ASEAN+3 Information on Transaction Flows and Settlement Infrastructures

By Shinji Kawai and Taiji Inui

This report, consisting of three parts, is the result of Phase 2 studies of the ASEAN+3 Bond Market Forum Sub-Forum 2 and enhances the findings of Phase 1. Part 1 provides an overview of ASEAN+3 bond markets and their infrastructure. Part 2 reports on the bond market-related issues of economies in the region. Part 3 contains diagrams of ASEAN+3 bond market infrastructures, domestic bond transaction flows, and cross-border bond transaction flows.

• Language: English
• Publisher: Asian Development Bank
• Release date: Dec 1, 2013
• ISBN: 9789292544492

Book preview

Statement from SF2 Chairs

The Chair and Vice-Chairs express their heartfelt gratitude to members and experts of ABMF SF2 for their contributions in making this initiative fruitful. The Chair and Vice-Chairs hope to enjoy the continuous support of the members and experts since this Report is only the first stage of bringing the objectives of ABMF to fruition. The Chair and Vice-Chairs also express their heartfelt gratitude to the ADB Secretariat Team, in particular the ADB Consultant for ABMF SF2 and his team, for drafting this Report.

Preface

There have been significant developments in bond markets in Asia since the early 2000s. The amount of local currency (LCY) bonds outstanding in emerging East Asia has grown sharply from less than US$1.0 trillion at the end of 2001 to US $6.5 trillion at the end of 2012.a LCY bond markets became an effective alternative source of financing for governments and corporations during the recent global financial crisis, and are characterized by increasingly diversified issuance and a broader investor base that includes non-residents. The regional channeling of regional resources to regional investment needs improved from 2.8% in 2001 to 8.4% in 2011, as measured by the relative share of the region’s debt portfolio outflows being re-invested within the region.

However, there still remain various issues to be addressed. For example, the region’s bond market is still small in size due to the continued dominance of the banking sector, regional resource channeling needs to be further enhanced, volatile capital flows must be appropriately managed, and there is a need to improve market efficiency through lower transaction costs by implementing cross-border, straight-through-processing (STP) by harmonizing and standardizing message flows and items, and by streamlining regulations and market practices.

For a more efficient discussion on implementing cross-border STP and streamlining regulations and market practices, the ASEAN+3 Bond Market Forum (ABMF) was established in 2010—and endorsed by the ASEAN+3 Finance Ministers at the 13th ASEAN+3 Finance Ministers’ Meeting on 2 May 2010 in Tashkent, Uzbekistan—as a common platform to foster standardization of market practices and harmonization of regulations relating to cross-border bond transactions in the region.

The members of ABMF appointed or endorsed by the Asian Bond Markets Initiative (ABMI) Task Force 3 (TF3) include regulatory bodies, stock exchanges, depositories, self-regulatory organizations (SROs), market associations, and international market institutions. The Asian Development Bank (ADB) serves as the Secretariat. ABMF is expected to contribute to bond market development by offering a regional platform to enhance standardization and incorporating both public and private entities.

Since the first meeting in September 2010 in Tokyo, Japan, ABMF members and experts have met quarterly in December 2010 in Manila, Philippines; February 2011 in Kuala Lumpur, Malaysia; June 2011 on Jeju Island, Republic of Korea; September 2011 in Bali, Indonesia; December 2011 in Beijing, People’s Republic of China; February 2012 in Hong Kong, China; April 2012 in Manila, Philippines; September 2012 in Seoul, Republic of Korea; November 2012 in Bangkok, Thailand; February 2013 in Singapore; April 2013 in Jakarta, Indonesia; July 2013 in Tokyo, Japan; and November 2013 on Jeju Island, Republic of Korea. Fourteen meetings have been held in total.

ABMF consists of two forums: Sub-Forum 1 (SF1) and Sub-Forum 2 (SF2). The objective of SF1 is to close the information gap in regulations, market practices, and other areas in the region’s bond markets. SF2 focuses on enhancing regional STP through the harmonization of transaction procedures and standardization of messages.

