Minimizing Foreign Exchange Settlement Risk in the ASEAN+3 Region (Financed by the Japan Special Fund)

Technical Assistance Report

Project Number: 39312 August 2006

The views expressed herein are those of the consultant and do not necessarily represent those of ADB’s members, Board of Directors, Management, or staff, and may be preliminary in nature.

ABBREVIATIONS

ABMI – Asian Bond Markets Initiative ADB – Asian Development Bank APEC – Asia-Pacific Economic Cooperation ASEAN – Association of Southeast Asian Nations ASEAN+3 – ASEAN plus Japan, People’s Republic of China and Republic of Korea BIS – Bank for International Settlements CLS – Continuous Linked Settlement CSD – central securities depository DVP – delivery versus payment EMEAP – Executives’ Meeting of the East Asia-Pacific Central Banks FX – foreign exchange FXSI – Foreign Exchange Transactions and Settlement Issues ICSD – international central securities depository OREI – Office of Regional Economic Integration PRC – People’s Republic of China PVP – payment versus payment RETA – regional technical assistance RSI – regional settlement intermediary RTGS – real-time gross settlement TA – technical assistance WG – working group

TECHNICAL ASSISTANCE CLASSIFICATION

Targeting Classification – General intervention Sector – Finance Subsector – Capital markets and funds Themes – Sustainable economic growth, regional cooperation, private sector development Subthemes – Promoting macroeconomic stability, promoting economic efficiency and enabling markets, policy/institutional/legal/regulatory reforms

NOTE

In this report, "$" refers to US dollars.

Head M. Kawai, Office of Regional Economic Integration (OREI) Director S. Madhur, OREI

Team leader M. Miyachi, Senior Advisor, OREI Team member C. Kaneko, Capital Markets Specialist, OREI

I. INTRODUCTION

1. On 1 September 2005, the Association of Southeast Asian Nations (ASEAN)+31 Asian Bond Markets Initiative (ABMI) Working Group on Foreign Exchange Transactions and Settlement Issues (FXSI) requested the Asian Development Bank (ADB) to study risk reduction in clearing and settlement, particularly regarding foreign exchange (FX) settlement risk 2 for cross-border bond transactions. ABMI is a regional initiative established under the ASEAN+3 Finance Ministers’ Meeting. The President, under ADB’s 3-year Knowledge Products and Service Workplan 2006–2008, 3 approved the technical assistance (TA) concept clearance on 3 October 2005.4 The TA design was discussed and subsequently endorsed by ASEAN+3 on 17 March 2006 at the ABMI Focal Group meeting held at ADB, Headquarters in Manila, Philippines. The design and monitoring framework is in Appendix 1.

II. ISSUES

2. The lack of well-developed local currency bond markets, which resulted in maturity and currency mismatches for borrowers in the region, was one of the causes of the 1997 Asian financial crisis. At the time, overdependence on bank financing forced borrowers to take on excessive short-term foreign exchange exposure to finance long-term projects that could only generate local currency revenue. This created two “mismatch” problems: (i) loan maturities became too divergent to the detriment of both local creditors and borrowers; and (ii) the currencies in which the loans were made became vulnerable to exchange rate volatility, or worse, local currency exchange rate depreciation. When international confidence in one local currency caused a rapid depreciation against the US dollar, a payments crisis ensued, exacerbating the loss in confidence across the region (the “contagion” effect). This led to banking and currency crises in several countries. With improved global macroeconomic conditions in recent years and the structural reforms implemented throughout the region, most crisis-affected economies recovered and have returned to robust growth. However, the lack of efficient bond markets in the region remains, so the absence of alternative sources of long-term local currency finance continues to be a source of potential financial vulnerability.

