HSBC Asia-Pacific Rates Guide 2011
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Transcript of HSBC Asia-Pacific Rates Guide 2011
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Overview 1
Market profiles 9
China 10
Hong Kong 18
India 24
Indonesia 30
Korea 36
Malaysia 42
Philippines 48
Singapore 54
Sri Lanka 60
Taiwan 66
Thailand 72
Vietnam 78
Australia 84
New Zealand 90
Japan 96
Appendices 103
Disclosure appendix 111
Disclaimer 112
Contents
We would like to thank Ronald Man, our graduate trainee, as well as our HSBC colleagues throughout Asia-Pacific for
their valuable contributions towards this bond guide.
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Executive summary The Asian local bond market has firmly established itself as an asset class in its own right. Global excess liquidity
and economic decoupling from Western Europe and the US has encouraged strong inflows into Asia-Pacific aided by
portfolio diversification benefits, higher yields and currency appreciation prospects. The development of Asian
markets has progressed markedly and recent developments now include, among others, enhanced access to CNY via
Hong Kong’s CNH market as well as new futures contracts deepening Thai and Korean rates markets. In response to
significant foreign inflows, however, some countries such as Thailand, Korea and Taiwan have implemented capital
control measures, though there is little evidence of an initial material impact on net outflows.
HSBC conducted a survey to analyse key factors that are most important to Asian sovereign bond investors and its
results are presented in the first section of the Overview. The questionnaire was sent to a large sample of global and
emerging market (EM) dedicated bond funds located in the US, Europe and Asia between mid-November and December
2010. There are three key findings: First, investors intend to increase their portfolio allocation in Asian local bonds,
with 64% of those surveyed indicating plans to allocate more than 10% of their portfolio exposure in Asian bonds.
Second, the three markets with the most investment opportunities in 2011 are China, Korea and Indonesia, according
to survey respondents. Third, ‘capital controls’ and ‘liquidity and volatility’ are the main obstacles for investors
accessing Asian local bond markets.
HSBC’s Asian Local Bond Index (ALBI) has become a benchmark index for Asian bonds, delivering superior
performance since 2001. The second section of the Overview examines its performance in 2010, with three main
findings: First, ALBI delivered superior returns (10.4%) versus both US Treasuries (5.3%) and European government
bonds (0.8%) during 2010. Second, high-yielding regions, such as India (with an interest income of 7.3%),
outperformed, as higher accrual returns offset capital losses to generate a positive local currency return of 4.9%. Third,
ALBI outperforms EFFAS Global in both the short (12 months) and long run (5 years) based on the Sharpe ratio.
We conclude that investors want to further tap into the Asian local bond market. The portfolio diversification attributes
of this region, in the context of a global bond portfolio, support this preference. The third section of the Overview
analyses the dynamics of correlation changes since 2000. Our analysis shows that emerging market (EM) bonds,
including allocation to Asian local bonds, provide a significantly positive contribution to a global portfolio.
Market profiles follow this Overview, containing specific market developments as well as useful technical
information, including regulatory changes and market liquidity. This 2011 edition includes three new countries:
Australia, New Zealand, and Japan.
Overview
The strong development of emerging Asian bond markets has resulted in
market capitalisation growing to USD6.1trn (from USD5.3bn at end 2009)
HSBC’s survey indicates that investor appetite for Asian bonds remains
high for 2011, as portfolio allocation into Asian exposure is set to increase
Excess liquidity and economic divergence have generated sizeable
foreign inflows, prompting the imposition of capital controls
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HSBC survey indicates continued preference for Asian bonds HSBC conducted a survey to analyse key factors that are important to Asian sovereign bond investors. The questionnaire
was sent to a large sample of global and emerging market (EM) dedicated bond funds located in the US, Europe and Asia
between mid-November and December 2010. There are three key findings: (1) investors are set to increase their portfolio
allocation in Asian local bonds, (2) China, Korea and Indonesia are the most preferred markets for 2011 and (3) capital
controls and liquidity and volatility are cited as the main obstacles for investors accessing Asian local bond markets.
Allocations into Asia: Fundamentals become increasingly important
To gauge the prevalence of Asian local bond investments, funds participating in the survey were asked to indicate
how much of their portfolio is allocated into Asian bonds: under 3%, 3-5%, 5-10% or over 10%. A reasonably large
proportion have allocated over 10%, and this proportion is set to increase by 3ppt to 64% in 2011 (Figure 1). The
survey also indicated a decline in the proportion of investors allocating under 3% of the total portfolio in Asian
bonds, to 14% from 29%, between 2010 and 2011. Higher prospective portfolio allocations point to expectations of
continued inflows into Asian bonds rather than liquidation. Re-allocation into Asian bonds appears to be justified
mainly by a strong Asian fundamental outlook, which was ranked as the most important driver by 40% of respondents,
followed by developed market rates, FX outlook and attractiveness versus other EM local bond markets.
Local currency bonds are strongly preferred to USD-denominated Asian sovereign bonds. In addition to superior carry,
the preference for local currency bonds is likely motivated by a perceived undervaluation of Asian currencies. For
this reason, 34% of respondents ranked potential FX returns among the most influential factors in deciding allocations
within the Asian local bond market universe, followed by local capital gains, local carry return and weightings in
benchmark indices.
Most preferred bond markets: China, Korea, and Indonesia
The top three preferred Asian local bond markets that present the best opportunities in 2011, according to the survey,
are China, Korea and Indonesia (Figure 2). China was ranked the top Asian local bond market for 2011 by 26% of
respondents, having laid the foundation for international use of CNY and following market developments in the offshore
CNY (‘CNH’) market during 2010. The prospect of additional monetary tightening measures in response to inflation
is largely incorporated into China’s onshore government bond market, giving rise to potential opportunities for market
participants searching for yield. As mentioned in the China market profile section, however, bonds issued in the Hong
Kong CNH market are generally issued at a substantial yield discount versus onshore, as investor demand has
outstripped supply, influenced by the prospect of an eventual CNY revaluation.
Figure 1. Investors indicate higher portfolio allocation to Asian bonds
Figure 2. China, Korea and Indonesia are the most preferred Asian bond markets (Rank 1 being the most preferred)
2010 allocation Projected 2011 allocation
Under 3% 3-5% 5-10% Over 10%
0%
10%
20%
30%
40%
50%
60%
CN
Y
HKD INR
IDR
KRW
PHP
SGD
LKR
TWD
THB
VND
% o
f res
pond
ents
Rank 1 Rank 2 Rank 3
Source: HSBC Source: HSBC
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Korea is expected to sustain investor interest into 2011, as 54% of respondents ranked it as a top three market on a
par with China. Korean Treasury Bonds (KTBs) and Monetary Stabilisation Bonds (MSBs) may continue to be
dictated by developments in the areas of macro-prudential policies and geopolitics, but a potential cheapening of
valuations as a result of these developments provides opportunities to establish long positions. Relatively steep
curves in Korea are also likely to entice duration demand. Moreover, as the Korean rates market is one of the most
developed and accessible in Asia, there is a diverse range of rates and FX hedging instruments for investors.
Indonesia remains attractive for Asian bond investors, capturing 17% of votes for the market with the best
opportunities in 2011. This is attributable to persistently high fixed income returns over 2009 and 2010 of 22% and
20%, respectively, in local currency terms only. Closely following Indonesia, India was ranked the top Asian bond
market by 23% of those surveyed. Opportunities in India are partly a result of high relative yields, traditionally low
correlation versus EM Asia and a low foreign investor base, but these advantages are somewhat hampered by an
aggregate foreign investment cap even though the USD10bn-increase in the foreign institutional investors (FIIs) limit
on government and corporate bonds is seen as a positive step.
Obstacles to investing in local Asian bonds: ‘capital controls’ and ‘liquidity and volatility’
The threat of capital controls as a response to strong inflows into Asian local bond markets is the key barrier for
investors according to the survey. Around 34% of total respondents indicated capital controls as the most significant
obstacle, followed by liquidity and volatility, tax and regulations, political risk and benchmark restrictions (Figure
3). During 2010, Thailand, Korea and Taiwan have introduced measures to stem capital inflows. In October 2010,
Thailand instituted a 15% capital gains tax on government bond investments by foreign investors. At the time of
writing, Korea is on the cusp of repealing tax exemptions previously enjoyed by foreign bondholders. In November
2010, Taiwan imposed a 30%-cap on fixed income investments as a proportion of foreign investors’ total portfolio.
Liquidity & volatility is the primary concern for 31% of survey respondents.
Funds sailing from Western Europe into emerging Asia on a fundamentals current
Since November 2008, according to the Emerging Portfolio Fund Research (EPFR), global bond funds have been
reducing their portfolio allocation from developed Europe whilst simultaneously increasing exposure to emerging
Asia (Figure 4). Allocations into emerging Asian bonds increased from 3.4% to 5.2%, and those for developed
Europe fell from 34.9% to 30.2%. On the back of relatively strong Asian fundamentals, HSBC’s survey results
indicate that these trends are likely to continue into 2011.
Figure 3. Capital controls remain the biggest obstacle perceived by investors
Figure 4. Global funds shift their portfolio allocation from developed Europe into Emerging Asia
0%
10%
20%
30%
40%
Liquidity
& v ol.
Political
risk
Capital
control
Tax &
reg.
BM
restriction
% o
f res
pond
ents
25
30
35
40
45
Jan-08 Dec-08 Nov -09 Oct-10
%
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
%
Developed Europe (LHS) Emerging Asia (RHS)
Source: HSBC Source: HSBC, EPFR
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Performance of the HSBC ALBI ALBI delivered superior returns versus other markets during 2010
High-yielding regions continue to outperform with higher accrual returns
ALBI outperforms EFFAS Global both in the short and the long term, based on Sharpe ratios
The HSBC Asian Local Bond Index (ALBI) outperformed the developed bond indices, generating superior returns of
10.4% (6.2% and 4.2% accounted by fixed income and FX, respectively) in 2010 to 17 December, versus 5.3% and
0.8% delivered by US Treasuries and European Government bonds, respectively. This is an outperformance
compared with 2009 as well, when ALBI generated around 7.17% in total returns. In general, all the regional markets
outperformed the 2009 returns (Figure 5), in part as a consequence of stronger capital inflows from developed markets.
Indonesian government bonds were the best performers for the third consecutive year, returning 20% in local currency
and 24% in USD terms.
The HSBC ALBI tracks the total return performance of a bond portfolio, which consists of local-currency denominated,
high-quality and liquid bonds in Asia ex-Japan. The ALBI includes bonds from the following countries/regions:
China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand. For
more information including country weights derivation, see ALBI factsheet.
Return attribution and analysis
Total returns can be dissected into individual components: FX gains/losses, capital gains/losses, and accrual returns
(Figure 6). During 2010, all the regions generated positive FX returns, with Thai government bonds delivering the
most currency gains (around 10%). In terms of capital gains and losses, Indonesia and Philippines generated the
highest capital gains (around 12.1% and 6.3%, respectively). Increased foreign participation in Indonesia and stronger
domestic demand in the Philippines helped lower yields. Meanwhile, Indian government bonds suffered the largest
loss (2.5%), primarily on the back of heavy bond supply and worsening liquidity conditions.
The benefits of high interest income can be seen clearly in markets such as India, where capital losses were more than
offset by a higher interest accrual return, to generate a positive total return of 4.9% year-to-date. High-yielding markets
such as Indonesia, India and the Philippines continue to generate highest interest income (10.4%, 7.3%, and 6.0%
respectively) while low yielding regions such as China, Taiwan, Hong Kong, and Singapore, as expected, delivered
relatively low accruals (3.2%, 2.5%, 3.1%, and 2.9%, respectively). In addition, the mid-yielding markets, such as
Korea, Malaysia, and Thailand, generated modest accruals of around 4.7%, 3.9%, and 4.1%, respectively.
Figure 5. Fixed income and FX returns Figure 6. ALBI return attributes
-10%
0%
10%
20%
30%
40%
JPY
AUD
CN
Y
HKD IN
R
IDR
KRW
MYR PH
P
SGD
TWD
THB
Ret
urn
Return FI y-t-d Return FX y-t-dReturn FI y-t-d 2009 Return FX y-t-d 2009
-5
0
5
10
15
20
25
30
CN
Y
TWD
HKD
SGD
KRW
MYR TH
B
INR
IDR
PHP
Tota
l ret
urn
(%)
Capital gains Interest accruals FX gains
Source: HSBC, Bloomberg Source: HSBC
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Performance during 1H10 exceeded that of 2H10 in most of the regional markets. In terms of capital gains, India was
the only market that slightly underperformed during 1H10, with capital losses of 0.45%. However during 2H10, six
markets (China, Singapore, India, Hong Kong, Thailand, and Taiwan) suffered significant capital losses (2.9%,
2.4%, 2.1%, 1.9%, 3.1%, and 0.1%, respectively). FX returns were also relatively weak during this period, with
regions such as Indonesia and China registering relatively suppressed gains of around 1% and 2% respectively. Even
with such capital losses, total returns were positive, with the exception of China, which generated a total return of
negative 1.3%. The primary reasons for such underperformance during the second half were the correction in US
Treasuries, inflation uncertainty, and quantitative tightening by the PBoC.
Varying risk and return profiles in ALBI
Higher returns offered by Asia Local markets are often characterised by higher volatility and risk (Figure 7). As
illustrated in Figure 7, the two best-performing assets in 2010 – Indonesia and the Philippines – also have the most
volatile returns (32.2% and 11.1% in annualised terms, respectively). By contrast, low-yielding regions such as
Singapore and China delivered lower returns with less volatility (2.8% and 1.6%, respectively). This should not
imply, however, that higher returns of ALBI will also be associated with higher risks. The natural diversification
benefits offered by an index comprising a variety of asset classes reduce the volatility and increases the return of the
ALBI. In a global context, the addition of Asian local government bonds to a global bond portfolio could result in an
improvement in the risk-return profile.
ALBI outperformance versus developed bond markets
In 2010, ALBI has outperformed most of the developed bond markets on a total return basis (Figure 8). Moreover,
Sharpe ratios suggest superior performance of Asian local bonds versus developed bond markets both in the short
and in the long term. Using the 5-year US Treasury rate as a risk-free rate for monthly returns during January 2001-
December 2006, the Sharpe ratio (measured as excess return per unit of risk) for ALBI is approximately 0.50 versus
0.12 for EFFAS Global Index. An even larger differential in Sharpe ratios (0.70 for ALBI versus 0.09 for EFFAS) is
observed using data for the past 12 months, which may be explained by reduced EM volatility and higher return
because of consistent FII inflows.
Figure 7. Risk and volatility relationship (y-t-d 2010) Figure 8. ALBI outperformed developed markets during 2010
IDR
PHP
GRE
IREPOR
ESP
DEUUSD
HKD
KRW
CNY
M YRSGD
JPY
THB
INR
-20
-15
-10
-5
0
5
10
15
20
25
-5 5 15 25 35Volatil ity (%)
Ret
urn
(%)
0%
2%
4%
6%
8%
10%
12%
ALBI
US
Trea
surie
s
UK
Gilt
s
Euro
pe
Aust
ralia
Japa
n
Ret
urn
(%)
Source: HSBC, EPFR Source: HSBC, Bloomberg, EFFAS
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Asia local bond markets: Opportunities for diversification Emerging local bond markets have experienced a surge in foreign capital inflows. In addition to the prospect of
higher total return, the demand for EM assets is likely to continue to increase on the basis of their diversification
benefits. In a majority of Asia EM markets, the Sharpe ratio (defined as excess return over the risk-free rate per unit
of risk) is above that of developed bond markets. This measure, however, often fails to highlight the precise
diversification benefits in the context of a global portfolio.
Efficient frontier – not Sharpe ratio – is a better guide for global allocation
A more appropriate technique for achieving higher return with reduced risk is to allocate the portfolio on the basis of
the efficient frontier, which represents the best possible return that can be generated given a specified number of
asset classes for the specified amount of risk appetite. This is achieved by making relatively large allocation to assets
that generate high returns but are weakly correlated with one other. The strategy not only achieves a higher return but
also reduces the portfolio’s systemic risk. But, as the global economy has become increasingly integrated in the last
decade, two questions relating to global asset allocation have emerged: (1) How are the benefits of an internationally
diversified portfolio affected in the event of a crisis? and (2) Do these potential benefits shrink over the time?
In the event of crises, diversification benefits are generally reduced because of higher correlation among the various
asset classes. To analyse the diversification attributes a heatmap of correlation between various government bond
markets is plotted using data during 2008 crisis. The regions of heat-map with yellow and blue colours indicate a
weaker correlation whilst the regions with red and orange colours highlight a stronger correlation. Figure 9 illustrates
clustering of higher correlation between regional bond markets between September 2008 and March 2009. Relatively
weaker correlation exhibited by Asian local bond markets, however, highlights the potential opportunity to diversify
systemic risks even during such periods. Divergent total returns generated by the ALBI index (+0.73%) and
developed bond markets in EFFAS global indices (-0.73%) during this period also reinforce diversification benefits.
Over a longer time horizon, it is logical to expect stronger correlation among different markets and hence a decrease
in return-to-risk ratio of a global portfolio. In Figure 10, the diversification benefits of Asian domestic bond markets
are highlighted by plotting returns per unit of risk observed at Maximum Sharpe Ratio (MSR) portfolio for two
portfolios representing global government bond markets and global government bond markets excluding Asia. As
indicated, the incremental benefits of adding Asia local bonds reduced somewhat during the 2008-2009 period which
witnessed the Lehman crisis. During 2004-2010, however, the potential benefits do not appear to be reduced,
suggesting that diversification benefits with dynamic allocations are sustainable over a longer period of time.
Figure 9. Clustering correlation during 2008 crisis (September 2008-March 2009)
Figure 10. Asia Local bonds continue to improve the risk-return attributes of the Global bond portfolio
UK US EU JP AU NZ CA PD CZ HU RSA CH HK SG KR MY TH PH IN ID
UK 1 0.22 0.78 -0.4 0.87 0.76 0.83 0.76 0.84 0.69 0.76 -0.1 -0.1 0.11 0.19 -0.1 0.18 0.54 0.08 0.58
US 0.22 1 0.62 0.3 0.41 0.65 0.39 0.52 0.42 0.69 0.41 0.24 0.44 0.79 -0.1 0.6 0.33 0.2 0.22 0.54
EU 0.78 0.62 1 0.11 0.96 1 0.83 0.91 0.93 0.96 0.92 0.23 0.32 0.6 0.42 0.44 0.55 0.51 0.45 0.81
JP -0.4 0.3 0.11 1 -0 0.12 -0.1 0.22 0.13 0.2 0.12 0.74 0.67 0.42 0.6 0.83 0.51 -0.2 0.74 0.14
AU 0.87 0.41 0.96 -0 1 0.95 0.9 0.93 0.96 0.92 0.97 0.16 0.23 0.38 0.51 0.29 0.53 0.61 0.43 0.8
NZ 0.76 0.65 1 0.12 0.95 1 0.82 0.9 0.92 0.96 0.91 0.24 0.33 0.63 0.4 0.45 0.55 0.48 0.45 0.8
CA 0.83 0.39 0.83 -0.1 0.9 0.82 1 0.9 0.83 0.88 0.93 -0 0.13 0.11 0.38 0.25 0.39 0.87 0.24 0.9
PD 0.76 0.52 0.91 0.22 0.93 0.9 0.9 1 0.96 0.95 0.96 0.38 0.47 0.34 0.58 0.46 0.64 0.66 0.58 0.82
CZ 0.84 0.42 0.93 0.13 0.96 0.92 0.83 0.96 1 0.89 0.93 0.4 0.42 0.37 0.58 0.31 0.63 0.51 0.58 0.69
HU 0.69 0.69 0.96 0.2 0.92 0.96 0.88 0.95 0.89 1 0.94 0.28 0.45 0.52 0.45 0.52 0.63 0.66 0.51 0.88
RSA 0.76 0.41 0.92 0.12 0.97 0.91 0.93 0.96 0.93 0.94 1 0.22 0.35 0.3 0.62 0.4 0.63 0.73 0.53 0.88
CH -0.1 0.24 0.23 0.74 0.16 0.24 -0 0.38 0.4 0.28 0.22 1 0.9 0.33 0.59 0.41 0.76 -0.2 0.89 -0.1
HK -0.1 0.44 0.32 0.67 0.23 0.33 0.13 0.47 0.42 0.45 0.35 0.9 1 0.33 0.52 0.45 0.89 0.09 0.87 0.13
SG 0.11 0.79 0.6 0.42 0.38 0.63 0.11 0.34 0.37 0.52 0.3 0.33 0.33 1 0.05 0.62 0.31 -0.2 0.32 0.33
KR 0.19 -0.1 0.42 0.6 0.51 0.4 0.38 0.58 0.58 0.45 0.62 0.59 0.52 0.05 1 0.46 0.73 0.29 0.86 0.41
MY -0.1 0.6 0.44 0.83 0.29 0.45 0.25 0.46 0.31 0.52 0.4 0.41 0.45 0.62 0.46 1 0.38 0.12 0.53 0.58
TH 0.18 0.33 0.55 0.51 0.53 0.55 0.39 0.64 0.63 0.63 0.63 0.76 0.89 0.31 0.73 0.38 1 0.32 0.92 0.36
PH 0.54 0.2 0.51 -0.2 0.61 0.48 0.87 0.66 0.51 0.66 0.73 -0.2 0.09 -0.2 0.29 0.12 0.32 1 0.11 0.79
IN 0.08 0.22 0.45 0.74 0.43 0.45 0.24 0.58 0.58 0.51 0.53 0.89 0.87 0.32 0.86 0.53 0.92 0.11 1 0.26
ID 0.58 0.54 0.81 0.14 0.8 0.8 0.9 0.82 0.69 0.88 0.88 -0.1 0.13 0.33 0.41 0.58 0.36 0.79 0.26 1
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2004 2005 2006 2007 2008 2009 2010
Ret
urn
/ Ris
k ra
tio
Global government bond portfolio
Global ex Asia government bonds portfolio
Source: HSBC Source: HSBC
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Resulting dynamics in the efficient frontier
The efficient frontier shows the optimal risk-return trade-off and is a result of minimising idiosyncratic risk by
exploiting correlations between assets to improve the risk-return trade off in a portfolio. Given changes in
correlation, diversification benefits from a global portfolio vary over time as the efficient frontier changes. Analysis
of the efficient frontier over last 5 years suggests a decreasing trend in diversification benefits. The Maximum Sharpe
Ratio (MSR) represents the highest mean-variance efficiency that can be achieved on an efficient frontier. Figure 11
shows both the MSR and Minimum Variance Portfolio (MVR) of a global portfolio has shifted down and right
respectively over 2004-10. In 2008-09 at the peak of the crisis, it was virtually impossible to achieve any return
without taking on approximately 5% risk. This directional movement indicates higher systemic risk as the coupling
of markets shrinks the benefits of diversification. Such shifts, however, can also be triggered by a crisis event. It is
therefore appropriate for investor to revise allocations actively according to market dynamics.
The apparent diminishing benefits from diversification questions the justification of its application. To examine this,
three different government bond portfolios were created using Asian Local Bond Indices (ALBI) and European
Federation of Financial Analysts Society (EFFAS) bond indices to act as proxy for global government bonds, global
ex-Asia government bonds and developed market government bonds. Three efficient frontiers representing each
portfolio are generated using the historical return and volatility data over last 10-years. Figure 12 shows the global
efficient frontier formed by adding Asia government bonds to the Global-ex Asia portfolio shifting significantly left
and upwards, dominating the other two frontiers by potentially yielding higher return for any level of risk.
One quantifiable measure of the benefits from an additional asset class into a portfolio is the change in MSR. ALBI
increased the maximum return that can be achieved on efficient frontier by around 200bp and the MSR by around
0.30. A second measure is the realised reduction in the MVP after adding a new asset class. The MVP reduced by
around 1.31% relative to global ex-Asia or developed market frontier. A third measure combines the previous two
methods to compute the Treynor ratio, which divides the MSR by a percentage increase in MVP. The Treynor ratio
for global portfolio is around 1.28% after the addition of ALBI which indicates significant diversification benefits.
The benefits of a global portfolio are anchored upon the correlation matrix of its assets. Strong quantifiable measures
indicate that local investors have a chance to improve the risk-return efficiency of their portfolios by investing in EM
assets, in particular Asia. In the event of clustered correlation similar to the 2008-09 crises, benefits from a global
portfolio may be severely impaired by strong systemic risk. It therefore remains critical to account for temporal
variations in the return vector and variance-covariance matrix in asset allocation to fully capture benefits of a
globally diversified portfolio.
Figure 11. Extreme risk-return trade off of global portfolio during peak of crisis
Figure 12. A global portfolio gives superior risk-return trade off (2001-2010)
0%
5%
10%
15%
20%
25%
30%
2% 7% 12% 17%Risk
Ret
urn
2004-2005 2006-20072008-2009 2009-2010
5%
7%
9%
11%
13%
15%
3% 7% 11% 15%Risk
Ret
urn
Global portfolio Global ex Asia portfolioDeveloped markets
Source: HSBC Source: HSBC, EFFAS, ALBI total return index
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Market profiles
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Asia-Pacific Rates Guide 2011 China December 2010
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Market developments During 2010, China took significant steps towards
gradual capital account liberalisation and
internationalising the Chinese yuan (CNY). A rapid
succession of recent moves – CNY de-peg and
expansion of CNY trade settlement (June 2010), lifting
most restrictions on Hong Kong’s CNY business (July
2010), acceleration of offshore CNY bond issuance
(August 2010) and improved access to onshore bond
market (August 2010) – suggests that additional
measures aimed at opening both the offshore and the
onshore CNY markets are likely to intensify in the years
ahead. See The rise of the redback – A guide to RMB
internationalisation, 9 November 2010.
In July, the People’s Bank of China (PBoC) laid the
groundwork for an offshore CNY (“CNH”) interbank
market by allowing all companies to open offshore
CNY accounts without limits. Corporate, institutional
and retail investors may now transfer funds between CNY
accounts held at different Hong Kong banks for any
purpose. Previously, CNY funds were non-transferable
between entities outside China. Allowing banks to
circulate CNY among themselves (on behalf of retail as
well as corporate clients) facilitates the development of
an offshore CNY interbank market deposit base and
related investment and financial products. The result is
an expansion in the number of vehicles through which
foreign investors and enterprises can invest their CNY
earnings and funds, especially as trading volumes become
sizeable and the deposit base grows (approximately
CNY200bn as of November 2010).
Trade settlements with the mainland are cleared in Hong
Kong only through Bank of China (HK) Limited – the
designated trade settlement clearing bank – which is
subject to a total annual settlement quota (CNY8bn in
Aa3/AA-/A+China
China takes major steps to develop CNY market on- and offshore, laying
the groundwork for future internationalisation of the CNY
Foreigners may access a newly launched offshore, deliverable CNY
(“CNH”) market
CNH bond market develops rapidly during 2010, but supply is outstripped
by demand
Bonds outstanding Government bond maturity profile (as of July 2010)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Sep-02 Sep-04 Sep-06 Sep-08 Sep-10
USD
bn
0
10
20
30
40
50
60
% G
DP
Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)
1-3 y ears
20%3-5 y ears
12%
5-7 y ears
9%
Less than 1 y ear
30%
7-10 y ears
14%
Ov er 10 y ears
15%
Source: ADB Source: HSBC, Chinabond
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2010, quota for 2011 yet to be announced at the time of
writing) or any approved onshore bank (for example,
HSBC China), subject to limits set by the People’s Bank
of China (PBoC). In the future, approved onshore banks
(e.g. HSBC China) may be provided a similar quota set
by PBoC. In the event that the RMB conversion quota
allocated to the RMB trade settlement scheme runs out
(as happened in October 2010), emergency (trade
related only) access to a CNY200bn-swap line between
Hong Kong and China may be activated. Additionally,
repatriation of offshore CNY is only allowed for
participating Authorised Institutions (AIs) for the
purpose of settling trade specific transactions under a
trade settlement scheme first launched in July 2009. See
Hong Kong Economic Spotlight: Offshore renminbi
product take off, 22 July 2010 for more information.
The market for Hong Kong-issued CNY-denominated
(“CNH”) bonds rapidly developed in 2010, though
demand has outstripped supply. Foreign investors are
not subject to regulatory approvals in order to access the
offshore CNY market. The issuance process, however,
is still characterised by heavy regulatory barriers and
funding channels are asymmetrically tighter for CNY
flows into mainland China. Consequently, bonds are
oversubscribed with strong demand spilling into low
rated debt, resulting in a single-B rated bond from Galaxy
Entertainment receiving over 10x subscription in
December 2010 as the first high-yield CNH bond. Other
notable issues during 2010 include that of: Hong Kong
SAR-based Hopewell Highway Infrastructure (first non-
PRC corporate bond, July), Citic Bank (first certificate
of deposit, July), McDonald’s (first multinational bond,
September) and Asian Development Bank (first
supranational bond / 10yr bond / Hong Kong Exchange-
listed bond, October).
Since the first CNH bond issuance in 2007, the total
outstanding has reached CNY58bn at the time of writing.
This is equal to only 1/4,000 of the onshore interbank
market, indicating potential for market expansion. Gross
issuance is expected to increase over the next three years
given the tendency of CNH bond yields to trade well inside
onshore bonds and onshore deposit rates due to strong
demand. See RMB offshore bonds: Developments,
dynamics and outlook for more information.
In November 2010, China’s Ministry of Finance
(MoF) enhanced the CNH yield curve by issuing
CNY8bn in MoF bonds. The issues were in the 2, 3, 5
and 10 year tenors and were oversubscribed 10x. Market
demand resulted in a 2ppt primary yield discount versus
comparable onshore bonds. The establishment of a CNH
government curve is expected to serve as a benchmark
risk-free curve for future corporate bond issuance.
Access to the onshore CNY bond market has also
broadened. In August 2010, China allowed certain foreign
investors to access the CNY20trn-onshore interbank
bond market subject to approval and an investment quota
granted by the PBoC. Three types of investors – namely,
foreign central banks, CNY-clearing banks in Hong Kong
and Macau, and CNY-settlement banks – are now eligible
to access the onshore interbank market. The Qualified
China: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? NoEligible collateral for repos - For CB repos T-bonds- For interbank repos T-bonds, PBOC bills, financial bondsMark-to-market requirements - Banks? Yes- Insurance companies? No- Pension funds? No- Mutual funds? YesTaxation: Government bonds* - Onshore investors Tax exempt if held to maturity,
else 5% business tax- Offshore investors Same as onshore**Offshore investor access - Foreign ownership of government bonds CNY106bn (Oct-10)- As % of outstanding 0.6% of bond market (Oct-10)- Direct purchase? Yes (for QFIIs)- Subject to cap? Yes- Registration requirement? Yes- Access to onshore funding? No- Access to onshore FX hedging? No- Access to rates hedging (IRS, repo, futures)? Yes (NDIRS)Market liquidity statistics Treasury bonds - Daily turnover (LCbn) CNY20-30bn- Buying volume in a single day (USDm) (with minimal market impact)
USD10m
- Bid/offer spreads under normal conditions (bp) 8bpPBoC bills - Daily turnover (LCbn) CNY30-40bn- Buying volume in a single day (USDm)
(with minimal market impact) USD20m
- Bid/offer spreads under normal conditions (bp) 8bp
CNH bonds - Daily turnover (LCbn) CNY0.05bn- Buying volume in a single day (USDm)
(with minimal market impact) Variable
(eUSD0.8m for on-the-run)- Bid/offer spreads under normal conditions (bp) 30-40bp
*HSBC is not a qualified tax adviser. Consult a professional advisor for further guidance **Reducible by DTA Source: HSBC
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Foreign Institutional Investor (QFII) scheme is the only
channel for the remaining foreign investors to access the
onshore market via the stock exchange. China’s onshore
interbank market accounts for more than 94% of trading
activity onshore, in contrast to the much smaller bond
trading volume on stock exchanges. See Hong Kong
Economic Spotlight: Completing the on/offshore RMB
circle, 18 August 2010 for more information.
New Credit Risk Mitigation (CRM) instruments
launched in November 2010. The new instruments are
essentially credit default swaps, using short-term bills,
mid-term bills and bank loans with maturities ranging
from 36 days to more than 26 months as underlying
assets. A total of CNY1.84bn CRM was launched and
20 deals were struck on the first day of trading. Only
authorised institutions may trade the new instruments,
including China Development Bank, most of the major
state lenders, joint-stock banks and the China units of
HSBC and Deutsche Bank.
Domestic banks are allowed to trade bonds on the
exchange from March 2010 subject to approval from
the China Banking Regulatory Commission (CBRC)
and the relevant stock exchange. Previously, bond
trading was permitted only in the interbank market.
Monetary policy While other central banks typically set short-term rates,
the People’s Bank of China manages monetary policy
both in the long term (e.g. setting 1yr benchmark
lending and deposit rates) as well as the short term
(rediscount rate). The PBoC also conducts open market
operations through repos, deposits, and the issuance of
PBoC bills. Though there are no explicit targets, the
PBoC has guided credit and money growth to control
inflation expectations.
Historically, the PBoC sets interest rates that are
divisible by 9bp as Chinese banks have used a 360-day
cycle to calculate interest rates rather than the 365-day
international norm. On 19 October 2010, the PBoC
hiked deposit and lending rates by 25bp, signalling a
move towards international standardisation.
Key policy rates
Rediscount rate: Interest rate charged to banks for
borrowing short-term funds. Bloomberg: CNDSC Index.
Time deposit and lending rates: Rate applied to bank
deposits and loans. Bloomberg: CNDR1Y Index (1yr
deposit), CHLR12M Index (1yr lending).
Reserve ratio: The PBoC may apply different levels of
required reserves to different domestic banks (e.g. large-,
medium- and small-size and rural banks). In addition to
setting the level of reserves, the PBoC may change deposit
rates on these reserves. Bloomberg: CHRRDEP Index.
PBoC bill yields: Domestic rates may be guided by the
PBoC through yield cut-offs for PBoC bills. Bloomberg:
CNBI3MO Index (90-day), The 90-day PBoC bill daily
fix rate is calculated as the average yield (excluding 25%
of both max and min) provided by more than 20 quote
banks. Reuters: CN3MNFIX=R.
USD/CNY fix: The fixing sets the midpoint for the
daily interbank trading band of +/- 0.5% around this
reference rate. Bloomberg: CNYMUSD Index.
Key market rates
7-day repo rate: The interbank benchmark rate and
primary fixing rate for both onshore and offshore swaps.
Bloomberg: RP07 Index (page CIRS). Reuters:
CN7DRP=CFXS.
Shanghai Interbank Offer Rate (SHIBOR):
Weighted average of offered rates of domestic banks for
a range of tenors (overnight to 1yr). Bloomberg:
SHIF3M Index (3mth).
USD/CNH: Exchange rate for Hong Kong deliverable
Chinese yuan. Bloomberg: CNH Curncy.
Fixed income instruments The Chinese bond market has grown to a market
capitalisation of USD2.8trn (52.6% of GDP), making it
the largest local bond market in Asia outside of Japan.
Approximately 56% of the bond market is composed of
government bonds (including Treasury bonds and PBoC
bills), 26% are quasi-government bonds (financial
bonds issued by state policy banks) and the remaining
17% is accounted for by private sector bonds (mostly
corporate bonds and MTNs).
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Onshore CNY bonds by type (total: CNY19.3trn)
PBoC bills
23%
Other
8%MTNs
7% Corporate
bonds
7%
Financial
bonds
26%
Gov ernment
bonds
29%
Source: HSBC, Chinabond
There are 61 government bond underwriters, including
HSBC. More than 90% of bond trading activity takes
place in the interbank market. Key participants in the
bond market include commercial banks, policy banks,
and national social security funds. Participation by
institutional investors such as mutual funds, securities
companies and insurance companies has also increased.
There are 54 PBoC open-market-operations primary
dealers, including HSBC, where the PBoC issues PBoC
bills and other money market instruments twice a week
to control the liquidity of the onshore funding market.
At the moment, there are issuances of 3mth, 1yr and
3yr, but issuing plans will be changed subject to the
PBoC’s overall sterilization strategy.
Offshore CNY cross-border participating banks investing
in the onshore interbank bond market must invest
through a licensed agent for clearing, in accordance to
PBoC regulations introduced in August 2010. There are
45 licensed clearing agents, including HSBC. Offshore
banks that are qualified and also interested in investing
in the CNY bond market must file an application with
the PBoC and receive an investment quota in advance.
Foreign investment by means of QFII is relatively
small, at USD16bn as of October 2010 (0.6% of the
bond market). QFIIs may invest in A-shares, government
bonds, corporate bonds, convertible bonds and warrants
listed on China’s stock exchanges, and other financial
instruments as approved by the CSRC.
Bonds
Treasury bonds, commonly referred offshore as
Chinese government bonds (CGBs), are issued by the
Ministry of Finance (MoF) as the government’s main
debt instrument. Treasury bonds are sold in scripless
form through Dutch-style auctions to government
underwriters. Maturities typically range between 1yr
and 10yr but are increasingly available in longer-term
tenors (e.g. 15yr, 20yr, 30yr and – since November
2009 – in 50yr).
PBoC bills are issued by the PBoC to manage liquidity
and sterilise FX operations. They are sold in scripless
form via a Dutch auction. Available maturities range
between 1m and 3yr. The volume and frequency of
PBoC bill issuances have risen sharply due to persistently
high balance-of-payments surpluses. Active trading in
PBoC bills makes it – particularly the 3yr – a useful
benchmark for money market rates.
Corporate debt is issued by firms approved by the
National Development and Reform Commission
(NDRC). Corporate debt includes Commercial Paper
(CP) and Medium Term Notes (MTNs). They are sold
by book-running. Maturities vary according to business
needs and typically range between 3 and 30 years.
Financial bonds are issued by corporate firms and
underwritten by banks and leading securities firms. The
main type of financial bonds are policy bank bonds that
are issued by the three policy banks backed by the
government (China Development Bank, Export-Import
Bank of China and Agricultural Development Bank of
China) for the purpose of financing key national projects
that are not covered by the national budget. Financial
bonds are sold via an electronic auction at the China
Government Securities Depository Trust and Clearing
Company (CDC).
Hong Kong-issued CNY-denominated (“CNH”)
bonds were first issued in 2007, but the market
experienced rapid growth in 2010 due to market
liberalisation measures that fostered the growth of an
offshore CNY market that is deliverable, convertible
and transferable.
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Relative to the onshore CNY market, the CNH bond
market is characterised by shorter duration, generally
higher credit quality, lower yields, and very thin liquidity.
The average tenor is 1.5yr as of December 2010 with over
90% of bonds having a single-A rating or higher. Yields
are currently much lower than their onshore CNY bonds
and offshore Eurodollar Chinese bonds counterparts, but
estimated turnover is only CNY50m per day, with bid-
offer spreads of 20-40bp compared with 10bp and 15bp for
onshore government and corporate bonds respectively.
Offshore CNY bonds can be settled via the Central
Monetary Unit (CMU) under HKMA, as well as the
international clearing companies Euroclear/Clearstream.
See RMB offshore bonds: Developm ents, dynamics and
outlook, 13 December 2010 for further details. As of
December 2010, CNH bond supply stood at CNY58bn.
Derivatives
An onshore and offshore market exists for CNY interest
rate swaps (see table China: IRS and CCS markets).
Onshore IRS is a relatively new market, established in
2006. Foreign investors are not allowed to participate in
the onshore swap market. The market has grown rapidly
in recent years in terms of overall turnover, which was
CNY400bn in 2009 and CNY900bn as of October 2010.
It is still relatively small compared with the size of
outstanding bank loans (CNY50trn as of October 2010.
Although the 3mth Shanghai Interbank Offer Rate
(SHIBOR) was envisaged by authorities to serve as the
market’s swap fixing rate, in practice, a variety of
reference rates have been used with a majority of swaps.
The 7-day repo rate is still considered the most widely
used funding instrument in money markets. Consequently,
the 7-day repo IRS has the best liquidity among all
different types of IRS, taking around 65% of the overall
IRS turnover. Overnight SHIBOR and 1yr PBoC deposit
and lending rates have also been employed as fixing
rates in relative IRS products.
