The Asian Bond Markets Initiative (ABMI)

Ministry of Finance, Japan

OECD-ADBI 9th Tokyo Round Table on Capital Market Reform 26-27 February 2008, Tokyo, Japan Background and Purpose of the ABMI

 Background – High savings in many Asian countries were not efficiently utilized. – Bond markets in the region --- underdeveloped – Dominant financing tools --- short-term bank loans provided by the foreign capital The savings deposited in local banks in the region have been funneled into international financial centers and then back to the region in the form of dollar-denominated short-term capital, which is used for local currency- denominated long-term investment. ⇒ maturity and currency mismatches (“double-mismatch”)

 Purpose – To enable the private sector in Asia to raise and invest long-term capital without maturity and currency risks.

1 Major issues of ABMI

[ １．Diversification of issuers ]

（ ） Bond Markets in Asia Issuance of bonds Government Agencies （e.g. JBIC ） Government／ Local Japanese （guarantee） Enterprises Government Agencies Global Enterprises （Issuance of bonds） Local Enterprises International Financial Institutions （Issuance of bonds） （World Bank、ADB、IFC）

[ ２．Enhancing Bond Market Infrastructure ] Utilization of existing guarantee providers Regional Rating Agencies (e.g. JBIC) Credit enhancement toward bond issuing New credit guarantee Information dissemination mechanism mechanism technical assistance

Market infrastructure Development of legal systems （settlement etc.） （securities laws etc.） Infrastructure Framework after ASEAN+3 Finance Ministers’ Meeting in May 2005

ASEAN+3 Finance Ministers’ Meeting (AFMM+3)

ASEAN+3 Finance and Central Bank Deputies’ Meeting (AFDM+3)

Focal Group Meeting （Deputy’s Deputy（Director-General）Level） （Chair：Rotating）

○Ad-Hoc Support Team for the Focal Group ○ Technical Assistance Coordination Team （Chair：Rotating, same as Focal Group） （Chair：Indonesia、Vice-chairmen：Malaysia, Philippines)

① Creating New Securitized Debt Instruments （Chair：Thailand）

② Credit Guarantee and Investment Mechanisms （Co-chairs：Korea and China） ASEAN+3:Association of Southeast Asian Nations, China, Japan, ③ Foreign Exchange Transactions and Settlement Issues and the Republic of Korea （Chair：Malaysia）

④ Rating Systems （Co-chairs：Singapore, Japan） 3 High growth of local currency bond markets in Asia （in USD Billions）

1997 2002 2006 1997→2006 2002→2006

China (Excluding Hong Kong） 83.6 342.3 1,184.9 Indonesia 4.6 58.1 87.6 Korea 153.2 538.2 1,010.4 Malaysia 57.0 84.4 146.9 Philippines 16.8 27.6 44.9 Singapore 23.8 56.4 86.6 Thailand 10.5 48.3 111.5 Vietnam - - 4.9 Subtotal 349.5 1,155.3 2,677.7 7.7-fold 2.3-fold

Japan 4,202.6 6,416.8 8,487.8 Hong Kong 43.4 58.1 66.1

Total 4,595.5 7,630.2 11,231.6 2.4-fold 1.5-fold (Note) All figures are the sum of amount outstanding of government bonds and corporate bonds. Percent of GDP in parenthesis. * Vietnam: as of December 2005. 4 (Source) Asian Development Bank “Asian Bonds Online” The Joint Ministerial Statement of the 10th ASEAN+3 Finance Ministers’ Meeting 5 May 2007, Kyoto, Japan =Excerpt= On the Asian Bond Markets Initiative, we encouraged collective efforts of ABMI Working Groups in prioritising the work plans and setting clear deliverables to move forward. We welcomed the diversification of issuers and types of local currency denominated bonds, and endorsed undertaking of the following new studies: Exploring New Debt Instruments for Infrastructure Financing, Promotion of Securitisation of Loan Credits and Receivables, and Promotion of Asian Medium Term Note (MTN) Programme. We also recognised noticeable progress of studies on Regional credit guarantee and investment mechanism, settlement system, credit rating harmonisation as well as technical assistance coordination. Furthermore, we were also pleased to see the strengthened public and private sector cooperation under the ABMI.

5 Exploring New Debt Instruments for Infrastructure Financing

• Bonds issued for infrastructure investments with source of repayments stemming from the proceeds of the projects (Infrastructure Bonds). • Investment decisions do not depend on credit ratings of issuers, but on the profitabilities of the projects. • It is expected that the study under the ABMI will suggest new types of debt instruments and associated infrastructure project.

Payment (interest and principal) Usage fees Investors Users Benefit Infrastructure Project

Insurance premium

Source :“Research on the utilization of Revenue Bond” Policy Research Institute for Land Infrastructure and Guarantee for default transportation (Revised.) Insurance company 6 Promotion of Securitization of Loan Credits and Receivables

• Further securitization of loan credits and receivables would contribute to enhance the volume of bond markets, as well as to a further development of various types of collateralized debt obligations. • It is expected that the study under the ABMI will explore the measures to support a further promotion of securitization of these assets. Major impediments, standards and best practices for realization of these instruments will also be identified.

（Securitization of Account Receivables) Account Receivables Transfer of A/R Notes /Bonds Client Originator SPC/SPV Investors

Goods/Services proceeds proceeds

7 Source： ”East Asian Finance” (World Bank), METI,Japan Promotion of Asian Medium Term Note (MTN) Programme

 MTN Programme is the framework which enables companies to issue bonds/notes with various maturity and rates under certain simple procedures and is a major source of funding in the US and European market.

 It is expected that the study under the ABMI will find the way for the development and expansion of MTN program in the region utilizing the modality of the ADB’s Asian Currency Note Programme launched last year.

（ADB’s Asian Currency Note Programme) Issuer

Local currency Local currency bonds proceeds Programme Offering Dealer Circular/Documents (as primary subscriber) (English Law) Home local Home local currency currency bonds

Respective domestic clearing Investors (Singapore・Hong Kong・ documents will be documented Source：ADB under local laws Malaysia・Thailand) 8