3. With this in mind, ASEAN+3 finance ministers established the ABMI in August 2003 to boost development of local currency bond markets. Currently, the ABMI Focal Group5 and four working groups focus on (i) expanding the pool of issuers on local currency bond markets, and (ii) developing a regulatory environment that promotes good governance and is thus attractive to domestic and regional bond market participants. The working groups offer policy recommendations to ASEAN+3 finance ministers, who decide on the next steps for bond market development within the region. ADB has supported ABMI since its inception, particularly through

1 ASEAN+3 includes the 10 members of ASEAN (Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam), Japan, People’s Republic of China, and Republic of Korea. 2 FX settlement risk refers to risk exposure to payments arising during bond settlements in cross-border transactions. 3 ADB. 2005. Three-year ADB-wide KPS Work Plan 2006–2008. Manila. 4 The TA first appeared in ADB Business Opportunities on 18 January 2006. 5 There were initially six working groups (WGs): (WG1) New Securitized Debt Instruments (chaired by Thailand) (WG2) Regional Credit Guarantee and Investment Mechanism (the People’s Republic of China [PRC] and the Republic of Korea); (WG3) Foreign Exchange Transaction and Settlement Issues (Malaysia); (WG4) Issuance of bonds denominated in local currencies by multilateral development banks, foreign government agencies (PRC); (WG5) Rating Systems and Dissemination of Information (Japan and Singapore); and (WG6) TA Coordination (Indonesia, Malaysia, and Philippines). The working groups were reorganized in 2005: WG4 achieved its objectives and was dissolved, while WG5 became WG4 and was renamed Working Group on Rating Systems. WG6 was moved directly under the Ad-Hoc Support Team to the newly created Focal Group, an apex body that oversees overall ABMI progress.

2 the provision of TA.6 The ABMI also complements work done by other regional forums on bond market development, including the Executives’ Meeting of the East Asia-Pacific Central Banks (EMEAP) and Asia-Pacific Economic Cooperation (APEC).7

4. In line with a recommendation included in ADB’s report on ASEAN+3 Regional Settlement Linkages8, WG3 (footnote 5) requested ADB to further analyze ways to minimize FX settlement risk for cross-border bond transactions.9 The report cited FX settlement risk as one major detriment to increasing cross-border bond settlement. 10 In cross-border transactions, different time zones mean different operational hours for national payment systems, leaving trading parties faced with potential FX losses (Herstatt risks). 11 Thus, true delivery versus payment (DVP) rarely occurs. The development of a well-functioning FX settlement system— where transactions are timely, definitive, and cost-efficient—can help minimize this risk and contribute to a more efficient bond market. As FX transaction volume rises within the region,12 minimizing FX settlement risk can also bring about greater financial stability. To some extent, these issues were examined in the EMEAP and Bank for International Settlements (BIS) studies, but without focus on issues pertinent to bond market development in ASEAN+3.13

5. There are currently several means for cross-border bond settlement: (i) global custodians, (ii) local agents (financial institutions in the local market), (iii) direct access, (iv) international central securities depositories (ICSDs), and (v) linkages of central securities depositories (CSDs) in the region. However, because of the current low volume of Asian currency-denominated bond market transactions (as well as limitations on currency convertibility, legal uncertainties, and over-regulation in some countries), most clearing and settlement providers offer very limited Asian coverage and services. Settlement of Asian currency-