The main regulator of the swap market is the PBoC while
the China Foreign Exchange Trade System (CFETS),
also known as the National Interbank Funding Center
(the Center), is responsible for the daily monitoring and
deal reporting of the interbank market for PBoC.
CNH bond issuance and forecast
0
20
40
60
80
100
120
2007 2008 2009 2010f 2011f 2012f 2013f
CN
Ybn
Gross issuance Redemption Net issuance
Source: HSBC
China: IRS and CCS markets
Onshore IRS Offshore NDIRS Offshore CCS (NDS)
Non-resident access: Not allowed Existent Existent Tenors 1-10 years 1-10 years 1-10 years Liquid tenors 1-5 years 1-5 years 1-5 years Average trade size CNY100m CNY100m USD10m Bid/offer spreads under normal conditions (bp)
2-5bps 2-5bps 15-30bp
Fixing rate Various: 7-day repo rate, 3mth SHIBOR, o/n SHIBOR, 1yr PBoC deposit rate
7-day repo rate, 1yr PBoC deposit, 6mth SOR, 3mth SHIBOR
6mth USD Libor
Day count Fixed leg: Actual/365 Floating leg: Actual/365 for 7-day repo rate Actual/360 for 3mth SHIBOR, o/n SHIBOR and 1yr deposit rate
Actual/365 Actual/360
Effective date T+1 T+1 (7 day, 1yr deposit), T+2 (SOR), T+0/T+1 (SHIBOR)
T+2
Fixing time (local time) 11am for 7-day fixing repo rate, 11:30am for 3mth SHIBOR and o/n SHIBOR
11am 11am
Fixing page www.chinamoney.com.cn Reuters: CNREPOFIX=CFXS (repo), SHIBOR (3mth Shibor), PBOCB (1yr PBoC deposit), CNYSORFIX (6mth SOR),
Reuters: PNDS
Local market hours OTC, normally 9am-5:30pm 9am-5pm 9am-5pm Main participants Interbank, corporates Interbank, corporates Interbank, corporates
Source: HSBC
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Offshore non-deliverable IRS (NDIRS) and CCS
(NDCCS) curves have developed in Hong Kong. Like
its counterpart onshore, the CNY NDIRS curve may use
a variety of fixing rates, although the most common is
the 3mth SHIBOR. The fixing pages for NDIRS and
NDCCS markets are CNREPOFIX=CFXS.
The credit risk mitigation (CRM) market was launched
in November 2010 for China’s version of the CDS with
the aim of helping investors to hedge against risks in the
domestic corporate bond market. Currently, only China
Development Bank, most major state lenders, joint stock
banks such as China Everbright Bank, and the China
units of HSBC and Deutsche Bank are allowed to trade
these credit derivatives. Reuters: CN/CDS1.
Regulatory, settlement and tax issues Regulation
Three types of investors can access the onshore
interbank market subject to a quota assigned by the
PBoC: foreign central banks, CNY-clearing banks in
Hong Kong and Macau, and CNY-settlement banks.
Other foreign investors are required to have a QFII
status. QFIIs must appoint a local custodian and a
domestic broker. QFIIs are allowed to invest in T-
bonds, convertible bonds and corporate bonds listed on
the stock exchange. For more information, refer to the
China Securities Regulatory Commission (CSRC).
For the CNH market, there are no restrictions.
Settlement
Onshore settlement is done by the China Government
Securities Depository Trust & Clearing Co. For more
information, see http://www.chinaclear.cn.
For the CNH market, settlement is conducted by the
Central Money Markets Unit (CMU) or Euroclear on a
T+3 basis.
Taxation1
Onshore bonds are subject to taxes as stipulated by a
circular2 issued by the Chinese State Administration of
Taxation (SAT) in January 2009.
Tax liabilities of QFII investors depend on the bond
investment. Coupon income from government bond
investments is generally exempt from the 25% income
tax.
While income tax treatment on capital gains for QFII
investors remains unclarified, capital gains are generally
subject to an income tax of 25% and a business tax of
5%. Income tax on capital gains derived by foreign
investors may be further reduced to 10% or lower, subject
to a double tax treaty.
Foreign exchange Normal market conditions
Onshore spot daily average volume USD30-40bnOnshore spot volume per transaction USD5-10mOnshore Bid/Ask spread 5-10 pips (0.0005-0.0010 CNY)Onshore forward & swap transaction USD10-20bnOnshore forward spread 50–100 pips (0.0050 – 0.010 CNY) in 6M Offshore daily NDF average volume USD3bnNDF volume per transaction USD10mNDF spreads 40-60 pips (0.0040 – 0.0060 CNY) in 6MOffshore implied option volatility spread 0.2 vol
Notes: Data above only refers to interbank market. Spreads are subject to change with market developments Source: HSBC FX strategy
Useful links Information sources
China Government Securities Depository Trust & Clearing Co. Ltd
www.chinaclear.cn
People’s Bank of China www.pbc.gov.cnChina Securities Regulatory Commission (CSRC) www.csrc.gov.cnChina Insurance Regulatory Commission (CIRC) www.circ.gov.cnChina Bank Regulatory Commission (CBRC) www.cbrc.gov.cnNational Council for Social Securities Fund www.ssf.gov.cnChina National Social Security (CNSS) www.cnss.cnChinese State Administration of Taxation (SAT) www.chinatax.gov.cnState Administration of Foreign Exchange (SAFE) www.safe.gov.cnCentral Moneymarkets Unit www.cmu.org.hk
______________________________________ 1 HSBC is not a qualified tax adviser. Consult a professional adviser for further guidance
2 Guoshuihan [2009] No. 47 (Circular 47)
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China: Bonds
Treasury bonds PBoC bills Corporate bonds Offshore CNY (“CNH”) bonds
Issuer People's Republic of China (PRC)
People's Bank of China (PBoC)
Firms approved by the National Development and Reform Commission
Ministry of Finance (MoF, PRC), financial institutions, corporations
Currency Renminbi (CNY) Renminbi (CNY) Renminbi (CNY) Renminbi (CNY) Form Scripless Scripless Scripless Scripless Minimum denomination CNY100-1,000 CNY100-1,000 CNY100-1,000 CNY50,000 (institutional
tranche) Tenors 3 months, 1-10, 15, 20, 30, 50
years 1, 3, 6 months, 1, 3 years 3- 30 years 2-10 years
Coupon/discount Fixed rate, floating rate or zero coupon
Zero or fixed rate Fixed rate, floating rate or zero coupon
Fixed/ floating rate
Coupon frequency Annual or semi-annual None Annual Semi-annual Amortising schedule Bullet Bullet Bullet Bullet Day count Actual/ 365 Actual/ 365 Actual/ 365 Actual/365 Amount outstanding CNY6.4trn (Oct-2010) CNY4.4trn (Oct-2010) CNY3.3trn (Oct-2010) CNY58bn (Dec-2010)
Primary market Auction style Dutch auction Dutch auction Book running Book running Average issue size CNY26bn-35bn CNY3-50bn CNY1bn-10bn CNY200m-5bn Auction frequency Weekly Weekly Ad hoc Ad hoc Participants Underwriting group members
only Primary dealers only Selected underwriter Selected underwriter
Settlement T+3 T+1 T+1 or T+2 T+3
Secondary market Trading mechanism OTC, stock exchange OTC OTC, through stock exchange OTC, stock exchange Trading hours 9-12am, 1:30-4:30pm;
9:30-11:30am and 1-3pm 9-12am, 1:30- 4:30pm 9-12am, 1:30-4:30pm;
9:30-11:30am and 1-3pm n/a
Quoting convention Yield to 2-4 decimals Yield to 1-3 decimals Yield to 3-8 decimals Price to 2 decimals Average bid-offer spreads 10bp 10bp 15bps 30-40bp Average trade size CNY30-100m CNY30-200m CNY30-100m CNY1-5m Volume CNY7bn per day CNY21.4bn per day CNY3bn per day CNY50m per day Settlement T or T+1 in interbank market,
T for bonds, T+1 for cash in stock market
T or T+1 T+0 or T+1 in interbank market, T+0 for bonds, T+1 for cash in stock market
T+3
Clearing CDC or CSDCC CDC CDC or CSDCC CMU, Euroclear Main participants Members and domestic
investors if listed Members Members and domestic
investors if listed Members, foreign investors
Regulations for foreign investors Restriction on foreign investment
Generally closed to foreigners, open to QFIIs
Closed to foreigners Generally closed to foreigners, open to QFIIs
None
Custodian Local custodian required n/a Local custodian required None Interest income tax Government bonds generally
exempt from 25% income tax n/a n/a None
Capital gains tax 5% business tax. Related capital gain/loss will be included in 25% profit tax
n/a 5% business tax. Related capital gain/loss will be included in 25% profit tax
None
Entry/exit (SAFE) PBoC and CFETS approval required
n/a (SAFE) PBoC and CFETS approval required
None
Source: HSBC
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Asia-Pacific Rates Guide 2011 Hong Kong December 2010
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Market developments During 2010, Hong Kong strengthened its offshore
CNY (“CNH”) market platform status. The CNH
trade settlement scheme was expanded in July 2010,
making it easier for the private sector to open CNH
bank accounts and conduct payments and transfers with
them. This is achieved by eliminating restrictions on
banks in Hong Kong when opening CNH accounts for
and providing related services to financial institutions.
The People’s Bank of China (PBoC) allowed foreign
central banks and all CNH-clearing accounts
participating in the CNY trade settlement scheme to
enter its CNY20trn onshore interbank bond market. This
helps Hong Kong strengthen its comparative advantage
as an offshore CNY centre that develops a varied range
of CNY-related products and services.
The CNH bond market started in 2007, initially via
supply from mainland China-incorporated financial
institutions. In late 2009, sovereign bonds issued by the
Ministry of Finance (MoF) were sold for the first time
outside of mainland China. In 2010, strong demand for
sovereign/quasi-CNH bonds was evident with the
Chinese Government’s RMB8bn issuance of 2, 3, 5, 10
year bonds in November drawing 10x oversubscription
and the 3-year tranche drawing 15x oversubscription.
Recent issuance from CHEXIM (Export-Import Bank of
China) received a book of 12.6x and China
Development Bank (CDB) 9x. To develop a liquid
benchmark curve for this growing CNH market, further
sovereign and quasi-issuance is likely.
A total of HKD19.5bn new Hong Kong Government
Bonds (HKGBs) are issued under the 2009-14
Government Bond Programme in 2010. Bonds are
issued in either 2, 5 or 10 years tenors. During 2010,
HKD7bn, HKD4bn and HKD8.5bn of HKGBs were
issued in 2, 5, 10 year maturity respectively. The10-year
issue size was raised from an initial announcement of
HKD2bn to HKD3bn in October 2010.
Under the programme, the Special Administrative
Region may issue debt up to HKD100bn over the next
few years. As opposed to Exchange Fund Bills and
Notes (EFBNs), these bonds are not backed by foreign
reserves under Hong Kong’s currency board but are
Hong Kong
Strengthens offshore yuan (CNH) market platform status
Hong Kong Government continues debt issuance under the Institutional
Issuance Programme
Bonds outstanding Government bond maturity profile (as of September 2010)
0
20
4060
80
100
120140
160
180
Sep-02 Sep-04 Sep-06 Sep-08 Sep-10
USD
bn
0
10
20
30
40
50
60
70
80%
GD
P
Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)
1-3 y ears,
54.9%
3-5 y ears,
22.2%
Ov er 10 y ears,
7.9%
5-10 y ears,
15.0%
Source: ADB Source: ADB
Aa1/AAA/AA+
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liabilities of the Special Administrative Region’s
government.
Monetary policy The Hong Kong Monetary Authority (HKMA) has
enforced a currency board against the USD, which
requires both the stock and flow of the Monetary Base
to be fully backed by foreign reserves. Changes in
foreign reserves fully match any change in the size of
the Monetary Base, which comprises: Certificates of
Indebtedness and government-issued notes and coins
issued by the three note-issuing banks (NIBs, including
HSBC), sum of balances of banks’ clearing accounts
(Aggregate Balance) maintained with the HKMA as
well as the outstanding amount of EFBNs.
Since 1983, the HKMA has maintained a Linked
Exchange Rate of 7.80 vs. the USD. In 2005, a
convertibility zone of 7.75-7.85 with two-way
convertibility undertaking was introduced. The currency
regime is fully backed by foreign reserves held in the
HKMA’s Exchange Fund. Apart from ensuring that the
fund meets its statutory roles, one of the HKMA’s
principal day-to-day activities is the active management
of the fund’s assets. These are held mainly in the form
of marketable interest-bearing instruments and equities
in certain foreign currencies.
Whilst not permanently appropriated for the use of the
Exchange Fund, the government’s fiscal reserves are
also managed by the HKMA. Proceeds from fiscal
reserves are repaid to the General Revenue Account
when they are required to meet the government’s
operational needs.
Open market operations are used to control the
monetary base. This includes purchase or issuance of
EFBs for liquidity management purposes, repos and
direct intervention in the FX market. FX swaps and term
repurchase arrangements are incorporated into the
HKMA’s continuing market operations. This provides
HKD liquidity assistance to banks and eligibility is
assessed case-by-case.
Key policy rate:
Base rate: Cost of borrowing by banks from the
HKMA’s overnight discount window. Along with its
open-market operations, the base rate is used by HKMA
as a tool for influencing overnight interbank rates and
for managing liquidity in the banking system.
Bloomberg: HKBASE Index.
Key market rate:
Overnight HIBOR: Interest rate stated in HKD in
overnight lending and borrowing between banks in the
Hong Kong interbank market. HIBOR fixing rates
(ranging from 1 to 12 months) are based on the average
of the middle 14 of 20 HIBOR quotations provided by
banks designated by the Hong Kong Association of
Banks. HIBOR rates are used in conjunction with USD
LIBOR rates for quotations in the active basis swap
market. Bloomberg: HIHDO/N Index (overnight).
Prime rate: Also known as the best lending rate (BLR),
it is a standard measure for mortgage and other
consumer-based interest rates. Market rates are greatly
influenced by the prime rates of four dominant banks in
Hong Kong, including HSBC. Bloomberg: PRIEHSBC
Index (HSBC).
Hong Kong: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos EFB/EFNs- For interbank repos Government bonds, EFB/EFNs,
high-grade corporate bondsMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors None- Offshore investors NoneOffshore investor access - Foreign ownership of government bonds n/a- As % of outstanding n/a- Direct purchase? Yes- Subject to cap? No- Registration requirement? No- Access to onshore funding? Yes- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? YesMarket liquidity statistics EFB/Ns - Daily turnover (LCbn) HKD300bn- Buying volume in a single day (USDm) (with minimal market impact)
USD100m (1yr), USD20m (10yr)
- Bid/offer spreads under normal conditions (bp) 3-5bp (EFB), 5-10bp (EFN)HK SAR Government bonds - Daily turnover (LCbn) HKD0.3bn- Buying volume in a single day (USDm) (with minimal market impact)
USD10-20m
- Bid/offer spreads under normal conditions (bp) 10bp
Source: HSBC * HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.
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Composite interest rate: Introduced in 2005, the rate
reflects movement in various deposit rates, interbank
rates and other interest rates associated with banks’
average cost of funds. It enables banks to track changes
in their funding costs and is intended by the HKMA to
be a benchmark in setting mortgage rates. Bloomberg:
HKIRCOMP Index.
Fixed income instruments The Hong Kong bond market has grown to a market
capitalisation of USD167bn as of November 2010. The
market is dominated by quasi-government bonds,
constituting 55%. Government and corporate bonds
make up 1% and 44% of the market, respectively.
There are no “Primary Dealers”, but in the Hong Kong
Exchange Fund (EF) market, the HKMA publishes
every June and December a league table with the top-12
market makers for EFs based on six-month turnover.
Principal institutional investors in HKD fixed income
include banking institutions, the Mandatory Provident
Fund (MPF) and all pension plans under the Occupational
Retirement Schemes Ordinance (ORSO), insurance
companies, asset management companies and government-
related institutions (eg the Housing Authority).
Bonds
Exchange Fund Bills and Notes (EFB/Ns) are issued
by the EF and guaranteed by the government. They are
mainly held by banks to meet liquidity ratios. EFBs
have maturities ranging between 1 week and 12 months.
EFNs have maturities between 2 and 15 years and carry
a fixed rate coupon paid semi-annually.
Auction frequency is dependent on the tenor issued. For
EFBs, 91-day bills are held weekly, 182-day bills are
held bi-weekly and 364-day bills are held monthly. On
the other hand, for EFNs, 2, 3 and 5 year notes are held
quarterly whilst 10 and 15 year notes are held semi-
annually. All auctions use a multiple price system but a
small portion of EFNs may also be allocated using a
non-competitive bid.
Hong Kong Government Bonds (HKGBs) are
unsecured liabilities of the Hong Kong Government and
are not backed by the HKMA’s FX reserves, which make
them distinct from EFB/Ns. HKGBs cannot be used as
collateral to access the HKMA’s discount window.
Available maturities range between 2 and 15 years. The
bonds carry tax exempt status but are not fungible, unlike
EFBNs. Under the Institutional Bond Issuance
Programme, tender is open only to Recognized Dealers
which are appointed as Primary Dealers, though investors
wishing to apply for bonds during a tender offer can do so
through any of the Primary Dealers. Auctions are held bi-
monthly and use a multiple price system.
The current bond issue programme is scheduled to run
from 2009 to 2014, although bonds from the previous
programme in July 2004 are still traded in the secondary
market. There are two bonds from the 2004 programme:
a 2019 HKD500,000 HKD issue and a 2014
USD100,000 USD issue.
Negotiable Certificates of Deposits (NCDs) are
negotiable instruments issued by banks, financial
institutions and deposit-taking companies. They are
issued either as fixed or floating rate. Primary issues are
underwritten and arranged by banks as private
placements or public syndicated issues. Secondary
trading is conducted OTC.
Corporate bonds are private debt issued by non-
government issuers. They are usually sold through private
placements following a reverse enquiry process. Secondary
trades are mainly investor-driven and transacted OTC.
Corporate bonds issued by wholly-owned government
institutions are called “Specified Instruments”. “SIs” are
issued by the Airport Authority, Hong Kong Mortgage
Corp (HKMC), Kowloon-Canton Railway Corp
(KCRC) and Mass Transit Railway Corp (MTRC).
Exchange Fund Bills and Notes (EFB/Ns) outstanding
0
100
200
300
400
500
600
700
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
HK
Dbn
EF Bills EF Notes
Source: HKMA
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Derivatives
An onshore market exists for HKD interest rate swaps
(see table Hong Kong IRS and CCS markets).
Interest rate and cross-currency swaps extend out to
15 years but liquidity is greatest up to 10 years. There
are no restrictions on non-resident investor access to the
HKD IRS and CCS markets for HKD funding, or to
either hedge or take positions in HKD forwards, IRS
and CCS.
Overnight Index Swaps (OIS) were developed by the
Market Practices Committee of the Treasury Bureau.
The OIS market is a fixed-to-floating interest rate swap
with the floating leg tied to a published index of
overnight reference rates. Liquidity is extremely low,
with no market activity in 2010 but if there was to be a
trade, its size would be HKD500m.
HIBOR-LIBOR basis swap spreads is a market to
connect HKD liquidity to USD liquidity and vice versa.
They are normally transacted by HKD issuers looking to
swap USD liabilities back into HKD, supranational and
other foreign issuers looking to swap HKD liabilities
into USD, Hong Kong investors of USD-denominated
credits looking to swap back in HKD or HK banks and
foreign banks with HKD balance sheet transferring
liquidity to/from USD.
HIBOR (1mth and 3mth) and 3yr EFN futures are
available and traded in the derivatives market of the
Hong Kong Exchanges and Clearing (HKEx).
Regulatory, settlement and tax issues Regulation
Hong Kong offers foreign and local investors equal
access to local securities. Trading is generally
unrestricted with no limit on size.
Settlement
There are three distinct clearing and settlement systems:
the Central Money Markets Unit (CMU) of the HKMA,
Central Clearing and Settlement System (CCASS) and
Derivatives Clearing and Settlement System (DCASS)
of the HKEx.
The CMU is a central securities depository unit provides
electronic clearing, settlement, and custodian services
for Hong Kong dollar-debt instruments. The
implementation of the Real Time Gross Settlement
(RTGS) system provides real-time, Delivery-versus-
Payment (DvP) service for all debt securities
transactions.
CCASS provides clearing, settlement, and depository
services for exchange-traded securities. Clearing and
settlement is conducted using a Continuous Net
Settlement (CNS), or trade-by-trade system.
CNY Real Time Gross Settlement (RTGS) System
clears and settles offshore CNY bond transactions.
Hong Kong: IRS and CCS market
Onshore IRS HIBOR-LIBOR Basis Swap Onshore CCS (Fixed vs. fixed) OIS
Non-resident access: Allowed Allowed Allowed Allowed Tenors Up to 15 years Up to 15 years Up to 15 years Up to 2 years Liquid tenors Up to 10 years Up to 10 years Up to 10 years Up to 1 year Average trade size HKD100mn HKD100m HKD100mn HKD500m Bid/offer spreads under normal conditions (bp)
2-3bp 2bp 3-4bp 10bp
Fixing rate 3mth HIBOR 3mth HIBOR /USD LIBOR 3mth USD LIBOR HONIX Day count Actual/365F Actual 365/360 Actual/365F Actual/365F Effective date T+0, T+1 (after 11am) T+2 T+2 T+0, T+1 (after 11am) Fixing time (local time) 11am 11am (HK time) and 11am (London time) 11am (London time) 4pm Fixing page Reuters: HKABHIBOR Reuters: HKABHIBOR Reuters: LIBOR01 Reuters: HONIX Reuters: LIBOR01 Local market hours 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm Main participants Corporates Corporates Corporates Corporates
Source: HSBC
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Taxation3
For foreign and resident investors equally, there is no
tax on interest income and capital gains in Hong Kong.
For domestic institutions, however, there is a profits tax
of 16.5% (15% if not a corporate) applied to capital
gains and coupons. Instruments eligible for a 50%
concession of profits tax are: qualified debt instruments,
quasi-government notes, and debt instruments issued in
Hong Kong. Interest deposits, trading profits and
interest income are exempt. A full list of corporate
bonds that are eligible for tax concession can be found
on: www.ird.gov.hk/eng/tax/bus_qdi.htm.
______________________________________ 3 HSBC is not a qualified tax advisor. Consult a professional advisor for further
guidance.
Foreign exchange Normal market conditions
Onshore average daily volume USD12bnOnshore spot transaction USD50mOnshore bid/ask spread 2 pips (0.0002HKD)Onshore forward transaction USD50mOnshore forward spread out to 1 year 10 pips (0.0010HKD) Implied option volatility spread 0.1 vol
Note: Spreads are subject to change with market developments Source: HSBC FX strategy
Useful information Information sources
Hong Kong Monetary Authority (HKMA) www.info.gov.hk/hkma Central Moneymarkets Unit (CMU) www.cmu.org.hk Hong Kong Exchanges and Clearing Limited www.hkex.com.hk Financial Services and the Treasury Bureau www.fstb.gov.hk/eng/sfst/fstb.html Hong Kong Association of Banks (HKAB) www.hkab.org.hk Mandatory Provident Fund Schemes Authority (MPFA)
www.mpfa.org.hk/eindex.asp
Hong Kong Mortgage Corporation Limited (HKMC)
www.hkmc.com.hk/eng/
Invest Hong Kong www.investhk.gov.hk
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Hong Kong: Bonds
Exchange Fund Bills (EFBs)
Exchange Fund Notes (EFNs)
HK Government Bond Programme 2009-14
Corporate bonds
Issuer Hong Kong Monetary Authority (HKMA)
Hong Kong Monetary Authority (HKMA)
Hong Kong SAR Government (HKSAR)
Local/ multilateral corporations, foreign banks
Currency Hong Kong Dollar (HKD) Hong Kong Dollar (HKD) Hong Kong Dollar (HKD) Hong Kong Dollar (HKD) Form Global bearer (CMU,
Euroclear, CEDEL) Global bearer (CMU, Euroclear, CEDEL)
Book entry in securities accounts maintained with HKMA
Global bearer (CMU, Euroclear, CEDEL)
Minimum denomination HKD500,000 HKD50,000 HKD50,000 HKD50,000-1m Tenors 1 week, 1, 3, 6, 9 months, 1
year 2-5, 10, 15 years 2, 5, 10 years 1-30 years, mostly 3-5 years
Coupon/discount Zero, issued at discount Fixed Fixed Fixed or floating rate Frequency None Semi-annual Semi-annual Quarterly, semi-annual or
annual Amortising schedule Bullet Bullet Bullet Bullet Day count Actual/ 365 Actual/ 365 Actual/ 365 Actual/ 365 Amount outstanding HKD581.19bn (Jun-10) HKD70.2bn (Jun-10) HKD16bn (Jun-10) HKD569bn (Jun-10)
Primary market Auction style Multiple price, competitive
tender on bid-yield basis Multiple price, competitive tender on bid-price basis, (small portion for non-competitive tender)
Multiple price, competitive tender on bid-price basis
Private placement, EMTN programmes
Average issue size HKD0.5bn-24bn total HKD600m-1200m HKD2-3.5bn HKD100m-1bn Issuance cycle Weekly (91-day), bi-weekly
(182-day), monthly (364-day) Quarterly (2, 3, 5-year), semi-annual (10, 15-year)
Bi-monthly Ad hoc
Participants Eligible Market Makers (EMMs) only
Eligible Market Makers (EMMs) only
Primary Dealers Fund managers, insurance companies and banks
Settlement T+1 T+1 T+1 T+5
Secondary market Trading mechanism OTC OTC OTC OTC Trading hours 9-11am, 2-4pm 9-11am, 2-4pm 9-11am, 2-4pm 9-11am, 2-4pm Quoting convention Yield to 2 decimal places Clean price to 2 decimal places Clean price to 2 decimal places Yield Average bid-offer spreads 91 and 182-day 3bp; 364-day
5-10bp HKD5-10bp (depending on tenor)
10bp 10-30bp depending on maturity and credit quality
Average trade size HKD200-300m HKD20-100m HKD10-50m HKD50m-100m Volume HKD214bn per day HKD83bn per day HKD267mn per day HKD4-6bn per month (for
NCDs and corporate firms) Settlement T+1 T+1 T+1 T+3 Clearing Central Moneymarket Unit
(CMU) Central Moneymarket Unit (CMU)
Central Moneymarket Unit (CMU)
Central Moneymarket Unit (CMU)
Main participants Mainly held by banks to meet liquidity ratio requirement
Mainly held by banks to meet liquidity ratio requirement
Mainly held by banks but some are also held by fund managers, insurance companies etc
Fund managers, insurance companies and banks
Regulations for foreign investors Restriction on foreign investment
None None None None
Custodian None None None None Interest income tax None None None None Capital gains tax None None None None Entry/exit None None None None
Source: HSBC
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Market developments The quota limit on Foreign Institutional Investors’
(FII) government (GOI) and corporate bond
purchases is raised (September 2010). Specifically, the
GOI limit is lifted from USD5bn to USD10bn and
corporate limit from USD15bn to USD20bn. Purchased
bonds must have a remaining maturity of over 5 years
and corporate bonds must be issued by infrastructure
companies. See India Rates: FII Factor, 26 November.
Domestic banks shift to a Base Rate system from a
Benchmark Prime Lending Rate (BPLR) system
(July 2010). The new system aims to increase
transparency by preventing banks from lending below a
self-imposed base rate. It also provides policymakers
with a greater assessment of monetary policy
transmission. Under the previous system, bank BPLRs
were set high and effectively functioned as the ceiling
rate for higher-risk small loans that historically did not
fluctuate with the Reserve Bank of India (RBI)
benchmark policy rates, particularly during monetary
easing periods.
Liquidity Adjustment Facility (LAF) corridor is
narrowed from 150bp to 100bp, reducing money
market volatility (23 September 2010). LAF corridor is
defined as the spread between the repo and reverse repo
rates set by the RBI to manage short-term liquidity.
During two policy meetings (July 2010 and September
2010), the RBI reduced the width of the LAF corridor
by 50bp to a 100bp-spread considered a normalisation
move. The LAF corridor had been maintained at 150bp
since November 2008.
RBI doubles the number of monetary policy meetings
during a fiscal year from once per quarter to twice-
quarterly. The change in the frequency of regular policy
reviews aligns the RBI schedule closer with other central
banks globally. The RBI had resorted to inter-meeting
changes to benchmark policy rates 13 times since 2008.
Corporate bonds rated AA or above are eligible for
repo transactions (March 2010). All scheduled
commercial banks are allowed to borrow under this
system. Mutual funds and insurance companies must be
approved by Securities and Exchange Board of India
(SEBI) and Insurance Regulatory and Development
Baa3/BBB-/BBB-India
Foreign limit on GOI and corporate bond holdings is raised by USD10bn
Domestic banks switch to a Base Rate system from BPLR system
LAF corridor is narrowed 50bp to 100bp, reducing money market volatility
Bonds outstanding INR bond market composition (as of June 2010)
0
100
200
300
400
500
600
700
800
Sep-04 Sep-06 Sep-08 Sep-10
USD
bn
0
10
20
30
40
50
60%
GD
P
Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)
Financial
Institutions
3%
Local
bodies 0%Supran'l
0%
G-Sec
62%
Tbill
4%
State loans
17%
PSU
5%
Corp.
4%
Bank
bonds
5%
Source: ADB Source: CEIC
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Authority (IRDA) to trade in corporate bond repos.
Certificates of Deposits (CDs), Commercial Paper (CP)
and non-convertible debentures with maturity less than
one year do not qualify.
Infrastructure bonds with at least seven years
maturity are classified under held-to-maturity
(HTM) category from April 2010. Bonds under the
HTM category are exempt from mark-to-market
requirements and may constitute up to 25% of a bank’s
investment. The change is aimed at encouraging
investment by local banks in bonds sold by local
infrastructure firms to fund new projects.
Ceiling on banks’ exposure to unlisted non-SLR
papers is relaxed (April 2010). Banks are permitted to
treat exposure to unlisted non-statutory liquidity ratio
(SLR) debt securities as an investment in listed securities
at the time of making investments. This promotes the
corporate bond market and diverts corporate financing
from direct bank credit to the market. Eligible papers
cover investments in primary bond offerings and those
picked up from the secondary market.
India plans to introduce new interest rate futures on
91-day T-bill, 2- and 5-year government bonds (April
2010), providing investors a means to hedge long bond
positions.
Monetary policy The Reserve Bank of India does not have an explicit
inflation target. Its key benchmark policy rates are the
repo and reverse repo rates, which serve as the top and
low end of the LAF corridor, respectively. The repo rate
is applied to short-term loans from the RBI while the
reverse repo rate is applied to overnight deposits.
The RBI conducts liquidity management largely through
the LAF as well as the issuance of Market Stabilisation
Scheme (MSS) bonds. The LAF acts as a window for
adjusting day-to-day liquidity mismatches, whereas the
MSS addresses large swings in liquidity conditions that
can typically affect markets for 1 to 3 months. The RBI
may also control liquidity through adjustments to banks’
Cash Reserve Ratio (CRR) as well as the SLR. The RBI
may also impose ceilings on bank external commercial
borrowings (ECBs) and offshore investment in
government and corporate bonds.
During extreme conditions of tight domestic liquidity or
exceptionally heavy GOI supply, the RBI may
accommodate market conditions through GOI buyback
programmes as part of open market operations (OMOs).
In the past, the RBI has also temporarily reduced the
SLR.
Key policy rates:
Repo rate: Rate applied to short-term loans by banks
from the RBI. Bloomberg: INRPYLD Index.
Reverse repo rate: Rate applied to banks’ overnight
deposits held by RBI. Bloomberg: RSPOYLD Index.
Cash reserve ratio (CRR): Minimum reserves each
commercial bank must hold to customer deposits and
notes. Bloomberg: RBICRRP Index.
India: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? NoEligible collateral for repos - For CB repos GOIs, T-bills- For interbank repos GOIs, Oil bonds, T-bills, corp. bonds (>AA)Mark-to-market requirements - Banks? Yes- Insurance companies? Yes (Unit-Linked Insurance Plans only)- Pension funds? No- Mutual funds? YesTaxation: Government bonds* - Onshore investors Capital gains:
10% (if maturity <12mths), 30% (if maturity >12mths)
- Offshore investors 20% withholding tax, capital gains tax same as onshore**
Offshore investor access - Foreign ownership of government bonds Approx. INR210bn (Nov-2010)- As % of outstanding Approx. 1% of GOIs (Nov 2010)- Direct purchase? Yes (for FIIs)- Subject to cap? Yes (FII limits:
USD10bn government, USD20bn corporate)
- Registration requirement? Yes- Access to onshore funding? No- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? Yes (NDOIS)Market liquidity statistics GOIs - Daily turnover (LCbn) INR100-150bn- Buying volume in a single day (USDm) (with minimal market impact)
USD100m
- Bid/offer spreads under normal conditions (bp) 1-2bpCorporate bonds - Daily turnover (LCbn) INR2bn- Buying volume in a single day (USDm) (with minimal market impact)
USD6-20m
- Bid/offer spreads under normal conditions (bp) 2-3bp
Source: HSBC * HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance. **Reducible by DTA.
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Statutory liquidity ratio (SLR): Minimum percentage
of demand and time liabilities that must be held in liquid
assets including cash, gold and approved securities such
as government bonds. Bloomberg: RBICSLR Index.
Key market rates:
Call money rate: Overnight interest rate that a bank
pays to borrow from another. It is also the floating rate
fixing for the OIS market. Bloomberg: NSERO Index.
Mumbai Interbank Forward Offered Rate
(MIFOR): Implied forward INR rates derived from the
London Interbank Offer Rate (LIBOR) and the forward
premium implied by the Indian FX markets. Bloomberg:
MIFORIM6 Index (6mths).
Fixed income instruments The Indian bond market has grown to a market
capitalisation of USD742bn as of September 2010 (49%
of GDP), making it the third largest local bond market
in Asia outside of Japan. Approximately 68% of the
bond market is composed of government bonds, 20%
are quasi-government bonds and the remaining 11% is
accounted for by corporate bonds.
There are 20 primary dealers (PDs), including HSBC.
PDs are required to provide two way prices for
Government Securities (“G-Secs”) through the
Negotiated Dealing System-Order Matching (NDS-OM),
OTC market and recognised Stock Exchanges in India.
Foreign investors held USD17.3bn (2.3% of total) GOIs
and corporate bonds in September 2010, according to
HSBC estimates. At that time, foreign investment under
India’s FII scheme was marginally below the aggregate
investment limit set by the RBI (USD20bn). In
September 2010, the quota limits on GOIs and corporate
bonds were raised from USD5bn to USD10bn and from
USD15bn to USD20bn, respectively, with new
purchases limited to bonds with a maturity of over 5
years. The increased limit for corporate bonds is
restricted to bonds issued by infrastructure companies.
Bonds
GOI bonds are medium- to long-term obligations
issued by the government to finance the fiscal deficit
and infrastructure development programmes. GOIs are
allocated through a multiple price auction. Maturities
range between 1 and 30 years. Most GOI bonds carry a
fixed, semi-annual coupon with bullet redemption.
Primary issues are underwritten by PDs and carry back-
up underwriting by the RBI. Each PD is required to bid
for a minimum of 3% of the notified amount. Major
players in the secondary market include banks,
insurance companies and pension funds. Liquidity is
concentrated in the 5- to 15-year segment.
Treasury bills are short-dated discount securities issued
by the RBI on behalf of the government. Maturities
range between 91 and 364 days. They are sold through a
multiple price auction held on Wednesdays and
allotments are awarded to the highest bidders subject to
a cut-off price set by the RBI. Winning bids are filled at
their bid level. T-bills are fully underwritten by PDs
committed to bid for a certain percentage of each issue.
MSS bills and bonds are issued for the RBI’s liquidity
management. The tenors and issue size are announced
on Fridays. MSS are not underwritten. The RBI sets an
annual ceiling for the outstanding amount of MSS. A
ceiling of INR500bn for FY10-11 ending March was set
by the RBI on April 2010.
Quasi-government sector includes Public Sector
Undertaking (PSU) bonds, and state and agency bonds.
Liquidity is generally thin but the PSU secondary
market is slightly more active.
PSU bonds are medium- to long-term obligations
issued by public sector organisations. Provident funds
are required to invest a minimum of 30% in PSU and
bank bonds. There are two forms of PSUs: 1) Taxable
bonds that carry a higher average yield than tax-free
Foreign investment in the Indian bond market
0
200
400
600
800
Jun-04 Sep-05 Dec-06 Mar-08 Jun-09 Sep-10
USD
bn
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Corp (LHS)G-Secs (LHS)FII holding, % total govt. and corp. debt (RHS)
Source: HSBC, SEBI
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bonds. Main investors are banks, corporate firms,
provident fund, retail investors, and mutual funds.
2) Tax-free bonds provide a fiscal advantage with the
coupon being at a discount to that for taxable bonds.
Bonds are issued in dematerialised form and freely
transferable. Main investors are corporates and retail
investors.
State and agency bonds are medium- to long-term
obligations issued by state governments and government
agencies. They typically possess a slightly higher yield
than GOI bonds. State bonds are auctioned similarly as
government bonds.
Corporate bonds contain private sector bonds, bank
bonds, CDs and CP. Private sector and bank bonds have
long maturities whereas CDs and CPs are short-term
securities.
Private sector bonds are mainly rated AAA/AA+/AA,
with the bulk in the AAA rating segment. There is
hardly any market for sub-AA rated paper.
Bank bonds are subordinated debt issued by banks to
meet their capital adequacy requirements. They may
only constitute up to 10% of their capital. Banks may
issue Upper Tier II and Hybrid Tier I instruments.
Hybrid Tier I (Perpetual) bonds also have a call option
10 years after issuance. Upper Tier II bonds have a
maturity of 15 years with a call option after 10 years.
Derivatives
An onshore and offshore market exists for INR interest
rate swaps (see table India: IRS and CCS markets).
Overnight Indexed Swaps (OIS) is extensively traded
by banks. The INR OIS curve uses overnight call money
as the floating leg fixing. Maturities range between 1
and 10 years, with liquidity concentrated at 1- to 5-year
tenors. As offshore investors cannot use the OIS curve
to hedge their long bond positions, a non-deliverable
OIS curve has passively developed offshore. This offers
liquid tenors up to 5 years and also uses the O/N rate as
the fixing rate. Liquidity, however, is less than its
onshore counterpart.
Cross currency swaps (CCS) are quoted off the
MIFOR IRS curve. The forward curve extends up to 10
years but is more liquid up to 12 months. The fixing rate
for the MIFOR curve is the 6 month. The longer dated
INR FX forward rates are also calculated using the
MIFOR curve. For non-resident investors, a non-
deliverable cross-currency swap curve (NDCCS) has
developed offshore, but is characterised by poor
liquidity and wide bid-offer spreads beyond one year.
Non-resident investors may also use USD/INR FX
forwards to hedge their FX exposure on long-bond
positions. The longer dated INR FX forward rates are
calculated using the MIFOR curve.
Bond futures for 91 day T-bills, notional 10-year
coupon bearing bonds and notional 10-year zero coupon
bonds were first introduced in 2003. While banks were
allowed to use futures only to hedge their government
sector investments in held-for-trading (HFT) and
available-for-sale (AFS) categories, PDs were allowed
to deal in interest rate derivatives (IRDs) for both
hedging and trading. These products, however, failed
after few weeks due to lack of market participation. In
August 2009, SEBI, in consultation with Fixed Income
and Money Market Derivatives Association (FINMDA),
reintroduced a future contract on the 10-year notional
India: IRS and CCS markets
Onshore OIS Offshore NDOIS Onshore CCS Offshore CCS
Non-resident access: Not allowed Existent Principal hedging allowed Existent Tenors 1-10 years 1-10 years 1mth-10 years 1mth-10 years Liquid tenors 1-5 years 1-5 years 1mth-5 years 1mth-1 year Average trade size INR250m-1bn USD5m INR250m USD5-10m Bid/offer spreads under normal conditions (bp)
3-4bp 2-4bp 30-50bp 30-50bp
Fixing rate Overnight rate Overnight rate 6mth MIFOR 6mth USD LIBOR Day count Actual/365 Actual/365 Actual/365 Actual/360 Effective date T+1 T+1 T+2 T+2 Fixing time (local time) 10:00am 9:40am 12:30pm 2:30pm Fixing page Reuters: MIBR=NS Reuters: MIBR=NS Reuters: INSWAP01 Reuters: RBIB Local market hours 9:00am-5:00pm 9:00am-5:00pm 9:00am-5:00pm 8am-5pm (HK/Sing) Main participants Interbank, corporates Interbank Interbank, corporates Interbank, corporates
Source: HSBC
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bond, which is priced on the basis of the cheapest to
deliver bond in a basket comprising of two to six GOI
bonds with maturity ranging from 9 to 11 years.