In its first phase of activity during 2010–11 (Phase1), SF1 worked on collecting legal and regulatory information for the individual ASEAN+3 markets, and SF2 identified detailed information on bond transaction flows.

As a key output of ABMF Phase1 activities, a comprehensive ASEAN+3 Bond Market Guide (the Guide) was published in April 2012, including individual bond market guides for ASEAN+3 member economies. The Guide consisted of Volume 1: Sub-Forum 1—Comparative Analysis and Bond Market Guides, and Volume 2: Sub-Forum 2—Information on Transaction Flows and Settlement. The Guide aimed to dispel persistent misperceptions about ASEAN+3 markets. The Guide was expected to narrow information gaps and establish a common understanding of how markets in the region operate.

The information and findings gathered during Phase1 became the foundation of the next phase of activities during 2012–13 (Phase2). In Phase2, SF1 has been working on developing a regionally standardized bond issuance framework called the ASEAN+3 Multi-Currency Bond Issuance Framework (AMBIF), and SF2 on enhancing survey practices to identify information about government and corporate bond transaction flows and delivery-versus-payment (DVP) flows, and interest payments and redemption procedures. Based on the survey results, SF2 provided policy recommendations to implement cross-border STP through the harmonization and standardization of transaction flows and message items. With continued discussions and consultations, ABMF members finalized the interim reports for both SF1 and SF2 during the 12th ABMF Meeting on 23–24 April 2013 in Jakarta, Indonesia, describing key policy recommendations for AMBIF on standardizing bond transaction flows and message items. The interim reports were submitted to the ASEAN+3 Finance Ministers’ and Central Bank Governors’ Meeting (AFMCGM) on 2 May 2013 through ABMI TF3.

This report, entitled ASEAN+3 Information on Transaction Flows and Settlement Infrastructure and consisting of three parts, is the result of Phase2 studies of ABMF SF2 and enhances the findings of Phase 1. Part 1 provides an overview of ASEAN+3 bond markets and their infrastructure. Part 2 reports on the bond market-related issues of economies in the region. Part 3 contains diagrams of ASEAN+3 bond market infrastructures, domestic bond transaction flows, and cross-border bond transaction flows. The contents of the report are as follows.

Overview

This report was completed through the joint efforts of national members and experts, and international experts participating in ABMF SF2, supported by the ADB Secretariat comprising Shinji Kawai of ADB’s Office of Regional Economic Integration (ADB OREI), Seung Jae Lee (ADB OREI), and Taiji Inui (ADB Consultant).

Thanks also go to ABMF SF2 Chair, Jong-Hyung Lee (Korea Securities Depository) and the Vice-Chairs, Margaret Mutiara Tang (Indonesian Central Depository) and Yuji Sato (Japan Securities Depository Center), for their leadership in facilitating active discussions and guiding SF2 members and the ADB Secretariat.

The national members and experts kindly provided inputs by answering questionnaires and commenting on diagrams during market visits and the draft review process.

The international experts very kindly provided report inputs and freely shared their requirements and assessments, often from proprietary sources. In addition, the team thanks all interviewees who gave useful comments and responses during the Phase2 market visits. Therefore, the report should be regarded as a crystallization of region-wide collaborative efforts and knowledge sharing toward more harmonized and integrated ASEAN+3 bond markets.

Without such strong support and cooperation from ABMF members and experts, as well as from market experts in the region, this report could not have been published.

The team also thanks the national members and experts of Hong Kong, China; Indonesia; Japan; the Republic of Korea; the Philippines; Singapore; and Thailand for hosting ABMF meetings in Phase2. The smooth organization of the meetings made possible the conduct of intensive discussions in multiple sessions at each meeting. In addition, valuable advice, support, and guidance were provided by ABMF Japan members, in particular by the Ministry of Finance. Also, supporting teams at ADB and the NTT DATA Corporation helped the ADB Consultant for SF2.