6 ADB currently provides (or has provided) TAs for the following ABMI initiatives: ADB. 2003. Technical Assistance for ASEAN+3 Regional Guarantee Mechanism. Manila. (TA 6127-REG, for $800,000, approved on 27 October); ADB. 2003. Technical Assistance for ASEAN+3 Regional Settlement Linkage. Manila. (TA 6161–REG, for $300,000, approved on 19 December); ADB. 2005. Technical Assistance for ASEAN+3 Regional Multicurrency Bonds. Manila. (TA 6244-REG, for $400,000, approved on 3 June); and Japan Fund for Information and Communications Technology 9040: the AsianBondsOnline website (http://asianbondsonline.adb.org) and the Asian Bond Monitor. 7 EMEAP initiatives include enhancing the demand side for bond market development through Asian Bond Funds 1 and 2. APEC initiatives included the Initiative on Development of Securitization and Credit Guarantee, and Harmonization of Bond Market Rules and Regulations. 8 ADB. 2005. Bond Market Settlement and Emerging Linkages in Selected ASEAN+3 Countries. Manila (June). 9 In 1997, ADB conducted the “Technical Study on Strengthening Clearing and Settlement Systems for Bonds” (ADB. 1996. Technical Assistance for New Initiatives on Infrastructure Financing and Regional Capital Market Development. Manila [TA 5708-REG, approved on 11 November 1996]). The study concluded that there was no need for a regional settlement system as existing global clearing institutions would suffice. However, as the study focused on clearing for Dragon bonds and dollar-denominated bonds issued in Asia, a second study (TA 6161– REG [footnote 6]) was carried out, this time focusing on how regional settlement systems can enhance local currency bond market transactions in ASEAN+3. The study included an assessment of whether a regional linkage between settlement systems is viable. Although there was no consensus regarding the need to create a regional linkage, the study put forth four recommendations: (i) enhancing transparency, (ii) complying with international standards, (iii) boosting regional cooperation, and (iv) reducing risk. The study was completed in June 2005. 10 Other risks include legal risk, operational risk, and credit risk. 11 Herstatt risk is the risk that one party to a FX transaction takes when it pays the currency it sold, but does not simultaneously receive the currency it bought. 12 Bank for International Settlements (BIS). 2004. Triennial Survey of Central Banks, Foreign Exchange and Derivatives Market. Switzerland. The survey noted that average global FX daily turnover surged 57% from 2001 to 2004, with Asia accounting for about 19% of the increase. 13 EMEAP. 2001. Foreign Exchange Settlement Risk in East Asia Pacific Region. The report does not discuss participants other than commercial banks. In addition, there are no publicly available studies on development of bankruptcy laws that form the basis for PVP. The BIS Study on Reducing Foreign Exchange Settlement Risk covered only FX markets in Group of 10 industrialized (or commonly known as G10) countries.

3 denominated bonds remains exposed to Herstatt risk as most ICSDs, such as Euroclear and Clearstream, operate from different time zones than Asian markets. This can lead to other risks, such as available liquidity, which could contribute to instability in the region’s financial market.14 To further eliminate FX settlement risk, participation to the Continuous Linked Settlement (CLS) Bank15 is also important. However, there are currently only four Asian currencies (Hong Kong dollar, Japanese yen, Korean won, and Singapore dollar) eligible for CLS Bank settlement. CLS Bank has indicated informally that it wants to increase trading volume for the existing 15 currencies it covers rather than increasing the number of eligible currencies. For non-CLS Asian currencies, FX transactions may see widening spreads as a result of FX settlement risk, and the increased costs associated with settlement through a correspondent bank, i.e., third party bank (a CLS settlement member). There is also a higher risk incurred when using settlement procedures that do not comply with international standards. Given this, real-time settlement of CLS noneligible Asian currency-denominated bonds is not possible.

6. Preliminary work done with WG3 (footnote 5) suggests several options to mitigate the FX settlement risk. First, the region could continue to rely on existing local agents, global custodians, or ICSDs. However, there is concern that this approach will limit settlement to the few firms currently providing such services. This concentration could indeed add further risk. Earlier studies have shown that global financial market efficiency coincides with a huge potential risk with a system concentrated in few operators.16 Moreover, as long as the volume of cross- border trade of Asian currency-denominated bonds is insignificant and regulatory impediments remain, these operators are unlikely to extend their coverage in Asia. Thus, heavy reliance on existing operators will continue Herstatt risk and slow bond market development within the region. An alternative option is establishing a regional settlement intermediary (RSI) within Asia, as a “third time zone,” to service Asian business hours. Besides providing DVP to settle Asian currency-denominated bond transactions, the RSI could provide PVP for Asian currency settlement. The RSI could be linked to CLS Bank, real-time gross settlement (RTGS) systems,17 and CSDs in each ASEAN+3 country. Aside from resolving the Herstatt risk issue, an RSI established with ASEAN+3 support could induce the region’s capital markets to harmonize regulations better, leading to further and speedier bond market development across the region.