Furthermore, plans to introduce interest rate futures on
notional 5-year and 2-year coupon bearing bonds, and
91 day T-bills have also been announced during 2010.
Regulatory, settlement and tax issues Regulation
Foreign individuals, corporates and hedge funds can
register directly as FIIs. Institutional investors,
including FIIs, are allowed to short-sell, lend and
borrow Indian securities.
The total FII limit on government securities is
USD10bn. For corporate debt investments, the limit is
USD20bn. Purchased bonds must have remaining
maturity of over 5 years and corporate bonds must be
issued by infrastructure companies.
Settlement
GOI securities are held in dematerialised form by
interbank counterparties with RBI. They are settled
through the Clearing Corp of India on a delivery vs.
payment (DvP) basis.
Corporate bonds are held in scripless form with the
National Securities Depository Ltd (NDSL). They are
settled through a custodian on a non-DvP basis because
the FII account is debited only after the securities are
delivered.
Taxation4
Foreign investors are subject to a 20% withholding tax
on interest payments. There is a capital gains tax of 10%
and 30% for holding periods less than and greater than
12 months, respectively. The above rates would have to
be enhanced by surcharge and education cess as
applicable
The Double Tax Avoidance (DTA) agreement may
reduce payable tax for FIIs. Please see
http://www.incometaxindia.gov.in for more
information.
Foreign exchange Normal market conditions
Onshore daily average volume USD9bnOnshore spot transaction USD5mOnshore bid/ask spot spread 2 pip (0.02INR)Onshore forward transaction USD10mOnshore forward spread 2 pips (0.02INR)Offshore daily average volume* USD1.1bnNDF transaction* 1M USD5mNDF spread* 1M 3 pips (0.03INR)Onshore implied option volatility spread 0.7 volOffshore implied option volatility spread* 0.4 vol
Note: Spreads are subject to change with market developments Source: HSBC FX strategy
Useful information Information sources
Reserve Bank of India www.rbi.org.in Ministry of Finance finmin.nic.in Association of Mutual Funds in India (AMFI) www.amfiindia.com Fixed Income Money Markets and Derivatives Association (FIMMDA)
www.fimmda.org
Securities and Exchange Board of India (SEBI) www.sebi.gov.in Reuters Fixing page IN/CCIL Bloomberg Fixing page BBFD
______________________________________ 4 HSBC is not a qualified tax advisor. Consult a professional advisor for further
guidance.
29
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India: Bonds
Government of India bonds (GOIs)
Treasury bills State Government bonds Corporate bonds
Issuer Government of India (GOI) Government of India (GOI) State governments PSUs, banks, private sector Currency Indian Rupee (INR) Indian Rupee (INR) Indian Rupee (INR) Indian Rupee (INR) Form Scripless Scripless Scripless Scripless Minimum denomination INR 10,000 (market lot INR 5cr) INR 25,000 (market lot INR 5cr) - INR 10,000 (market lot INR 5cr)Tenors 1-7, 10, 30 years 91, 182, 364 days Up to 15 years Up to 20 years Coupon/discount Mostly fixed Zero, issued at discount Mostly fixed Mostly fixed Coupon frequency Semi-annual None Semi-annual Annual or specific to issuance Amortising schedule Bullet Bullet Bullet Bullet Day count 30/360 Actual/365 30/360 Actual/365 mostly Amount outstanding INR20.9trn (Sep-2010) INR1.2trn (Sep-2010) INR5.7trn (Sep-2010) INR1.6trn (Sep-2010)
Primary market Auction style Multiple price style auction Multiple price style auction,
non competitive tranche for special entities
Multiple price style auction Private placement or bilateral
Average issue size INR20-60bn INR10-80bn per tenor (INR30-100bn total)
INR20-60bn INR1-2bn
Auction frequency 2-4 auctions per month 91-day weekly, 182, 364-day fortnightly
2 auctions per month Ad hoc
Participants Banks, institutions, mutual funds
Banks, institutions, mutual funds
Banks, institutions Banks, institutions, mutual funds, corporates
Settlement T+1 or T+2 T+1 or T+2 T+1 or T+2 T+0 to T+2
Secondary market Trading mechanism OTC, exchange OTC, exchange OTC, exchange OTC, exchange Trading hours 9am-5:30pm 9am-5:30pm 9am-5:30pm 9am-5:30pm Quoting convention Price to 2 decimals Yield Price to 2 decimals Yield Average bid-offer spreads 2-3bp 5bp 2-3bp 2-3bp Average trade size INR100m INR250m INR100m INR270m Volume INR100-150bn per day INR20-30bn per day INR1bn per day INR2bn per day Settlement T+1 T+2 T+1 T to T+2 Clearing RBI's SGL system, CCIL RBI's SGL system, CCIL RBI's SGL system Principal to Principal, NSDL Main participants Fund managers, insurance
companies, banks Fund managers, insurance companies, banks
Fund managers, insurance companies, banks
Fund managers, insurance companies, banks, corporates
Regulations for foreign investors Restriction on foreign investment
Eligible FIIs are permitted up to USD10bn total limit (G-Secs)1
Eligible FIIs are permitted up to USD5bn total limit (G-Secs)2
Eligible FIIs are permitted up to USD10bn total limit (G-Secs)
Eligible FIIs are permitted up to USD20bn total limit (corporate bonds)3
Custodian Local custodian required Local custodian required Local custodian required Local custodian required Interest income tax 20% interest, subject to Double
Taxation Agreement (DTA) 20% interest, subject to Double Taxation Agreement (DTA)
20% interest, subject to Double Taxation Agreement (DTA)
20% interest, subject to Double Taxation Agreement (DTA)
Capital gains tax 10% for long-term, 30% for short-term, subject to Double Tax Agreement (DTA)
30% for short-term, subject to Double Tax Agreement (DTA)
10% for long-term, 30% for short-term, subject to Double Tax Agreement (DTA)
10% for long-term, 30% for short-term, subject to Double Tax Agreement (DTA)
Entry/exit None None None None
Source: HSBC. 1GOIs must have greater than 5yr maturity. 2Until Sep-2010. 3Corporate bonds must be issued by infrastructure companies.
30
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Market developments During 2010, foreign investors purchased USD10bn in
Indonesian government bonds (IndoGBs), absorbing
approximately 125% of net issuance and raising total
holdings to USD22bn (vs. USD12bn at the end of 2009).
Most purchases by foreign investors centred at the long-
end of the IndoGB curve, which allowed the government
to extend the market capitalisation-weighted average
tenor to 10.4yrs, according to the HSBC ALBI index.
Avid foreign investment in IndoGBs and high carry has
made Indonesia a core holding in global emerging market
bond funds.
Bank Indonesia (BI) attempts to direct capital flows
from short-term central bank bills to longer-term
government bonds. Foreign investment in central
bank-issued Sertifikat Bank Indonesia (SBIs) increased
USD2.3bn year-to-October. In a bid to reduce foreign
investment in short-term instruments and prevent
market volatility associated with short-term flows, BI
has instituted several capital flow measures (June 2010),
including a 28-day minimum holding period for foreign
investment in SBIs. BI is gradually phasing in other
measures aimed at discouraging foreign investment in
SBIs, including a reduction in the frequency of SBI
auctions from weekly to ad hoc (based on SBI
maturities). To reduce the supply of SBIs, BI also began
to shift from tradable SBIs to term deposit SBIs (“TD-
SBIs”) that are neither tradable nor accessible to foreign
investors, beginning with an auction for 3mth TD-SBIs
on 11 November. BI also introduced a 9-month SBI in
August 2010.
Documentation requirements for double taxation
treaties are introduced (January 2010). New and
existing bond issuers must prove they do not hold
offshore units in eligible countries for the sole purpose
of reducing payable withholding tax. For bond
Ba2/BB/BB+Indonesia
During 2010, foreign investors purchased USD10bn in IndoGBs,
absorbing approximately 125% of net issuance
Foreign investment in short-term central bank-issued SBIs has been
discouraged through a variety of capital flow measures
Indonesia lengthened its maturity profile through increased issuance in the
10-20yr curve segment
Bonds outstanding Government bond maturity profile (as of September 2010)
0
20
40
60
80
100
120
Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10
USD
bn
0
5
10
15
20
25
% G
DP
Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)
1-3 y ears,
19.7%Ov er 10 y ears,
39.2%
3-5 y ears,
13.3%
5-10 y ears,
27.9%
Source: ADB Source: ADB
31
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investors, absent a tax liability reduction though a
Double Taxation Treaty Agreement (DTTA), a standard
20% withholding tax is applied to foreign investors on
interest income as well as capital gains for both
government and corporate bonds.
Monetary policy Bank Indonesia conducts monetary policy through the
establishment of monetary targets (such as money
supply or interest rates) with the primary goal of
keeping inflation at the government-prescribed level.
Since July 2005, the benchmark policy rate has been the
BI rate, which at the operational level is reflected in
movement in the Interbank Overnight Rate.
For liquidity management purposes, BI employs open
market operations, including issuance of SBIs, term
deposits by banks, buying and selling of securities,
prescribing a minimum reserve requirement and buying
and selling of FX versus the rupiah.
In June 2010, BI reduced the frequency of SBI auctions
from weekly towards monthly issuance. Liquidity
management in between SBI auctions will be more
reliant on shorter-term instruments such as the Standing
Facility and other instruments for temporary liquidity
absorption (Fine Tune Contraction/FTK, Reverse Repo
of Government Securities and Buying Swaps) and
injection (Fine Tune Expansion/FTE and Selling
Swaps). The Standing Facility includes overnight repos
(ceiling rate applied) for individual banks experiencing
liquidity shortages and overnight short-term deposit
facility (FASBI, floor rate applied) for banks carrying
excess liquidity.
Key policy rates:
BI overnight rate: The benchmark monetary policy
rate used by BI. Bloomberg: IDBIRATE Index.
Indonesia morning deposit facility overnight
discount rate/Fasilitas Simpanan Bank Indonesia
(FASBI): Rate set by BI for money market funds placed
overnight with BI. Bloomberg: IDINO/N Index.
SBI auction yields: Average yield on BI’s primary
auctions of SBIs, or Central Bank bills. The 3mth SBI
yield is also the fixing rate for a majority of
transactions. Bloomberg: SBI3AY3M Index (3mth),
SBI6AY6M Index (6mth).
Fixed income instruments The Indonesian bond market has grown to a market
capitalisation of USD112bn (September 2010) from
USD98bn at the end of 2009.
There are 18 primary dealers (PDs), including HSBC.
PDs are required to provide two-way quotations based
on an agreed maximum bid-offer spread.
Foreign investment has increased to 30.5% of total
Indonesian government bonds (December 2010) from
19.0% by end of 2009. In particular, holdings of SBIs
increased significantly from IDR43.9trn by end of 2009
to IDR63.2trn in November 2010. This prompted BI to
consider measures to increase limits on foreign investor
access to SBIs (e.g. 1-month holding period requirement
and shift to non-marketable term deposit SBIs) to limit
potential volatility in the IDR.
Indonesia: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? No- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? NoEligible collateral for repos - For CB repos SBIs, T-bills and T-bonds
(subject to 5% haircut)- For interbank repos T-bondsMark-to-market requirements - Banks? Yes- Insurance companies? No- Pension funds? No- Mutual funds? YesTaxation: Government bonds* - Onshore investors Interest and capital gains reported to BEI: 20%
withholding tax. Else, general income tax after initial 15% withholding tax deducted
- Offshore investors 20% withholding tax on interest income and discount upon sale**
Offshore investor access - Foreign ownership of government bonds IDR196trn (Dec-2010)- As % of outstanding 30.5% of IndoGBs (Dec-2010)- Direct purchase? No- Subject to cap? No- Registration requirement? Yes- Access to onshore funding? No- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? NoMarket liquidity statistics IndoGBs - Daily turnover (LCtr) IDR4-5trn (total for T-bonds,
T-bills, ZCs, ORIs)- Buying volume in a single day (USDm) (with minimal market impact)
USD5m
- Bid/offer spreads under normal conditions (bp) 10-20bpSBIs - Daily turnover (LCtr) IDR0.1-1trn- Buying volume in a single day (USDm) (with minimal market impact)
USD5-10m
- Bid/offer spreads under normal conditions (bp) 25-50bp
Source: HSBC * HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance. **Reducible by DTTA
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Bonds
Government bonds are issued by the MoF and consist of
recapitalisation and treasury bonds. Recapitalisation bonds
were issued to 35 troubled banks following the late 1990s
financial crisis and are no longer issued. Tenors of
treasury bonds vary between 1 and 30 years, with auctions
held twice a month. There are two types of Treasury bond:
Fixed Rate bonds (FRs) and Variable Rate bonds (VRs).
FRs carry a pre-determined coupon paid semi-annually.
VRs have coupons that are set quarterly at the prevailing
3-month SBI rate. Government bonds are allowed to trade
on the Indonesia Securities Exchange.
Treasury bills (T-bills) are designed to gradually replace
SBI as the primary domestic liquidity management tool.
The current purpose remains government funding. The
only available maturity is 1 year.
Zero coupon (ZC) bonds are tax solutions for short-
term T-bills. They have the same tax treatment as
Treasury bonds. Issuance is held through a Dutch
auction. Maturities range between 1 and 5 years.
Retail treasury bonds are bonds issued by the MoF aimed
at retail investors (both national and non-nationals). They
are also known as Obligasi Ritel Indonesia (ORI). Two key
differences between ORIs and Treasury bonds are: 1)
coupons are paid on a monthly basis; 2) ORIs are issued
through non-competitive bidding.
Sukuk are the Islamic equivalent of bonds issued by the
MoF. Maturities typically range between 5 and 20 years.
They do not pay interest in compliance with Islamic law.
Instead, a sukuk replicates cash flows of conventional
bonds by representing partial ownership in a debt, asset,
project, business or investment. Liquidity in sukuk is
weak as the market requires further development, with
premiums reaching up to 50bp over non-Islamic bonds.
Sertifikat Bank Indonesia (SBI) are issued by BI to
absorb excess liquidity from the financial system. They
were previously issued weekly, but following changes in
June 2010, SBIs are expected to be issued on a monthly
basis. The SBI maturity profile has also been extended
from 3 months to 6 months with the intention of
improving the efficacy of liquidity management. BI also
introduced a 9-month SBI in August 2010. Yields on
3mth SBIs also serve as the fixing for a majority of IDR
IRS contracts. In June, BI imposed a 28-day holding
period on foreign investors. During 2H10, BI said it will
gradually shift into term-deposit SBIs that are neither
marketable nor accessible to foreign investors.
Corporate debt includes corporate bonds and medium-
term notes. They are issued by corporations or state-
owned companies and listed on the Indonesia Securities
Exchange.
Derivatives
An onshore and offshore market exists for IDR interest
rate swaps (see table Indonesia: IRS and CSS markets).
Interest rate and cross currency swap markets exist,
but liquidity is generally poor with bid-ask spreads of
50bp. The market convention for the floating rate index
in IDR IRS is the 3mth SBI. This has changed several
times because it depends mostly on the primary auction
frequency of SBI securities. Previously, when primary
auctions of 1mth SBI securities were frequent, the
convention was IRS vs. 1mth SBI.
Foreign holdings of IndoGBs and SBIs IndoGB investors by type (total: IDR642trn as of December 2010)
0
50
100
150
200
250
300
Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10
IDR
trn
0%
5%
10%
15%
20%
25%
30%
35%
SBI (LHS) IndoGBs (LHS)% of IndoGBs (RHS)
Non-
residents
30%
Insurance
12%Pensions
6%
Banks
34%
Mutual funds
8%
BI
3%
Others
7%
Source: HSBC Source: HSBC
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Regulatory, settlement and tax issues Regulation
Foreign investors can freely access the local bond
market. There are no limitations on foreign ownership.
Foreign investment in SBIs, however, is subject to a 28-
day holding period requirement.
Settlement
Government securities are settled via the BI’s Book
Entry Registry system on a delivery vs. payment (DvP)
basis. The settlement period is normally negotiated by
the counterparties and generally T+2 or T+3.
SBIs are settled T+1 in the primary market, whilst in the
secondary market it is between T+1 and T+3. This is
done on a DvP or Free of Payment (FoP) basis.
All corporate bonds are settled through Indonesia’s
Central Depository (KSEI) on a DvP or FoP basis. They
are mostly in scripless form as all corporate debt has
been issued scripless since 2000.
Taxation5
A standard 20% withholding tax is applied to foreign
investors on interest income. Whilst there is officially
no capital gain tax on Indonesian government bonds,
there is a ‘withholding tax on discount on the sale of
bond’ (‘discount’ meaning difference between the sale
and purchase price of the bond). However, these taxes
may be reduced through a Double Taxation Treaty
Agreement (DTTA) depending on jurisdiction (eg.,
Singapore, Netherlands, UK, US). Eligible non-
______________________________________ 5 HSBC is not a qualified tax advisor. Consult a professional advisor for further
guidance.
residents must provide either a DGT-1 or DGT-2 form
to take advantage of the DTTA. See the Directorate
General of Taxes for more information.
Foreign exchange Normal market conditions
Onshore average daily volume USD800mOnshore spot transaction USD2-5mOnshore bid/ask spread 5-10 pips (5-10IDR)Onshore forward transaction USD10mOnshore forward spread 0.2-30bp (0.2-30 IDR)Offshore average daily volume USD500mNDF transaction USD5mNDF spread 200 pips (20 IDR)Onshore implied option volatility spread 1.0 vol for all datesOffshore implied option volatility spread
Note: Spreads are subject to change with market developments Source: HSBC FX strategy
Useful information Information sources
Bank Indonesia (BI) www.bi.go.id/web Ministry of Finance (MOF) www.depkeu.go.id/Eng/ Debt Management Office (DMO) www.dmo.or.id/en/index.php?section=1Capital Market and Financial Institution Supervisory Board (BAPEPAM-LK)
www.bapepam.go.id/
Directorate General of Taxes www.pajak.go.id/eng/ PEFINDO (Credit Rating Indonesia) new.pefindo.com Indonesia Exchange (IDX) www.idx.co.id
Indonesia: IRS and CCS markets
Onshore IRS Onshore CCS Offshore CCS
Non-resident access: Illiquid Underlying documentation needed Existent Tenors 1-10 years 1-7 years 1-10 years Liquid tenors <6mth <6mth forward <6mth forward Average trade size IDR50bn USD5m USD5m Bid/offer spreads under normal conditions (bp) 50bp 50bp 50bp Fixing rate 3mth SBI rate 6mth USD LIBOR 6mth USD LIBOR Day count Actual/360 Actual/360 Actual/360 Effective date T+2 T+2 T+2 Fixing time (local time) 4:00pm USD Libor Fixing 11:00am Singapore time Fixing page BISBI LIBOR01 ABSIRFIX01 (Reuters) Local market hours 8:30-12:00pm, 2:00-4:30pm 8:30-12:00pm, 2:00-4:30pm 8:30-12:00pm, 2:00-4:30pm Main participants Interbank, corporates Interbank, corporates Interbank, corporates
Source: HSBC
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Asia-Pacific Rates Guide 2011 Indonesia December 2010
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Indonesia: Bonds (1)
Sertifikat Bank Indonesia (SBI) Recapitalisation bonds Treasury bonds
Issuer Bank Indonesia (BI) Republic of Indonesia Republic of Indonesia Currency Indonesian Rupiah (IDR) Indonesian Rupiah (IDR) Indonesian Rupiah (IDR) Form Scripless Scripless Scripless Minimum denomination IDR1m IDR1m IDR1m Tenors 3 , 6, 9 months Fixed rate up to 6 years, variable rate
up to 13 years 1-10, 15, 20, 30 years
Coupon/discount Zero (issued at discount) Fixed or floating rate Fixed or floating rate Frequency None Semi-annual for fixed rate, quarterly for
floating rate Semi-annual
Amortising schedule Bullet Bullet Bullet Day count Actual/360 30/360 Actual/Actual Amount outstanding IDR252trn including term deposit (TD)
SBIs, offshore accessible IDR73trn (Sep-2010)
IDR203trn of which IDR65trn Fixed Rate, IDR138trn Variable Rate (Sep-2010)
IDR387trn (Sep-2010) or IDR590trn including Recaps
Primary market Auction style Dutch auction Private placement by government to
recap banks Dutch auction, non-competitive bidding and private placement
Average issue size IDR30-50trn total No longer issued IDR0.5-3.5trn Issuance cycle Monthly No longer issued Twice a month Participants Primary dealers, financial institutions,
investors Banks, pension funds, mutual funds, insurance, corporate firms and individuals
Primary dealers, banks, pension funds, mutual funds ,insurance, corporate firms and individuals
Settlement T+1 No longer issued T+2
Secondary market Trading mechanism OTC OTC, Indonesia Securities Exchange OTC, Indonesia Securities Exchange Trading hours 8am-5pm 9am-12pm, 2pm-5pm 9am-12pm, 2pm-5pm Quoting convention Annualised yield in one-eights Price Price Average bid-offer spreads 25-50bp 10-20bp 10-20bp Average trade size IDR50bn IDR10-50bn IDR10-50bn Volume IDR0.1-1trn per day IDR4-5tr per day (total for T-bonds,
T-bills, ZCs, ORIs) IDR4-5tr per day (total for T-bonds, T-bills, ZCs, ORIs)
Settlement T+1 to T+3 T+2 or T+3 T+2 or T+3 Clearing BI’s BER system, DVP settlement BI’s BER system, DVP settlement BI’s BER system, DVP settlement Main participants Banks Banks, mutual funds, pension funds and
insurance companies Banks, mutual funds, pension funds and insurance companies
Regulations for foreign investors Restriction on foreign investment Some possibility to be implemented in
2010 None None
Custodian Local custodian required Local custodian required Local custodian required Interest income tax 20% standard tax, reducible by Double-
Taxation Treaty Agreement (DTTA) 20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
Capital gains tax 20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
Entry/exit None None None
Source: HSBC
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Indonesia: Bonds (2)
Treasury bills Zero coupon bonds (ZC) Retail treasury bonds (ORI) Corporate bonds
Issuer Republic of Indonesia Republic of Indonesia Republic of Indonesia Local companies, state agencies
Currency Indonesian Rupiah (IDR) Indonesian Rupiah (IDR) Indonesian Rupiah (IDR) Indonesian Rupiah (IDR) Form Scripless Scripless Scripless Scripless (mostly) and bearer Minimum denomination IDR1m IDR1m IDR1m IDR10m-50m Tenors 1 year 1-5 years 1-5 years 3-10 years (mostly 5 years) Coupon/discount Zero (issued at discount) Zero (issued at discount) Fixed Fixed or floating rate Frequency None None Monthly Semi-annual for fixed rate,
quarterly for floating rate Amortising schedule Bullet Bullet Bullet Bullet (mostly), amortising
structure on auto-finance companies
Day count Actual/Actual Actual/Actual Actual/Actual 30/360 Amount outstanding IDR30trn (Sep-2010) IDR3trn (Sep-2010) IDR41trn (Dec-2010) IDR105trn (Sep-2010)
Primary market Auction style Dutch auction and non-
competitive bidding Dutch auction and non-competitive bidding
Non-competitive bidding Bookbuilding and underwritten
Average issue size IDR0.5-3.5trn IDR0.5-3.5trn IDR2-5trn IDR100bn-1trn Issuance cycle Twice a month Ad hoc, but approximately twice
a year Ad hoc, but approximately twice a year
Banks, fund manager, pension fund and insurance
Participants Primary dealers, banks, pension funds, mutual funds, insurance, corporate firms and individuals
Primary dealers, banks, pension funds, mutual funds, insurance, corporate firms and individuals
Primary dealers, banks, pension funds, mutual funds, insurance, corporate firms and individuals
FOP, investors need to pay 1 day in advance
Settlement T+2 T+2 T+2 T+5 up to 10
Secondary market Trading mechanism OTC and Indonesia Securities
Exchange OTC and Indonesia Securities Exchange
OTC and Indonesia Securities Exchange
OTC
Trading hours 9am-12pm, 2pm-5pm 9am-12pm, 2pm-5pm 9am-12pm, 2pm-5pm 9.30am-11.30am; 2pm-4pm Quoting convention Price Price Price Clean price to 2 decimal placesAverage bid-offer spreads 10-20bp 10-20bp 10-20bp 100-200bp Average trade size IDR10-50bn IDR10-50bn IDR10-50bn IDR1-2bn Volume IDR4-5tr per day (total for
T-bonds, T-bills, ZCs, ORIs) IDR4-5tr per day (total for T-bonds, T-bills, ZCs, ORIs)
IDR4-5tr per day (total for T-bonds, T-bills, ZCs, ORIs)
IDR20-50bn per day
Settlement T+1 to T+3 T+2 or T+3 T+2 or T+3 T+3 Clearing BI’s BER system, DVP
settlement BI’s BER system, DVP settlement
BI’s BER system, DVP settlement
KSEI for scripless settlement
Main participants Banks Banks, mutual funds, pension funds and insurance companies
Banks, mutual funds, pension funds and insurance companies
Mutual funds, pension funds and insurance companies
Regulations for foreign investors Restriction on foreign investment
None None None None
Custodian Local custodian required Local custodian required Local custodian required Local custodian required Interest income tax 20% standard tax, reducible by
Double-Taxation Treaty Agreement (DTTA)
20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
Capital gains tax 20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
Entry/exit None None None None
Source: HSBC
36
Asia-Pacific Rates Guide 2011 Korea December 2010
abc
Market developments The Ministry of Strategy and Finance (MoSF) has
announced its intention to repeal the tax exemption on
interest income and capital gains earned by non-
resident investors on Korean Treasury Bonds (KTBs) and
Monetary Stabilisation Bonds (MSB) purchased since 13
November 2010 (December 2010). Interest income earned
by non-residents from KTBs and MSBs purchased before
13 November would remain exempt. At the time of
writing, the National Assembly was in the process of
finalising the final applicable tax rates. The expected total
effective tax rates are 15.4% for the withholding tax on
interest income and 22% for the capital gains tax.
Foreign investor preference has generally shifted
towards longer-duration bonds as holdings of KTBs
have increased versus short term MSBs, which are
purchased predominantly for arbitrage trades. Foreign
bond holdings in KTBs expanded to KRW49trn from
KRW31trn between January and November 2010. On
the other hand, MSB holdings increased only slightly, to
KRW31trn. Nevertheless, inflows into MSBs were cited
as responsible for inducing KRW appreciation, prompting
consideration of FX-related measures.
Macro-prudential measures have been implemented
to curb KRW volatility arising from foreign bond
investments (June 2010). These measures include
(1) limits on the foreign exchange derivative positions
of domestic banks (50%) and foreign bank branches
(250%), (2) tighter prudential regulations on banks’
foreign currency liquidity, (3) tighter regulations on
foreign currency-denominated bank loans, and (4) more
stringent monitoring of these activities. In line with the
goals of expanding and enforcing macro-prudential
measures, the Bank of Korea (BoK) and Financial
Supervisory Service (FSS) conducted joint inspections
on banks during October-November 2010. The latest
A1/A/A+Korea
MoSF repeals tax exemption on interest income and capital gains earned
by non-residents on KTBs and MSBs purchased since 13 November 2010
Foreign investor preference has shifted towards longer-duration bonds as
holdings of KTBs have increased while those of MSBs have remained flat
Macro-prudential measures are implemented to curb KRW volatility arising
from foreign bond investments
Bonds outstanding Government bond maturity profile (as of September 2010)
0
200
400
600
800
1,000
1,200
Sep-02 Sep-04 Sep-06 Sep-08 Sep-10
USD
bn
0
20
40
60
80
100
120
% G
DP
Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)
1-3 y ears,
36%
Ov er 10 y ears,
10%
5-10 y ears,
21%
3-5 y ears,
33%
Source: HSBC, ADB Source: ADB
37
Asia-Pacific Rates Guide 2011 Korea December 2010
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inspection centred on banks’ FX forward positions such
as non-deliverable forwards (NDFs).
The MoSF is planning to issue short-term KTBs to
provide a benchmark for short-term rates. KTBs
with maturities of less than 1yr will be issued in 2011-
2012 following revisions to the National Finance Act.
Specific maturities have not been announced. The size
of MSB issuances has been rather irregular in 2010,
reflecting market liquidity. Instead, the MoSF is expected
to issue short-term KTBs according to a pre-announced
issuance schedule that will help to provide stable
benchmarks for the front end of the cash curve.
The BoK has introduced a new term deposit facility
to control liquidity (October 2010), which could
replace the conventional method of issuing short-term
MSBs to drain excess liquidity. Term deposits are
generally issued mainly in 14- and 28-day maturities,
though they can reach up to 91 days. Foreign investors
are excluded from accessing the new facility.
A new 10-year inflation-linked “KTBi” has been
issued (June 2010). This 2.75% June-20 KTBi is the
second inflation-linked issue, the other being the 2.75%
March-17. The 10yr KTBi was issued at an initial size
of KRW1.25trn, which exceeded expectations as a
result of a new issuance method of fixing the rate rather
than amount and the introduction of a deflation floor.
The inclusion of KTBs in the World Government
Bond Index (WGBI) has been delayed, but is still
under consideration by the index committee. The delay
may be attributable to Korea’s various policy responses
intended to mitigate bond inflows, such as the re-
imposition of withholding tax (WHT). Previous
qualifications, including Euroclear and Clearstream
settlement, have been met.
Settlement for 10yr KTB futures contracts has
changed from physical to cash delivery (October
2010). This change aims to stabilise price movements
by increasing liquidity generated by primary dealers.
Monetary policy The Bank of Korea’s primary objective is price stability,
with a target of 2-4% headline inflation for 2010-2012.
Monetary policy is managed through short-term rates.
The main policy rate is the 7-day repo rate, which is the
reference rate applied to transactions between the BoK
and financial institutions, such as repos and the BoK’s
lending and deposit facilities. The BoK conducts 7-day
repo transactions on a weekly basis at the BoK base rate
supplemented by shorter-term repos (generally 1- to 3-
day tenors) on an ad hoc basis. Eligible forms of collateral
are KTBs, MSBs, and bonds issued by the Korean Housing
Finance Corporation (KHFC). Reverse repo transactions
use the base rate as the minimum bid rate.
The BoK also uses open market operations such as
repos, lending/deposit facilities, and standing facilities.
Korea: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos KTBs, MSBs- For interbank repos KTBs, MSBs, triple-A bank bondsMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors Exempt once tax exemption application is
accepted by tax authority- Offshore investors Pending legislation (expected: 15.4% withholding
tax on interest, 22% tax on capital gains)Offshore investor access - Foreign ownership of government bonds
KRW79.8trn (of which KRW48.7tr KTBs, KRW31.1tr MSBs)
- As % of outstanding 14.9% of total government bonds (13.2% of KTBs, 18.8% of MSBs)
- Direct purchase? No- Subject to cap? No- Registration requirement? Yes- Access to onshore funding? Yes (up to KRW30bn with BoK approval)- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? Yes (IRS, futures)Market liquidity statistics KTBs - Daily turnover (LCtr) KRW7-9tr- Buying volume in a single day (USDm) (with minimal market impact)
USD100m
- Bid/offer spreads under normal conditions (bp) 1-2bpMSBs - Daily turnover (LCtr) KRW4-6trn- Buying volume in a single day (USDm) (with minimal market impact)
USD100m
- Bid/offer spreads under normal conditions (bp) 1-2bp
*HSBC is not a qualified tax adviser. Consult a professional adviser for further guidance Source: HSBC
38
Asia-Pacific Rates Guide 2011 Korea December 2010
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Key policy rate
7-day repo rate: Considered as the BoK’s policy rate.
Bloomberg: KORP7D Index.
Key market rates
91-day Certificate of Deposit (CD): Rate applied to
91-day CDs submitted by local securities firms.
Bloomberg: KWCDC Curncy.
MSB yields: Secondary market yields on BoK-issued
sterilisation instruments. Bloomberg: KWMSB1 (1yr),
KWMSB2 Curncy (2yr).
Fixed income instruments The Korean bond market has grown to a market
capitalisation of USD1.1trn as of November 2010
(119.7% of GDP), making it the second-largest local
bond market in Asia outside of Japan. Approximately
40% of the bond market is composed of government
bonds, while the remainder is evenly split between
agency and corporate bonds.
There are 20 primary dealers (PDs). PDs have the right
to participate in non-competitive acquisitions of KTBs
at primary auctions from January to November of every
year. The value of KTBs to which PDs are entitled for a
non-competitive acquisition ranges between 10% and
25% of the amount acquired in the competitive auction.
Rights for non-competitively auctioned KTBs cannot be
accumulated and must be either used or forfeited each
month. In return, PDs are required to provide two-way
quotes in the exchange market.
Foreign investment has increased to 17% of total
Korean government bonds (KTBs plus MSBs) as of
November 2010, from 11.5% at end-2009, with virtually
all this growth due to increased holdings in KTBs.
KRW49trn of total foreign holdings is in KTBs (13.2%
of outstanding KTBs) and KRW31trn in MSBs (18.8%
of outstanding MSBs).
Bonds
Treasury bonds (KTBs) are issued by the Republic of
Korea primarily to manage the national treasury. KTBs
are issued in auctions that take place every Monday.
Maturities range between 3 and 20 years.
Monetary stabilisation bonds (MSBs) are issued by
the BoK for the purpose of managing liquidity including
sterilisation of FX interventions. MSBs are sold through
a Dutch auction every Monday. 2yr MSBs are sold on
every first and third Wednesday of each month. Maturities
range from 14 days to 2 years, with secondary market
liquidity greatest at the 1-2 year segment.
Inflation-linked Treasury bonds (KTBi) protect the
holder from inflation risks. The coupon and principal
are adjusted for CPI on each reference date (see table
KTBi calculations). Interest is paid semi-annually and
issued on a monthly basis. All KTBi’s issued thus far
have original maturities of 10 years. The 2.75% March
2017 KTBi was the first KTBi, issued from March 2007
to August 2008. Termination was due to limitations of
the issuance method, liquidity shortages, and contracting
demand.
The second KTBi (2.75% June 2010) has been issued
monthly since June 2010 with a new deflation floor that
protects its nominal face value. This feature was
introduced to stabilise investor sentiment, rather than
imposing an actual financial burden on the BoK. In
addition, the issuance method of the two KTBi’s is
different. While the earlier KTBi was issued at a fixed
amount per auction, the amount issued for the new
KTBi is 10-20% of 10yr KTB issued for that month.
Foreign holdings of KTBs and MSBs
10
20
30
40
50
60
70
80
90
Feb-09 Sep-09 Apr-10 Nov -10
KR
Wtr
n
0%
5%
10%
15%
20%
KTBs (LHS) MSBs (LHS)% of total gov. debt (RHS)
Source: HSBC
39
Asia-Pacific Rates Guide 2011 Korea December 2010
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KTBi calculations
Component Calculation Remarks
Index ratio CPI on payment date / CPI on issue date
-
Interest calculation Face value x index ratio x coupon rate / 2
Coupons are semi-annual
Principal calculation Maximum (face value, [face value x index ratio])
Deflation floor imposed
Source: Ministry of Strategy and Finance
Financial debentures are issued by financial institutions
and held mainly by local bond investors. They may be
zero coupon, compound or coupon bonds. As most
issues are from commercial banks, they can be regarded
as private. The main issuers are Korea Development
Bank (KDB) and other quasi-government banks.
Corporate bonds are issued by non-financial private
companies to the general public. Only companies listed
on the Korean Stock Exchange or registered with the
Securities and Exchange Commission may make public
offerings. The issuer must obtain at least two credit ratings
from domestic credit rating agencies before registration
with the Financial Supervisory Commission. This market
is not dominated by any particular group of firms.
Derivatives
Derivatives consist of onshore IRS and CCS as well as
offshore IRS (NDIRS) and CCS (NDCCS). See table
Korea: IRS and CCS markets for more information.
The interest rate swap (IRS) is widely used for hedging
and bond swap trades. The main participants in the IRS
market are banks, securities companies, and asset
managers. Historically, KRW IRS rates have been lower
than KTB cash bond yields. However, negative bond
swap spreads have recently reversed, particularly at the
front ends (2yrs and below), as arbitrage trades from
securities companies’ cash management accounts led to
paying interest in front-end swaps. A non-deliverable
IRS (NDIRS) also exists, but there is essentially no
spread between the IRS and the NDIRS, as onshore
banks can conduct trades in both swap curves.
The cross currency swap (CCS) closely reflects onshore
USD liquidity. It is used for asset/liability swaps by
onshore investors and arbitrage trades related to swap
basis by offshore investors. Specifically, at the front end
of the curve, receiving interest comes mainly from
exporters and onshore investors having USD positions
in FX forward and asset swaps. Paying interest is
usually from arbitrage investors from onshore (foreign
bank branches) and offshore (since 2009, Thailand-
based funds dedicated to short-term Korean bonds, so-
called “kimchi funds” have become key participants in
the CCS market). The long end of the curve, however, is
largely determined by onshore USD debt issuers
engaging in liability swaps.
The KRW swap basis (CCS minus IRS rates) remains in
negative territory and has shown volatile movement
throughout 2010. FX-related regulations in June 2010
and at year-end have led to a widening of the KRW
swap basis from limiting USD supply and increasing
funding costs for USD.
Korea: IRS and CCS markets
Onshore IRS Offshore IRS Onshore CCS Offshore CCS
Non-resident access: Not allowed, only NDIRS Existent Yes, for underlying investment
Yes
Tenors 1-20 years 1-20 years 1-10 years 1mth-20 years Liquid tenors 1-10 years 1-10 years 1-5 years 1-5 years Average trade size KRW10bn KRW10bn USD10m USD10m Bid/offer spreads under normal conditions (bp)
2-3bp 2-3bp 10-20bp 10-20bp
Fixing rate 91-day CD rate 91-day CD rate 6mth USD LIBOR 6mth USD LIBOR Day count Actual/365F Qtly Actual/365 Semi Actual/365F for
KRW, Act/360 for USD Semi Actual/365F for KRW, Act/360 for USD
Effective date T+1 T+1 T+2 T+2 Fixing time (local time) 3:30pm 3:30pm Seoul time for both
91-day CD and USD/KRW 11am London time 3:30pm Seoul time for USD/KRW,
11am London time for USD Libor Fixing page Bloomberg: KSDA4 Bloomberg: KSDA4 for 91-day
CD, KFTC18 for USD/KRW Reuters: Libor 01 Bloomberg: BBAM1
Reuters: KFTC18 for USD/KRW, Libor 01 for USD Libor Bloomberg: BBAM1 for USD Libor
Local market hours 9am-3:15pm 9am-3:15pm 9am-3:15pm 9am-3:15pm Main participants Interbank Interbank (offshore) Interbank Interbank (offshore)
Source: HSBC
40
Asia-Pacific Rates Guide 2011 Korea December 2010
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FRAs and IRS forwards are actively traded in the
NDIRS market. Whilst the actual FRAs are not traded
actively in the interbank market, short-dated IRS
forwards (notably 6m, 9m and 1yr) are used by banks to
hedge FRA positions from clients. Offshore investors
express their curve views via NDIRS forwards.
3yr KTB futures constitute the most actively traded
derivatives market. The notional value of this market is
KRW100m. It is widely used for hedging and arbitrage
trading. It is not rare for 3yr KTB futures to record a
daily trading volume of 100,000 contracts. 10yr KTB
futures were introduced in February 2008. Low liquidity
in this market led to revised specifications in October
2010 – namely, changes to cash settlement from
physical delivery as well as a reduction in the coupon
rate to 5% from 8%.