The bond markets and infrastructures in the region are rapidly developing by adopting international standards and principles. However, the efforts toward harmonization and standardization of ASEAN+3 bond markets have just begun. Given large differences in the levels of economic and bond market development in the region, the task will not be easy. The related work is inevitably gradual and step-by-step. The further harmonization and standardization of cross-border STP for bond transactions in the region will be a major challenge. There are no obvious low-hanging fruits in such an endeavor. As such, SF2 will continue to foster a region-wide understanding of the benefits of more harmonized and standardized bond transactions. This unique initiative will create momentum to push the region toward deeper, more liquid, and more integrated bond markets.

ABMF is expected to continue to function as a platform to realize and institutionalize regionalism by helping formulate regional views and opinions into a common policy framework.

Finally, it should be noted that no part of the report represents the official views of any of the institutions that participated as ABMF members or provided experts. The ADB team is responsible for the contents of the report.

ABMF Secretariat Team

Part 1

Bond Markets and Their Infrastructures in ASEAN+3

Contents

Executive Summary

The ASEAN+3 Bond Market Forum (ABMF) was established in September 2010 after being endorsed by the ASEAN+3 Finance Ministers’ Meeting as a common platform to foster the standardization of market practices and harmonization of regulations relating to cross-border bond transactions in the region.¹ ABMF aims to discuss various bond market issues in order to enhance the mobilization of regional savings for regional investments, and to improve information flow in regional markets. ABMF consists of two forums: Sub-Forum 1 (SF1) and Sub-Forum 2 (SF2). The objective of SF1 is to close the information gap in regulations, market practices, and other areas in the region’s bond markets.² SF2 focuses on enhancing regional straight-through-processing (STP) through the harmonization of transaction procedures and standardization of messages.

ABMF SF2 members and experts discussed how to enhance regional STP of bond transactions from trade to settlement. ABMF SF2 conducted a survey of delivery-versus-payment (DVP) flows and interest payment and redemption flows for both government and corporate bonds.

Survey findings on (i) bond market infrastructure, (ii) DVP flows, (iii) interest payment flows, (iv) message standards, (v) numbering and coding, (vi) market practices and other issues, and (vii) cross-border DVP flows are summarized in this report. Fit and gap analyses of DVP flows and interest payment flows were conducted to identify similarities and differences with an eye toward future harmonization in the region. Message format, numbering and coding, and market practices are also discussed with respect to standardization and harmonization. Some characteristics of cross-border DVP flows, such as additional messages to meet FX and cash controls in each economy, are also identified based on the survey results.

Observations and Policy Recommendations

Based on our findings, the following observations and policy recommendations aimed at fulfilling the objectives of ABMF SF2 were compiled:

Suggestions for the Next Phase of ABMF Activities

Considering the above observations and policy recommendations, the following are suggested topics for ABMF SF2 to tackle in its next phase.

Roadmap and Work Plan. In relation to the suggested next phase of ABMF activities, ABMF SF2 would like to propose the following Roadmap and Work Plan, subject to approval by Asian Bond Markets Initiative (ABMI) Task Force 3 (TF3) members.

Submission of the report to ABMI TF3. ABMF SF2 would like to submit this Phase 2 report to ABMI TF3 as the key findings of SF2. SF2 members expect that the information and data accumulated through ABMF SF2 activities will be utilized as substantial and practical references in pursuing the harmonization of transaction flows and market practices. ABMF SF2 members hope the suggested recommendations in this report can serve as a reference for authorities in the design and implementation of bond market policies.

A list of members and experts, including observers and the ADB Secretariat Team, is presented in Appendix 1.

Introduction

Purpose of ASEAN+3 Bond Market Forum

The ASEAN+3 Bond Market Forum (ABMF) was established in September 2010, based on the endorsement of the ASEAN+3 Finance Ministers’ Meeting, as a common platform to foster the standardization of market practices and harmonization of regulations relating to cross-border bond transactions in the region.¹

ABMF is expected to discuss various bond market issues to further develop liquid and well-functioning bond markets in order to make cross-border bond investment and settlement both smoother and less expensive; hence, the region’s abundant savings can be channeled more effectively to meet the region’s increasing investment needs.