7. Asian bond market participants say that the private sector alone will not initiate any regional entities such as the RSI unless there is a reasonable profitability timetable. In addition, any regional settlement entity such as an RSI is often viewed as public infrastructure requiring government support. The proposed study would allow ABMI to jump-start the process of creating an RSI that would draw the private sector in as a catalytic participant in deepening bond market development in the region.

14 Herstatt risk can lead to liquidity risk—a risk that arises when counterparties must settle obligations, not on the due date, but on an unspecified later date. For example, because of time zone differences, the failure of Bankhaus Herstatt (1974) led to its counterpart banks’ exposure to German mark deliveries in the absence of suspended US dollars they expected from Bankhaus Herstatt. 15 CLS Bank opened in 2002 to provide a multilateral currency netting mechanism to remove the loss-of-principal risk on FX transactions by ensuring simultaneous PVP settlement and thus finality on both sides of the FX transactions. More information regarding membership and eligibility criteria can be found at http://www.cls-group.com. 16 European Central Bank. 2003. Review of the Foreign Exchange Market Structure. Germany; Cross, Sam Y. 1998. All About the Foreign Exchange Market in the United States. New York: Federal Reserve Bank of New York. 17 RTGS is defined by BIS as a gross settlement system whereby both fund transfers and bond settlement instructions can be processed in real time. As a gross settlement system, transfers are settled individually, i.e., without netting debits against credits. As a real-time settlement system, it effects final settlement continuously rather than periodically at prespecified times. Moreover, it is based on the real-time transfer of central bank funds. An RTGS system can thus be characterised as a funds transfer system that is able to provide continuous intraday finality for individual transfers.

III. THE TECHNICAL ASSISTANCE

A. Impact and Outcome

8. The TA aims to reduce regional financial vulnerabilities by offering ways to minimize clearing and settlement risk and thus encourage greater Asian currency-denominated cross- border bond transactions. The outcome is to increase the volume of cross-border bond issuance, increase trade transactions, and thus bolster the attractiveness of investing in local currency Asian bond markets. The TA will contribute to providing efficient, timely, and reliable infrastructure for these markets. It will assist government officials by offering policy recommendations that remove impediments in clearing and settlement bond transactions, which will encourage local currency bond market development. The TA complements ADB’s Office of Regional Economic Integration (OREI) drive to (i) promote regional economic policy dialogue by contributing active support to ABMI, and (ii) conduct research in the area of regional cooperation and integration.

B. Methodology and Key Activities

9. A key factor to the study’s success will be the feasibility of the resultant recommendations, driven to a large extent by the views and other inputs of market participants. ADB, together with the TA consultants, will consult with the private sector through organized meetings and/or conferences in addition to augmenting existing dialogue with all other stakeholders. The TA design will be relatively flexible to accommodate views from both the private sector and government officials. ADB, together with TA consultants, will meet regularly with WG3 members to discuss and consult with them on the TA design and to develop appropriate policy recommendations. The scope of the TA, with preliminary agreement with WG3 members, includes the following five components (paras 10–14).

10. The study will review the nature of FX settlement risks in cross-border bond transactions. Existing information and data from the ASEAN+3 Regional Settlement Linkage report (footnote 8) and the BIS and EMEAP reports (footnote 13) will be used as supporting information for building an assessment of the extent of FX settlement risk in each ASEAN+3 market. FX risk mitigation practices and FX transaction and settlement volumes between ASEAN+3 currencies will also be examined.

11. The study will (i) review available options in existing markets for settlement (including the role of CLS Bank); and (ii) assess each option’s potential effects, both positive and negative, in reducing FX settlement risk arising from bond trades. The impact on bond market development will also be studied. The analysis will include an assessment of the applicability and viability of each option for each ASEAN+3 country. Using gap analysis, the study will describe current technical, regulatory, and market challenges, among others, that face ASEAN+3 countries.