Regulatory, settlement and tax issues Regulation
Foreign investors must obtain an Investment Registration
Certificate (IRC) from the FSS. Necessary documents
are (1) the Standing Proxy Agreement or Power of
Attorney from the foreign investor authorising a local
sub-custodian bank (which may be a local branch of a
foreign bank), (2) the certificate of incorporation issued
by the government or public institution of the relevant
country, (3) the IRC application form, providing a
detailed investor profile, and (4) the certificate of residency
document, to determine the investor’s tax residency. An
IRC is not required if foreign investors trade through a
Euroclear/Clearstream omnibus account.
Settlement
An omnibus account settles KTB and MSB investments.
This was introduced by Euroclear and Clearstream to
provide another channel by which foreign investors may
access these instruments. For bonds traded over the
counter (OTC), settlement dates can be negotiated
between T+1 and T+30. Foreign investors tend to use a
T+2 settlement cycle. Securities eligible for Korea
Securities Depository (KSD) are settled via KSD’s book
entry system. Foreign investors require a local custodian
to facilitate this settlement process.
Taxation6
At the time of writing, a re-imposition of taxes on interest
income and capital gains on foreign investor KTB and
MSB holdings was anticipated upon formal legislation
by the National Assembly. Foreign investors are expected
to be subject to three taxes: a 14% withholding tax on
interest income, 20% capital gains tax, and an additional
10% “resident tax”. The last of these effectively raises
the withholding and capital gains taxes to 15.4% and 22%,
respectively. These taxes may only apply to bonds
purchased since 13 November 2011. Interest income
earned by non-residents on KTBs and MSBs settled on
or before 12 November 2010 remain exempt. A bank
levy is also under consideration. Final tax rates and
treatment are pending a decision by the government and
the National Assembly.
These taxes may be reducible if the investor resides in a
jurisdiction that has a double tax treaty with Korea (the
US, Singapore, or Luxembourg). See National Tax
Service for more information.
Foreign exchange Normal market conditions
Onshore average daily volume USD15bnOnshore spot transaction USD3-5mOnshore bid/ask spread 10 pips (0.10KRW)Onshore forward transaction USD50mOnshore forward spread 1M 10 pips (0.10KRW)Offshore average daily volume USD4bnNDF transaction USD5mNDF spread 1M 50 pips (0.50KRW)Implied option volatility spread 0.4 vol
Note: Spreads are subject to change with market developments Source: HSBC FX strategy
Useful information Information sources
Bank of Korea (BoK) www.bok.or.kr/eng Ministry of Strategy and Finance (MoSF) english.mosf.go.kr Futures Exchange (KTB futures) eng.krx.co.kr/ Korean Securities Dealers Association (KSDA) www.ksda.or.kr Financial Supervisory Service (FSS) english.fss.or.kr Korea Bond Web www.bondweb.co.kr/ National Tax Service www.nts.go.kr/eng/ Ministry of Knowledge Economy (MKE) www.mke.go.kr National Pension Service (NPS) www.nps.or.kr
Source: HSBC
______________________________________ 6 HSBC is not a qualified tax adviser. Consult a professional adviser for further
guidance
41
Asia-Pacific Rates Guide 2011 Korea December 2010
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Korea: Bonds
Treasury bonds (KTBs)
Monetary Stabilisation Bonds (MSBs)
Inflation-linked Treasury Bonds (KTBi’s)
Financial debentures Corporate bonds
Issuer Republic of Korea Bank of Korea (BoK) Republic of Korea Financial institutions Korean corporations Currency Korean Won (KRW) Korean Won (KRW) Korean Won (KRW) Korean Won (KRW) Korean Won (KRW) Form Scripless Scripless Scripless Scripless Scripless Minimum denomination KRW 10,000 KRW 10,000 KRW 10,000 KRW10,000 KRW10,000 Tenors 3, 5, 7, 10, 20 years 14, 28, 63, 91, 140, 182,
362, 392, 546 days, 2 years10 year 1-7 years 1-5 years (mostly 3 years)
Coupon/discount Fixed Fixed rate for 1 and 2-year MSBs, zero for all others
Fixed (applied to an increasing/decreasing principal)
1-year (Fixed rate or zero coupon); 2-7 year (Fixed)
Fixed
Frequency Quarterly (all issues before 2003) or semi-annual (all issues since 2003)
Quarterly Semi-annual Quarterly Quarterly
Amortising schedule Bullet Bullet Bullet Bullet Bullet Day count Actual/Actual Actual/Actual Actual/Actual Actual/Actual Actual/Actual Amount outstanding KRW320trn (Nov-2010) KRW164trn (Nov-2010) KRW2.5trn (Nov-2010) KRW29trn (Oct-2010) KRW197trn (Oct-2010)
Primary market Auction style Dutch and conventional
auction (multiple price by 3bp grouping)
Dutch auction, Mozip (similar to window sale)
Dutch and conventional auction (multiple price by 3bp grouping)
Book-building Book-building, private placement
Average issue size KRW1-3tr KRW1-3trn KRW150bn KRW50-100bn per issuance
KRW50-100bn per issuance
Issuance cycle Weekly (Monday) Every Monday for 14-day to 1-year, first and third Wednesday for 2-year, Mozip sale on some Fridays
Monthly (2 days after 10-year KTB sale)
Ad hoc Ad hoc
Participants Primary Dealers (9 banks, 11 securities firms)
Banks and securities firms selected by BoK
Primary Dealers (9 banks, 11 securities firms)
Banks, securities firms, ITCs, insurance
Banks, securities firms, ITCs, insurance
Settlement T+1 T+1 T+1 T+0 T+0 to T+1
Secondary market Trading mechanism Mostly OTC or KRX Mostly OTC Mostly OTC Mostly OTC OTC or KRX Trading hours 9am-3.05pm 9am-3.05pm 9am-3.05pm 9am-3pm 9am-3pm Quoting convention Yield to 2 decimal places Yield to 2 decimal places Yield to 2 decimal places Yield to 2 decimal places Yield to 2 decimal places Average bid-offer spreads 1-2bp (up to 5y
benchmarks) 1-2bp 5-10bp 5-10bp 5-10bp
Average trade size KRW10bn KRW10bn KRW10bn KRW5-10bn KRW10bn Volume KRW7-9trn per day KRW4-6trn per day KRW0-20bn per day KRW0.5trn per day KRW0.5trn per day Settlement T+1 T+1 T+1 T+1 (OTC) T+1 or T+2 Clearing KSD KSD KSD Book-entry system Book-entry system Main participants Banks, securities firms,
ITCs, insurance Banks, securities firms, ITCs, insurance
Banks, securities firms, ITCs, insurance
Banks, securities firms, ITCs, insurance
Banks, securities firms, ITCs, insurance
Regulations for foreign investors Restriction on foreign investment
None None None None None
Custodian Local custodian required, unless through ICSD (Euroclear)
Local custodian required, unless through ICSD (Euroclear)
Local custodian required, unless through ICSD (Euroclear)
Local custodian required Local custodian required
Interest income tax Pending legislation (15.4% to be expected, reducible by tax treaty and future legislation up to 0%)
Pending legislation (15.4% to be expected, reducible by tax treaty and future legislation up to 0%)
Pending legislation (15.4% to be expected, reducible by tax treaty and future legislation up to 0%)
15.4%, reducible by tax treaty
15.4%, reducible by tax treaty
Capital gains tax Lower of 22% on capital gains or 11% of sales proceeds to be expected, reducible by tax treaty
Lower of 22% on capital gains or 11% of sales proceeds to be expected, reducible by tax treaty
Lower of 22% on capital gains or 11% of sales proceeds to be expected, reducible by tax treaty
Lower of 22% on capital gains or 11% of sales proceeds, reducible by tax treaty
Lower of 22% on capital gains or 11% of sales proceeds, reducible by tax treaty
Entry/exit None None None None None
Source: HSBC
42
Asia-Pacific Rates Guide 2011 Malaysia December 2010
abc
Market developments Government begins regular issuance of 7-year
government bonds (March, July and October 2010). In
December 2009, the government announced that it
would begin regular issuance of 7-year Malaysia
Government Securities (MGS). The benchmark 4.012%
9/17 benchmark was first issued in March 2010 and
then reopened in July and October.
Foreign investors absorbed a large portion of net
government issuance during 2010, attracted by
investment prospects and a liberal capital flow regime.
Malaysia possesses a developed bond market for an
economy of its size with virtually no restrictions on
capital flows. Foreign investors purchased MYR31bn in
MGS during 2010-to-October – absorbing roughly 75-
80% of net government bond issuance and raising total
foreign holdings by +75% to MYR72bn (USD22bn).
Malaysia is also a global leader in the area of sukuk – or
Islamic bond – financing, contributing to 60.5% of new
issuance in the first half of 2010 (USD10bn).
New criteria allow more companies to seek
assistance from the Corporate Debt Restructuring
Committee (CDRC) in restructuring debt
obligations. The four criteria for companies are: 1)
aggregate indebtedness of at least MYR30m, 2)
minimum of two financial creditors, 3) not in
receivership or liquidation unless receivers are
appointed over certain specified assets and control of
companies’ overall operations remain with directors, 4)
have not yet defaulted. Any company classified as PN17
or GN3 are eligible irrespective of total debt
outstanding. The CDRC was established in 1998 to
provide a platform for both borrowers and creditors to
work out feasible debt restructuring schemes without
having to resort to legal proceedings.
A3/A-/A-Malaysia
Government deepens bond curve with issuance of 7-year MGS
Foreign investors absorbed a large portion of net government issuance
during 2010, attracted by returns and a liberal capital flow regime
New criteria allow more companies to seek assistance from CDRC in
restructuring debt obligations
Bonds outstanding Government bond maturity profile (as of September 2010)
0
50
100
150
200
250
Sep-04 Sep-06 Sep-08 Sep-10
USD
bn
0
20
40
60
80
100
120
% G
DP
Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)
1-3 y ears,
32%
3-5 y ears,
24%
5-10 y ears,
35%
Ov er 10 y ears,
8%
Source: ADB Source: ADB
43
Asia-Pacific Rates Guide 2011 Malaysia December 2010
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Monetary policy The board of the Bank Negara Malaysia (BNM) meets
six times a year to conduct monetary policy. The key
benchmark rate is the Overnight Policy Rate (OPR),
which is used as the target rate for the interbank
overnight rate, also known as the Kuala Lumpur Inter-
Bank Offered Rate (KLIBOR).
BNM has a number of monetary instruments at its
disposal to inject and withdraw funds to influence the
level of interest rates in the financial system. Examples
of these instruments include the purchase and sale of
central bank bills (Bank Negara Monetary Notes or
BNMNs), direct lending and borrowing in the interbank
market and FX forwards.
In addition, BNM manages liquidity and credit creation
in the banking system by requiring financial institutions
to maintain a Statutory Reserve Requirement (SRR)
equivalent to a certain proportion of their eligible
liabilities (EL) base consisting of MYR-denominated
deposits and non-deposit liabilities, net of interbank
assets and placements with BNM.
Key policy rate:
Overnight policy rate (OPR): The benchmark policy
rate for BNM, which sets a corridor of +/- 25bps for the
overnight interbank (KLIBOR) rate to fluctuate around
the OPR. Bloomberg: MAOPRATE Index.
Key market rate:
3-month Kuala Lumpur Interbank Offered Rate
(KLIBOR): The rate at which banks borrow and lend to
each other on the interbank market. The 3mth KLIBOR
rate also serves as the fixing rate for the IRS market.
The 3mth KLIBOR is the polled average of
contributions from 12 banks. KLIBOR rates are also
polled for 1, 2, 6, 9 and 12 months conducted daily at
11am. Bloomberg: KLIB3M Index.
Fixed income instruments The Malaysian bond market has grown to a market
capitalisation of USD234bn (96.6% of GDP) as of
September 2010 from USD185bn at the end of 2009.
The government sector – including quasi-government
entities – comprises a significant portion (69.9%) of the
Malaysian bond market.
There are 12 primary dealers, including HSBC. They
are obliged to provide two-way price quotations for
benchmark securities under all market conditions to
ensure liquidity in the secondary market. It is their
function to bid for the money market and repo auctions
conducted by BNM. During government bond auctions,
PDs are obliged to tender a minimum amount of the
issue size in order to ensure 100% subscription.
Foreign investors have been significant participants in
the MYR bond market and this intensified in 2010. As
of October 2010, foreign ownership of MGS has risen to
MYR72bn, or 27% of outstanding MGS. As a percent
of the government bond market, foreign ownership
stands at 21% as this figure includes Islamic MGIIs,
which typically see less foreign purchases. Foreign
holdings of short-term BNMNs and Treasury bills also
accelerated during 2011 to MYR40bn.
Malaysia: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? NoEligible collateral for repos - For CB repos As specified by RENTAS - For interbank repos As specified by RENTAS, PDS, NID, BAMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors None- Offshore investors NoneOffshore investor access - Foreign ownership of government bonds
MYR97.9bn of which MYR68.0bn in MGS, MYR29.9bn in BNM bills (Sep-10)
- As % of outstanding 31% of outstanding MGS (Sep-10)- Direct purchase? Yes- Subject to cap? No- Registration requirement? No- Access to onshore funding? No- Access to onshore FX hedging?
Yes
- Access to rates hedging (IRS, repo, futures)? Yes (IRS)Market liquidity statistics MGS/MGIIs - Daily turnover (LCbn) MYR0.5-0.9bn- Buying volume in a single day (USDm) (with minimal market impact)
USD40-60m
- Bid/offer spreads under normal conditions (bp) 3-5bpBNMNs - Daily turnover (LCbn) MYR0.7bn- Buying volume in a single day (USDm) (with minimal market impact)
USD60-80m
- Bid/offer spreads under normal conditions (bp) 2-5bp
Source: HSBC *HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.
44
Asia-Pacific Rates Guide 2011 Malaysia December 2010
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Foreign investor holdings of MYR debt set to increase
0
20
40
60
80
100
120
Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
MYR
bn
0%
5%
10%
15%
20%
25%
BNMNs + Tbills (LHS) MGS + MGII (LHS)% of MGS/MGIIs (RHS)
Source: HSBC, Bank Negara Malaysia
Other key market participants include banks, finance
companies, insurance companies and provident funds.
The Employees Provident Fund (EPF), a social security
institution for private and public employees is the single
largest holder of MGS at 37% of outstanding holdings
as of June 2010. Insurance companies and commercial
banks also account for 25% of total MGS holdings.
Provident funds, insurance companies and financial
institutions have a statutory requirement to hold liquid
assets such as MGS. During government auctions, BNM
also has the option to participate for the purpose of
obtaining securities for its market operations at a
maximum allotment limit of 10%.
Foreign holdings of MYR bonds by type* (total: MYR127bn, as of October 2010)
BNMNs
27%
MTBs
1%
MGS
60%
MGII
0%
PDS
12%
Source: HSBC. *Bank Negara Malaysia Notes (BNMNs), Malaysia Treasury Bills (MTBs), Malaysia Government Securities (MGS), Malaysia Government Investment Issues (GII), Private Debt Securities & others (PDS)
Bonds
Malaysia Government Securities (MGS) are medium
to long-term bonds issued by the government for deficit-
funding purposes. Maturities extend from 3 to 20 years,
though liquidity is greatest at on-the-run 3, 5, 10yr
benchmarks. In 2010, the government began to issue 2yr
and 7yr MGS.
Ahead of an auction, details regarding the size and exact
date of the auction are announced at least 5 business
days in advance via the Fully Automated System for
Issuing/Tendering (FAST). Upon formal announcement
of MGS auction details, ‘when-issued’ (WI) trading
commences until the tender results are announced to the
market. A portion of government issuance may also be
issued via private placement.
Malaysia Government Securities (MGS) investors by type
EPF
37%
Public sector
2%
Social
security inst.
2%
Insurance
8%
Foreign
inv estors
23%
Financial
sector
28%
Source: HSBC, BNM
Malaysia Government Investment Issues (MGIIs) are
Islamic equivalents of MGS that do not bear coupons to
comply with Islamic law. Since March 2005, coupon
payments were introduced by operating on a profit-
sharing basis according to the “Bai Bithaman Ajil”
concept (sale of goods on a deferred payment basis).
Buyers of MGII include banks and dedicated Islamic
funds to meet their statutory liquidity requirements.
MGIIs also allow these funds to invest their liquid funds
in instruments based on Shariah principles as they
cannot invest in any interest-bearing instruments.
Treasury Bills (MTBs) finance the state’s short-term
funding requirements. They are discount securities
issued in 3, 6 and 12 month tenors by BNM on a weekly
basis. MTBs are traded OTC with two-way quotes. The
45
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Islamic equivalents of MTBs are MITBs (Islamic
Malaysia Treasury Bill).
Bank Negara Monetary Notes (BNMNs) are used for
liquidity management. Maturities range between 3
weeks to 3 years, but the usual tenors are 3, 6, 9 and 12
months. They are issued twice a week on a discount
basis like MTBs.
The Islamic equivalent is BNMN-Is, which adopt the
same market convention as MGIIs for profit-sharing
notes and MITBs for discount notes.
Private Debt Securities (PDS) are bonds issued by the
corporate and banking sector primarily to institutional
investors. Maturities range between short, medium and
long term debt. Top-rated PDS are typically purchased
at issuance and held to maturity given their scarcity. All
PDS issued since 1997 are scripless by regulation,
whilst physical forms issued before are allowed to
mature naturally. PDS include Cagamas bonds, MBS,
ABS, bank sub-debt, convertible bonds and various
Islamic bonds.
Currently, all issues, offers or invitations of PDS must
be rated by a rating agency recognised by the Securities
Commission (SC) – Rating Agency Malaysia Berhad
(RAM) or Malaysian Rating Corporation Berhad
(MARC) – unless exemptions were given by the
Securities Commission.
Derivatives
An onshore and offshore market exists for MYR interest
rate swaps (see table Malaysia: IRS and CCS markets).
Interest rate swaps (IRS) are developed with the curve
extending up to 10 years. Offshore investors are allowed
to participate for bond hedging purposes only.
Consequently, an offshore MYR NDIRS curve has
developed. The most liquid tenors are 1-5 years. During
2010, the estimated average daily volumes for the
onshore IRS market reached MYR250m. The fixing rate
is the 3mth KLIBOR.
Cross currency swaps (CCS) also have a curve
extending up to 10 years. Similarly, offshore investors
may only access the CCS market for bond hedging
purposes but liquidity is limited.
KLIBOR futures are based on the 3mth KLIBOR and
traded at the Bursa Malaysia. Their principal contract
size is MYR1m with bid and offer quoted in terms of an
index (100 minus the annual percentage yield to two
decimal places). The quarterly cycle contract months are
March, June, September and December up to five years
ahead and two serial months.
Regulatory, settlement and tax issues Regulation
There are no restrictions on foreign investors other than
appointment of a local custodian.
Settlement
The Real Time Electronic Transfer of Funds and
Securities (RENTAS) acts as the central depository and
payment agency. It is a real-time gross settlement
(RTGS) system that processes and settles fund transfer
instructions continuously. The transfers are
instantaneous and irrevocable only if there are sufficient
funds in the respective bank’s BNM settlement account.
Hence, financial institutions need to manage their
Malaysia: IRS and CCS markets
Onshore IRS Offshore NDIRS Onshore CCS
Non-resident access Bond hedging allowed Existent Bond hedging allowed Tenors 1-10 years 1-10 years 1-10 years Liquid tenors 1-10 years 1-5 years 1-5 years Average trade size MYR50m MYR30-50m USD15-25m Bid/offer spreads under normal conditions (bp) 3-5bp 3-5bp 10-15bp Fixing rate 3mth KLIBOR 3mth KLIBOR 3mth USD LIBOR vs 3mth KLIBOR Day count Quarterly Actual/365 Actual/365 Actual/360 (USD) Effective date T T T+2 Fixing time (local time) 11am 11am 11am Fixing page Reuters: KLIBOR
Bloomberg: BNMF Reuters: KLIBOR Bloomberg: BNMF
Reuters: KLIBOR, LIBOR Bloomberg: BNMF
Local market hours 9am-5pm 9am-5pm 9am-5pm Main participants Interbank, corporates Interbank, corporates, hedge funds Interbank, corporates
Source: HSBC
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intraday funds and customers must ensure availability of
funds prior to issuing payment instructions to eliminate
the settlement risk.
Government bonds are auctioned scripless through
principal dealers. Subsequent trades are executed on an
OTC basis and settled by delivery vs. payment (DvP)
through RENTAS. Payment is by bank transfer from the
buyer’s bank to the seller’s bank in Kuala Lumpur. The
value date is normally T+2.
Securities settled via RENTAS are held by Authorised
Depository Institutions (ADIs). These are dealers who
are approved or appointed by BNM to hold securities on
behalf of non-RENTAS members.
The settlement of all PDS is conducted through
RENTAS. Physical form PDS are physically delivered
with payment. KLSE listed PDS are traded in the same
manner as listed equities.
Taxation7
There is neither withholding tax on interest income nor
is there capital gains tax.
Non-residents are exempt from income tax on all bonds
and securities (other than convertible loan stocks) issued
by the government, publicly-listed companies on the
KLSE, companies rated by Rating Agency Malaysia
Berhad and/or Malaysian Rating Corporation Berhad
and all other debentures approved by the Securities
Commission.
There is no stamp duty relating to the issuance and
transfer of Malaysian government or private debt
securities approved by the Securities Commission.
______________________________________ 7 HSBC is not a qualified tax advisor. Consult a professional advisor for further
guidance.
Foreign exchange Normal market conditions
Onshore average daily volume USD1.2bnOnshore spot transaction (market lot) Via brokers: USD3m
Via Reuters :USD5m Onshore bid/ask spread 20–30 pips (0.0020 – 0.0030MYR)Onshore forward transaction USD10mOnshore forward spread 1-6M: 3-20 pips (0.0003-0.0020MYR)Onshore implied option vol spread 0.8-1.5 vol for all spreads
Note: Spreads are subject to change with market developments Source: HSBC FX strategy
Useful information Information sources
Bank Negara Malaysia (BNM) www.bnm.gov.my BNM Bond Info Hub rmbond.bnm.gov.my/portal/server.ptSecurities Commission (SC) www.sc.com.my Treasury Malaysia www.treasury.gov.my Kuala Lumpur Stock Exchange (KLSE) www.klse.com.my Federation of Malaysian Unit Trust Managers (FMUTM)
www.fmutm.com.my
Employees Provident Fund (EPF) www.kwsp.gov.my Bloomberg fixing page BNMF Reuters fixing page NEGARA, HSBM01
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Malaysia: Bonds
Malaysia Government Securities (MGS)
Malaysia Government Investment Issues (MGIIs)
Treasury Bills (MTBs) Bank Negara Monetary Notes (BNMNs)
Private Debt Securities (PDS)
Issuer Government of Malaysia Government of Malaysia Government of Malaysia Bank Negara Malaysia (BNM)
Malaysian corporations, quasi-govt agencies
Currency Malaysian Ringgit (MYR) Malaysian Ringgit (MYR) Malaysian Ringgit (MYR) Malaysian Ringgit (MYR) Malaysian Ringgit (MYR) Form Scripless Scripless Scripless Scripless Scripless Minimum denomination MYR1,000 MYR1,000 MYR1,000 MYR1,000 MYR1,000 Tenors 3, 5, 7, 10, 20 years 3 to 10.5 years 3, 6, 9 months, 1 year 91 days up to 3yrs 1-20 years Coupon/discount Fixed at weighted
average yield at auction to 3 decimal places
Fixed at weighted average yield at auction to 3 decimal places
Zero (issued at discount) Zero, coupon-bearing, floating
Fixed rate, floating rate, zero coupon or structured
Coupon frequency Semi-annual Semi-annual None None/Semi-annual Semi-annual Amortising schedule Bullet Bullet Bullet Bullet Bullet Day count Actual/Actual Actual/Actual Actual/365 Actual/365 Actual/Actual or
Actual/365 Amount outstanding MYR253bn (Sep-10) MYR80.5bn (Sep-10) MYR4.32bn (of which
MYR2bn Islamic) (Sep-10)
MYR62.4bn (of which MYR 20bn Islamic) (Sep-10)
MYR 133.7bn (of which MYR70bn Islamic) (Sep-10)
Primary market Auction style US Treasury style auction
via FAST US Treasury style auction via FAST
US Treasury style auction via FAST
US Treasury style auction via FAST
Book-building, private placement
Average issue size MYR3-5bn MYR2-4bn MYR80-200m MYR500m-3bn MYR250m-2bn Auction frequency Once or twice a month Once a month Weekly Twice-weekly Ad hoc Participants BNM appointed primary
dealers BNM appointed primary dealers
BNM appointed primary dealers
BNM appointed primary dealers
Banks, state pension funds, insurance companies (on book-building basis)
Settlement T+1 T+1 T+1 T+1 Usually 7 business days
Secondary market Trading mechanism OTC OTC OTC OTC OTC Trading hours 9am-12pm, 2-5pm 9am-12pm, 2-5pm 9am-12pm, 2-5pm 9am-12pm, 2-5pm 9am-12pm, 2-5pm Quoting convention Price to 2 decimal places Price to 2 decimal places Yield to 2 decimal places Yield to 2 decimal places Yield to 2 decimal places Average bid-offer spreads 5-10 cents (liquid issues),
50-100 cents (illiquid issues)
5-15 cents (liquid issues), 50-100 cents (illiquid issues)
3bp 3bp 5-10bp
Average trade size MYR5m MYR5m MYR5m MYR5m MYR5m Volume MYR600-900m per day MYR125-175m per day MYR25m per day MYR600m per day MYR500mn per month Settlement T+2 T+2 T+1 T+1 for discount and T+2
for coupon bearing T+2
Clearing RENTAS RENTAS RENTAS RENTAS RENTAS for unlisted bonds, CDS for listed
Main participants Banks, state pension funds, insurance companies
Banks, state pension funds, insurance companies
Banks Banks Financial institutions, asset managers, insurance, statutory bodies
Regulations for foreign investors Restriction on foreign investment
None None None None None for most issues
Custodian Local custodian required Local custodian required Local custodian required Local custodian required Local custodian required Interest income tax None None None None None Capital gains tax None None None None None Entry/exit None None None None None
Source: HSBC
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Market developments The Republic of the Philippines diversified and
deepened its investor base by issuing a maiden global
peso bond (GPB) in September 2010, the PHP44bn
4.95% ROP 1/21 sovereign bond. GPBs are US SEC-
registered bonds that are settled offshore in US dollars
but are peso-denominated, which minimises FX risk to
the Philippine government. In contrast to onshore
Treasury bonds (RPGBs), GPBs are not subject to 20%
withholding tax and this is the primary advantage for
overseas investors, which were balanced globally at the
time of issue (37% Asia, 30% Europe, 33% US).
Demand for the 10yr GPB has kept yields lower than
that for comparable onshore RPGBs net-of-tax. On
November 2010, Petron Corp became the first corporate
to issue a PHP20bn GPB.
Department of Finance (DoF) continues to lengthen
the government’s debt profile through debt exchange
programmes. The Philippine Bureau of the Treasury
(BTr) conducted bond swaps to replace existing RPGBs
with new, longer-tenor bonds to smoothen the
concentration of principal payments and extend the
maturity profile up to 25 years, which could be used to
benchmark loans for long-term infrastructure projects
under its private-public partnership programme.
The monetary board of the Bangko Sentral ng
Pilipinas (BSP) unwinds extraordinary monetary
stimulus provisions. In February 2010, the rediscount
rate rose by 50bp to 4.0%, aligning it with the
repurchase rate. The rediscounting facility is a standing
credit facility provided by the BSP to help banks meet
temporary liquidity needs by refinancing the loans they
extend to their clients. The rate was previously lowered
in response to global financials crisis threats against its
domestic financial markets. Also, the rediscounting
budget was decreased from PHP60bn to PHP40bn and
PHP20bn on March 2010 and May 2010, respectively.
Access to rediscounting facilities was also tightened.
The loan value of all eligible rediscounting paper was
restored to 80% from 90%.
Ba3/BB/BBPhilippines
The Philippines diversifies and deepens its investor base by issuing its
first-ever peso-denominated offshore bond, the first of its kind in Asia
Bond exchange programmes lengthen government debt profile
BSP monetary board unwinds extraordinary monetary stimulus provisions
Bonds outstanding Government bond maturity profile (as of September 2010)
0
10
20
30
40
50
60
70
80
Sep-04 Sep-06 Sep-08 Sep-10
USD
bn
32
34
36
38
40
42
44
% G
DP
Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)
Ov er 10 y ears,
6%
5-10 y ears,
42%
3-5 y ears,
24%
1-3 y ears,
29%
Source: ADB Source: ADB
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Rules on failed trades and delayed settlements of fixed
income securities revised. The Philippine Dealing and
Exchange Corp (PDEx) revised its definition, reporting,
handling and penalties in May 2010.
Monetary policy Bangko Sentral ng Pilipinas’ primary objective is to
“promote a low and stable inflation conducive to
balanced and sustainable economic growth.” The BSP
has adopted an explicit inflation target since January
2002. Its target for 2011 is 4.0% ± 1.0%. The key
benchmark policy rates are the overnight borrowing
(OBR), or reverse repurchase (RRP), rate and the
overnight lending or repurchase (RP) rate.
The BSP has a number of monetary policy instruments
at its disposal to promote price stability. To increase or
reduce liquidity in the financial system, the BSP may
avail of open market operations (OMOs), accept fixed-
term deposits through 1 week-1 month Special Deposit
Accounts (SDAs), extend loans and advances (through
its rediscounting facility) and require banking
institutions to hold statutory and liquidity reserves.
OMOs consist of repurchase and reverse repurchase
transactions, outright purchase/sale of government
securities by the BSP as well as FX swaps.
Key policy rates:
Overnight repo rate: The overnight rate at which
banks can borrow from the BSP to accommodate
liquidity requirements. Bloomberg: PPCBBLR Index.
Overnight reverse repo rate: The overnight rate at
which banks can lend to the BSP. Bloomberg:
PPCBOND Index.
Key market rates:
PDEX rates: PDST-F (Philippine Dealing System
Treasury-Fixing Rates) are the average 60% of firm bid
rates posted by designated PDST Fixing Banks for the
12 benchmark tenors at 11:15am daily. PDST-R1 and
PDST-R2 are the weighted average yields of done
transactions (or best firm bid rates as the case may be)
for the 12 benchmark tenors at 11:15am and 4:15pm
daily, respectively. Bloomberg: PDEX.
91-day T-bill: Used as a floating rate benchmark by
some market participants. Bloomberg: PH91AVG Index.
Philippines Overnight Interbank Reference Rate
(Phiref): Implied overnight peso rate derived from all
executed USD/PHP swap and forward transactions.
Bloomberg: PREFON Index. The 3-month Phiref is a
floating rate index for onshore IRS. It is a weighted
average of done deals in 3-month FX swaps.
Bloomberg: PREF3MO Index.
Fixed income instruments The Philippine bond market has grown to a market
capitalisation of USD72bn as of September 2010 (38%
of GDP). Government bonds dominated the market,
constituting roughly 88%.
There are 42 primary dealers in the Philippines,
including HSBC. Bills and bonds are in scripless form
with its auction process automated. The BSP requires
daily revaluation of securities, increasing transparency
and efficiency in secondary markets. Primary dealers
are known as Government Securities Eligible Dealers
(GSEDs).
Philippines: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? No- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos RPGBs- For interbank repos n/aMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors 20% withholding tax at source- Offshore investors 20% withholding tax at sourceOffshore investor access - Foreign ownership of government bonds Est. PHP60-80bn (Oct-10)**- As % of outstanding Est. 4-5% of RPGBs**- Direct purchase? Yes- Subject to cap? No- Registration requirement? Yes- Access to onshore funding? No- Access to onshore FX hedging? No- Access to rates hedging (IRS, repo, futures)? Yes (IRS)Market liquidity statistics Global Peso Bonds (GPBs) - Daily turnover (LCbn) USD1-5m- Buying volume in a single day (USDm) (with minimal market impact)
USD5m
- Bid/offer spreads under normal conditions (bp) 6-10bpRPGBs - Daily turnover (LCbn) PHP20-30bn- Buying volume in a single day (USDm) (with minimal market impact)
USD5m
- Bid/offer spreads under normal conditions (bp) 5-15bp
Source: HSBC * HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance. **Including 10yr Peso Global Bond.
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There is a clear distinction between securities dealers
and brokering participants. Securities dealers may only
buy and sell securities for their own accounts. Brokering
participants may only buy and sell for customer
accounts. All deals must pass through a SEC-license
broker, who posts the orders to the securities trading
platform or the Fixed Income exchange. This aims to
improve transparency and pricing in the secondary
market. No single individual may simultaneously act as
a securities dealer and brokering participant.
Foreigners held PHP61bn of government bonds (4.3%
of total) in October 2010. Specifically PHP44.0bn was
in GPB and PHP171.bn was allocated in onshore
RPGB, which is 2% of onshore total.
Bonds
Global peso bonds (GPBs) are US SEC-registered
bonds that are peso-denominated but settled offshore in
US dollars. In contrast to onshore Treasury bonds
(RPGBs), GPBs are not subject to 20% withholding tax
and this is the primary advantage for offshore investors.
For the sovereign, the GPB has assisted to extend the
debt maturity profile, lower borrowing costs as well as
diversify the investor base. Although there is no limit on
GPB holdings by domestic investors, domestic banks
must report their GPB holdings as part of their net short
USD/PHP position which is currently capped at
USD50m or 20% of unimpaired capital. Approval by
the BSP is required for GPB issuance.
Currently there are two GPBs: PHP44bn 4.95% ROP
1/21 sovereign bond issued in September 2010 and the
PHP20bn 7.00% PCOR 11/17 issued by Petron Corp in
November 2010.
Treasury bonds (RPGBs) are unconditional
obligations of the National Government (NG) issued by
the BTr. They are designed to extend the government’s
debt maturity profile, provide a benchmark yield curve
and improve trading liquidity in longer-term
instruments. Maturities range between 2 and 25 years
with auctions held twice a month. A tap facility allows
additional issuance of up to 50% the fully awarded
initial amount. The BTr may reject the entire auction.
The secondary market is regulated by the SEC. Only
SEC-licensed dealers may engage in the business of
buying and selling securities. The default settlement of
government securities is T+1, but can be agreed on T by
both counterparties.
Treasury bills (T-bills) are zero coupon debt issued
twice a month on Mondays by the BTr. There are three
available tenors: 91, 182 and 364 days.
Retail treasury bonds (RTBs) are small denomination
government securities (as low as PHP5,000) with fixed
rate coupon payments. Maturities range between 3 and 7
years. Coupons may be issued on a quarterly or semi-
annual basis. RTBs are aimed at individual investors but
open to institutional investors. The issuing process
spans over 1-2 weeks after the BTr has set a reference
yield. Although the BTr may provide an indicative issue
size, the actual issuance amount depends on orders
placed through selling agents.
Maturity profile of outstanding government bonds
0
100
200
300
400
500
600
2011 2014 2017 2020 2023 2026 2032 2035
Maturity date
PHPb
n
RPGBs ROP T-bills Global PHP
Source: HSBC, Bloomberg
Corporate debt is issued by firms to the public. It
consists of corporate bonds and commercial paper. The
market is generally illiquid with bid-offer spreads
ranging between 50-100bp. The BSP has issued
guidelines regarding mark-to-market benchmark pricing
to improve liquidity in this sector.
Derivatives
An onshore and offshore market exists for PHP interest
rate swaps (see table Philippines: IRS and CCS markets).
Interest rate swap (IRS) and cross-currency swap
(CCS) markets are generally illiquid. Liquidity is limited
to 1-5yr PHP IRS and up to 1yr FX forwards. Most
transactions are conducted bilaterally between banks and
corporate firms due to an inactive interbank market.
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BSP approval is required for offshore investors to access
onshore markets. For the IRS market, offshore investors
may only access for hedging purposes. In the FX market,
approval is required for both the offer-side FX swaps and
sale of foreign currency on a non-deliverable basis to
non-residents. Underlying documents are also required
for outright sales of foreign currency, including a sale in
the first leg of an FX swap or in the far leg of a currency
swap with non exchange of principal.
The offshore USD/PHP non-deliverable cross-currency
swap (NDS) curve is fairly liquid up to five years for
trading sizes up to USD10m at 20-30bp bid-offer spreads.
Regulatory, settlement and tax issues Regulation
Non-residents must register with the BSP and obtain a
Bangko Sentral Registration Document (BSRD) to
repatriate capital. Registration documents must prove
that FX funding for the investment has been inwardly
remitted and sold to the banking system for PHP. A
local custodian, proof of purchase and sale (for bonds,
equities and 90-day deposits) are required.
Settlement
All GSEDs settle trades through the Registry of
Scripless Securities (RoSS). This system is managed by
the BTr. GSEDs are required to hold two accounts: 1) A
securities account with the BTr that must separate the
GSED’s portfolio securities from those under custody
on their clients’ behalf; and 2) A cash settlement
account with a settlement bank, typically with the BSP
or commercial banks. The RoSS uses a delivery vs.
payment (DvP) system to eliminate settlement risk.
Settlement in the government’s primary market is
automated. Upon a successful bid, the BTr
automatically credits the securities account and debits
the cash settlement account.
Settlement in the secondary market is dependent on both
parties involved. If both are GSEDs, the deal is entered
into the PDEx system. This matches the security’s
details and sends the deal through the RoSS settlement
process upon authorisation by both parties. The
securities and cash settlement accounts are then debited
and credited by the BTr and the BSP, respectively.
To settle trades between a GSED and a non-GSED
investor, a transfer is made through RoSS from the
GSED’s account to the investor’s third party custodian.
Cash settlement here is normally by means of a
cashier’s order (manager’s cheque) or cheque, but may
also be via the real time gross settlement Philippine
payment system (PhilPaSS).
On the coupon payment date and maturity date of the
security, the BTr automatically credits the cash
settlement account of the appropriate institution. The
cut-off time for RoSS transactions is 1330. Government
securities may also be settled through Euroclear.
Philippines: IRS and CCS markets
Onshore IRS Onshore CCS Offshore CCS (Non-deliverable swap, NDS)
Non-resident access: No Prior approval required. Non-residents can access CCS with back-end exchange only where HSBC buys the USD ( if non-deliverable, no restrictions)
Allowed
Tenors 1 to 10 years <1yr forward only 1-10 years Liquid tenors 1 to 5 years <1yr forward only 1-5 years Average trade size PHP50m (USD1m) USD10m USD5-10m Bid/offer spreads under normal conditions (bp) 10-20bp 40-50bp 50bp Fixing rate 3m PHIREF 6mth USD LIBOR 6mth USD LIBOR Day count Quarterly Actual/360 Semi Actual/365 Semi Actual/365 Effective date T+1 T (for overnight only until 11am), T+1 after 11am T+2 Fixing time (local time) 11:30am 11am 11am Fixing page Reuters: PHIREF
Bloomberg: PHRF Reuters: PHPFIX=PDSP Reuters: PHPFIX=PDSP
Local market hours 9am-12pm, 2:30-4pm 9am-12pm, 2:30-4pm 9am-12pm, 2:30-4pm Main participants Interbank, corporates Interbank, corporates Interbank, corporates
Source: HSBC
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Taxation8
Interest income from government, quasi-government, or
corporate bonds is subject to 20% tax withheld at
source, with the exception of bonds issued by issuers
that are exempted by law or charter such as National
Power Corp (Napocor) and supra-national issuers like
ADB and IFC.
There are no capital gains taxes on government bonds
and publicly issued corporate debt with maturities of
more than five years. Else, these gains are subject to
corporate income tax. Interest on corporate debt issued
to less than 20 investors is also subject to corporate
income tax. There are no entry or exit taxes.
______________________________________ 8 HSBC is not a qualified tax advisor. Consult a professional advisor for further
guidance.
