions.
  - Features from exchange-based trading (market makers, agreed transaction/position limits) can be adapted to OTC markets to mitigate counterparty risk.
  - Good governance and risk management are vital to minimize stability threats from unregulated derivative trading.
- Investor base and market access:
  - Sustainable derivative trading needs regulatory flexibility to converge demand and supply of risk protection.
  - Banks and insurance companies are natural participants for interest risk transfer but institutional investor participation in ASEAN interest rate derivatives is constrained in some countries.
  - Regulatory requirements and investor composition in cash markets affect derivative needs; price discovery is most efficient if a wide range of economic agents have market access.
  - Many pension funds and insurance companies face stringent investment guidelines mandating substantial holdings of government debt; relaxing these needs to be gradual.
  - Derivative market regulations and reporting requirements often limit institutional investor participation and hedging ability.
  - Consistent and stable macroeconomic policies and increased market surveillance temper speculative pressures; distinguishing speculation from legitimate hedging is complex.
- Risk management, regulation, supervisory oversight, and enabling laws:
  - Prudential regulation, disclosure requirements, and market supervision with monitoring systems promote sound risk management and balanced derivative market growth.
  - Appropriate regulation and supervision lower counterparty risk, discourage detrimental trading activity, and minimize threats to financial stability.
  - Many ASEAN countries require further elaboration of regulatory and legal frameworks related to derivatives:
    - legal and accounting uncertainty, silence on certain derivative types, unclear regulatory jurisdiction, or unenforceability of derivative contracts have inhibited market development,
    - restrictive cash market regulations (e.g., limits on short-selling, limited securities lending in Indonesia and Thailand) have constrained derivative trading.

*Source: Annex II. Disclosure Requirements for Corporate Bonds, _wp11135 - Annex II. Disclosure Requirements for Corporate Bonds*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11135.pdf_