12. The study will explore the establishment of an RSI by examining several issues: (i) a detailed cost-benefit analysis, (ii) definition of the proposed roles and functions of an RSI, (iii) ownership, (iv) supervisory oversight, (v) level of participation by individual governments and/or ASEAN+3, (vi) linkages between RTGS systems, and (vii) specific private and public sector roles in an RSI. Aside from its ability to act as intermediary for non-CLS eligible currencies, an RSI could also provide a platform for an efficient cash management facility (which many private sector participants have suggested in earlier consultations) as well as become an information source for both payment and securities settlement, or become a regional

5 settlement agent for Asian multicurrency bonds, if and when they are issued. The role of the RSI in facilitating bond market development will also be discussed.

13. The study will develop a possible model for an RSI, identify potential impediments to its establishment, and highlight issues for further consideration. This component is meant to provide a practical example that could be implemented in the short term upon agreement by relevant parties.

14. The study will propose recommendations to WG3, and provide an appropriate roadmap to policymakers to remove identified impediments. It will also proffer ways to further reduce FX settlement risk in the longer term.

C. Cost and Financing

15. The total cost of the TA is estimated at the equivalent of $700,000. The TA will be financed on a grant basis by the Japan Special Fund, funded by the Government of Japan. Appendix 2 gives the details of the TA cost. Participating ASEAN+3 members have financed the costs of individual WG3 activities and intend to continue to do so.

D. Implementation Arrangements

16. ADB will be the Executing and Implementing Agency for the TA. It will be implemented and administered by OREI. In consultation with WG3 and especially the WG3 chair, OREI will supervise the work of the TA consultants.

17. Two international consultants (one clearing and settlement specialist and one bond market development specialist) will be hired for a total of 13 person-months. The consultants will have extensive experience in bond market development and clearing and settlement systems in the region. Outlined terms of reference are in Appendix 3. The consultants will be engaged by ADB as individual consultants in accordance with ADB’s Guidelines on the Use of Consultants. Procurement of equipment (computer, software, and other related items) will be in accordance with ADB’s Procurement Guidelines. After completion of the TA, any procured equipment could be retained by ADB for further use in other future TAs.

18. The TA will be implemented over 8 months and is expected to begin in August 2006, to be completed by March 2007. A series of consultations with market participants will be held in September 2006. With these inputs, as well as those from government officials, the draft interim report will be submitted to WG3 in November 2006. A final presentation to WG3 is expected in March 2007. The outline of the content of the report is in Appendix 4. Upon its completion, the report will be disseminated within ADB and appropriate websites,18 with external publication of the report subject to approval by WG3 members.

IV. THE PRESIDENT'S DECISION

19. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance not exceeding the equivalent of $700,000 on a grant basis for Minimizing Foreign Exchange Settlement Risk in the ASEAN+3 Region, and hereby reports this action to the Board.

18 For example, http://asianbondsonline.adb.org.

6 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks Impact Assumptions Financial Size and liquidity, Market statistics on • Macroeconomic and vulnerabilities in the including both growth of bond markets in political stability region are reduced number and volume ASEAN+3 • Access to information through the of bond issuance and and data development of liquidity in regional Market statistics on the domestic and bond markets bond trading and regional bond settlement markets Outcome Assumptions Increased number of Increased cross- Market statistics on • Conducive market issuers and investors border issuance, cross-border issuance conditions accessing ASEAN+3 inbound and regional and investments in Asian • Adequate bond markets investment, and currency-denominated commitment and trading in Asian bonds support from currency- ASEAN+3 denominated bonds governments

Outputs Assumptions Recommendations ASEAN+3 Reports published by • Access to information on options and governments agree Bank for International and data proposed steps to to take steps to Settlements, International • Sufficient market minimize FX remove risks and Organization of Securities consultation and input settlement risks impediments to FX Commission, Executive reflected in the report across ASEAN+3 clearing and Meetings of East Asia- for implementation markets, to create an settlement based on Pacific Central Banks, enabling environment recommended G30, and other Risk for efficient and options international forums and • Neither agreements effective clearing and financial institutions nor consensus settlement of bond obtained in the transactions Current indicators and process of finalizing available statistical data proposals by ASEAN from government + 3 officials agencies and financial institutions in developing member countries