Foreign exchange Normal market conditions
Onshore average daily volume USD1.7bnOnshore spot transaction USD1-3mOnshore bid/ask spread 2 pips (0.02PHP)Onshore forward transaction USD5-10mOnshore forward spread 10 pips (0.10PHP) 1 month forward 2 pips (0.02PHP) 12 months forward 30 pips (0.30PHP)Offshore average daily volume USD500-600mNDF transaction USD10-20mNDF spread 5-10 pips (0.05-0.10PHP)Onshore implied option volatility spread 2.0 volOffshore implied option volatility spread 1.0 vol
Note: Spreads are subject to change with market developments Source: HSBC FX strategy
Useful information Information sources
Bangko Sentral ng Pilipinas (BSP) www.bsp.gov.ph Department of Finance (DoF) www.dof.gov.ph Bureau of the Treasury (BTr) www.treasury.gov.ph Securities and Exchange Commission (SEC) www.sec.gov.ph Money Market Association of the Philippines (MART) www.mart.com.ph Philippine Dealing & Exchange Corporation (PDEx) www.pdex.com.ph Bankers Association of the Philippines (BAP) www.bap.org.ph
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Philippines: Bonds
Treasury bills Treasury bonds (T-bonds, or RPGBs)
Global Peso Bond (GPB) (sovereign)
Retail Treasury Bonds (RTBs)
Issuer Republic of the Philippines Republic of the Philippines Republic of the Philippines Republic of the Philippines Currency Philippine Peso (PHP) Philippine Peso (PHP) Philippine Peso (PHP)
denominated, US Dollar settledPhilippine Peso (PHP)
Form Scripless Scripless Scripless Scripless Minimum denomination PHP10m PHP10m PHP1m PHP5,000 Tenors 91, 182 and 364 day 2, 3, 4, 5, 7, 10, 20 and 25
years 10 years (sovereign) 3, 5 and 7 years
Coupon/discount Zero, issued at discount Fixed rate Fixed rate Fixed rate Frequency None Semi-annual Semi-annual Semi-annual or quarterly Amortising schedule Bullet Bullet Bullet Bullet Day count Actual/360 Actual/360 Actual/360 Actual/360 Amount outstanding PHP581bn (Jul-10) PHP1.6trn (Jul-10) PHP44bn (Dec-10) PHP291bn (Jul-10)
Primary market Auction style English; non-competitive bid
available Dutch for new issues; English auction for re-openings
Book building Dutch auction via selling agents
Average issue size PHP6-7bn PHP6-8bn Variable Variable Issuance cycle Every two weeks (Monday)
alternating with T-bonds Every two weeks (Tuesday) alternating with T-bills
Ad hoc Ad hoc
Participants Primary dealers (GSEDs) Primary dealers (GSEDs) Foreign investors Primary dealers (GSEDs) Settlement T+2 T+2 T+0 T+14
Secondary market Trading mechanism OTC OTC OTC OTC Trading hours 9am-12pm and 2pm-4pm 9am-12pm and 2pm-4pm (Same as USD denom RoPs) 9am-12pm and 2pm-4pm Quoting convention Yield basis Yield basis Price basis Yield basis Average bid-offer spreads 20-30bp 1-3bp for jumbos, 5-10 for
others 5 bp 15-20bp
Average trade size PHP50m PHP50m PHP50m PHP50m Volume PHP1bn per day PHP20-30bn per day USD1-5m per day PHP1-2bn per day Settlement T+1 T+1 T+2 T+1 Clearing Registry of Scripless Securities
(RoSS) Registry of Scripless Securities (RoSS)
Euroclear Registry of Scripless Securities (RoSS)
Main participants Local banks, government institutions
Local and foreign banks, institutional investors, government institutions
Foreign investors Local and foreign banks, institutional investors, corporate firms, retail investors
Regulations for foreign investors Restriction on foreign investment
None None None None
Custodian Local custodian required Local custodian required None, Euroclearable Local custodian required Interest income tax 20% withholding at source
(applied to discount), applies equally to all market participants
20% withholding at source, applies equally to all market participants
None 20% withholding, applies equally to all market participants
Capital gains tax None Tax exempt if instrument has maturity of more than 5yrs. Otherwise, capital gain is subject to corporate income tax
None None
Entry/exit None None None None
Source: HSBC
54
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Market developments Monetary Authority of Singapore (MAS) announced
plans to issue short term MAS bills starting in 2Q11
(announced in June 2010). The move intends to increase
the availability of liquid securities to banks as well as
provide the MAS with a fourth instrument for its money
market operations in addition to FX swaps, borrowings
and repos. The bills will be negotiable, allowing banks
to sell or pledge them as collateral in the interbank repo
markets and the MAS Standing Facility as well as
constitute part of banks’ reserve requirements. To
prevent overlap with SGS T-bills, MAS bills will have
tenors of up to 3 months and be phased in gradually
with an initial size of SGD20bn.
MAS expands eligible securities that can be pledged
in the Standing Facility – the key liquidity facility for
banks – to include AAA-rated and zero risk-weighted
public sector entities. In 2009, the MAS accepted AAA-
rated SGD debt securities issued by supranationals,
sovereigns and sovereign-guaranteed companies for
both the Standing Facility as well as Tier 2 liquid assets
with the same haircut as SGS.
Singapore Exchange (SGX) introduces initiatives to
promote the listing and trading of fixed income
instruments on the exchange. In particular, corporates
are encouraged to issue bonds onto the SGX. The
duration of the approval process is aimed to be cut in half.
MAS is provided with more power to influence
government bond market. The Government Securities
(Amendment) Bill of 2009 provides the central bank
with the power to: 1) Inspect, suspend and revoke
appointments of primary dealers; 2) Redeem SGS at
market price before maturity; and 3) Use SGS in
lending arrangements with PD. The government may
issue new SGS for the MAS to lend overnight if there is
not enough to meet demand from primary dealers.
Aaa/AAA/AAASingapore
MAS plans to expand money market tools to include issuance of short-
term MAS bills, from 2Q11
MAS expands eligible securities that can be pledged in the Standing
Facility to include AAA-rated and zero risk-weighted public sector entities
SGX introduces initiatives to promote listing and trading of fixed income
instruments on the exchange
Bonds outstanding Government bond maturity profile (as of September 2010)
0
50
100
150
200
Sep-07 Sep-08 Sep-09 Sep-10
USD
bn
0
20
40
60
80
100
% G
DP
Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)
1-3 y ears,
32%
Ov er 10 y ears,
20%
5-10 y ears,
31%
3-5 y ears,
17%
Source: ADB Source: ADB
55
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MAS and the People’s Bank of China (PBoC) agree on
a three-year bilateral currency swap on 23 July 2010.
Up to RMB150bn and SGD30bn of liquidity may be
provided, targeting direct investment and bilateral trade.
Monetary policy The Monetary Authority of Singapore is the central
bank. Singapore's monetary policy is centred on the
trade-weighted exchange rate monetary policy rather
than interest rate or monetary aggregate targets. In the
context of Singapore’s open capital account, this implies
that domestic interest rates are endogenous and market-
determined. The MAS manages the SGD against an
undisclosed trade-weighted basket of currencies of
Singapore’s major trading partners and competitors and
maintains it broadly within an undisclosed target band.
The MAS meets semi-annually in April and October to
review its policy stance including net appreciation or
depreciation vs. the NEER, rate of appreciation or
depreciation and potential re-centring or widening of the
NEER FX band.
HSBC Research has estimates for spot SGD NEER
(nominal effective exchange rate) as well as reference
midpoint and top/bottom range for the SGD NEER
trading band (see chart HSBC estimated SGD NEER,
trading band and 6mth SOR).
The MAS’ money market operations are aimed at
ensuring sufficient liquidity in the banking system to
meet banks' demand for reserve and settlement balances.
The main instruments for MAS liquidity management
operations include repo operations, FX swaps and direct
lending. Banks are also required to maintain reserve
requirement or Minimum Cash Balance (MCB) with the
MAS as a proportion of their liabilities base.
To facilitate the fine tuning of liquidity at the level of
the banking system and the level of the individual bank,
MAS operates the MAS Standing Facility (SF) and
Intra-day Liquidity Facility (ILF). The SF – the central
liquidity facility for banks – allows banks to: 1) initiate
SGD deposit or swap for SGD (using eligible foreign
currencies) or 2) borrow SGD (via repo of eligible
collateral) from MAS on an overnight and interest-
paying basis. The ILF is for participants that require
unusually large intra-day payments and funds.
Key policy rate:
Nominal Effective Exchange Rate (NEER): An
estimated weight average value of the SGD relative to a
basket of currencies of its major trading partners and
competitors. The MAS does not disclose weights, but
HSBC provides estimates for the SGD NEER spot as
well as the midpoint and top/bottom range of the trading
Singapore: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes - Under MAS standing facility- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos SGS, T-bills, AAA-rated debt issued by sovereigns,
supranational, sovereign-backed corporates- For interbank repos Same as for CB reposMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors None- Offshore investors NoneOffshore investor access - Foreign ownership of government bonds SGD21-24bn- As % of outstanding Est. 16-18% of SGS (Oct-10)- Direct purchase? Yes- Subject to cap? No- Registration requirement? No- Access to onshore funding? Yes- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? Yes (IRS, repo)Market liquidity statistics SGS - Daily turnover (LCbn) SGD1.9bn- Buying volume in a single day (USDm) (with minimal market impact)
USD100m
- Bid/offer spreads under normal conditions (bp) 3bpT-bills - Daily turnover (LCbn) SGD1.2bn- Buying volume in a single day (USDm) (with minimal market impact)
USD50m
- Bid/offer spreads under normal conditions (bp) 5bp
Source: HSBC *HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.
HSBC estimated SGD NEER, trading band and 6mth SOR
95
100
105
110
115
Nov -06 Nov -07 Nov -08 Nov -09 Nov -10
HSB
C S
GD
NEE
R
0
1
2
3
4
Rat
e (%
)
SGD NEER (LHS) Top (LHS)Mid (LHS) Bottom (LHS)6mth SOR (RHS)
Source: HSBC
56
Asia-Pacific Rates Guide 2011 Singapore December 2010
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band. Bloomberg: ASFXSGD Index (SGD NEER),
ASFXSGT Index (range top), ASFXSGM Index (range
mid), ASFXSGB Index (range bottom).
Key market rates:
6-month SGD Swap Offer Rate (SOR): Implied 6-month
FX forward rate, which is also used as the IRS fixing rate.
Bloomberg: SORF6M Index. Reuters: ABSIRFIX01.
3-month SGD Singapore Inter-Bank Offered Rate
(SIBOR): Reference interest rate at which banks offer
to lend unsecured SGD funds in the inter-bank market.
Bloomberg: SIBF3M Index.
3-month USD SIBOR: Reference interest rate at which
banks offer to lend unsecured USD funds in the inter-
bank market. Bloomberg: SIBU3M Index.
Fixed income instruments The Singapore bond market has grown to a market
capitalisation of USD177bn as of September 2010.
Government bonds account for 55% of the market
whereas corporate bonds account for the remainder.
There are 11 primary dealers (PDs), including HSBC,
that are required to provide two way prices for repo
agreements, outright SGS and Treasury bill (T-bill)
transactions under all market conditions. The MAS
conducts money market operations exclusively with
PDs in recognition of their role as specialist
intermediaries in the SGS and money markets.
Official data on foreign participation in the Singaporean
bond market is not officially collected, but it is
estimated to be 16-18% for the SGS and T-bill market
(approximately SGD20bn-SGD25bn as of October
2010). The Central Provident Fund (CPF) is a major
holder of Singaporean bonds.
Bonds
Singapore Government Securities (SGS) are long-
term debt instruments that pay a coupon semi-annually
and are redeemable at par upon maturity. Maturities
range between 2 and 20 years. SGS are issued on a
monthly basis through a uniform price auction.
Both competitive and non-competitive auctions are open
to all investors, but non-PDs must bid through a PD.
Competitive auctions take the form of a uniform price
auction and whilst there is no limit on the number of
competitive bids, the maximum allotments are 30% for
PDs and 15% for non-PDs. The limit for non-
competitive bids is 1% of issue size for a PD and
SGD2m for non-PD. The government may also issue to
the MAS for its liquidity operations. The scheduled
auction dates are announced at the start of each year but
their individual sizes are only disclosed a week before.
Treasury bills are discount securities with maturities
ranging between 3 months and 1 year. 3-month bills are
issued every Monday whereas one-year bills are issued
semi-annually. They are sold through a uniform price
auction and the limit for non-competitive bids is 1% of
issue size for a PD and SGD1m for non-PD for T-bills.
Corporate bonds are issued by corporates to the
general public. A wide variety of bonds is available,
Singapore: Corporate bonds
Issuer Rating Tenors Typical issue size Secondary market
Statutory Board Big Four: Housing Development Board (HDB), Jurong Town Corporation (JTC), Land Transport Authority (LTA), Public Utilities Board (PUB)
Implicit AAA as guaranteed by government
5– 15 years Around SGD250m or more, with a preference to long-dated issues
Liquid, bid offer quotes: 10-50cents
Domestic issuers Property companies Not rated: investors compensated via higher yield
1– 20 years SGD100m-1500m for plain vanilla issues, SGD400m-1bn for securitised deals
Less liquid than Statutory board, bid-offer spreads 20-30bp depending on issuer and tenor
Non property companies Rated and non-rated available.
Up to 30 years SGD150m-300m Domestically very liquid and trades at slightly higher premium than Statutory Board. Bid-offer spread 25-50cents
Non-domestic/foreign issuers
KfW (German Development Bank), International Finance Corp. (IFC), African Development Bank (AfDB), Islamic Development Bank, International Bank of Reconstruction and Development
Rated: normally takes on parent’s rating
n/a SGD100m-300m Less liquid than Statutory Board paper, bid offer spread: 20-50cents
Source: HSBC
57
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including fixed coupon, floating rate, asset backed,
equity linked and mortgage backed securities. Issuance
is typically managed by bank panels and secondary
trading is conducted over-the-counter (OTC). Bonds are
quoted on a clean price basis. The market is divided into
three categories: 1) Statutory Board, 2) domestic
issuers, and 3) non-domestic/foreign issuers. See table
Singapore: Corporate bonds, for more information. Derivatives
An onshore market exists for SGD interest rate and
cross-currency swaps (see table Singapore: IRS and
CSS markets).
Interest rate swaps (IRS) and cross-currency swaps
(CCS) are accessible by offshore investors without
restriction. Tenors range from 1 to 20 years, with
liquidity concentrated in the 1 to 10-year segment.
Average trade sizes range from SGD10-25m (10-year
tenor) to SGD25-50m (2-year tenor). The 6mth SOR is
the floating rate fixing for SGD IRS.
SGS bond futures are based on the 5-year Singapore
Government Bond. This was established to facilitate
hedging in the SGS market. Eligible bonds include SGS
with 3-6 years remaining to maturity from the first
calendar day of the contract month. Liquidity in this
market remains low.
Regulatory, settlement and tax issues Regulation
Foreign investors and issuers can access Singapore’s
financial markets with ease. No approval is required
from the regulatory authorities and non-residents may
obtain local funding to finance bond purchases.
Settlement
MAS Electronic Payment System (MEPS+) settles
scripless SGS and facilitates high-value fund transfers.
It is a real-time, gross settlement system (RTGS) that
irrevocably transfers SGS and funds between MEPS+
participants. All banks and MAS-approved non-banks
of systemic importance in Singapore are eligible to
access the MEPS+ facility. SGS transactions are cleared
electronically on a delivery versus payment (DvP) basis
over MEPS+ and MAS’ SGS book-entry clearing
system. Settlement of an SGS transaction is usually
T+1, though later settlement is also possible.
SGS trading accounts (or a custody account) are used by
non-bank investors to clear SGS. These accounts can be
opened with any of the local banks. Cross-border
delivery requires a foreign investor to appoint a
Depository Agent (DA) based in Singapore and take
custody of their SGD bonds in the CDP system. In
addition, international clearing systems, such as
Euroclear and Clearstream, can participate in the CDP
system via a DA. CDP now has indirect links with
Euroclear and Clearstream that allow for cross-border
trades for both SGD and non-SGD bonds. CDP has an
account with Clearstream, while both Euroclear and
Clearstream have an account with the DAs of CDP.
A DA who maintains a CDP account is able to transfer
SGD bonds to a designated Euroclear/Clearstream
account on the basis of free of payment but “for good
value”. For example, Euroclear has a cut-off time of
Settlement Date 03:55 CET for free of payment SGD
corporate bonds transfer. As such, secondary trades
Singapore: IRS and CCS markets
Onshore IRS Onshore CCS
Non-resident access: No restriction No restriction Tenors 1-20 years 1-20 years Liquid tenors 1-10 years 1-10 years Average trade size SGD25-50m (2 year), SGD20-30m (5 year),
SGD10-25m (10 year) SGD25-50m (2 year), SGD20-30m (5 year), SGD10-25m (10 year)
Bid/offer spreads under normal conditions (bp) 3bp 5-6bp Fixing rate 6 month SOR 6 month SOR, 6 month USD LIBOR (basis swap) Day count Actual/365 Actual/365 (SGD), Actual/360 (USD) Effective date T+2 or T+3 (after 11:30am) T+2 or T+3 (after 11:30am) Fixing time (local time) 11am 11am Fixing page Reuters: ABSIRFIX01
Bloomberg: ABSI1 Reuters: LIBOR01, ABSIRFIX01 Bloomberg: BBAM1
Local market hours 9am-4:30pm 9am-4:30pm Main participants Interbank, corporates, hedge funds Interbank, corporates
Source: HSBC
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involving cross-border transfer require T+3 days for
settlement, as opposed to T+1 in a straight CDP
clearing.
Central Depository (Pte) Ltd (CDP) settles corporate
bonds via a method akin to DvP. The seller inputs
transactions into the Debt Securities Clearing Settlement
System (DCSS) to pre-match securities. Cash payment
is initiated by the buyer via MEPS+, which bears a
specific payment reference. Upon receipt of the MEPS+
payment, the securities will be transferred from the
sellers’ to the buyer’s account. This settlement process
is generally T+3.
Taxation9
There are no capital gain taxes in Singapore.
Qualifying Debt Securities (QDS) are fixed income
instruments are eligible for tax incentives as determined
by the MAS. Interest from QDS is subject to a 10% tax
for corporate investors in Singapore. Individual
investors (resident and non-resident)10 and non-resident
corporate investors outside Singapore which did not
finance acquisition of QDS using funds from its
Singapore operations are tax exempt. SGS and T-bills
issued between 28 February 1998 and 31 December
2013 qualify as QDS.
Interest from non-QDS is subject to a 17% tax for
corporate investors in Singapore and withholding tax at
15% will be applicable to non-resident corporate
investors outside Singapore. Such income is tax exempt
to individual investors.
SGS/T-bills trading income derived by primary dealer is
tax exempt whilst such income will be subject to tax at
10% by FIs which have been awarded FSI incentive.
______________________________________ 9 HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance. 10 Under the Tax Exemption of Singapore-sourced Investment Income Derived by Individuals from Financial Instruments.
Foreign exchange Normal market conditions
Onshore average daily volume USD9bnOnshore spot transaction USD10mOnshore bid/ask spread 2-5 pips (0.0002-0.0005SGD)Onshore forward transaction USD50mOnshore forward spread 1-4 pips (0.0001-0.0004SGD)Implied option volatility spread 0.3 vol
Note: Spreads are subject to change with market developments Source: HSBC FX strategy
Useful information Information sources
Monetary Authority of Singapore (MAS) www.mas.gov.sg Ministry of Finance (MoF) app.mof.gov.sg Ministry of Trade and Industry www.mti.gov.sg Central Provident Fund (CPF) mycpf.cpf.gov.sg Singapore Government Securities www.sgs.gov.sg
59
Asia-Pacific Rates Guide 2011 Singapore December 2010
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Singapore: Bonds
Treasury bills (T-bills) Singapore Government Securities (SGS)
Corporate bonds
Issuer Republic of Singapore Republic of Singapore Statutory Board, domestic corporates, foreign issuers
Currency Singaporean Dollar (SGD) Singaporean Dollar (SGD) Singaporean Dollar (SGD) Form Scripless Scripless Physical or scripless Minimum denomination SGD1,000 SGD1,000 SGD10,000-250,000 Tenors 3-month and 1-year 2, 5, 7, 10 ,15 and 20 years 1- 20 years Coupon/discount Zero, issued at discount Fixed Fixed or floating Coupon frequency None Semi-annual Semi-annual or annual Amortising schedule Bullet Bullet Bullet Day count Actual/365 Actual/365 Act/365 for corporates; Actual/Actual for
Statutory Board Amount outstanding SGD53.1bn (Jun-10) SGD75.0bn (Jun-10) SGD97.9bn (Jun-10)
Primary market Auction style Uniform price auction Uniform price auction Public offer, private placement Average issue size SGD3.0-4.0bn (3 month T-bills),
SGD3.0-3.6bn (12 month T-bills) SGD1.5-3bn for new issues, SGD1-2.5bn for re-openings
SGD100m-500m
Auction frequency 91-day weekly, 365-day semi-annual Monthly (approximately, depending on SGS issuance calendar)
Ad hoc
Participants 13 primary dealers 13 primary dealers Banks, insurance companies, asset management companies
Settlement T+3 T+3 or 4 T+3
Secondary market Trading mechanism OTC OTC OTC or exchange traded Trading hours 9am-11:30am, 2pm-4:30pm 9am-11:30am, 2pm-4:30pm 9am-11:30am, 2pm-4:30pm Quoting convention Discount yield Price to 2 decimal places Price to 2 decimal places Average bid-offer spreads 3-5bp On-the-run: 5-40 cents,
Off-the-run: 5-30 cents; in yield terms, 3bp
10-50 cents
Average trade size SGD5-10m SGD5m SGD1m-5m Volume SGD1.2bn per day SGD1.9bn per day SGD20-50m per day Settlement T+1 T+1 T+3 Clearing DvP basis through the MEPS and MAS
SGS book-entry system DvP basis through the MEPS and MAS SGS book-entry system
Central Depository (Pte) Limited (CDP)
Main participants Primary dealers, secondary dealers, brokers, finance companies, insurance companies, fund managers, corporations and individuals
Primary dealers, secondary dealers, brokers, finance companies, insurance companies, fund managers, corporations and individuals
Primary dealers, secondary dealers, brokers, finance companies, insurance companies, fund managers, corporations and individuals
Regulations for foreign investors Restriction on foreign investment None None None Custodian Local custodian required Local custodian required Local custodian required Interest income tax None None Generally, none for QDS, otherwise 15-
17% Capital gains tax None None None Entry/exit None None None
Source: HSBC
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Market developments Planned reforms could open the corporate bond
market to foreign investors in 2011. These plans were
announced in November in conjunction with the 2011
budget with the aim of easing inward investment,
including allowing foreign investors to invest in Sri
Lankan rupee (LKR) denominated corporate debentures,
which was previously highly restricted. Foreign
participation in the corporate bond market would
diversify the investor base in private debt, accelerate
growth in the market, cheapen borrowing costs for long-
term funds, ease dependence on local bank funding and
improve liquidity in the secondary market which is still
considered to be in its developmental stages.
For foreign investors, it provides an alternative
investment channel in addition to the equities market
and government securities where total foreign holdings
are subject to an investment cap of 10% of outstanding.
Plans to open the corporate bond market to foreign
portfolio investors are among a host of other FX-related
liberalisation measures that are intended to facilitate
two-way (inward and outbound) capital flows, such as
allowing local firms to invest abroad.
Foreign investment in government bonds (SLGBs)
and Treasury bills (T-bills) reached the 10% debt
limit during 1H10. Foreign appetite for LKR
government securities has outstripped the supply of
bonds available under the aggregate debt limit of 10%
of total outstanding SLGBs and T-bills. Participation by
foreign investors in the government debt market has
enabled the government to raise FX reserves, deepen the
local bond market, extend the debt maturity profile,
diversify away from external debt and bring down
borrowing costs on total debt, which stood at 85% of
GDP.
Economic growth potential, improving fiscal
dynamics and political stability laid the groundwork
for debt consolidation. The end of a decades-long civil
conflict in 2009 and the following economic activity
highlights Sri Lanka’s long-term development potential,
B1/B+/B+Sri Lanka
Planned reforms could open the corporate bond market to foreigners
Foreign investment in SLGBs and T-bills reached the 10% debt limit
Economic growth potential, improving fiscal dynamics and political stability
lay the groundwork for debt consolidation
Government bonds outstanding Government debt composition (as of December 2009)
0
5
10
15
20
25
Dec-98 Dec-01 Dec-04 Dec-07 Dec-10
USD
bn
0
10
20
30
40
50
% G
DP
T-bills (LHS) Treasury bonds (LHS)Total (% of GDP) (RHS)
Foreign,
42%
Treasury Bonds,
36%
Rupee Loans,
3%Other,
8%
Treasury Bills,
11%
Source: ADB Source: Ministry of Finance
61
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whilst the IMF’s 20-month USD2.6bn Stand-By
Arrangement approved in 2009 and the increase in FX
reserve buffer imparted a degree of stability to attract
foreign investment and raise investor confidence.
Monetary policy The core objectives of the Central Bank of Sri Lanka
(CBSL) are economic and price stability. At present,
monetary management in Sri Lanka is based on a
monetary targeting framework, including announcement
of explicit targets for monetary aggregates and quarterly
reserve money targets, though there are plans in the
future to move away from this framework towards one
based on inflation targets.
The CBSL employs a variety of tools to conduct
monetary policy in line with monetary objectives. The
main monetary policy instruments currently used are:
benchmark policy rates (the repurchase and reverse
repurchase rates), open market operations (OMOs) and
Statutory Reserve Requirements (SRR) on commercial
bank deposit liabilities. The benchmark policy rates are
the repurchase and reverse repurchase rates, which form
an interest rate corridor. Under the CBSL’s OMOs,
liquidity is managed via daily repo and reverse repo
auctions to absorb or inject liquidity, standing facilities
at interest rates bounded by the policy rate corridor and
outright sales or purchases of government securities.
Recently, however, the CBSL has not used OMOs or
outright sale and purchases of government securities,
but reserve the right to do so.
To manage the liquidity of commercial banks, the
CBSL may also change SRRs – the proportion of the
deposit liabilities that commercial banks are required to
keep as a cash deposit with the CBSL.
Key policy rates:
Repurchase rate: Rate applied to overnight deposits
with the CBSL and also serves as the lower bound of
the policy interest rate corridor. Bloomberg:
SLMMREPO Index.
Reverse repurchase rate: Rate applied to overnight
borrowing from the CBSL and also serves as the upper
bound of the policy interest rate corridor. Bloomberg:
SLMMRVRT Index.
Key market rate:
Sri Lanka Interbank Offer Rate (SLIBOR):
Interbank lending rate computed on a daily basis by the
CBSL based on rates offered by commercial banks.
3mth SLIBOR, with 3mth T-bill yields, have been used
for the floating rate calculation for the IRS market.
Bloomberg: SLBR1DAY Index (overnight).
Fixed income instruments The Sri Lankan government bond market has expanded
to a market capitalisation of USD22bn as of November
2010. Approximately 24% of the bond market is
composed of T-bills, while the remainder are Sri
Lankan Government Bonds (SLGBs). In addition to
these debt instruments, the government also has
outstanding liabilities in the form of rupee loans from
domestic banks and external commercial and
concessional debt.
Sri Lanka: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos SLGBs, T-bills- For interbank repos SLGBs, T-billsMark-to-market requirements - Banks? Yes- Insurance companies? No- Pension funds? No- Mutual funds? YesTaxation: Government bonds* - Onshore investors 10% withholding tax, corporate tax on
interest income and capital gains- Offshore investors 10% withholding taxOffshore investor access - Foreign ownership of government bonds LKR183.3bn- As % of outstanding 8.8%- Direct purchase? Yes- Subject to cap? Yes- Registration requirement? Yes- Access to onshore funding? No- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)?
Yes (IRS, repo)
Market liquidity statistics T-bills - Daily turnover (LCbn) LKR0.5bn- Buying volume in a single day (USDm) (with minimal market impact)
USD2m
- Bid/offer spreads under normal conditions (bp) 20bpSLGBs - Daily turnover (LCbn) LKR0.5bn- Buying volume in a single day (USDm) (with minimal market impact)
USD2m
- Bid/offer spreads under normal conditions (bp) 20bp
Source: HSBC * HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.
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There are 11 primary dealers registered with CBSL.
Among the major participants in the Sri Lankan debt
market are domestic private and state banks, CBSL and
the state Employees Provident Fund (EPF).
At 9.7% of outstanding T-bills and 10.0% of SLGBs
(LKR54bn and LKR183bn, respectively), foreign
investment in government securities is just below the
10% foreign investment limit, as of November 2010.
Foreign holdings of T-bills and SLGBs accelerated
sharply after the end of the civil conflict (see chart
Foreign holdings of T-bills and T-bonds). The
government last increased the foreign investment cap in
SLGBs in December 2007 from 5% to 10% currently –
extending this investment cap to T-bills in May 2008.
Bonds
Treasury bonds (SLGBs) are medium- or long-term
securities issued by the government. They carry a semi-
annual coupon at a fixed rate in scripless form.
Maturities range between 2 and 20 years. Three to five
SLGB auctions are held every month (usually on
Thursdays) based on the government's cash requirement
and are subject to competitive bidding. The 3yr and 5yr
bonds remain the most liquid tenors.
In 2005 and 2006, the government issued inflation
index-linked SLGBs.
Treasury bills (T-bills) are short-dated discount
securities issued by the government in maturities of 3, 6
and 12 months. The bills are auctioned on Wednesdays
and settled on Fridays. Only primary dealers approved
by CBSL can bid at primary auctions. Foreign investors
may invest up to a collective total of 10% of amount
outstanding.
Corporate debt is issued by corporate firms to both the
private and public sector. They consist mainly of
Commercial Paper (CP) and Floating Rate Notes
(FRNs). CP are the most liquid and defined as
promissory notes under provisions of the Bills of
Exchange Ordinance. Corporate debt securities are dealt
in the electronic trading system Debt Exchange (DEX)
of the Colombo Stock Exchange (CSE).
Corporate debt securities are settled only after CBSL’s
Real Time Gross Settlement (RTGS) system confirms
the availability of funds. This reduces settlement risk.
The market is, however, still relatively underdeveloped
as there has yet to be a market-driven long-term
benchmark yield curve.
The government revealed its intention to allow foreign
investors to invest in corporate bonds. In 2010, foreign
investors were allowed to purchase 30% of a bond
issued by a quasi-government entity.
Foreign holdings of T-bills and T-bonds
0
50
100
150
200
250
Nov -09 Feb-10 May -10 Aug-10 Nov -10
LKR
bn
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
T-bills T-bonds % of total gov. bonds
Source: HSBC
Sri Lanka: IRS and FX forward markets
Onshore IRS Onshore FX forwards
Non-resident access Yes Yes Tenors 1-5 years 1-5 years Liquid tenors 6 months 1 year Average trade size USD1-2m USD1-2m Bid/offer spreads under normal conditions (bp) 75bp 30 cents Fixing rate 3mth SLIBOR or 3mth T-bill - Day count Actual/360 - Effective date T+2 - Fixing time (local time) 11:00am - Fixing page Reuters: SLIBOR - Local market hours 8.30am-4pm 8.30am-4pm Main participants Interbank, corporates Interbank, offshore participants
Source: HSBC
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Derivatives
An interest rate swap (IRS) curve exists for non-
residents to hedge their exposure related to bill and
bond investments. The IRS curve is, however, illiquid
with infrequent transactions (see table Sri Lanka: IRS
and FX forward markets).
Non-residents can access the FX forward market to
hedge currency risk on underlying investments.
Regulatory, settlement and tax issues Regulation
Offshore investors can hold up to 10% of Sri Lankan
government bonds and T-bills. The CBSL first
permitted foreign investor access to SLGBs in January
2007 at an initial debt limit of 5%, which was
subsequently raised to 10% in December 2007 and
extended to T-bills in May 2008.
Eligible foreign investors include foreign country funds,
mutual funds or regional funds approved by the
Securities and Exchange Commission of Sri Lanka,
corporate bodies incorporated outside Sri Lanka and
citizens of foreign states.
Settlement
Sri Lankan Government debt securities are scripless and
the securities transfer is done on an electronic basis. In
the Scripless Securities Settlement System (SSSS),
transfer instructions are carried out on a trade-by-trade
basis, with the transfer of securities and transfer of
funds for payment taking place simultaneously.
Foreign investors must open a Securities Investment
Account (SIA) to facilitate fund flows. A custody
account with LankaSecure is also required. All
commercial banks in Sri Lanka are dealer direct
participants. It is common for resident commercial
banks to provide both the SIA and custody services.
Taxation11
Foreign investors face a 10% withholding tax on interest
income collected at primary issue for SLGBs and T-
bills, but are exempt from capital gains or coupon
income.
Foreign exchange Normal market conditions
Onshore average daily volume USD55mOnshore spot transaction USD1-1.5mOnshore bid/ask spread 8 pips (0.08LKR)Onshore forward transaction USD1-1.5mOnshore forward spread 20-35 pips (0.20-0.35LKR)
Note: Spreads are subject to change with market developments Source: HSBC FX strategy
Useful information
______________________________________ 11 HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.
Information sources
Central Bank of Sri Lanka (CBSL) www.cbsl.gov.lk Ministry of Finance and Planning (MoF) www.treasury.gov.lk
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Sri Lanka: Bonds
Treasury bonds Treasury bills Corporate bonds
Issuer Democratic Socialist Republic of Sri Lanka
Democratic Socialist Republic of Sri Lanka
Domestic corporates and quasi-government
Currency Sri Lankan rupee (LKR) Sri Lankan rupee (LKR) Sri Lankan rupee (LKR) Form Scripless Scripless Physical or scripless Minimum denomination LKR100,000 LKR100,000 LKR50,000,000 Tenors 2-5, 7, 10, 15 and 20 years 3, 6 months, 1 year 3 months - 5 years Coupon/discount Fixed Zero, issued at discount Fixed Coupon frequency Semi-annual None Semi-annual Amortising schedule Bullet Bullet Bullet Day count Actual/Actual Actual/364 Actual/365 Amount outstanding LKR1.8trn (Nov-10) LKR559bn (Nov-10) LKR3.7bn (Nov-10)
Primary market Auction style Multi-price, English auction Multi-price, English auction Public offer, private placement Average issue size LKR1-2bn LKR9-12bn (total for all tenors) LKR 500mn Auction frequency Approximately once every two weeks Weekly (Wednesday) Ad hoc Participants Primary dealers Primary dealers Commercial banks, institutional investors Settlement T+2 or T+3 T+2 T+2
Secondary market Trading mechanism Mostly OTC, limited Bloomberg
platform for PDs Mostly OTC Through DEX and OTC
Trading hours 9am-4pm 9am-4pm 9am-4pm Quoting convention Yield to 3 decimal places Yield to 3 decimal places Yield to 3 decimal places Average bid-offer spreads 20bp 20bp 75bp Average trade size LKR50m LKR50m LKR50m Volume LKR500m LKR250m No active Interbank market Settlement T+1 or 2 T+1 or 2 T+2 Clearing SSS (Scripless Securities System) SSS SSS through the DEX and in Script Main participants Primary dealers, local and foreign
banks, foreign investors, captive sources, insurance companies, fund managers, corporations and individuals
Primary dealers, local and foreign banks, foreign investors, captive sources, insurance companies, fund managers, corporations and individuals
Commercial Banks, Institutional Investors
Regulations for foreign investors Restriction on foreign investment Up to foreign investment total of 10% of
outstanding Up to foreign investment total of 10% of outstanding
Debentures will have to be listed on the Colombo Stock Exchange
Custodian Local custodian required Local custodian required Local custodian required Interest income tax 10% withholding tax deducted at
issuance 10% withholding tax deducted at issuance
10% withholding tax deducted at issuance
Capital gains tax None None None Entry/exit Investment via special accounts Investment via special accounts Investment via special accounts
Source: HSBC
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Asia-Pacific Rates Guide 2011 Taiwan December 2010
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Market developments Strong capital inflows during 2010 prompted
restrictions to cap foreign investment in Taiwan
government bonds and money market products at
30% of the investor’s total portfolio (announced by
authorities in November 2010). This rule had been
discarded since 1995. Prior to this, the 30% cap only
applied to debt maturing in less than 1 year – a
restriction imposed in November 2008. The 30% cap
does not apply to corporate bonds.
These curbs in fixed income instruments by foreign
investors began with a ban on foreign investment in
time deposits imposed in November 2009. As of
November 2010, foreign investment in the money
market totalled roughly TWD300bn and the Central
Bank of the Republic of China (CBC) vowed to further
reduce short-term capital inflows and a few legislators
have proposed other measures including a tax on
currency gains as well as a potential management fee on
foreign capital inflows. As of November 2010, about
30% of foreign investor holdings in Taiwan fixed
income were in short-term bonds.
Ministry of Finance (MoF) conducts an unsuccessful
buyback of government bonds in November 2010. An
initial target of TWD40bn in purchases of 5yr TGBs
was announced but only TWD2bn was achieved due to
strong demand for government paper. The MoF
intended to buy back bonds and issue more liquid bonds
to improve trading activity in its bond market.
CBC hikes policy rates twice in 2010. The discount
policy rate was raised twice in 12.5bp-increments to a
cumulative 25bp in the year to November. Higher rates
were aimed at calming Taiwan’s real estate market. The
CBC has asked commercial banks to regulate their
vacant-lot loans due to widespread land hoarding
activity.
Aa3/AA-/A+Taiwan
Foreign investors may only invest up to 30% of their total investment
portfolio in government bonds and money market products
Prior to this, the 30% cap only applied to debt maturing in less than 1 year
MoF conducts an unsuccessful buyback of government bonds
Bonds outstanding Taiwan local debt market, by type (total: TWD7.3trn, as of September 2010)
0
50
100
150
200
250
Sep-04 Sep-06 Sep-08 Sep-10
USD
bn
0
10
20
30
40
50
60
% G
DP
Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)
Corporate
16%
Local gov ernment
2%
Central
gov ernment
56%
Financial
debentures
11%
T-bills
2%
NCDs
3%
Bankers'
Acceptances
0%
CP
10%
Source: ADB Source: CEIC
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Monetary policy The Central Bank of the Republic of China is the
monetary authority of Taiwan. It typically meets
towards the end of the calendar quarter to set the
discount rate, the official benchmark policy rate. The
CBC may also change the rate applied to temporary
liquidity accommodations (with or without collateral)
under the discount window. Interest rates on CBC-
issued Negotiable Certificates of Deposits (NCDs)
offered in 1mth, 3mth, 6mth and 12mth tenors carry
monetary policy signals.
In addition, the CBC uses other policy instruments,
including open market operations, required reserve
ratios and deposits of financial institutions to directly
influence the level of interbank call-loan market interest
rates. Open market operation instruments include
government securities and CBC-issued NCDs, which
may be purchased (or issued) either on an outright basis
or under repurchase agreements to inject (or mop up)
domestic liquidity, respectively. The CBC can also
change the level of required reserves as well as accept
or release funds deposited by banks and the postal
savings system.
Key policy rates:
Official discount rate: Official benchmark policy rate
typically adjusted in 12.5bp increments and normally
decided during quarterly policy rate-setting meetings of
the CBC. Bloomberg: TAREDSCD Index.
Rate on accommodations with/without collateral:
Accommodations with and without collateral are set at a
certain spread above the discount rate. As of December
2010, these spreads were 37.5bp (with collateral) and
225bp (without collateral). See CBC website for the latest.
Rates on Negotiable Certificates of Deposit (NCDs):
Rate on NCDs issued by the CBC primarily to withdraw
excess liquidity. Rates are typically adjusted the day
after a CBC rate decision. Reuters: TWDC=R.
Key market rate:
90-day Commercial Paper (CP) rate: Floating rate
fixing for the IRS market. It is calculated daily at 11am.
The top and bottom quartile of submitted CP rates are
eliminated from calculation and the remainder averaged.
Bloomberg: CPTW90DY Index.
Fixed income instruments The Taiwan bond market has grown to a market
capitalisation of USD229bn (September 2010) from
USD216bn at end 2009. The market is primarily
composed of government bonds, constituting 58% of the
market. Corporate bonds account for 37% of the market
whilst the remaining 5% are quasi-government bonds.
There are 15 primary dealers who offer two-way price
quotations in the interbank market. HSBC is not a
primary dealer but a bond dealer. A primary dealer may
tender in the primary bond auction whereas a bond
dealer may not. Key local investors are Chunghwa Post,
domestic banks, insurance firms and securities
companies. Chunghwa Post is a government owned
postal service and the largest deposit-taking institution
(TWD5trn as of December 2009) in Taiwan, but cannot
extend loans as it is not a financial institution, which
makes it dependent on holdings of government debt for
investments (TWD1.4trn or 20.5% of total assets as of
March 2009).
Taiwan: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? No- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos TGBs- For interbank repos -Mark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors 10% - Offshore investors 15% withholding tax**Offshore investor access - Foreign ownership of government bonds TWD250bn (Aug-10)- As % of outstanding Approx. 9.9% of
TGBs/Tbills (Aug-10)- Direct purchase? No- Subject to cap? 30% of total investment
portfolio- Registration requirement? Yes (FINI/FIDI)- Access to onshore funding? No- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? Yes (NDIRS)Market liquidity statistics TGBs - Daily turnover (LCbn) TWD30-60bn- Buying volume in a single day (USDm) (with minimal market impact)
USD60m
- Bid/offer spreads under normal conditions (bp) 0.5-2bp on-the-run, (3-5bp off-the-run)
Source: HSBC *HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance. **Reducible by DTTA
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Official statistics are not available, but foreign investors
held approximately USD8bn of total government bonds
in August 2010 (estimated 10% of total). As of
November 2010, about 30% of foreign investor holdings
in Taiwan fixed income were in short-term bonds.
Bonds
Government bonds (TGBs) are issued by the CBC on
behalf of the MoF to finance government spending and
develop a benchmark yield curve. They are issued by
the CBC monthly with maturities between 2 and 30
years and carry annual fixed rate coupons. Auction
schedules are fixed and a calendar is issued at the end of
the fiscal year (June).
Treasury bills (T-bills) are issued by the CBC on
behalf of the MoF for address short-term funding needs.
T-bills are divided into two classes: Class A bills
(issued at par and pay a coupon at maturity) and Class B
(discount securities). Maturities range between 3
months and 1 year. Foreign investors are only allowed
to buy T-bills maturing within 90 days and total
purchases must not exceed 30% of total cash inflows.
Negotiable Certificates of Deposits (NCDs) are
depository certificates issued by the CBC and
commercial banks. The CBC uses NCDs as a tool for
open-market operations, while commercial banks use
them as a short-term funding tool. The CBC issues
NCDs on a daily basis with maturities of 1, 3 and 6
months. The rate is set on the day following the
monetary board’s quarterly policy rate meeting.
Commercial banks may issue NCDs with maturities up
to 12 months.
Corporate debt consists of CP and corporate bonds.
CPs are discounted securities issued by corporates in the
form of short-term promissory notes guaranteed by
financial institutions. They must be certified by a
qualified underwriter or a bill house. Non-trade-related
CP dominates the market.
Corporate bonds are normally issued in fixed rate bullet
terms in physical form by both private and public sector
corporations. Most corporate bonds are issued via a
public auction. Secondary market liquidity is poor
because they are primarily purchased for buy-and-hold
accounts by banks.
Financial debentures are long-term financing sources
for qualified banks. They carry a fixed coupon and form
part of a bank’s capital reserves. The main buyers of
long-term debentures are insurance companies.
Derivatives
An onshore and an offshore market exist for TWD
interest rate swaps (see table Taiwan: IRS and CSS
markets). Offshore investors are not allowed to access
the onshore TWD cross currency swap (CCS) markets.
An offshore non-deliverable market for TWD IRS and
CCS, however, has developed.
Interest rate swap curves extend from 1 to 15 years
with liquidity being greatest in 1 to 10 years. The
average trade size is TWD500m, with a conventional
minimum size of TWD300m. All tenors use the 90-day
CP rate as the floating rate.
The TWD NDIRS curve is very liquid up to 5 years
(with trading size up to TWD1bn) and modestly liquid
up to 10 years (trading size up to TWD500m).
Cross currency swap curves extend from 1 to 10 years
with liquidity concentrated in 1 to 5 year tenors. The
average trade size is USD20m whilst the conventional
minimum size is USD10m. The TWD non-deliverable
CCS (NDCCS) curve is illiquid.
Futures contracts exist for the 10-year government bond
and 30-day CP interest rate. These are offered by the
Taiwan Futures Exchange (TAIFEX) quarterly and
monthly for the 10-year government bond and 30-day, CP
respectively. The government bond requires physical
delivery whilst the CP is cash settled. Trading volume and
Local investors in Taiwan government bonds (as of October 2010)
Banks
43%
Insurance
26% Bills finance
4%
Securities
serv ices
1%
Non-primary
dealers
26%
Source: CBC
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open interest in both contracts is minimal. The 10-year
bond futures have a notional value of TWD5m and a 3%
coupon rate with physical delivery of bonds. Underlying
bonds have a minimum maturity of 8.5 years and a
maximum maturity of 10 years. The 30-day CP interest
rate future is cash settled and based on 30-day financing
commercial paper with a face value of TWD100m.
Regulatory, settlement and tax issues Regulation
Offshore investors in Taiwan are classified either as
Foreign Institutional Investors (FINIs) or Foreign
Individual Investors (FIDIs). FINIs enjoy an unlimited
investment quota, while FIDIs are subject to a
maximum of USD5m. FINIs must obtain an investment
ID via registration with the CBC and the Taiwan Stock
Exchange (TSE), while FIDIs are required to obtain an
investment ID only from the TSE.
Both FINIs and FIDIs must open a book-entry and fund
account with one of the approved clearing banks and a
trading account with a bond dealer. Investment products
available to both FINI and FIDI include listed stocks,
financial bonds, government bonds, debentures,
corporate bonds, open-ended bond funds and money
market instruments (e.g., CP, BEs). Investors may trade
government bonds and submit auction bids through
bond dealers. Neither may engage in short selling or
margin trading. Sub-accounts remaining inactive for 3
years from the date of ID approval and holding no assets
must be closed.
Foreign investors may only invest up to 30% of their
total investment portfolio in government bonds and
money market products, as announced by authorities in
November 2010.
Settlement
Government bonds, supranational bonds issued in
Taiwan and convertible bonds are stored with the
Taiwan Securities Central Depository (TSCD), which
uses a book-entry system. Delivery and settlement of
securities are handled by the TSE’s Computerised
Exchange Clearing Department.
Corporate bonds and money market instruments in
bearer form cannot be held at the TSCD. Instead they
are held by custodian banks that have main custody
accounts directly linked to the TSCD for settlement
purposes. Each custody client may have a sub-account
under the custodian’s main account.
Taxation12
Non-residents are subject to a 15% withholding tax on
interest. There is no official tax guideline on repos or
capital gains tax. Taiwan has entered double tax treaties
(DTT) with 11 countries that reduce withholding tax on
interest to 10%. There are no capital gains taxes.
Investment income can be repatriated freely after a tax
guarantor has been appointed and approves the
repatriation amount.
______________________________________ 12 HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.
Taiwan: IRS and CCS markets
Onshore IRS Offshore NDIRS Onshore CCS Offshore CCS
Non-resident access: Not allowed Existent Not allowed Existent Tenors 1-15 years 1-10 years 1-10 years 1-10 years Liquid tenors 1-10 years 1-5 years 1-5 years 1-5 years Average trade size TWD500m USD10m USD20m USD10m Bid/offer spreads under normal conditions (bp)
2-5bp 3-6bp 10-40bp 20-60bp
Fixing rate 90-day CP rate 90-day CP rate 6mth USD Libor 6mth USD Libor Day count Actual/365 Actual/365 Actual/365 (TWD),
Actual/360 (USD) Actual/365 (TWD), Actual/360 (USD)
Effective date T+2 T+2 T+2 T+2 Fixing time (local time) 11am 11am 11am 11am Fixing page Reuters: TWCPBA
Reuters: TAIFX1 Reuters: TWCPBA Reuters: TAIFX1
Reuters-Telerate successor page: 3750 Reuters: TAIFX1
Reuters-Telerate successor page: 3750 Reuters: TAIFX1
Local market hours 9am-12pm, 2pm-4pm 9am-12pm, 2pm-4pm 9am-12pm, 2pm-4pm 9am-12pm, 2pm-4pm Main participants Interbank, corporate firms Interbank, corporate firms Interbank, corporate firms Interbank, corporate firms
Source: HSBC
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Countries that entered DTT with Taiwan
Australia Belgium Denmark Gambia Indonesia Israel Macedonia Malaysia Netherlands New Zealand Paraguay Senegal Singapore South Africa Swaziland Sweden United Kingdom Vietnam
Source: Taxation Agency, MoF Foreign exchange Normal market conditions
Onshore average daily volume USD1.7-2.1bnOnshore spot transaction USD3-5mOnshore bid/ask spread 5 pips (0.005TWD)Onshore forward transaction USD20-30mOnshore forward spread 20 pips (0.020TWD)Offshore average daily volume USD2bnNDF transaction USD10mNDF spreads 10 pips (0.010TWD)Implied option volatility spread 0.3 vol for all dates
Note: Spreads are subject to change with market developments Source: HSBC FX strategy
Useful links Information sources
Central Bank of China (CBC) www.cbc.gov.tw Ministry of Finance (MOF) www.mof.gov.tw Financial Supervisory Commission (FSC) www.sfcey.gov.tw Reuters TAIFX1 Bloomberg APF1<go>
Taiwan: Bonds
Taiwan Government Bonds (TGBs) Treasury bills( T-bills) Corporate bonds
Issuer Ministry of Finance (MoF) Ministry of Finance (MoF) Taiwanese corporations Currency Taiwanese Dollar (TWD) Taiwanese Dollar (TWD) Taiwanese Dollar (TWD) Form Scripless Scripless Physical bearer form Minimum denomination TWD100,000 TWD 100,000 TWD100,000 Tenors 2, 5, 10, 15, 20 and 30 years 91, 182 ,273 and 364 days 2-15 years (typically 3-5 years) Coupon/discount Fixed Fixed Fixed, floating or structured Coupon frequency Annual None Semi-annual or annual Amortising schedule Bullet Bullet Bullet Day count Actual/365 Actual/365 Actual/365 Amount outstanding TWD4.0trn (Aug-2010) TWD165bn (Aug-2010) TWD1.2trn (Aug-2010)
Primary market Auction style Dutch auction Dutch auction Dutch auction Average issue size TWD30bn-70bn TWD20bn-30bn TWD2bn-15bn Auction frequency Monthly Monthly Ad hoc Participants Banks, bill finance cos., insurance
house and security firms Banks, bill finance, insurance company Banks, security house, insurance
company Settlement T+2 T+2 T+2
Secondary market Trading mechanism EBTS (mostly), OTC OTC OTC Trading hours 9am-1:30pm 9am-3pm 9am-1:30pm Quoting convention Yield to 4 decimal places Yield to 4 decimal places Yield to 4 decimal places Average bid-offer spreads On-the-run: 1-3bp; Off-the-run: 3-5bp 5-10bp 3-5bp Average trade size TWD50m TWD 10-30M n/a Volume TWD100-200bn per day TWD300-500m per day TWD3.8bn per day Settlement T+2 T+2 T+2 Clearing TDCC (Taiwan Depositary and
Clearing Corp.) TDCC (Taiwan Depositary and Clearing Corp.)
TDCC (Taiwan Depositary and Clearing Corp.)
Main participants Financial institutions Financial institutions Bond mutual funds, financial institutions
Regulations for foreign investors Restriction on foreign investment Restricted to investments in TGBs >1-
year; investments capped at 30% of cash inflows for FINIs
Restricted to investments in T-bills with >3mths residual maturity; investments capped at 30% of cash inflows for FINIs
None for registered FINIs
Custodian Local custodian required Local custodian required Local custodian required Interest income tax 15% withholding tax, reducible by tax
treaty 15% withholding tax, reducible by tax treaty
15% withholding tax, reducible by tax treaty
Capital gains tax None None None Entry/exit None None None
Source: HSBC
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Asia-Pacific Rates Guide 2011 Thailand December 2010
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Market developments The 15% tax exemption on capital gains as well as
discount income from zero-coupon bonds – afforded to
foreign investors since 16 November 2004 – was repealed
(October 2010). The re-imposition of withholding tax
(WHT) levels the playing field between domestic
investors and foreigners. Tax re-imposition is not
retroactive and only applies to bonds purchased since 13
October. There remains no tax on interest income.
The Thailand Futures Exchange launched new futures
markets for 5-year government bonds (ThaiGBs) and
short-term interest rates (6-month THB fix and 3-
month BIBOR). The 5yr ThaiGB futures began trading on
18 October 2010. The 6mth THB fix and 3mth BIBOR
were launched on 29 November 2010 and are accessible by
both local and foreign investors. These new instruments
may deepen the Thai bond market and help investors to
manage risk from interest rate movements at two different
points on the THB rates curve.
The ThaiGB curve may be extended to 50 years. At
the time of writing, the targeted issue amount for a
potential 50-year ThaiGB (to be issued in 1Q11) is
THB4-5bn, which is relatively small compared to the
initial FY10-11 gross issuance plan of THB709bn.
According to the FY10-11 preliminary government
borrowing plan, there are also plans to introduce index-
linked bonds, and floating rate notes (FRNs) may
continue to be issued.
Prohibition on sales of Bills of Exchange (BEs) to
foreign investors is extended to securities companies.
Banks have been prohibited by the Bank of Thailand
(BoT) from issuing BEs to foreign investors, but the
BoT has clarified that this restriction applies also to
securities firms. BEs are short-term money market debt
instruments that are issued by corporates or financial
institutions and considered as short-term borrowings of
THB from non-residents.
Baa1/BBB+/BBBThailand
Government repeals 15% tax exemption on capital gains on bonds held by
foreign investors
Futures markets for 5-year ThaiGBs, 6-month THB fix and 3-month BIBOR
launched
ThaiGB curve may be extended to 50 years in 2011
Bonds outstanding Government bond maturity profile (as of September 2010)
0
50
100
150
200
250
Sep-04 Sep-06 Sep-08 Sep-10
USD
bn
0
10
20
30
40
50
60
70
% G
DP
Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)
1-3 years,
39%
Ov er 10 y ears,
14%
5-10 y ears,
25%
3-5 y ears,
21%
Source: ADB Source: ADB
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Capital outflow controls were loosened (February
2010). In an effort to increase two-way flows in the FX
market, the BoT liberalised outbound flows by Thai
entities, specifically: 1) Thai firms may freely make direct
investments overseas, 2) domestic individuals may
purchase up to USD10m of immovable properties
overseas per annum as opposed to USD5m previously, 3)
Thai companies may lend up to USD50m to non-affiliated
companies overseas, 4) firms may freely transfer foreign
currencies between a corporate treasury centre and
affiliate firms in Thailand, 5) FX hedging transactions no
longer require BoT approval, and 6) portfolio investments
allocated to investors and under the SEC's supervision
were expanded to USD50bn from USD30bn.
Korea Export-Import Bank, Industrial Bank of
Korea and Korea Development Bank increased
Korean issuance in THB bonds (June 2010). The
issuances by each firm are THB4bn, THB5bn and
THB3bn, respectively. In 2010, 18 separate applications
to issue THB bonds were approved of which five were
Korean. It is likely that Korean firms will be the first
among Asian markets to gain regular access into this
market as a counterweight to heavy investment in
Korean fixed income instruments by so-called “kimchi”
funds, which are Thailand-based bond funds dedicated
to short-term Korean debt investments.
More stringent issuance conditions are imposed on
state enterprises and government agencies. SEC
approval and a credit rating are now required for state
enterprise and government agencies to issue bonds,
reducing reliance on the government curve and
encouraging accountability.
Monetary policy Since May 2000, the Bank of Thailand (BoT) has
conducted monetary policy under a flexible core
inflation targeting framework (0.5-3.0% quarterly
average). Its primary roles are to preserve internal and
external stability of the THB, supervise financial
institutions and act as banker to the government and
state enterprises. The benchmark policy rate has been
the 1-day repo rate since January 2007, when the BoT
moved away from the 14-day repo rate. The BoT
conducts overnight bilateral repurchase agreements with
domestic banks at the policy rate.
The BoT also uses a variety of monetary policy
instruments to influence short-term money market rates
through open market operations, reserve requirements
and standing facilities. Open market operations include:
bilateral repurchase and reverse repurchase transactions
with primary dealers, outright purchase/sale of
government securities, issuance of BoT bills and bonds,
FX swaps and Electronic BoT Debt Security (e-PNs).
Key policy rate:
1-day repo rate: Benchmark policy rate of the BoT. It
is also used by banks to borrow THB from BoT.
Bloomberg: BTRR1DAY Index.
Key market rate:
6-month THB fix: The fixing rate for IRS markets. It is
partly determined by onshore USD/THB FX forward
rates, which could at times produce significant
Thailand: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos LBs, MoF SOEs- For interbank repos LBs, T-billsMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors 1% tax for institutions- Offshore investors 15% tax on capital gains**Offshore investor access - Foreign ownership of government bonds THB142bn (Nov-10)- As % of outstanding 5.8% (Nov-10)- Direct purchase? Yes- Subject to cap? No- Registration requirement? Yes- Access to onshore funding? No- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? Yes (IRS)Market liquidity statistics ThaiGBs a.k.a. Loan Bonds (LBs) - Daily turnover (LCbn) THB2-7bn- Buying volume in a single day (USDm) (with minimal market impact)
USD15m
- Bid/offer spreads under normal conditions (bp) 3-6bpBoT Bills/Bonds - Daily turnover (LCbn) THB10-88bn- Buying volume in a single day (USDm) (with minimal market impact)
USD40-60m
- Bid/offer spreads under normal conditions (bp) 10bpSOE bonds - Daily turnover (LCbn) THB0.7-3.5bn- Buying volume in a single day (USDm) (with minimal market impact)
USD10m
- Bid/offer spreads under normal conditions (bp) 5-10bp
Source: HSBC *HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance **Reducible by DTTA
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divergence from the BoT’s 1-day repo rate. Reuters:
THBFIX.
Fixed income instruments The Thai bond market has expanded to a market
capitalisation of USD217bn as of September 2010.
Government and agency bonds each constitute
approximately 41% of the bond market, while the
remainder is comprised of corporate bonds.
There are 11 primary dealers (PDs), including HSBC,
which are required to quote two-way prices for all
benchmark bonds under normal market conditions,
particularly after the private repurchase market has been
activated. The Public Debt Management Office
(PDMO) is the office within the MoF charged with
government financing plans.
Foreign investment in ThaiGBs and BoT bills has
climbed to THB199bn as of November 2010 from
THB52bn at the end of 2009 (see chart Foreign
holdings of BoT bills and ThaiGBs). BoT bills
accounted for THB57bn of foreign holdings, whilst
investment in ThaiGBs stood at THB142bn (or 5.8% of
outstanding ThaiGBs).
Bonds
Thailand Government Bonds (ThaiGBs), also known
locally as Loan Bonds (LBs), are the primary
government bond instruments issued by the MoF to
finance Thailand’s budget needs. Maturities range
between 1 and 30 years, with a new 50yr planned to be
issued in FY11. Liquidity lies greatest in the 5 and 10
year tenors. Issuance of LBs is under the responsibility
of the PDMO and uses a US treasury style multiple
price auction process. The BoT provides a quarterly LB
auction schedule in the month before the start of each
quarter. The schedule specifies auction dates and bond
issuance tenors (or, in the case of a re-opening, the
specific issue), though it is subject to revisions.
Treasury bills (T-bills) are short-term discounted
government securities issued by the Ministry of Finance
(MoF) used for short-term treasury cash management.
Available tenors are 1, 3 and 6 months. They are sold
every Monday through US Treasury style multiple price
auctions. Thai Savings Bonds (TSBs) are issued by the
government. They carry a modest yield premium to
partially compensate retail investors for the 15%
withholding tax. The secondary market is illiquid as
most retail investors hold TSBs to maturity. TSBs are
allowed to trade as regular LBs one year after issuance
and only then are available for purchase by non-retail
and foreign investors.
Promissory notes (PNs) are primarily issued to address
market demand for long-term investment instruments by
the PDMO. They are open to long-term investors
although there is no fixed issuance plan. Bidding is
announced up to one month in advance and offers the
PDMO more flexibility. A new fixed rate PN with tenor
between 12 to 30 years and up to THB45m in size is
scheduled to be released next year.
BoT bills/bonds are used for BoT liquidity
management. Maturities range from one month to three
years. Foreign investment in BoT bills has increased
dramatically during 2010, which has spurred concerns
about speculative FX inflows.
State-owned enterprise (SOE) bonds are medium- to
long-term debt securities issued by corporates with
infrastructure projects. There are two types of SOE
bond: those guaranteed by the MoF (MoF SOEs) and
those not (non-MoF SOEs). Only MoF SOEs can
qualify for liquidity reserve requirements and BoT repo
transactions, but they may not exceed 10% of total
budget expenditure. Approximately 85% of SOEs are
MoF SOEs. Primary bids for SOE bonds are conducted
by a uniform price auction. Most secondary trading
Foreign holdings of BoT bills and ThaiGBs
0
50
100
150
200
250
Feb-09 Sep-09 Apr-10 Nov -10
THB
bn
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
BoT bills (LHS) ThaiGBs (LHS)% of ThaiGBs (RHS)
Source: HSBC, Thai Bond Market Association
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takes place in the repurchase market but the bonds are
relatively illiquid given their small size.
Corporate bonds are issued by corporates to the public.
All public issuance to more than 10 investors must
obtain a rating from an SEC-approved credit rating
agency (TRIS Rating Co. or Fitch). Debt with issuance
amount less than THB100bn or issued to creditors for
debt restructuring purposes is exempt from obtaining a
rating. A wide variety of potential structures are
available: straight, FRNs, amortising, convertible,
securitised, structured notes and credit-linked.
Derivatives
An onshore and offshore market exists for THB interest
rate swaps (see table Thailand: IRS and CCS markets).
Interest rate swaps (IRS) are liquid up to 5 years but
are available up to 10 years. An offshore non-
deliverable IRS (NDIRS) market has developed that is
closely aligned to the THB IRS curve. The THB fix,
which is partly derived from 6mth USD/THB forwards,
is used for floating rate calculation.
Cross currency swaps (CCS) are generally illiquid and
the curve trades below the THB IRS curve. Since
foreign investors may not access the onshore CCS
market, an offshore non-deliverable CCS (NDCCS)
curve has developed. The difference between onshore
and offshore CCS curve is largely accounted for by FX
restrictions.
5-year ThaiGB futures were launched in October
2010. Its basket of eligible bonds must have 4-6 years
time to maturity (on the first calendar day of the
contract month) and outstanding value of at least
THB5bn. With the 3-5yr segment of the ThaiGB curve
being the most liquid, the THB fix future allows both
local and foreign investors to express directional views
on ThaiGB yield. It also contributes to efficient price
discovery in this key segment of the ThaiGB curve.
Bloomberg: TOBA Cmdty.
6-month THB fix futures have a contract size of
THB10m and are cash settled. This market aids
management of very short-dated risk from THB IRS and
6-month FX forwards. Bloomberg: TXBA Cmdty.
3-month BIBOR futures have contract size of
THB10m and are cash settled. They will be calculated
from the 3-month BIBOR fixed at 11:00am Bangkok
time as announced by BoT on the last trading day (4
decimal points). The main users are likely to be banks
looking to hedge a portion of their balance sheet.
Bloomberg: TORA Cmdty.
Regulatory, settlement and tax issues Regulation
Foreign investors must open a custodian account with a
local or foreign-based bank in Thailand. A power of
attorney (POA) must be prepared to allow the custodian
to buy and sell Thai government bonds and BoT
registered bonds on the investor’s behalf. The POA
must be presented every time the foreign investor buys
or sells. The POA application is verified by the BoT in
roughly a week.
Foreign participation in the onshore bond market was
severely impaired in December 2006. This was due to the
imposition of a 3mth holding requirement and capital
controls by way of a 30% unremunerated reserve
requirement (URR) on non-resident entities selling foreign
Thailand: IRS and CCS markets
Onshore IRS Offshore IRS Onshore CCS
Non-resident access: Not allowed Existent Not allowed Tenors 1-20 years 1-10 years 1-20 years Liquid tenors 2, 5, 10 years 2, 5, 10 years 2, 5 years Average trade size THB200-400m THB200-400m USD5m Bid/offer spreads under normal conditions (bp) 4-5bp 4-5bp 10-15bp Fixing rate 6mth SOR 6mth SOR 6mth USD Libor Day count Actual/365 Actual/365 Actual/365 Effective date T+2 T+2 T+2 Fixing time (local time) 11am 11am 11am Fixing page Reuters: THBFIX=TH Reuters: THBFIX=TH Reuters: THBFIX=TH Local market hours 8am-5pm 9am-5pm 8am-5pm Main participants Interbank, corporate firms Interbank, corporate firms, hedge funds Interbank, corporate firms
Source: HSBC
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currency for THB. In February 2008, both measures were
lifted and this has since led to the reappearance of foreign
investment in the Thai bond market.
There are three regulatory bodies in the Thai market.
The BoT supervises the operation of banking and
finance business; the SEC supervises the primary and
secondary market for securities business; the Thai Bond
Market Association (TBMA) supervises13 and aims to
be an information centre for the bond market.
Settlement
Scripless government and SOE bonds are settled
through the Post Trade Integration (PTI) system.
Physical government and state-owned enterprise bonds
are settled either at the Thailand Securities Depository
(TSD) or BoT. Cash settlement can be executed via the
BahtNet system or by cheque as agreed between buyer
and seller. The standard settlement period is T+2.
Taxation14
For government bonds, by virtue of the tax law to be
issued with retroactive effect from 13 October 2010,
interest income remains exempt, but capital gains and
discount income from non-interest bearing government
bonds (i.e., zero coupon bonds) purchased on or after 13
October 2010, would be subject to a 15% withholding
tax. Likewise, the tax may be reduced or exempt
according to a Double Taxation Treaty.
For Thai corporate bonds, foreign investors are subject
to a 15% tax on interest income, discount income (from
zero coupon bonds) as well as capital gains. The tax
may be reduced or exempt according to a Double
Taxation Treaty.
For domestic investors, tax implications vary according
to the status of investors and type of income. Focusing
on institutions, there will be 1% WHT on interest,
except for interest on bonds issued by financial
institutions and held by financial institutions. There is
no WHT on capital gains. However, domestic investors,
excluding mutual funds, are liable to include both
interest and capital gains in computation of corporate
income tax.
______________________________________ 13 Under the Securities and Exchange Commission Act BE 2535 14 HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.
Countries that have entered a Double Taxation Treaty with Thailand
Armenia France Malaysia South Africa Australia Germany Nepal Spain Austria Hong Kong Netherlands Sri Lanka Bahrain Hungary New Zealand Sweden Bangladesh India Norway Switzerland Belgium Indonesia Oman Seychelles Bulgaria Israel Pakistan Turkey Canada Italy Philippines Ukraine China, P.R. Japan Poland United Arab
Emirates Cyprus Republic of Korea Romania United Kingdom Czech Republic Kuwait Russian United States of
America Denmark Laos Singapore Uzbekistan Finland Luxemburg Slovenia Vietnam
Source: Thai Revenue Department
Foreign exchange Normal market conditions Normal market conditions
Onshore average daily volume USD1.1bnOnshore spot transaction USD3mOnshore bid/ask spread 1 pips (0.01THB)Onshore forward transaction USD30-50mOnshore forward spread 1M 3-5 pip (0.005THB)
12M 10-20 pips (0.010-0.020THB)Offshore average daily volume USD800mOffshore bid/ask spread 10 pips (0.010 THB)Onshore implied option volatility spread 0.5-1.0 vol for all datesOffshore implied option volatility spread 0.5-2.0 vol for all dates
Note: Spreads are subject to change with market developments Source: HSBC FX strategy
Useful information Information sources
Bank of Thailand (BOT) www.bot.or.th Ministry of Finance (MOF) www.mof.go.th/index_e.html Bureau of the Budget www.bb.go.th/bbhomeeng Public Debt Management Office (PDMO) www.mof.go.th/pdmo Thai Bond Market Association (TBMA) www.thaibma.or.th Bond Electronic Exchange (BEX) www.bex.or.th Securities and Exchange Commission (SEC) www.sec.or.th/index.jsp?lang=en Government Pension Fund (GPF) www3.gpf.or.th/english TRIS Rating Co. Ltd. www.trisrating.com
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Thailand: Bonds
Thailand Government Bonds (ThaiGBs, or Loan Bonds)
Treasury bills Bank of Thailand (BoT) bills and bonds
Corporate bonds 5yr ThaiGB futures 6mth THB fix futures
Issuer Ministry of Finance (MoF)
Ministry of Finance (MoF)
Bank of Thailand (BoT)
Corporations and finance companies
Thailand Futures Exchange
Thailand Futures Exchange
Currency Thai Baht (THB) Thai Baht (THB) Thai Baht (THB) Thai Baht (THB) Thai Baht (THB) Thai Baht (THB) Form Scripless Scripless Scripless Physical or scripless - - Minimum denomination
THB20-40m THB50-100m THB50-100m THB20-30m THB1m THB10m
Tenors 2, 3, 5, 7, 10, 15, 20, 30, 50 years
1, 3 and 6 months 14 days, 1, 3, 6, 12 months, 2-3 years
1-10 years, mainly 3-5 years
5 years 6 months
Coupon/discount Fixed Zero, issued at discount
Zero, issued at discount, except 2-year notes (fixed)
Fixed, floating or step-up
5% Floating
Coupon frequency Semi-annual None None (semi-annual for 2yr BoT bonds)
Quarterly/semi-annual
Semi-annual -
Amortising schedule Bullet Bullet Bullet Bullet or amortised - - Day count Actual/365 Actual/365 Actual/365 Actual/365 - - Amount outstanding THB2.4trn (Aug-
2010) THB162bn (Aug-2010) THB2.2tr (Aug-2010) THB1.2trn (Aug-
2010) THB9m (Oct-2010) Nil (Nov-2010)
Primary market Auction style US Treasury-style
auction US Treasury-style auction
US Treasury-style auction
Public offer, private placement
- -
Average issue size THB3bn-30bn per auction (issue sizes often exceed THB30bn through a series of auctions/re-openings)
THB1bn-5bn THB40-80bn for 14 days, THB10-50bn for other tenors
THB1bn-10bn - -
Auction frequency Weekly on Wednesdays
Weekly (Monday) Weekly on Tuesdays for 12-month bills and bi-weekly on Tuesdays for 2-year notes
Ad hoc - -
Participants Primary dealers and banks
Primary dealers and banks
Primary dealers and banks
Financial institutions, corporations and individuals
- -
Settlement T+2 T+2 T+2 T+2 - -
Secondary market Trading mechanism OTC OTC OTC OTC TFE TFE Trading hours 9am-12pm, 1:30-4pm 9am-12pm, 1:30-4pm 9am-12pm, 1:30-4pm 9am-12pm, 1:30-4pm 9:15am-12:30pm,
2pm-4pm 9:15am-12:30pm, 2pm-4pm
Quoting convention Yield to 2 decimal places
Yield to 2 decimal places
Yield to 2 decimal places
Yield to 2 decimal places
Percent of par value to 2 decimal places
In terms of index 100.00 - Yield (on annual basis to 3 decimal places)
Average bid-offer spreads
3-6bp 10-15bp 10bp 10-15bp 10-20bp None traded (Nov-2010)
Average trade size THB20-40m THB50-100m THB50-100m THB10-40m THB1m THB10m Volume THB2-7bn per day THB0.7-3.5bn per
day THB10-88bn per day THB300m-400m per
day THB1m None traded (Nov-
2010) Settlement T+2 T+2 T+2 T+2 T+2 T+2 Clearing BoT BoT BoT Thai Securities
Depository TFEX TFEX
Main participants Financial institutions, asset management companies
Financial institutions Financial institutions Financial institutions, corporations and individuals
Financial institutions Financial institutions
Regulations for foreign investors Restriction on foreign investment
None None None None None None
Custodian Local custodian required
Local custodian required
Local custodian required
Local custodian required
Account with local broker required
Account with local broker required
Interest income tax None None None 15% withholding tax, reducible by treaty
None None
Capital gains tax 15% withholding tax, reducible by treaty
15% withholding tax, reducible by treaty
15% withholding tax, reducible by treaty
15% withholding tax, reducible by tax treaty
None None
Entry/exit None None None None None None
Source: HSBC
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Market developments Tax on foreign investment in government bonds
raised to 10% effective June 2010. Circular 64 is an
amendment to Circular 134 issued in 2008 by the
Ministry of Finance (MoF). The new rate of interest will
be calculated and paid after the sale or transfer of the
bond. Previously, foreign investment in bonds and
certificates of deposit (CDs) were taxed only at 0.1% of
the cumulative total of interest earned and the
instrument’s face value.
The VND corporate bond market continues to grow
in size and sophistication in 2010 as state enterprises,
commercial banks and private sector entities seek
medium- and long-term funding sources. Corporate
bonds now comprise about 10% of the total bonds in the
market.
The Vietnam Bond Market Association (VBMA),
formerly the Vietnam Bond Forum, was formally
launched in H2 2009 with the purpose of promoting the
development of the bond market, including establishing
a framework for standards and practices as well as a
benchmark yield curve. VBMA comprises 60 banks,
securities companies, investment funds, insurance, fund
management and financial companies.
Monetary policy The State Bank of Vietnam (SBV) is a ministerial
agency of the government that performs the state
management of monetary and banking activities and
acts as the central monetary authority. It has a dual
policy objective of keeping inflation below real GDP
growth and to support growth.
The SBV has three key benchmark policy rates — the
discount rate, the refinance rate and the base rate. In the
past, the SBV has also enforced a system of rate caps
and floors on lending and deposit rates. The SBV may
also adjust interest rates applied to both VND and USD
reserve deposits. In addition to interest rate guidance,
the SBV also engages in open market operations
through repo operations and lending/borrowing activity
with domestic banks.
B1/BB/B+Vietnam
Foreign investors of government bonds are now subject to a 10% tax on
interest income
VND corporate bond market continues to grow in size and sophistication
Vietnam Bond Market Association (VBMA) furthers bond development
Bonds outstanding Government bond maturity profile (as of September 2010)
0
5
10
15
20
Sep-04 Sep-06 Sep-08 Sep-10
USD
bn
0
5
10
15
20
% G
DP
Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)
1-3 y ears, 58%
3-5 y ears, 19%
5-10 y ears,
17%
Ov er 10 y ears,
7%
Source: ADB Source: ADB
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The SBV sets a trading band for USD/VND transactions
in the spot market. The current trading band is +/-3%
from the official reference rate, which was widened in
August 2010. During 2010, the SBV devalued the VND
three times. In addition to the official exchange rate,
there exists a parallel gray market where market quotes
can significantly deviate from the daily fixing rate.
Offshore VND fixing vs. SBV official fixing
15,000
16,000
17,000
18,000
19,000
20,000
21,000
22,000
Jun-08 Feb-09 Sep-09 Apr-10 Dec-10
VND
Offshore fix SBV fix
Source: Bloomberg
The SBV cooperates with the MoF and the Ministry of
Planning and Investment. Ultimate responsibility for both
monetary and FX policy resides with the State Council,
which comprises the Monetary Policy Department and the
Foreign Exchange Control Department.
Key policy rates:
Base rate: Previously used as the reference rate for
commercial lending rates, which in the past have been
capped at 1.5x the base rate. The SBV removed this cap
in early 2010, but retains the right to reinstate this rule.
Bloomberg: VNDIBASE Index.
Discount rate: Interest rate imposed on loans from the
SBV to domestic banks. Bloomberg: VNDISC Index.
Refinance rate: Interest rate charged by the SBV on its
lending facilities to all credit institutions. Bloomberg:
VNREFINC Index.
USD/VND fixing rate: Official USD/VND fixing of
the SBV. Bloomberg: USDVND SBVN Curncy.
Key market rates:
Vietnam interbank rates: Rates applied to loans in the
interbank market. Reuters: VNIVNDOND =
(overnight).
VND offshore spot fixing: Offshore USD/VND spot
fixing rate as determined by the Association of Banks in
Singapore (ABS) at 11:30am. Bloomberg: VNDDFIX
Index.
Fixed income instruments The Vietnamese bond market has grown to a market
capitalisation of USD14bn (15.6% of GDP) as of
September 2010) from USD12bn (13.4% of GDP) at the
end of 2009.
There is no Primary Dealer system in Vietnam.
Institutions or enterprises wishing to participate in the
primary market must obtain a certificate of bond
bidding participating member from the Ha Noi
Exchange (HNX). Eligible primary auction participants
include credit institutions, insurance institutions,
securities companies and enterprises. Nearly all VGBs
and VDBs are listed on the HNX.
Vietnam: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? No- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos VGBs, SBV bills, VDBs, Municipal bonds- For interbank repos VGBs, SBV bills, VDBs, Municipal bondsMark-to-market requirements - Banks? No- Insurance companies? No- Pension funds? No- Mutual funds? NoTaxation: Government bonds* - Onshore investors 0.1% tax on all fixed income securities sold
and coupons from investment in bonds- Offshore investors 10% withholding tax on coupon, 0.1%
‘transfer tax’ upon saleOffshore investor access - Foreign ownership of government bonds
Est. USD50-100m (Oct-10)
- As % of outstanding Est. <1% (Oct-10)- Direct purchase? Yes- Subject to cap? No, only for bank bonds- Registration requirement? Yes (trading account, trading
code, custodian account)- Access to onshore funding? No- Access to onshore FX hedging? No- Access to rates hedging (IRS, repo, futures)? NoMarket liquidity statistics VGBs - Daily turnover (LCbn) VND100-400bn- Buying volume in a single day (USDm) (with minimal market impact)
USD5-10m
- Bid/offer spreads under normal conditions (bp) 20-30bpVDBs - Daily turnover (LCbn) VND100bn- Buying volume in a single day (USDm) (with minimal market impact)
USD5-10m
- Bid/offer spreads under normal conditions (bp) 30-50bp
Source: HSBC * HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.
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As of October 2010, foreign investors held
approximately USD50-100m in government bonds,
equating to less than 1% of outstanding government
bonds. The largest participants in the bond market are
domestic banks, including state-owned, joint-stock,
joint-venture, foreign banks and state-owned
commercial banks (SOCBs) – Vietnam Bank for
Agriculture and Rural Development (Agribank), Bank
for Investment and Development of Vietnam (BIDV),
Vietnam Commercial Joint Stock Bank for Foreign
Trade (Vietcombank), Vietnam Commercial Joint Stock
Bank for Industry and Trade (VietinBank).
Bonds
Vietnam Government Bonds (VGBs) and Vietnam
Development Bank Bonds (VDBs) are the primary
instruments issued by the government to finance the
state budget deficit and meet state investment needs.
VGBs range between 2 and 15 years in terms of
maturity and may be issued either through auction or
underwriting. The MoF usually announces tentative
auction and underwriting dates at the start of every
quarter, but it may also announce auction details
regarding tenor and amounts within a week’s notice.
VDBs typically have longer duration and are issued by
the state-owned Vietnam Development Bank. They are
fully guaranteed by the government and thus carry the
same credit risk. VDBs trade at a modest spread of
around 10-50bps over T-bonds because there is no
haircut charge for a repo on a VGB, whereas VDB
repos face a 20% haircut charge.
In addition, the Vietnam Bank for Social Policy (VBSP)
may also issue bonds to finance government projects
and policy priorities.
Treasury notes (T-notes) are issued to finance the state
budget deficit. Maturities range between 1 week and 1
year. They are issued through the State Treasury or in
the open market. The former is normally for one year
tenors in physical form at fixed interest rate, whereas
the latter is for financial institutions.
SBV bills (T-bills) are short-dated discount instruments
used by the SBV to manage money market liquidity.
Face values are multiples of VND100m with maturities
ranging 1 to 9 months. T-bills are only issued to credit
institutions. The SBV has the authority to demand bank
subscription and redeem these bills before maturity.
Around VND8.5trn was issued in Q1 2010.
Municipal bonds are issued by local governments. The
largest municipal issuer is the Ho Chi Minh City
Investment Fund for Urban Development (HIFU),
which issues two types of bonds (at 5 and 10yr
maturities) to supplement the city’s investment budget.
Maturities range between 5 and 15 years and are
normally sold through agreements with commercial
banks and financial institutions (private placement).
Issuance via auctions has become more popular.