Feedback from financial institutions, market participants, and policy makers through market consultation seminar and survey

RETA final report

Appendix 1 7

Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks Activities with Milestones Inputs • ADB staff 1.1 Conduct market consultation (September 2006). • International consultants with 2.1 Present interim findings to ASEAN+3 ABMI WG3 on FXSI appropriate skills and (November 2006). expertise • ASEAN+3 3.1 Present final report to ASEAN+3 ABMI WG3 on FXSI (March 2007). governments • WG3 chair • Bond market participants, including private sector

ADB – $700,000 - 13 person-months of international consulting: $390,000 - Travel expenses for international consultants: $90,000 - Printing reports and communications expenses: $50,000 - Presentation to WG members and market players: $100,000 - Purchase of equipment (computer, software, and other related items): $3,000 - Miscellaneous administration and support cost: $20,000 - Contingencies: $47,000

ADB = Asian Development Bank; ABMI = Asian Bond Markets Initiative; ASEAN+3 = Association of Southeast Asian Nations (Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam), Japan, People’s Republic of China and Republic of Korea; FX = foreign exchange; FXSI = Foreign Exchange Transactions and Settlement Issues; G30 = Group of Thirty; WG3 = working group 3

8 Appendix 2

COST ESTIMATES AND FINANCING PLAN ($'000)

Total Item Cost

Asian Development Bank Financinga 1. Consultants a. Remuneration and Per Diem i. International Consultantsb 390.0 b. International and Local Travelc 90.0 c. Reports, Printing, and Communications 50.0

2. Training, Seminars, and Conferencesd 100.0

3. Equipment (computer, software, and other related items) 3.0

4. Miscellaneous Administration and Support Costs 20.0

5. Contingencies 47.0

Total 700.0 a Financed by the Japan Special Fund, funded by the Government of Japan. b Assuming 13 persons-month of international consulting at $30,000 per month. c Assuming 18 international trips at $5,000 per trip. d Assuming four seminars (presentation to working group and/or market consultation) at $25,000 per seminar. Source: Asian Development Bank estimates.

Appendix 3 9

OUTLINE TERMS OF REFERENCE FOR CONSULTANTS

A. Clearing and Settlement Specialist-Team Leader (international, 7 person-months) 1. The team leader is expected to have significant research and market experience in clearing and settlement, and extensive knowledge in settlement risk in financial markets, particularly foreign exchange settlement risk in the Association of Southeast Asian Nations (ASEAN)+3 1 bond markets. The team leader will coordinate with the other consultant to incorporate views into the requested reports. The team leader will perform the following tasks:

(i) Prepare the executive summary together with the other consultant. Prepare the introduction of the report, including the background, objective, and rationale of the study.

(ii) Review the nature of foreign exchange (FX) settlement risks in cross-border bond transactions. Assess and analyze the extent of the FX settlement risk in each ASEAN+3 bond market (mainly markets in Hong Kong, China; Japan; Malaysia; People’s Republic of China; and Singapore), including risk mitigation practices and FX transactions and settlement volume between ASEAN+3 currencies.

(iii) Identify existing options for clearing and settlements of bonds and assess each option, both positive and negative, in reducing FX settlement risks arising from bond trades. The analysis shall include the applicability and viability of the option for ASEAN+3. Describe the current challenges (e.g., technical, regulatory, and market) facing ASEAN+3 by conducting gap analysis.

(iv) Explore the establishment of a regional settlement intermediary (RSI) by conducting a detailed cost-benefit analysis through (a) a review of the positive and negative aspects of an RSI, (b) its roles and functions, (c) ownership, (d) supervisory oversight, (e) level of participation by ASEAN+3 governments, (f) expected linkages with Real-Time Gross Settlement Systems (RTGS), and (g) the role of the private and public sectors.