Corporate bonds are issued by corporate firms for
capital raising purposes. They include all bonds issued
by enterprises and banks, whether state-owned or
private. Issuance may be in bearer or registered form
with minimum face value of VND100,000 and tenor of
one year or more. Previously, bonds were issued mainly
by large state-owned enterprises such as Electricity of
Vietnam (EVN) and Vietnam National Oil and Gas
Group (PetroVietnam), though issuance by commercial
banks, other state enterprises and the private sector has
broadened the corporate bond issuer base in recent
years. In particular, corporate bond issuance by
commercial banks has accelerated in recent years as a
means to mobilise medium- and long-term capital.
Corporate issuers have also issued floating rate notes
and convertible bonds.
Public issuance of corporate bonds is regulated by
Circular 75/2004/TT-BTC dated 23 July 2004. Private
placement bonds are regulated by Decree 52/2006/ND-
CP dated 19 May 2006.
Regulatory, settlement and tax issues Regulation
Foreign investors are allowed to invest in bonds in
Vietnam on the secondary market through brokers. To
trade bonds, foreign investors must have a trading code
at the STC, a trading account with one broker only and
custodian and cash accounts with a custodian bank.
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Settlement
Listed bonds
Trades executed through the HNX are settled on a
rolling T+1 basis for bonds for onshore and offshore
investors. The implementation of the Electronic-bond
trading system is considered delivery vs. payment (DvP)
by most banks in Vietnam. E-bond members place their
order into the system directly on T date. E-bond
members are responsible for ensuring there are enough
bonds and cash for trade before placing the order.
However, the Vietnam Securities Depository (VSD)
will double check if the seller has enough bonds,
otherwise it will terminate the trade. If the buyer does
not have sufficient funds, BIDV (a cash-settlement
bank) will lend to the buyer and charge a penalty fee.
For those that are not E-bond members, the process is
similar as before but through their brokers.
Unlisted bonds
Unlisted bonds are traded between two counterparties
directly. Upon confirmation of the deal, parties submit
all details and supporting documents to the registration
agent appointed by the issuer for interest and principal
payments and title transfer. Unlike listed bonds, the title
may be transferred to the buyer after the value date,
although the buyer will have already held ownership of
the bond since the settlement date.
Taxation15
Since June 2010, foreign investors have been subject to
a 10% withholding tax on coupon payments from all
bonds, including government bonds. Foreign investors
are also subject to a 0.1% tax on the par value of the
bond payable with transfer of ownership.
Prior to June 2010 for all bonds, foreign investors are
subject to a withholding tax of 0.1% of the par value
and coupon of the bonds, at the time of receipt of the
coupon. At the time of sale or transfer of bonds, they are
further subject to a tax of 0.1% of the prevailing total
value of the bonds, regardless of capital gains or losses.
The tax is payable with the transfer of ownership and
applies to all securities, except tax-exempt bonds (e.g.,
education development bonds issued to retail investors).
______________________________________ 15 HSBC is not a qualified tax advisor. Consult a professional advisor for
further guidance.
Foreign exchange Normal market conditions
Onshore interbank average daily volume USD80-100mOnshore spot transaction USD2mOnshore bid/ask spread 20-50 pips (20-50VND)Onshore forward transaction USD1mOnshore forward spread 40-80 pips (40-80VND)Offshore average daily volume USD5mOffshore implied option volatility spread 5-10 vol for all dates
Note: Spreads are subject to change with market developments Source: HSBC FX strategy
Useful links Information sources
State Bank of Vietnam (SBV) www.sbv.gov.vn Vietnam Government Portal www.vietnam.gov.vn Ministry of Finance (MoF) www.mof.gov.vn
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Vietnam: Bonds
Vietnam Government Bonds (VGBs), Vietnam Development Bank bonds (VDBs)
Treasury Notes (T-notes) Municipal bonds (e.g. HIFU) Financial Institution bonds/ debentures
Issuer Ministry of Finance (MoF) Ministry of Finance (MoF) Ho Chi Minh City Investment Fund for Urban Development (HIFU)
Financial institutions/ corporations
Currency Vietnamese Dong (VND) Vietnamese Dong (VND) Vietnamese Dong (VND) Vietnamese Dong (VND) Form Scripless Scripless Scripless Scripless Minimum denomination VND100,000 VND1bn VND100,000 VND1bn (mostly) Tenors 2-3, 5, 7, 10, 15 years 7, 14, 28, 56, 84, 182, 364
days 5-15 years 2-15 years
Coupon/discount Fixed Zero, issued at discount Fixed Fixed, Floating or step up Coupon frequency Annual None Annual Annual Amortising schedule Bullet Bullet Bullet Bullet Day count Actual/Actual Actual/Actual Actual/365 Actual/365 Amount outstanding VND168trn (VGBs and VDBs)
(Dec-10) VND8.5trn (Dec-10) VND4tr (Oct-10) VND2.5trn (Sep-10)
Primary market Auction style Dutch auction, Underwriting Amount bidding (rates are
fixed, participants bid for amount)
Private placement Public offer, private placement
Average issue size VND200bn-1.0tr (dependent on SBV yield target)
VND 200-300bn VND200-300bn VND1trn (banks), VND200-300bn (corporates)
Auction frequency Usually weekly to bi-weekly Specific tenors available certain days of the week
Ad hoc Ad hoc
Participants Banks, financial institutions Banks Banks, financial institutions Banks, financial institutions Settlement T+1 (issuance date), up to
T+15 (HNX registration period) T or T+1 (depending on whether issued in morning or afternoon)
T+2 T+2
Secondary market Trading mechanism OTC, STC no market for T-notes at the
moment OTC, STC OTC
Trading hours 9am-12pm, 1:30pm-4pm n/a 9am-12pm, 1:30pm-4pm 9am-12pm, 1:30pm-4pm Quoting convention Price to 3 decimal places n/a Yield to 2 decimal places Yield to 2 decimal places Average bid-offer spreads 20-30bp n/a 20-30bp 50-70bp Average trade size VND50-100bn n/a VND10bn VND10bn Volume VND200-500bn (VND100-400bn
for VGBs, VND100bn for VDBs) per day
n/a VND10-30bn per day VND10-30bn per day
Settlement T+1 n/a T+2 T+2 Clearing BIDV n/a Registered and paying agent Registered and paying agent Main participants Financial institutions n/a Financial institutions Financial institutions
Regulations for foreign investors Restriction on foreign investment None Not allowed None None Custodian Local custodian required - Local custodian required Local custodian required Interest income tax 10% withholding tax - 10% withholding tax 10% withholding tax Capital gains tax 0.1% ‘transfer tax’ upon sale - 0.1% ‘transfer tax’ upon sale 0.1% ‘transfer tax’ upon sale Entry/exit None - None None
Source: HSBC
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Market developments In contrast to other developed regions, Australia
remains firmly on a path of fiscal reconsolidation.
Gross bond issuance for FY10-11 (1 July 2010 – 30
June 2011) was revised down to AUD53bn-58.5bn
from AUD60bn announced in May 2010 (November
2010). The Australian Office of Financial Management
(AOFM) announced the change due to a smaller
expected budget deficit for FY09-10 despite a higher
forecast budget deficit in FY10-11 of AUD41.5bn
(-3.2% of GDP), compared with the May estimate of
AUD40.8bn. The budget deficit, however, is forecasted
to fall further to -2.4% of GDP in FY11-12 and shift to
a surplus in FY12-13. This implies negative net
issuance in a few years but the AOFM is committed to
maintaining a liquid benchmark issuance.
Issuance of a new T-bonds maturing in 2023 has been
deferred until 2011-12. Instead, a 2018 and 2025 bond
will be issued in FY10-11. Treasury notes (3 and 6
month discount instruments, see Fixed income
instruments), however, are not expected to constitute a
significant proportion of overall funding in FY10-11.
Only AUD10bn is planned to be issued in the financial
year.
Whilst gross issuance for FY10-11 is thus expected to
remain close to the AUD54bn issued in FY09-10, net
issuance is set to decrease to AUD12bn by FY11-12.
The frequency of Treasury indexed bonds issuance is
set to increase in FY10-11, as announced in November
2010. The total planned issuance for the financial year is
set at AUD3-3.5bn, with auctions taking place on a
monthly basis with the exception of December 2010.
New 2030 Treasury indexed bond launched (16
September 2010). The bond pays a 2.5% coupon and a
total of AUD1.25bn was issued via a syndicate offering.
Total Treasury indexed bond issuance for FY10-11 is
expected to be between AUD3bn and AUD3.5bn.
Government increases accessibility of retail investors
into corporate bond markets (May 2010). Under
ASIC Class Order C0 10/321, corporate issuers may
now issue “vanilla” bonds to retail investors using a
simple short form prospectus. This initiative aims to
increase the market value of Australia’s corporate bonds
Aaa/AAA/AA+Australia
Bond issuance for FY10-11 revised down to AUD53bn-58.5bn
Frequency of Treasury indexed bonds issuance increased
Government enhances accessibility of corporate bond markets
Bonds outstanding Government bond maturity profile (as of June 2010)
0
200
400600
800
1,000
1,2001,400
1,600
1,800
Sep-04 Mar-06 Sep-07 Mar-09 Sep-10
USD
bn
Government Financial corporations Non-financial corporations ABS
3-5 y ears
32%
5-10 y ears
24%
Ov er 10 y ears
14%
1-3 y ears
30%
Source: HSBC, RBA Source: RBA
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from AUD20bn in May 2010. For corporates to
participate in this scheme, at least AUD50m must be
issued and the issuer must be a listed company with a
good disclosure history.
This is the first step of structural reforms aimed at
developing Australia’s corporate market. Market
participants have indicated that tax breaks for bond
interest income, extension of the curve and a retail
market for bonds are required to advance the market.
Increased issuance of non-government guaranteed
bonds by banks to 85% in 1H10 from 15% in 1H09.
Since October 2008, bonds issued by eligible authorised
deposit-taking institutions were offered government
guaranteed status for a fee, ultimately affording them
the government’s AAA credit rating. Bonds constitute
about one-quarter of total bank funding, with about
three-quarters outstanding issued offshore.
Monetary policy The Reserve Bank of Australia (RBA) is responsible for
exercising its power that would best contribute to:
“1) the stability of the currency of Australia, 2) the
maintenance of full employment in Australia and 3) the
economic prosperity and welfare of the people of
Australia.” It has a medium-term inflation target of 2-
3% and in particular over each business cycle.
The main monetary instrument is the target ‘cash rate’,
which signals the RBA’s monetary stance. This is set by
the Reserve Bank Board who meets on the first Tuesday
of each month. The RBA can also employ open market
operations such as repo / reverse repo agreements, FX
transactions and investment in foreign asset markets.
Key policy rate:
Target cash rate: Interest rate on overnight funds held
at the RBA. Bloomberg: RBATCTR Index.
Key market rate:
90-day bank bill swap rate (BBSW): Floating rate
benchmark in an IRS swap. Bloomberg: BBSW3M
Index.
Fixed income instruments The Australian bond market has grown to a market
capitalisation of USD1.3trn as of September 2010
(120.7% of GDP). Financial corporations dominate the
bond market, constituting 65.3% of it. The government
sector (G-Sec) accounts for 23.1% whilst non-financial
corporate bonds only constitute 11.6% of the market.
There is no primary dealer system in Australia due to the
large number of active participants in the primary market
and competitive secondary market. An eligible
counterparty of the RBA must satisfy at least one of the
following conditions: “1) Be an Authorised Deposit-
Taking Institution (ADI) regulated by APRA, 2) Hold an
Australian financial service licence and regulated by ASIC,
3) Subject to an exemption from the requirement to hold an
Australian financial services licence, as determined by
ASIC and subject to any conditions specified by ASIC in
that exemption and 4) Where established under State or
Australia: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos Treasury bonds- For interbank repos Treasury bondsMark-to-market requirements - Banks? n/a- Insurance companies? n/a- Pension funds? n/a- Mutual funds? n/aTaxation: Government bonds* - Onshore investors None- Offshore investors NoneOffshore investor access - Foreign ownership of government bonds
AUD106bn (Jun-10)
- As % of outstanding 71.7% (Jun-10)- Direct purchase? Yes- Subject to cap? No- Registration requirement? No- Access to onshore funding? Yes- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? YesMarket liquidity statistics ACGBs - Daily turnover (LCtr) AUD3.5bn- Buying volume in a single day (USDm) (with minimal market impact)
USD20-50m (deal size)
- Bid/offer spreads under normal conditions (bp) 1bpTreasury bills - Daily turnover (LCtr) AUD200m- Buying volume in a single day (USDm) (with minimal market impact)
USD20m
- Bid/offer spreads under normal conditions (bp) 1bp
Source: HSBC *HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance.
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Territory legislation, subject to adequate controls as
deemed appropriate by the Reserve Bank.”
Foreign investment has increased to 71.7% of total
Australian government debt (June 2010) from 62.7% at
end 2009 (see chart Foreign holdings of Australian
government debt). This growth is solely from non-
Treasury notes (T-notes) as foreign investors have
stopped investing in T-notes since March 2003. The
value of foreign holdings of government debt was
AUD105.5bn in June 2010.
Foreign holdings of Australian government securities
0
20
40
60
80
100
Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
USD
bn
0%
10%
20%
30%
40%
50%
60%70%
80%
90%
Foreign holdings (LHS) % of total gov. debt (RHS)
Source: HSBC, RBA
Bonds
Treasury fixed coupon bonds are medium- to long-
term debt used primarily to finance fiscal expenditure.
They pay a fixed coupon on a semi-annual basis.
Maturities range between 1 and 15 years. Competitive
bid auctions are held on Wednesdays and Fridays, with
details in a particular week announced at Friday noon of
the preceding week. The face value offered in each
tender is typically AUD500m to AUD1.2bn.
From July to November 2010, new T-bonds maturing in
2014 and 2016 have been issued. The total planned
issuance for 1 July 2010 – 30 June 2011 is between
AUD50bn-55bn, and will result in a net increase of
AUD31bn-36bn of T-bonds on issue.
In the past, the Australian government also issued
Australian Saving Bonds in 1976-87, with maturities of
around 7.5yrs and Treasury Adjustable Rate bonds since
1994. Treasury Adjustable Rate bonds are floating-rate
notes, where the coupon is reset periodically in line with
movements in the bank bill swap rate. They are now
infrequently issued on an ad-hoc basis.
Treasury notes are short dated discount instruments
issued via competitive bid auctions every Thursday by
the AOFM. They help the government's within-year
financing task with issuance decisions made weekly
based on daily cash position forecasts for the
forthcoming weeks. Details of the tenors and amounts to
be offered are provided at Friday noon of the preceding
week. Only 3- and 6-month tenors are available. The
AOFM aims to keep at least AUD10bn of T-notes
outstanding to ensure a liquid market.
Treasury indexed bonds are medium- to long-term
inflation linked bonds that pay a fixed coupon rate on a
quarterly basis. Maturities range from 5 to 20 years. As
the face value of the bond is adjusted for inflation
calculated via the Consumer Price Index (CPI), the
nominal coupon payable is adjusted each year. At
maturity, bond holders are repaid the adjusted principal
value of the bond.
Competitive bid auctions are held on Tuesdays with
details of the issuance announced at noon on the Friday
of the preceding week.
Financial bonds are issued by banks and other financial
corporations to the public. The four big banks of
Australia have been ranked Aa1 by Moody’s since
2007, and are amongst the highest rated banks by global
credit rating agencies. They account for AUD620.2bn of
debt collectively: Westpac (28.0%), Australia and New
Zealand Banking Group (ANZ) (17.1%),
Commonwealth Bank of Australia (28.6%), and
National Australia Bank (NAB). Maturities range from
1 to 30 years, but are typically concentrated in the 2-6yr
segment, with an average of 3.5yrs. The distribution of
Australian banks bond issuance has shifted towards
shorter-term tenors since the financial crisis.
Corporate debt markets are relatively undeveloped in
Australia, accounting for 11.6% of the bond market.
This is due to household savings being invested by fund
managers via superannuation accounts and costly
disclosure requirements making it easier for issuers to
raise funding from institutions.
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Derivatives
An onshore and offshore market exists for AUD interest
rate swaps (see table Australia: IRS and CCS markets).
Interest rate (IRS) and cross-currency swaps (CCS)
extend out to 40 years but liquidity is greatest up to 30
years. There are no restrictions on non-resident investor
access to the AUD IRS and CCS markets for AUD
funding, or to either hedge or take positions in AUD
forwards, IRS and CCS.
Regulatory, settlement and tax issues Regulation
Foreign and domestic investors face the same
requirements to access the Australian government bond
market. An application requires two completed forms:
the Purchase Form and an Identification Release Form16
sent to the Registry for Commonwealth Government
Inscribed Stock at the Reserve Bank in Sydney or
Canberra. If the application is signed under power of
attorney, then the original power or its certified copy
must be provided in the application.
Settlement
The Reserve Bank Information and Transfer System
(RITS) settles high value payments on a real-time gross
settlement (RTGS) basis. Settlement risk is eliminated
as the Exchange Settlement Accounts (ESAs) of both
counterparties are credited and debited simultaneously.
ESAs are held at the RBA and membership of RITS is
compulsory for their holders.
______________________________________ 16 In compliance with the Anti-Money Laundering and Counter-Terrorism
Financing Act (2006).
Taxation17
Foreign investors are exempt from Australian interest
withholding tax for bonds issued in a manner which
qualifies for interest withholding tax exemption,
including passing a relevant "public offer test".
Otherwise, a 10% interest withholding tax applies.
Non resident bondholders who do not hold their bonds
on revenue account should be exempt from Australian
capital gains tax on the disposal of their bonds. Those
who hold their bonds on revenue account may be taxed
in Australia on profits on disposal, although residents of
a country that holds a treaty with Australia may be
entitled to income tax relief. Resident bondholders may
be taxable on profits on disposal of their bonds.
Countries that have entered a tax treaty with Australia
Argentina Italy Slovakia Austria Japan South Africa Belgium Kiribati South Korea Canada Malaysia Spain China Malta Sri Lanka Czech Republic Mexico Sweden Denmark Netherlands Switzerland Fiji New Zealand Taipei Finland Norway Thailand France Papua New Guinea United Kingdom Germany Philippines United States Hungary Poland Vietnam India Romania Indonesia Russia Ireland Singapore
Source: Australian Taxation Office
______________________________________ 17 HSBC is not a qualified tax advisor. Consult a professional advisor for
further guidance.
Australia: IRS and CCS markets
IRS CCS
Non-resident access: Allowed Allowed Tenors 1-40 years 1-40 years Liquid tenors 1-30 years 1-30 years Average trade size AUD20k market parcel AUD20k market parcel Bid/offer spreads under normal conditions (bp)
2-3bp 2-3bp
Fixing rate 1-3yrs: 3mth BBSW, 4-40yrs: 6mth BBSW 3mth BBSW vs. 3mth LIBOR Day count Actual/365 3mth BBSW: Actual/365, 3mth LIBOR: 30/360 Effective date T+1 T+2 Fixing time (local time) 11am 11am Fixing page SWAPREF SWAPREF Local market hours 8:30am – 4:30pm 8:30am – 4:30pm Main participants Interbank Interbank
Source: HSBC
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Useful information Information sources
Reserve Bank of Australia www.rba.gov.au Australian Taxation Office (ATO) www.ato.gov.au Australian Financial Markets Association (AFMA) www.afma.com.au Australian Securities Exchange (ASX) www.asx.com.au Australian Office of Financial Management www.aofm.gov.au
Australia: Bonds
Treasury fixed coupon bonds
Treasury notes Treasury indexed bonds
Financial bonds Corporate bonds
Issuer The Commonwealth of Australia
The Commonwealth of Australia
The Commonwealth of Australia
Financial institutions Private sector
Currency Australian Dollar (AUD) Australian Dollar (AUD) Australian Dollar (AUD) Australian Dollar (AUD) Australian Dollar (AUD) Form Scripless Scripless Scripless Scripless Scripless Minimum denomination AUD1m AUD1m AUD1m AUD0.1m AUD0.1m Tenors 1-7, 9, 10, 15 years 3, 6 months 5, 10 15, 20 years 1-30 years 1-30 years Coupon/discount Fixed Zero, issued at discount Fixed (applied to an
increasing/decreasing principal)
Fixed, floating Fixed, floating
Coupon frequency Semi-annual None Quarterly Mainly semi-annual Mainly semi-annual Amortising schedule Bullet Bullet Bullet Bullet Bullet Day count Actual/Actual Actual/365 Actual/Actual Actual/Actual Actual/Actual Amount outstanding AUD30.3bn (Sep-10) AUD277.4bn (Sep-10) AUD12.6bn (Sep-10) AUD905.3bn (Sep-10) AUD422.6bn (Sep-10)
Primary market Auction style Competitive-bid Competitive-bid Competitive-bid Syndicated Syndicated Average issue size AUD500m-1.2bn AUD400-600m AUD225-300m AUD500-750m AUD300-500m Auction frequency Weekly Wednesdays and
Fridays Weekly (Thursday) Monthly (Tuesday) Ad hoc Ad hoc
Participants Eligible counterparties Eligible counterparties Eligible counterparties Financial institutions, corporations and individuals
Financial institutions, corporations and individuals
Settlement T+3 T+1 T+3 T+3 T+3
Secondary market Trading mechanism OTC OTC OTC OTC, ASX OTC, ASX Trading hours 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm Quoting convention Semi-annual yield to
maturity Semi-annual yield to maturity
Semi-annual yield to maturity
Semi-annual yield to maturity
Semi-annual yield to maturity
Average bid-offer spreads 1bp 1bp 2bp 5bp 7bp Average trade size AUD20m AUD20m AUD5m AUD5m AUD5m Volume AUD3.5bn AUD200m AUD100m AUD50-100m AUD25-50m Settlement T+3 T+3 T+3 T+3 T+3 Clearing Austraclear/Euroclear Austraclear/Euroclear Austraclear/Euroclear Austraclear/Euroclear Austraclear/Euroclear Main participants Banks Banks Banks Banks Banks
Regulations for foreign investors Restriction on foreign investment
None None None None None
Custodian Local custodian required Local custodian required Local custodian required Local custodian required Local custodian required Interest income tax No No No 10% withholding tax 10% withholding tax Capital gains tax No No No No No Entry/exit None None None None None
Source: HSBC
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Market developments Demand for longer maturity bonds increased over
2010. In response to this, new 15 March 2019
government bond was issued to develop the yield
curve further. The new bond was announced on 28
September 2010 and was designed to fill in the gap
between bonds maturing in 2017 and 2021. It pays a 5%
semi-annual coupon.
New 2025 inflation-indexed bond (IIB) announced
(10 September 2010), becoming the first inflation linked
issuance since 1999 and set to be a new benchmark. The
timing of the launch was scheduled to be in November
2010, conditional on market conditions and will
constitute part of the NZD12.5bn domestic bond
programme announced at the FY10-11 (1 July 2010 –
31 June 2011) budget. At the time of writing (December
2010), however, the bond has yet to be issued with no
further indication by the New Zealand Debt
Management Office (NZDMO).
Demand for New Zealand inflation-indexed bonds
jumped in September 2010. This is largely a result of an
increase in the Goods and Services Tax (GST) to 15%
from 12.5% on 1 October 2010, creating broad inflation
expectations.
NZDMO announces a decrease in issuance of bonds
(May 2010). Total issuance over FY10-11 will fall by
NZD2bn to NZD12.5bn due to an improved fiscal
outlook. Planned issuance for FY11-12, FY12-13 and
FY13-14 are NZD10.5bn, NZD10bn and NZD6bn
respectively.
NZDMO remains committed to deepen bond market
liquidity (May 2010). The NZDMO has signalled
intentions to participate in the secondary market,
providing the option for bond switches and offering
bond repurchase agreements.
Direct secondary market participation allows the
NZDMO to buy and sell government bonds and match
demand with supply. Yields will be stabilised in the
event of low demand.
The bond switch facility allows investors to switch
between bonds, promoting liquidity and investor
participation. In particular, it is aimed at moving investors
Aaa/AA+/AA+New Zealand
New 15 March 2019 government bond develops yield curve further
New 2025 inflation-indexed bond announced
NZDMO announces a decrease in issuance of bonds
Government bonds outstanding Government bond issuance maturity profile (January – October 2010)
0
5
10
15
20
25
30
35
Sep-04 Mar-06 Sep-07 Mar-09 Sep-10
USD
bn
Gov. bonds T-bills
Ov er 5 y ears
33%
2-5 y ears
29%
3-6 months
6%
6 months -2 y ears
21%
Less than 3 months
11%
Source: HSBC, RBA Source: RBA
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from the February 2016 IIB and nominal bonds into the
new 2025 IIB, and moving investors from the November
2011 bond into other government bonds.
Repo agreements help lengthen the term that bonds can
be borrowed from overnight to up to 1 month and also
providing access to IIBs.
NZDMO reintroduces 12-month Treasury bill (T-
bill) (April 2010) to increase the range of available
funding options. Investors are provided with an
additional short-term government security. The 12-
month bill follows the same structure in terms of
issuance procedures as other T-bills.
Monetary policy The Reserve Bank of New Zealand is responsible for
delivering “stability in the general level of prices,”
currently defined as between 1% and 3% on average
over the medium term. The target is specified in the
Policy Targets Agreement (PTA).
The main monetary instrument is the Official Cash Rate
(OCR), determined by the Bank but with responsibility
resting solely on the Governor. The OCR is reviewed
eight times a year and Monetary Policy Statements are
released on four of those occasions. The Bank also
employs open market operations (OMO) such as reverse
repo, repo transactions and Reserve Bank Bills (RBBs),
and standing facilities to manage liquidity in the
financial system.
Key policy rate:
Official Cash Rate: Interest rate on overnight funds
held at the Reserve Bank of New Zealand. Bloomberg:
NZOCRS Index.
Key market rates:
3m Bank Bill Rate: Rate on a 3-month bank bill, which
is a short-term money market investment of which the
acceptor or endorses is a bank. Bloomberg: NDBB3M
Curncy.
Overnight London Inter-Bank Offered Rate
(LIBOR): Reference interest rate at which banks offer
to lend in the interbank market. Bloomberg: NZ00S/N
Index.
Fixed income instruments The New Zealand government bond market has grown
to a market capitalisation of USD32.6bn as of October
2010. Approximately 82% of the bond market is
composed of T-bonds, with the remainder as T-bills.
There is no primary dealer system in New Zealand. For
institutions to register as a tender counterparty with the
NZDMO, they must 1) have a minimum credit rating of
A0/A3, 2) have their obligations guaranteed by a parent
entity with a minimum credit rating of A0/A3 or 3) be a
crown financial institution.
Foreign investment has increased to NZD24.7bn (56.3%
of total New Zealand government debt) as of October
2010 from 51.3% at end 2009 (see chart Foreign
holdings of Australian government debt). This growth is
driven by holdings in Treasury bonds, increasing 43.6%.
Specifically, foreign holdings of Treasury bonds was
NZD23.5bn (64.6% of total) whilst holdings of
Treasury bills was NZD1.2bn (15.8% of total).
New Zealand: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? YesEligible collateral for repos - For CB repos Government bonds- For interbank repos Government bondsMark-to-market requirements - Banks? Yes- Insurance companies? Yes- Pension funds? Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors No- Offshore investors 15% withholding tax**Offshore investor access - Foreign ownership of government bonds NZD43.9bn- As % of outstanding 54.7%- Direct purchase? Yes- Subject to cap? No- Registration requirement? Yes- Access to onshore funding? Yes- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? YesMarket liquidity statistics New Zealand Government Bonds - Daily turnover (LCtr) AUD500m- Buying volume in a single day (USDm) (with minimal market impact)
USD25m
- Bid/offer spreads under normal conditions (bp) 2bpTreasury bills - Daily turnover (LCtr) AUD50-100m- Buying volume in a single day (USDm) (with minimal market impact)
USD20m
- Bid/offer spreads under normal conditions (bp) 2bp
Source: HSBC *HSBC is not a qualified tax advisor. Consult a professional advisor for further guidance. **Reducible by DTA
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Foreign holdings of New Zealand government securities
0
2
4
6
8
10
12
14
16
18
Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10
USD
bn
0%
10%
20%
30%
40%
50%
60%
70%
80%
Gov. bonds T-bills % of total gov. bonds
Source: HSBC, RBA
Bonds
New Zealand Government Bonds are issued by the
NZDMO on the Crown’s (Her Majesty the Queen in
right of New Zealand) behalf to finance fiscal
expenditure. They pay a fixed coupon on a semi-annual
basis. Maturities range between 1 and 10 years. In the
event of oversubscription of a certain bond, the
NZDMO may offer up to an additional 50% of amount
offered for tender in that maturity. This is subject to the
total amount of bids (or offers) accepted in all maturities
does not exceed the total amount offered for tender,
notwithstanding the provision made to exceed the total
amount available in the allocation of bids (or offers).
The issuance process uses a competitive bid auction.
Bidders pay different prices for the securities according
to the yield at which they bid and sealed because
bidders are unaware of the other bidder’s bids when the
auction closes.
Treasury bills are discount securities issued by the
NZDMO on behalf of the Crown. Maturities range
between 3 months and 1 year. Auctions are held weekly
every Tuesday and only accessible to registered tender
counterparties. In the event of oversubscription of a
certain bond, the procedures are identical to government
bonds.
Inflation-Indexed Bonds (IIB) were first introduced in
1996 and not issued since 1999. Prior to the new
scheduled 2025 IIB bond, there is only one available IIB
bond expiring on 15 February 2016, the NZGB4.5 2/16.
This can only be purchased if a holder decides to sell it on.
Corporate bonds are issued by the private sector,
encompassing state-owned enterprises (SOEs), local
authority bonds, mortgage-backed securities, rated
bonds and lower-grade hybrids issued by corporates.
Maturities range between 1 and 15 years, with liquidity
focused between 3 and 10 years. Corporates seeking
short-term funding with maturity of less than 3 years
tend to approach banks, rather than the bond market.
In the past the yield curve has been flat, concentrating
supply at short-end tenors and consequently limiting
liquidity in the corporate bond market. Recently the
curve has been reverting, making it more attractive for
suppliers to lend further out in the curve (see Recent
yield curve reversion).
Recent yield curve reversion
3.0
3.54.0
4.5
5.0
5.56.0
6.5
7.0
1 2 3 4 5 6 7 8 9 10
Years
%
Nov-10 Nov-08 Nov-06 Nov-04
Source: HSBC, Bloomberg
Yet liquidity may still be constrained by: 1) slow
growth in the New Zealand fund management industry
and 2) a well developed and actively traded FX market
allowing domestic companies to access offshore capital
markets and hedge currency risks using currency and
interest rate swaps.
Major players are retail investors, top fund managers,
institutional investors and banks.
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Derivatives
An onshore and offshore market exists for NZD interest
rate swaps (see table New Zealand: IRS and CCS markets).
Interest rate (IRS) and cross-currency swaps (CCS)
extend out to 20 years but liquidity is greatest up to 10
years. There are no restrictions on non-resident investor
access to the NZD IRS and CCS markets for NZD
funding, or to either hedge or take positions in NZD
forwards, IRS and CCS.
Regulatory, settlement and tax issues Regulation
Foreign investors may purchase government bonds from
registered tender counterparties that bought government
bonds from the NZDMO from primary auctions. The
minimum amount that may be offered is NZD10,000 in
the secondary market, compared to NZD1m in the
primary market.
Settlement
NZClear is the primary real-time settlement system in
New Zealand. It is operated by the Reserve Bank of
New Zealand, who considers application for
membership of the system. A necessary condition is the
Reserve Bank of New Zealand must believe the
applicant is “of good standing and has the necessary
resources to meet its obligations as a member.”
Bonds are settled via delivery vs. payment (DvP) on a
Real Time Gross Settlement basis.
Taxation18
Government securities are subject to a 15% withholding
tax on interest but may be reducible if the foreign
investor resides in a country that entered a Double Tax
Agreement (DTA) with New Zealand. There is no
capital gain tax.
Useful information
______________________________________ 18 HSBC is not a qualified tax advisor. Consult a professional advisor for
further guidance.
New Zealand: IRS and CCS markets
IRS CCS
Non-resident access: Allowed Allowed Tenors 1-20 years 1-20 years Liquid tenors 1-10 years 1-10 years Average trade size NZD15k market parcel NZM15k market parcel Bid/offer spreads under normal conditions (bp) 3-4bp 3-4bp Fixing rate 3mth BKBM 3mth BKBM vs. 3mth LIBOR Day count Actual/365 3mth BBSW: Actual/365, 3mth LIBOR: 30/360 Effective date T+2 T+2 Fixing time (local time) 11am 11am Fixing page n/a n/a Local market hours 8:30am – 4:30pm 8:30am – 4:30pm Main participants Interbank Interbank
Source: HSBC
Countries that entered a DTA with New Zealand
Australia India Russia Austria Indonesia Singapore Belgium Ireland South Africa Canada Italy Spain Chile Japan Sweden China Korea Switzerland Czech Republic Malaysia Taiwan Denmark Mexico Thailand Fiji Netherlands Turkey Finland Norway United Arab Emirates France Philippines United Kingdom Germany Poland United States of America
Source: Inland Revenue
Information sources
Reserve Bank of New Zealand www.rbnz.govt.nz/ New Zealand Debt Management Office (DMO) www.nzdmo.govt.nz/ Inland revenue www.ird.govt.nz/
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New Zealand: Bonds
New Zealand Government Bonds
Treasury bills Inflation-indexed bonds Corporate bonds
Issuer The Crown The Crown The Crown Private sector Currency New Zealand Dollar (NZD) New Zealand Dollar (NZD) New Zealand Dollar (NZD) New Zealand Dollar (NZD) Form Scripless Scripless Scripless Scripless Minimum denomination NZM1m NZD1m NZD1m NZD1,000 - 100,000 Tenors 1, 3, 5, 7, 10 years 3, 6, 12 months 2016 1-15 years Coupon/discount Fixed Zero, issued at discount Fixed (applied to an
increasing/decreasing principal) Fixed, floating or step-up
Coupon frequency Semi-annual None Quarterly Mainly semi-annual Amortising schedule Bullet Bullet Bullet Bullet Day count Actual/Actual Actual/365 Actual/Actual Actual/Actual Amount outstanding NZD36.4bn (Oct-10) NZD7.5bn (Oct-10) NZD1.5bn (Oct-10) NZD5bn (Dec-10)
Primary market Auction style Competitive-bid Competitive-bid Competitive-bid Public offer, private placement Average issue size NZD50-110m NZD100-200m NZD50-100m NZD50-100m Auction frequency Weekly (Thursday) Weekly (Tuesday) Ad hoc Ad hoc Participants Banks Banks Banks Banks Settlement T+2 T+2 T+2 T+2
Secondary market Trading mechanism Austraclear/Euroclear Austraclear/Euroclear Austraclear/Euroclear Austraclear/Euroclear Trading hours 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm 8:30am-4:30pm Quoting convention Semi-annual yield to maturity Semi-annual yield to maturity Semi-annual yield to maturity Semi-annual yield to maturity Average bid-offer spreads 2bp 2bp 5bp 10bp Average trade size NZD5-10m NZD5-10m NZD5m NZD5m Volume NZD500m NZD50m NZD20m NZD20m Settlement T+2 T+2 T+2 T+2 Clearing NZClear NZClear NZClear NZClear Main participants Banks Banks Banks Banks
Regulations for foreign investors Restriction on foreign investment
None None None None
Custodian Local custodian required Local custodian required Local custodian required Local custodian required Interest income tax 15% withholding tax 15% withholding tax 15% withholding tax 15% withholding tax Capital gains tax None None None None Entry/exit None None None None
Source: HSBC
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Asia-Pacific Rates Guide 2011 Japan December 2010
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Market developments During 2010, the front end of the curve has been
pushed down by further quantitative easing by the
Bank of Japan (BoJ). As a result of additional
liquidity, this has prompted aggressive purchases of
medium-dated government bonds by Japanese city
banks. According to the Japanese Securities Dealers
Association (JSDA), the city banks purchased a total of
JPY12.6trn medium-dated bonds from January 2010 to
October 2010, dwarfing the JPY5.3trn in purchases
made during the same period during 2009. It is probable
that demand for longer-dated securities will filter along
the curve across time. city banks have national networks
across Japan, differentiating them from regional banks,
which do not. Examples of city banks are Bank of Tokyo-
Mitsubishi UFJ, Mizuho Corporate Bank, Mizuho Bank,
and Sumitomo Mitsui Bank.
Foreign JGB holdings have constantly remained
under 10%. Significant attention has centred on Chinese
purchases of JGBs in 2010. Until October 2010, it was
widely believed that China was significantly increasing
its stake in JGBs, with year purchases by July 2010
reaching seven times their previous overall record high
in 2005. These observations prompted Japanese Finance
Minister Yoshihiko Noda to announce an investigation
by the Japanese government of the motives behind the
purchases in September 2010.
In October 2010, however, data from the Japanese
Ministry of Finance (MoF) showed that China had sold
back a significant amount of JGB in August. Specifically,
China sold a net JPY2.0trn JGBs in August, neutralising
the net JPY583bn purchase in July and a majority of the
JPY2.3trn it bought in the first half of 2010, of which
96% of debt had maturities less than one year.
First issuance of 10-year inflation indexed bond
(JGBi) announced since August 2008. The JGB
issuance plan for FY10 included a one-time auction of
JPY0.3trn JGBi. Issuance was initially suspended due to
poor market liquidity, with the break-even inflation rate
reaching -3.8% on 9 December 2008. In March 2010,
the targeted buy-backs of JGBi also fell to JPY3trn from
JPY4trn. The decision to scale down the buyback was to
prevent intervention from being an excessive and
potentially detrimental response to the crisis.
Aa2/AA/AAJapan
Aggressive purchases of medium-term government bonds by city banks
Foreign JGB holdings have constantly remained under 10%
New issuance of 10-year JGBi announced since August 2008
Bonds outstanding Government bond maturity profile (as of June 2010)
0
2,000
4,000
6,000
8,000
10,000
12,000
Jun-04 Jun-06 Jun-08 Jun-10
USD
bn
0
50
100
150
200
250%
GD
P
Govt. bonds (LHS) Corp. bonds (LHS)Total (% GDP) (RHS)
1-3 y ears
29%
Over 10 y ears
17%
5-10 y ears
32%
3-5 y ears
22%
Source: ADB Source: ADB
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In June 2010, Japan announced a sharp 4.9%
increase to JPY144.3trn in JGB market issuance and
total net issuance of JPY44.3trn for FY10-FY11.
Towards the end of December 2010, the MoF is due to
announce issuance plans for the next fiscal year. Unlike
FY10-FY11, the prospect of a sharp rise in JGB market
issuance is less likely for FY11-FY12. There are
indications that the Kan administration will try and
stabilise the recent annual increases in new JGB
issuance and keep new financial resource bonds at
around JPY44trn. Meeting the original JPY44.3trn
target will be tough given a weak economy requiring
further fiscal stimulus and constraining tax revenues. By
the end of 2010, Japan’s public debt is expected to reach
227% of GDP, the highest amongst the G-7 countries.
Consequently, the ruling Democratic Party may be
required to reconsider the large promised spending
plans during its election campaign when drafting its
budget for FY11-FY12.
Monetary policy The Bank of Japan (BoJ) aims to achieve “price stability,
thereby contributing to the sound development of the
national economy.” It does not, however, have an explicit
inflation target. Monetary policy decisions are made by
the Bank’s Policy Board in Monetary Policy Meetings
(MPMs) and disclosed immediately. MPMs are held
once or twice a month for one or two days.
The main monetary policy is the uncollaterised overnight
call rate, although money market operations (MMOs) have
become dominant. This is because the uncollaterised
overnight call rate has been near zero since December
2008. MMOs consist of repo and reverse repo transactions
of Japanese Government Securities (JGSs).
Key policy rate
Uncollaterised overnight call rate: Bloomberg:
BOJDTR Index.
Key market rates
Japan money market call rate (MUTAN): Unsecured
overnight call rate in the short-term money market.
Bloomberg: JYMUON Curncy.
6-month JPY London Inter-Bank Offered Rate
(LIBOR): Fixing rate for Japanese IRS. Bloomberg:
JY0006M Index.
1-year LIBOR (USD JPY): Fixing rate for Japanese
CCS market. Bloomberg: JYBS1 Currency.
1-week Tokyo Inter-Bank domestic yen Offered Rate
(TIBOR): Fixing rate used for banks to lend unsecured
funds in wholesale money market. It reflects the rate in
the unsecured call market. Bloomberg: TI0001W Index.
1-week Euroyen TIBOR: Another form of the TIBOR
rate but reflecting the offshore market. Bloomberg:
EUYN01W Index.
Fixed income instruments The Japanese bond market has grown to a market
capitalisation of USD10.5trn as of October 2010 (194.5%
of GDP). The government sector (G-Sec) dominates the
bond market, constituting 90.3%. Corporate bonds
account for the remaining 9.7% of the market.
There is no primary dealer system in Japanese due to the
large number of active participants in the primary market
and competitive secondary market.
Japan: Bond market technicals & liquidity
Available repo facilities - Onshore banks with central bank? Yes- Onshore interbank? Yes- Offshore investors with onshore? Yes- Onshore nonbank investor (e.g. custodian) with onshore? n/aEligible collateral for repos - For CB repos T-bills, JGBs- For interbank repos T-bills, JGBsMark-to-market requirements - Banks? Yes- Insurance companies? No- Pension funds? Passive fund: No, Active fund: Yes- Mutual funds? YesTaxation: Government bonds* - Onshore investors None- Offshore investors NoneOffshore investor access - Foreign ownership of government bonds JPY23.1trn (Jun-10)- As % of outstanding 5.9% (Jun-10)- Direct purchase? Yes- Subject to cap? n/a- Registration requirement? n/a- Access to onshore funding? Yes- Access to onshore FX hedging? Yes- Access to rates hedging (IRS, repo, futures)? YesMarket liquidity statistics JGBs - Daily turnover (LCtr) JPY500bn-1trn- Buying volume in a single day (USDm) (with minimal market impact)
Mid USD200mSuper Long USD 50m
- Bid/offer spreads under normal conditions (bp) 0.5-2.0bpTreasury bills - Daily turnover (LCtr) JPY300bn-600bn- Buying volume in a single day (USDm) (with minimal market impact)
USD500m
- Bid/offer spreads under normal conditions (bp) 0.5bp
*HSBC is not a qualified tax adviser. Consult a professional adviser for further guidance **Reducible by DTA Source: HSBC
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Foreign investment increased between December 2009
and June 2010 in nominal value, to JPY23.1trn from
JPY17.2trn. As a percentage of total JGBs, however,
foreign ownership decreased to 5.9% from 6.1% over
the same period (see chart Foreign holdings of Japanese
government debt).
Foreign holdings of Japanese government securities
0
5
10
15
20
25
30
Jun-04 Jun-06 Jun-08 Jun-10
JPYb
n
0
1
2
3
4
5
6
7
8
9
%
JGBs (LHS) % of total JGBs (RHS)
Source: HSBC
Bonds
Treasury discount bills (T-bills) are discount securities
issued by the MoF to manage liquidity. Maturities
typically range from 3 to 12 months but occasionally 2-
month T-bills are also available. Competitive bid and
non-competitive bid auctions are held once to twice on a
weekly basis. Up to 10% of the total planned issue
amount may be issued in this format.
Coupon bearing bonds are typically referred to as
Japanese Government bonds (JGBs). They carry a semi-
annual coupon and maturities range between 2 to 40
years. Issuance frequency depends on the bond's
maturity and conducted by the MoF. Bonds with
maturities of 2, 5, 10 and 20 years are issued every
month. 30-year bonds are issued every other month
whilst 40-year bonds are issued on a quarterly basis.
Issuance is primarily conducted via competitive bid and
non-competitive bid auctions. There are two types of
non-competitive bid. In non-competitive bid auction I,
up to 10% of the total planned issuance may bid issued.
In non-competitive auction II, only JGB market special
participants are eligible to bid. Each participant is
allowed to bid up to 15% of their total successful
bidding in the competitive auction and non-competitive
auction I.
JGBs can be divided into two main categories: general
bonds and fiscal loan bonds (FILP bonds). As of 30
September 2010, general bonds and FILP constituted
82.8% and 16.6% of JGBs respectively. The difference
between the two is how their repayments are financed.
The interest and principal repayment of general bonds
are financed by tax revenues, whilst FILP bonds are
funded by loans made to FILP agencies. Eligible FILP
agencies encompass local governments, institutions
eligible for enterprise financing support, education,
welfare and medical services.
Other JGBs include subsidy bonds, subscription and
contribution bonds and government bonds converted
from government-guaranteed bonds issued by
organisations such as the Japanese National Railways
(JNR). Subsidy bonds are typically issued for
condolence payments and compensations.
10 year inflation index bond (JGBi) protects the investor
against inflation risk. The principal fluctuates with the
CPI figure (CPI excluding fresh food) and interest is
paid at a fixed coupon rate of the principal. The
adjustment is carried out using an indexation coefficient,
computed by taking the reference index for the day
divided by the reference index at the time of issuance
(which is the 10th day of the issue month). JGBis are
issued in competitive and non-competitive auctions.
15 year floating-rate JGBS (CMT) have a floating
coupon rate. The coupon rate is determined by a
reference rate minus a constant. The constant is set in
the morning of the auction date and stays constant till
maturity. The reference rate varies over time and is the
compound yield of average accepted bid from the 10-
year JGB auction held 6 months before the coupon
payment month. The rate is the yield rounded off to 2
decimal places.
Government agency bonds are issued by government
agencies and special corporations. They carry a semi-
annual coupon, which is generally a fixed rate. Maturities
range between 1 and 35 years, but most bonds are
concentrated in 10-year tenors. Key issuers include
housing and highway (Kodan) and Electric Power
Development Co., Ltd. The average issue size is
JPY30bn.
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Bank debentures consist of Zenshinren bonds and
Kinko bonds. Zenshinren bonds are issued by the
Shinkin Central Bank, who act as the Central Bank for
credit associations, community banks, municipal banks,
and town banks. Kinko bonds are issued by credit
banks. Maturities range between 1 and 10 years. They
may be issued at discount but most carry a coupon. The
average issue size is JPY15bn.
Corporate bonds are issued by private firms. They
typically carry a fixed semi-annual coupon with
maturities ranging between 1 to 30 years. Key issuers
are Japan Railways Co., Ltd, Nippon Telegraph and
Telephone Corporation (NTT) and Nippon Hoso Kyokai
(NHK) (Japan Broadcasting Corporation). The average
issue size is JPY25bn.
Samurai bonds are issued by foreign entities such as
international organisations and foreign corporations.
Maturities range between 5 and 20 years. They normally
carry a fixed semi-annual coupon with an average issue
size of JPY30bn.
Derivatives
An onshore and offshore market exists for JPY interest
rate swaps (see table Japan: IRS and CCS markets).
Interest rate (IRS) and cross-currency swaps (CCS)
extend out to 40 years but liquidity is greatest up to 10
years. There are no restrictions on non-resident investor
access to the JPY IRS and CCS markets for JPY
funding, or to either hedge or take positions in JPY
forwards, IRS and CCS.
Financial institutions that can sell JGBs
City banks Long-term credit banks Regional banks Foreign banks in Japan Trust banks Member banks of the
Second Association of Regional Banks
Shinkin Central Bank Shinkin Banks The Shinkumi Federation Bank
Credit cooperatives The Rokinren Bank Labor credit associations The Norinchukin Bank Credit federation of
agricultural cooperatives Agricultural cooperatives
The Shoko Chukin Bank Securities companies Foreign securities companies in Japan
Life insurance companies
Non-life insurance companies
Japan Post Bank
Source: Ministry of Finance
Regulatory, settlement and tax issues Regulation
Foreign and domestic investors can purchase government
bonds from an eligible financial institution, who will
provide step-by-step procedures once contacted. Only
foreign corporations may hold T-bills.
To invest in corporate bonds, prospective investors must
first register with a bond management company, which
is an agency designated by the MoF. Bond management
agencies vary among issuers. Once registered, investors
must use financial institutions approved by the Financial
Supervisory Agency and members of the issue’s
underwriting syndicate to apply for new bonds.
Settlement
Government bonds traded on the secondary market via
exchanges and over-the-counter (OTC) through securities
companies. The trades are recorded in accounts of the BoJ
Financial Network System (BoJ-NET) and settlement is
conducted on a delivery vs. payment (DvP) basis.
Japan: IRS and CCS markets
Onshore IRS Offshore IRS Onshore CCS Offshore CCS
Non-resident access: Yes Yes Yes Yes Tenors 1-40 years 1-40 years 1-40 years 1-40 years Liquid tenors 1-10 years 1-10 years 1-10 years 1-10 years Average trade size JPY10bn JPY10bn JPY10bn JPY10bn Bid/offer spreads under normal conditions (bp) 1bp 1bp 1.5bp 1.5bp Fixing rate 6mth JPY LIBOR 6mth JPY LIBOR 3mth LIBOR (USD JPY) 3mth LIBOR(USD JPY) Day count Actual/365F Actual/365F Actual/360 Actual/360 Effective date T+2 T+2 T+2 T+2 Fixing time (local time) 11:00am (London) 11:00am (London) 11:00am (London) 11:00am (London) Fixing page Reuters: Libor 01
Bloomberg: BBAM1 Reuters: Libor 01 Bloomberg: BBAM1
Reuters: Libor 01 Bloomberg: BBAM1
Reuters: Libor 01 Bloomberg: BBAM1
Local market hours 9am-6pm 9am-6pm 9am-6pm 9am-6pm Main participants Interbank Interbank Interbank Interbank
Source: HSBC
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Corporate bonds can also be traded on securities
exchanges or OTC. Bonds traded via securities
exchanges with enter a multilateral netting system via
Japan Securities Depository Centre, Inc. (JASDEC).
Investors must open a safe-keeping account with
JASDEC participant securities companies and other
institutions approved by the securities exchanges. Bonds
traded OTC are settled on a delivery vs. payment (DvP)
basis via JASDEC.
Taxation19
For foreign investors, JGBs and local government bonds
in book entry form are tax exempt, subject to certain
procedural requirements. Under the new system for 2010,
interest and profits from the redemption of corporate
bonds in book-entry form (issued on or before 31 March
2013) received by non-residents are also exempt from
tax, subject to certain procedural requirements.
Interest and profits from (1) redemption of profit-linked
bonds among corporate bonds in book-entry form, and
(2) from redemption of corporate bonds in book-entry
form received by entities in a special relationship with
the issuer are outside the scope of the tax exemption
scheme and remain subject to a 15% withholding tax.
Before the 2010 tax reform, interest on corporate bonds
in book-entry form received by non-resident was subject
to withholding tax at the rate of 15%.
______________________________________ 19 HSBC is not a qualified tax advisor. Consult a professional advisor for
further guidance.
Countries that entered DTA with Japan
Armenia Australia Austria Azerbaijan Bangladesh Belarus Belgium Brazil Bulgaria Canada China Czech Republic Denmark Egypt Finland Fiji France Germany Georgia Hungary India Indonesia Ireland Israel Italy Korea Kyrgyzstan Luxembourg Malaysia Mexico Moldova Netherlands New Zealand Norway Pakistan Philippines Poland Romania Russia Singapore Slovakia South Africa Spain Sri Lanka Sweden Switzerland Tajikistan Thailand Turkey Turkmenistan Ukraine UK USA Uzbekistan Vietnam Zambia
Source: HSBC
Useful information Information sources
Bank of Japan (BoJ) www.boj.or.jp/en/ Ministry of Finance (MoF) www.mof.go.jp Japan Securities Depository Centre, Inc. (JASDEC)
www.jasdec.com/en/
Japan Securities Dealers Association www.jsda.or.jp/html/eigo/index.html
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Japan: Bonds
Treasury discount bills (T-bills) Coupon bearing bonds (JGBs) Private corporate bonds
Issuer Japanese Government Japanese Government Private sector Currency Japanese Yen (JPY) Japanese Yen (JPY) Japanese Yen (JPY) Form Scripless Scripless Scripless Minimum denomination JPY10m JPY50,000 JPY100,000 for individual investors,
JPY100, for institutional investors Tenors 2, 3, 6 months, 1 year 2, 5, 10, 20, 30, 40 years 1-30 years Coupon/discount Zero, issued at discount Fixed Generally fixed Coupon frequency None Semi-annual Semi-annual Amortising schedule Bullet Bullet Bullet Day count Actual/365 Actual/365 30/360 Amount outstanding JPY43.1trn (Jun-10) JPY686.5trn (Jun-10) JPY11.5bn (Jun-10)
Primary market Auction style Competitive bid, non competitive bid Competitive bid, non competitive bid Public offer, private placement Average issue size n/a n/a JPY25bn Auction frequency Once or twice weekly 2, 5, 10, 20 years: monthly. 30 year:
every other month, 40 year: quarterly Ad hoc
Participants Corporates, banks, financial institutions Individuals, corporates, banks, financial institutions
Individuals, corporates, banks, financial institutions
Settlement n/a n/a n/a
Secondary market Trading mechanism OTC, exchange OTC, exchange OTC, exchange Trading hours Tokyo Stock Exchange:
9am-11am, 12:30pm-3pm, Osaka Stock Exchange: 9am-11am, 12:30pm-3:10pm, Nagoya Stock Exchange: 9am-11am, 12:30pm-3:30pm
Tokyo Stock Exchange: 9am-11am, 12:30pm-3pm, Osaka Stock Exchange: 9am-11am, 12:30pm-3:10pm, Nagoya Stock Exchange: 9am-11am, 12:30pm-3:30pm
Tokyo Stock Exchange: 9am-11am, 12:30pm-3pm, Osaka Stock Exchange: 9am-11am, 12:30pm-3:10pm, Nagoya Stock Exchange: 9am-11am, 12:30pm-3:30pm
Quoting convention Yield to 3 decimal places Yield to 3 decimal places Yield to 3 decimal places Average bid-offer spreads n/a n/a n/a Average trade size n/a n/a n/a Volume n/a n/a n/a Settlement T+3 T+3 T+3 Clearing BoJ-NET BoJ-NET BoJ-NET for OTC, JASEC for exchanges Main participants Corporates, banks, financial institutions Individuals, corporates, banks, financial
institutions Financial institutions, corporations and individuals
Regulations for foreign investors Restriction on foreign investment Only corporates None None Custodian Local custodian required Local custodian required Local custodian required Interest income tax None None None or 15% withholding tax* Capital gains tax None None 18% tax rate applied to redemption
profit for discount-issued bonds Entry/exit None None None
*See “Regulatory, settlement and tax issues” for further guidance Source: HSBC
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Appendices
Asia-P
acific Rates G
uid
e 2011 G
lob
al Fixed
Inco
me S
trategy
Decem
ber 2010
104
ab
c Region-at-a-glance: Bond market technicals & liquidity (1)
China Hong Kong India Indonesia Korea Malaysia
Available repo facilities - Onshore banks with central bank? Yes Yes Yes Yes Yes Yes - Onshore interbank? Yes Yes Yes No Yes Yes - Offshore investors with onshore? No Yes No No Yes No - Onshore nonbank investor (e.g. custodian) with onshore?
No Yes No No Yes No
Eligible collateral for repos - For CB repos T-bonds EFB/EFNs GOIs, T-bills SBIs, T-bills and T-bonds (subject to 5%
haircut) KTBs, MSBs As specified by RENTAS
- For interbank repos T-bonds, PBOC bills, financial bonds Government bonds, EFB/EFNs, high-grade corporate bonds
GOIs, Oil bonds, T-bills, corp. bonds (>AA) T-bonds KTBs, MSBs, triple-A bank bonds As specified by RENTAS, PDS, NID, BA
Mark-to-market requirements - Banks? Yes Yes Yes Yes Yes Yes - Insurance companies? No Yes Yes (Unit-Linked Insurance Plans only) No Yes Yes - Pension funds? No Yes No No Yes Yes - Mutual funds? Yes Yes Yes Yes Yes Yes Taxation: Government bonds* - Onshore investors Tax exempt if held to maturity, else 5%
business tax None Capital gains: 10% (if maturity <12mths),
30% (if maturity >12mths) Interest and capital gains reported to BEI: 20% withholding tax. Else, general income tax after initial 15% withholding tax deducted
Exempt once tax exemption application is accepted by tax authority
None
- Offshore investors Same as onshore** None 20% withholding tax, capital gains tax same as onshore**
20% withholding tax on interest income and capital gains**
Pending legislation (expected: 15.4% withholding tax on interest, 22% tax on capital gains)
None
Offshore investor access - Foreign ownership of government bonds CNY106bn (Oct-10) n/a Approx. INR210bn (Nov-2010) IDR196trn (Dec-2010) KRW79.8trn (of which KRW48.7tr KTBs,
KRW31.1tr MSBs) MYR97.9bn of which MYR68.0bn in MGS, MYR29.9bn in BNM bills (Sep-10)
- As % of outstanding 0.6% of bond market (Oct-10) n/a Approx. 1% of GOIs (Nov 2010) 30.5% of IndoGBs (Dec-2010) 14.9% of total government bonds (13.2% of KTBs, 18.8% of MSBs)
31% of outstanding MGS (Sep-10)
- Direct purchase? Yes (for QFIIs) Yes Yes (for FIIs) No No Yes - Subject to cap? Yes No Yes (FII limits: USD10bn government,
USD20bn corporate) No No No
- Registration requirement? Yes No Yes Yes Yes No - Access to Onshore funding? No Yes No No Yes (up to KRW30bn with BoK approval) No - Access to Onshore FX hedging? No Yes Yes Yes Yes Yes - Access to rates hedging (IRS, repo, futures)?
Yes (NDIRS) Yes Yes (NDOIS) No Yes (IRS, futures) Yes (IRS)
Market liquidity statistics Instrument #1 Treasury bonds EFB/Ns GOIs IndoGBs KTBs MGS/MGIIs - Daily turnover (LCbn) CNY20-30bn HKD300bn INR100-150bn IDR4-5trn (total for T-bonds, T-bills, ZCs, ORIs) KRW7-9tr MYR0.5-0.9bn - Buying volume in a single day (USDm) (with minimal market impact)
USD10m USD100m (1yr), USD20m (10yr) USD100m USD5m USD100m USD40-60m
- Bid/offer spreads under normal conditions (bp)
8bp 3-5bp (EFB), 5-10bp (EFN) 1-2bp 10-20bp 1-2bp 3-5bp
Instrument #2 PBoC bills HK SAR Government bonds Corporate bonds SBIs MSBs BNMNs - Daily turnover (LCbn) CNY30-40bn HKD0.5bn INR2bn IDR0.1-1trn KRW4-6trn MYR0.7bn - Buying volume in a single day (USDm) (with minimal market impact)
USD20m USD10-20m USD6-20m USD5-10m USD100m USD60-80m
- Bid/offer spreads under normal conditions (bp)
8bp 5-10bp 2-3bp 25-50bp 1-2bp 2-5bp
Source: HSBC *HSBC is not a qualified tax adviser. Consult a professional advisor for further guidance **Reducible by a double tax treaty
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Region-at-a-glance: Bond market technicals & liquidity (2)
Philippines Singapore Sri Lanka Taiwan Thailand Vietnam Australia New Zealand Japan
Available repo facilities - Onshore banks with central bank?
Yes Yes - Under MAS standing facility
Yes Yes Yes Yes Yes Yes Yes
- Onshore interbank? No Yes Yes No Yes Yes Yes Yes Yes - Offshore investors with onshore?
No Yes Yes No No No Yes Yes Yes
- Onshore nonbank investor (e.g. custodian) with onshore?
Yes Yes Yes Yes Yes Yes Yes Yes n/a
Eligible collateral for repos - For CB repos RPGBs SGS, T-bills, AAA-rated debt
issued by sovereigns, supranational, sovereign-backed corporates
SLGBs, T-bills TGBs LBs, MoF SOEs VGBs, SBV bills, VDBs, Municipal bonds
Treasury bonds Government bonds T-bills, JGBs
- For interbank repos n/a Same as for CB repos SLGBs, T-bills - LBs, T-bills VGBs, SBV bills, VDBs, Municipal bonds
Treasury bonds Government bonds T-bills, JGBs
Mark-to-market requirements - Banks? Yes Yes Yes Yes Yes No n/a Yes Yes - Insurance companies? Yes Yes No Yes Yes No n/a Yes No - Pension funds? Yes Yes No Yes Yes No n/a Yes Passive fund: No, Active fund:
Yes - Mutual funds? Yes Yes Yes Yes Yes No n/a Yes Yes
Taxation: Government bonds* - Onshore investors 20% withholding tax at source None 10% withholding tax, corporate
tax on interest income and capital gains
10% 1% tax for institutions 0.1% tax on all fixed income securities sold and coupons from investment in bonds
None No None
- Offshore investors 20% withholding tax at source None 10% withholding tax 15% withholding tax** 15% tax on capital gains** 10% withholding tax on coupon None 15% withholding tax** None
Offshore investor access - Foreign ownership of government bonds
Est. PHP60-80bn (Oct-10)*** SGD21-24bn LKR183.3bn TWD250bn (Aug-10) THB142bn (Nov-10) Est. USD50-100m AUD106bn (Jun-10) NZD43.9bn JPY23.1trn (Jun-10)
- As % of outstanding Est. 4-5% of RPGBs*** Est. 16-18% of SGS (Oct-10) 8.80% Approx. 9.9% of TGBs/Tbills (Aug-10)
5.8% (Nov-10) Est. <1% (Oct-10) 71.7% (Jun-10) 54.70% 5.9% (Jun-10)
- Direct purchase? Yes Yes Yes No Yes Yes Yes Yes Yes - Subject to cap? No No Yes 30% of total investment
portfolio No No, only for bank bonds No No n/a
- Registration requirement? Yes No Yes Yes (FINI/FIDI) Yes Yes (trading account, trading code, custodian account)
No Yes n/a
- Access to Onshore funding?
No Yes No No No No Yes Yes Yes
- Access to Onshore FX hedging?
No Yes Yes Yes Yes No Yes Yes Yes
- Access to rates hedging (IRS, repo, futures)?
Yes (IRS) Yes (IRS, repo) Yes (IRS, repo) Yes (NDIRS) Yes (IRS) No Yes Yes Yes
Market liquidity statistics Instrument #1 Global Peso Bonds (GPBs) SGS T-bills TGBs ThaiGBs a.k.a. Loan Bonds
(LBs) VGBs ACGBs New Zealand Government
Bonds JGBs
- Daily turnover (LCbn) USD1-5m SGD1.9bn LKR0.5bn TWD30-60bn THB2-7bn VND100-400bn AUD3.5bn AUD500m JPY500bn-1trn - Buying volume in a single day (USDm) (with minimal market impact)
USD5m USD100m USD2m USD60m USD15m USD5-10m USD20-50m (deal size) USD25m Mid USD200m
- Bid/offer spreads under normal conditions (bp)
6-10bp 3bp 20bp 0.5-2bp on-the-run, 3-6bp 20-30bp 1bp 2bp 0.5-2.0bp
Instrument #2 RPGBs T-bills SLGBs BoT Bills/Bonds VDBs Treasury bills Treasury bills Treasury bills - Daily turnover (LCbn) PHP20-30bn SGD1.2bn LKR0.5bn THB10-88bn VND100bn AUD200m AUD50-100m JPY300bn-600bn - Buying volume in a single day (USDm) (with minimal market impact)
USD5m USD50m USD2m USD40-60m USD5-10m USD20m USD20m USD500m
- Bid/offer spreads under normal conditions (bp)
5-15bp 5bp 20bp 10bp 30-50bp 1bp 2bp 0.5bp
Source: HSBC *HSBC is not a qualified tax adviser. Consult a professional advisor for further guidance **Reducible by a double tax treaty ***Including 10yr Peso Global Bond.
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China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Treasury bonds Exchange Fund Notes
(EFNs) Government of India bonds (GOIs)
Treasury bonds Treasury bonds (KTBs)
Malaysia Government Securities (MGS)
Treasury bonds (T-bonds)
Singapore Government Securities (SGS)
Issuer People's Republic of China (PRC) Hong Kong Monetary Authority (HKMA)
Government of India (GOI) Republic of Indonesia Republic of Korea Government of Malaysia Republic of the Philippines Republic of Singapore
Currency Renminbi (CNY) Hong Kong Dollar (HKD) Indian Rupee (INR) Indonesian Rupiah (IDR) Korean Won (KRW) Malaysian Ringgit (MYR) Philippine Peso (PHP) Singaporean Dollar (SGD) Form Scripless Global bearer (CMU, Euroclear,
CEDEL) Scripless Scripless Scripless Scripless Scripless Scripless
Minimum denomination CNY100-1,000 HKD50,000 INR 10,000 (market lot INR 5cr) IDR1m KRW 10,000 MYR1,000 PHP10m SGD1,000 Tenors 3 months, 1-10, 15, 20, 30, 50 years 2-5, 10, 15 years 1-7, 10, 30 years 1-10, 15, 20, 30 years 3, 5, 7, 10, 20 years 3, 5, 7, 10, 20 years 2, 3, 4, 5, 7, 10, 20 and 25 years 2, 5, 7, 10 ,15 and 20 years Coupon/discount Fixed rate, floating rate or zero
coupon Fixed Mostly fixed Fixed or floating rate Fixed Fixed at weighted average yield at
auction to 3 decimal places Fixed rate Fixed
Coupon frequency Annual or semi-annual Semi-annual Semi-annual Semi-annual Quarterly (all issues before 2003) or semi-annual (all issues since 2003)
Semi-annual Semi-annual Semi-annual
Amortising schedule Bullet Bullet Bullet Bullet Bullet Bullet Bullet Bullet Day count Actual/ 365 Actual/ 365 30/360 Actual/Actual Actual/Actual Actual/Actual Actual/360 Actual/365 Amount outstanding CNY6.4trn (Oct-2010) HKD70.2bn (Jun-10) INR20.9trn (Sep-2010) IDR387trn (Sep-2010) or
IDR590trn including Recaps KRW320trn (Nov-2010) MYR253bn (Sep-10) PHP1.6trn (Jul-10) SGD75.0bn (Jun-10)
Primary market Auction style Dutch auction Multiple price, competitive tender
on bid-price basis, (small portion for non-competitive tender)
Multiple price style auction Dutch auction, non-competitive bidding and private placement
Dutch and conventional auction (multiple price by 3bp grouping)
US Treasury style auction via FAST
Dutch for new issues; English auction for re-openings
Uniform price auction
Average issue size CNY26bn-35bn HKD600m-1200m INR20-60bn IDR0.5-3.5trn KRW1-3tr MYR3-5bn PHP6-8bn SGD1.5-3bn for new issues, SGD1-2.5bn for re-openings
Auction frequency Weekly Quarterly (2, 3, 5-year), semi-annual (10, 15-year)
2-4 auctions per month Twice a month Weekly (Monday) Once or twice a month Every two weeks (Tuesday) alternating with T-bills
SGD100m-500m
Participants Underwriting group members only Eligible Market Makers (EMMs) only
Banks, institutions, mutual funds Primary dealers, banks, pension funds, mutual funds ,insurance, corporate firms and individuals
Primary Dealers (9 banks, 11 securities firms)
BNM appointed primary dealers Primary dealers (GSEDs) 13 primary dealers
Settlement T+3 T+1 T+1 or T+2 T+2 T+1 T+1 T+2 T+3 or 4
Secondary market Trading mechanism OTC, Stock exchange OTC OTC, exchange OTC, Indonesia Securities
Exchange Mostly OTC or KRX OTC OTC OTC
Trading hours 9-12am, 1:30-4:30pm; 9:30-11:30am and 1-3pm
9-11am, 2-4pm 9am-5:30pm 9am-12pm, 2pm-5pm 9am-3.05pm 9am-12pm, 2-5pm 9am-12pm and 2pm-4pm 9am-11:30am, 2pm-4:30pm
Quoting convention Yield to 2-4 decimals Clean price to 2 decimal places Price to 2 decimals Price Yield to 2 decimal places Price to 2 decimal places Yield basis Price to 2 decimal places Average bid-offer spreads 10bp HKD5-10bp (depending on tenor) 2-3bp 10-20bp 1-2bp (up to 5y benchmarks) 5-10 cents (liquid issues), 50-100
cents (illiquid issues) 1-3bp for jumbos, 5-10 for others On-the-run: 5-40 cents, Off-the-
run: 5-30 cents; in yield terms, 3bp Average trade size CNY30-100m HKD20-100m INR100m IDR10-50bn KRW10bn MYR5m PHP50m SGD5m Volume CNY7bn per day HKD83bn per day INR100-150bn per day IDR4-5tr per day (total for T-bonds,
T-bills, ZCs, ORIs) KRW7-9trn per day MYR600-900m per day PHP20-30bn per day SGD1.9bn per day
Settlement T or T+1 in inter-bank market, T for bonds, T+1 for cash in stock market
T+1 T+1 T+2 or T+3 T+1 T+2 T+1 T+1
Clearing CDC or CSDCC Central Moneymarket Unit (CMU) RBI's SGL system, CCIL BI's BER system, DVP settlement KSD RENTAS Registry of Scripless Securities (RoSS)
DvP basis through the MEPS and MAS SGS book-entry system
Main participants Members and domestic investors if listed
Mainly held by banks to meet liquidity ratio requirement
Fund managers, insurance companies, banks
Banks, mutual funds, pension funds and insurance companies
Banks, securities firms, ITCs, insurance
Banks, state pension funds, insurance companies
Local and foreign banks, institutional investors, government institutions
Primary dealers, secondary dealers, brokers, finance companies, insurance companies, fund managers, corporations and individuals
Regulations for foreign investors Restriction on foreign investment
Generally closed to foreigners, open to QFIIs
None Eligible FIIs are permitted up to USD10bn total limit (G-Secs)***
None None None None None
Custodian Local custodian required None Local custodian required Local custodian required Local custodian required, unless through ICSD (Euroclear)
Local custodian required Local custodian required Local custodian required
Interest income tax* Government bonds generally exempt from 25% income tax
None 20% interest, subject to Double Taxation Agreement (DTA)
20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
Pending legislation (15.4% to be expected, reducible by tax treaty and future legislation up to 0%)
None 20% withholding at source, applies equally to all market participants
None
Capital gains tax* 5% business tax. Related capital gain/loss will be included in 25% profit tax
None 10% for long-term, 30% for short-term, subject to Double Tax Agreement (DTA)
20% standard tax, reducible by Double-Taxation Treaty Agreement (DTTA)
Lower of 22% on capital gains or 11% of sales proceeds to be expected, reducible by tax treaty
None Tax exempt if instrument has maturity of more than 5yrs. Otherwise, capital gain is subject to corporate income tax
None
Entry/exit (SAFE) PBoC and CFETS approval required
None None None None None None None
Source: HSBC *HSBC is not a qualified tax adviser. Consult a professional advisor for further guidance **Reducible by a double tax treaty ***GOIs must have greater than 5yr maturity
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Sri Lanka Taiwan Thailand Vietnam Australia New Zealand Japan Treasury bonds Taiwan Government Bonds
(TGBs) Thailand Government Bonds (ThaiGBs), Loan Bonds (LBs)
Vietnam Government Bonds (VGBs), Vietnam Development Bank bonds (VDBs)
Treasury fixed coupon bonds
New Zealand Government Bonds
Coupon bearing bonds (JGBs)
Issuer Democratic Socialist Republic of Sri Lanka Ministry of Finance (MoF) Ministry of Finance (MoF) Ministry of Finance (MoF) The Commonwealth of Australia The Crown Japanese Government Currency Sri Lankan Rupee (LKR) Taiwanese Dollar (TWD) Thai Baht (THB) Vietnamese Dong (VND) Australian Dollar (AUD) New Zealand Dollar (NZD) Japanese Yen (JPY) Form Scripless Scripless Scripless Scripless Scripless Scripless Scripless Minimum denomination LKR 100,000 TWD100,000 THB20-40m VND100,000 AUD1m NZM1m JPY50,000 Tenors 2-5, 7, 10, 15 and 20 years 2, 5, 10, 15, 20 and 30 years 2, 3, 5, 7, 10, 15, 20, 30, 50 years 2-3, 5, 7, 10, 15 years 1-7, 9, 10, 15 years 1, 3, 5, 7, 10 years 2, 5, 10, 20, 30, 40 years Coupon/discount Fixed Fixed Fixed Fixed Fixed Fixed Fixed Coupon frequency Semi-annual Annual Semi-annual Annual Semi-annual Semi-annual Semi-annual Amortising schedule Bullet Bullet Bullet Bullet Bullet Bullet Bullet Day count Actual/Actual Actual/365 Actual/365 Actual/Actual Actual/Actual Actual/Actual Actual/365 Amount outstanding LKR1.8trn (Nov-10) TWD4.0trn (Aug-2010) THB2.4trn (Aug-2010) VND168trn (VGBs and VDBs) (Dec-10) AUD30.3bn (Sep-10) NZD36.4bn (Oct-10) JPY686.5trn (Jun-10)
Primary market Auction style Multi-price, English auction Dutch auction US Treasury-style auction Dutch auction, Underwriting Competitive-bid Competitive-bid Competitive bid, non competitive bid Average issue size LKR1bn-2bn TWD30bn-70bn THB3bn-30bn per auction (issue sizes
often exceed THB30bn through a series of auctions/re-openings)
VND200bn-1.0tr (dependent on SBV yield target) AUD500m-1.2bn NZD50-110m n/a
Auction frequency Approximately once every two weeks Monthly Weekly on Wednesdays Usually weekly to bi-weekly Weekly Wednesdays and Fridays Weekly (Thursday) 2, 5, 10, 20 years: monthly. 30 year: every other month, 40 year: quarterly
Participants Primary Dealers Banks, bill finance cos., insurance house and security firms
Primary dealers and banks Banks, financial institutions Eligible counterparties Banks Individuals, corporates, banks, financial institutions
Settlement T+2 or T+3 T+2 T+2 T+1 (issuance date), up to T+15 (HNX registration period)
T+3 T+2 n/a
Secondary market Trading mechanism Mostly OTC, limited Bloomberg
platform for PDs EBTS (mostly), OTC OTC OTC, STC OTC Austraclear/Euroclear OTC, exchange
Trading hours 9am-4pm 9am-1:30pm 9am-12pm, 1:30-4pm 9am-12pm, 1:30pm-4pm 8:30am-4:30pm 8:30am-4:30pm Tokyo Stock Exchange: 9am-11am, 12:30pm-3pm, Osaka Stock Exchange: 9am-11am, 12:30pm-3:10pm, Nagoya Stock Exchange: 9am-11am, 12:30pm-3:30pm
Quoting convention Yield to 3 decimal places Yield to 4 decimal places Yield to 2 decimals places Price to 3 decimal places Semi-annual yield to maturity Semi-annual yield to maturity Yield to 3 decimal places Average bid-offer spreads 20bp On-the-run: 1-3bp; Off-the-run: 3-5bp 3-6bp 20-30bp 1bp 2bp n/a Average trade size LKR50m TWD50m THB20-40m VND50-100bn AUD20m NZD5-10m n/a Volume LKR500m TWD100-200bn per day THB2-7bn per day VND200-500bn (VND100-400bn for VGBs,
VND100bn for VDBs) per day AUD3.5bn NZD500m n/a
Settlement T+1 or 2 T+2 T+2 T+1 T+3 T+2 T+3 Clearing SSS (Scripless Securities System) TDCC (Taiwan Depositary and Clearing
Corp.) BoT BIDV Austraclear/Euroclear NZClear BoJ-NET
Main participants Primary dealers, local and foreign banks, foreign investors, captive sources, insurance companies, fund managers, corporations and individuals
Financial institutions Financial institutions, asset management companies
Financial institutions Banks Banks Individuals, corporates, banks, financial institutions
Regulations for foreign investors Restriction on foreign investment Up to foreign investment total of 10% of
outstanding Restricted to investments in TGBs >1-year; investments capped at 30% of cash inflows for FINIs
None None None None None
Custodian Local custodian required Local custodian required Local custodian required Local custodian required Local custodian required Local custodian required Local custodian required Interest income tax* 10% withholding tax deducted at
issuance 15% withholding tax, reducible by tax treaty
None 0.1% withholding tax No 15% withholding tax None
Capital gains tax* None None 15% withholding tax, reducible by treaty 0.1% withholding tax No None None Entry/exit Investment via special accounts None None None None None None
Source: HSBC *HSBC is not a qualified tax adviser. Consult a professional advisor for further guidance **Reducible by a double tax treaty
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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: André de Silva, Virgil Esguerra and Ki Yong Seong
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Rates
Europe Keerthi Angammana, CFA +44 20 7991 6701 [email protected]
Subhrajit Banerjee +44 20 7991 6851 [email protected]
Theologis Chapsalis +44 20 7991 6735 [email protected]
Wilson Chin +44 20 7991 5983 [email protected]
Fredrik Dahlqvist +44 20 7992 3706 [email protected]
Leandro Galli +44 20 7991 5979 [email protected]
R Gopi +91 80 3001 3692 [email protected]
Johannes Rudolph +49 211 910 2157 [email protected]
Sebastian von Koss +49 211 910 3391 [email protected]
Asia André de Silva, CFA Head of Rates Research, Asia-Pacific +852 2822 2217 [email protected]
Virgil Esguerra +852 2822 4665 [email protected]
Ki Yong Seong +852 2822 4277 [email protected]
Americas Larry Dyer +1 212 525 0924 [email protected]
Pablo Goldberg Head of Global Emerging Markets Research +1 212 525 8729 [email protected]
Gordian Kemen +1 212 525 2593 [email protected]
Alejandro Mártinez-Cruz +52 55 5721 2380 [email protected]
Jae Yang +1 212 525 0861 [email protected]
Hernan M Yellati +1 212 525 6787 [email protected]
Credit
Europe Ben Ashby Head of Credit Research, Europe +44 20 7991 5475 [email protected]
Lior Jassur +44 20 7991 1287 [email protected]
Zoe Duong Vu +44 20 7991 5915 [email protected]
Olga Fedotova +44 20 7992 3707 [email protected]
Dominic Kini +44 20 7991 6717 [email protected]
Philippe Landroit, CFA +44 20 7991 6864 [email protected]
Paul Lee +44 20 7991 5912 [email protected]
Laura Maedler +44 20 7991 6790 [email protected]
Ksenia Mishankina +44 20 7992 3703 [email protected]
Remus Negoita +44 20 7991 5975 [email protected]
Rodolphe Ranouil, CFA +44 20 7991 6855 [email protected]
Peng Sun, CFA +44 20 7991 5427 [email protected]
Asia Dilip Shahani Head of Global Research, Asia-Pacific +852 2822 4520 [email protected]
Zhiming Zhang +852 2822 4523 [email protected]
Devendran Mahendran +852 2822 4521 [email protected]
Mary Ellen Olson +852 2822 4524 [email protected]
Keith Chan +852 2822 4522 [email protected]
Sheldon Chan +852 2822 3232 [email protected]
Becky Liu +852 2822 4392 [email protected]
Louisa Lam +852 2822 4527 [email protected]
Yi Hu +852 2996 6539 [email protected]
Americas Van Hesser Head of Credit Research, US Financial Institutions +1 212 525 3114 [email protected]
Robert J Schmeider Head of Latam Corporate Credit +1 212 525 4829 [email protected]
John Kollar +1 212 525 3118 [email protected]
Anthony McCutcheon +1 212 525 4198 [email protected]
Monica A Parekh +1 212 525 4117 [email protected]
Catherine Shinyoung Yim +1 212 525 0191 [email protected]
Global Fixed Income Research Team
Steven Major, CFA Global Head of Fixed Income Research +44 20 7991 5980 [email protected]
André de SilvaGlobal Fixed Income Strategy Deputy HeadThe Hongkong and Shanghai Banking Corporation Limited (HK)+852 2822 [email protected]
André de Silva is currently a Managing Director of Global Fixed Income Research and has been Head of Asia-Pacifi c Rates Research since July 2010when he relocated to Hong Kong. Prior to that, he was based in London as Global Deputy Head of Rates Strategy. He has a wealth of experience in implementing strategy, quantitative techniques, asset allocation, derivative analysis and trade orientated Fixed Income research across various regions. He has a Masters in Financial Economics from Cambridge University, is a Chartered Financial Analyst, a qualifi ed technical analyst (MSTA) and is highly ranked in several Fixed Income Strategist/Analyst surveys.