(v) Undertake a practical case study by considering a possible model for the RSI to primarily play the role of mitigating FX settlement risk in the region. Identify impediments in setting up RSI and highlight issues for further consideration.

(vi) Propose recommendations and a roadmap to policymakers for removal of impediments, if any, and the way forward for reducing FX settlement risks for bond trades. Consult and work with appropriate government bodies on the possible removal of impediments if agreed by working group (WG) members.

(vii) Prepare and present the final report to the WG together with the other consultant. Ensure that the report is properly compiled in accordance with the Asian Development Bank’s (ADB) technical assistance format and edited before submission to ADB.

10 Appendix 3

(viii) Prepare questions that will be used to address issues relating to FX settlement risk in bond trades for market consultation with market participants. The outcome of the consultation should be analyzed and reflected in the final report.

(ix) Assist ADB in organizing meetings and reporting meeting minutes for market consultation meetings.

(x) Perform other tasks as reasonably requested by ADB.

B. Bond Market Development Specialist (international, 6 person-months) 2. The specialist is expected to have extensive research experience in bond market development, particularly in clearing and settlement for capital markets in the ASEAN+3 region. The specialist will work with the team leader to incorporate the specialist’s views into the requested reports. The specialist will perform the following tasks:

(i) Assist the team leader in preparing the executive summary.

(ii) Review the nature of FX settlement risks in cross-border bond trades in the ASEAN+3 region. Assess and analyze the extent of FX settlement risk in each ASEAN+3 bond market (mainly markets in Indonesia; Philippines; Republic of Korea; Thailand, and Viet Nam), including risk mitigation practices and the FX transactions and settlement volume of bond markets between ASEAN+3 currencies.

(iii) Discuss the impact on FX risk mitigation and bond market development in view of the impediments, based on the various options for bond settlement identified by the other consultant.

(iv) Based on the possible roles and functions of the RSI identified by other consultant, explore the RSI as (a) a platform for an efficient cash management facility; (b) a source of information on both payment and securities settlement; and (c) how the RSI could become a regional settlement agent for Asian multicurrency bonds, if issued. Discuss the role of the RSI in mitigating FX settlement risk and facilitating bond market development.

(v) Undertake a practical case study, together with other consultant, by considering a possible model for the RSI to primarily play the role of mitigating FX settlement risk in the region. Identify impediments in setting up the RSI and highlight issues for further consideration.

(vi) Propose recommendations and a roadmap to policymakers for removal of impediments, if any, and the way forward for reducing FX settlement risks for bond markets. Consult and work with appropriate government bodies on the possible removal of impediments if agreed by WG members.

(vii) Prepare and present the final report to the WG together with the team leader.

(viii) Assist the team leader in preparing questions that will be used to address issues relating to FX settlement risks in bond trades for market consultation with market players. The outcome of the consultation should be analyzed and reflected in the final report.

Appendix 3 11

(ix) Assist ADB in organizing meetings and reporting meeting minutes for market consultation meetings.

(x) Perform other tasks as reasonably requested by ADB.

12 Appendix 4

OUTLINE OF THE FINAL REPORT

I. EXECUTIVE SUMMARY

II. INTRODUCTION

III . REVIEW OF SETTLEMENT RISKS A. Review Various Settlement Risks B. Extent of FX Settlement Risk in the Region C. Analyze FX Transaction and Volume among ASEAN+3 Currencies

IV. IDENTIFY OPTIONS A. Review Existing Options (including Roles Played by CLS Bank) for Clearing and Settlement of Bonds B. Positive and Negative Aspects C. Identify Gaps in Various Options and Identify Challenges

V. PRACTICAL CASE STUDY A. Review Various Models for Regional Settlement Intermediary B. Case for Setting Up Regional Settlement Intermediary C. Identify Roles and Functions and Other Issues Such as Cost-Benefit Analysis, Ownership Structure, and Supervisory Oversight

VI. RECOMMENDATIONS A. Suggestions for Policymakers: A Possible Roadmap