ABMF aims to (i) assess existing regulatory frameworks and identify recommendations on how to foster the harmonization of regulations and market practices to facilitate cross-border bond transactions in the region, (ii) enhance dialogue between the private sector and ASEAN+3 officials to develop bond markets in the region and promote harmonization, standardization, and integration; and (iii) provide opportunities to exchange knowledge, expertise, and experience between the region’s private and public sectors.

ABMF also took stock of the Group of Experts (GoE) report² on Cross-Border Bond Transactions and Settlement Issues.

Organizational Structure and Governance

ABMF is organized under Task Force 3 (TF3) of the Asian Bond Markets Initiative (ABMI). ABMF occasionally consults with the co-chairs of TF3 in undertaking regional activities, and reports to TF3 on a regular basis regarding the progress of its activities. The organizational structure of ABMF is shown in Figure 1.1.

Figure 1.1 Organizational Structure of the ASEAN+3 Bond Market Forum

ABMF consists of two sub-forums: Sub-Forum 1 (SF1) and Sub-Forum 2 (SF2). The objective of SF1 is to close information gaps with respect to regulations, market practices, and other areas in the region’s bond markets. SF2 focuses on enhancing straight-through-processing (STP) in ASEAN+3. This report covers activities under SF2.

Purpose and Position of ABMF Sub-Forum2

The GoE report identified various settlement barriers related to messaging formats, securities numbering, matching, and the settlement cycle. Thus, ABMF SF2 seeks to address these problems to enhance regional STP through the harmonization of transaction procedures and standardization of messages.

It is desirable to execute cross-border transactions without any manual processes or data conversion among market infrastructure in the region. This ideal situation can be realized if all transactions are operated through a system using common standards and consistent messaging. This is not currently possible because individual economies have their own practices and standards, which is inevitable because certain transaction procedures follow unique national requirements. In addition, some segments of a market may prefer ways of handling transactions, which creates differences in transaction procedures and, hence, requires additional conversion to international practices. Furthermore, differences in language remain a significant barrier as some ASEAN+3 economies use their own characters for payment systems and communications. Adopting international standards frameworks such as ISO20022 can mitigate impediments and barriers, which will enhance interoperability in ASEAN+3 bond markets.³

Phase1 studies of ABMF SF2 mainly discussed business flows by focusing on government bond transactions, which are larger and relatively simpler than corporate bond transactions. The studies identified and standardized the procedures in trades and settlements, particularly delivery-versus-payment (DVP) of government bonds. In addition, ABMF SF2 discussed other settlement-related barriers such as securities numbering, settlement cycle, and matching to improve settlement procedures. The Phase1 report is posted on ADB’s website.⁴

Phase2 studies of ABMF SF2 have built upon the agenda of the GoE report and Phase1 studies of SF2. The GoE report pointed out barriers to promoting STP in ASEAN+3 bond markets. Phase2 studies have covered five barriers that are also discussed in the GoE report: (i) messaging format, (ii) pre-matching, (iii) securities numbering, (iv) settlement cycle, and (v) physical certificate. Moreover, both studies address DVP flows of corporate bonds, government bond flows in BCLM countries,⁵ flows of interest and redemption payments, message format and items, market practices, and FX and cash control in the implementation of STP (Figure 1.2).

Figure 1.2 Positions of Phase2 Studies of ABMF Sub-forum 2

Settlement Barriers Based on the Survey on the GoE Report

The GoE report pointed out the barriers to implementing STP in bond markets in ASEAN+3. Settlement-related barriers, including messaging standards, pre-matching, securities numbering, settlement cycle, and physical certificates, are discussed in the succeeding section of this report. The identified barriers to implementation are shown in Figure 1.3.

Figure 1.3 Barriers Focused under ABMF

Outline of Phase1 Studies by ABMF SF2

ABMF SF2 has been discussing the survey results from the viewpoint of enhancing cross-border STP and standardization of messages.

The following are the preliminary conclusions of the Phase 1 studies.

Schedule of Sub-Forum2 during Phase2

ABMF members and experts, with support from the ADB Secretariat and ADB Consultant for ABMF-SF2, have discussed issues of cross-border bond transactions at ABMF meetings, which were held eight times between February 2012 and November 2013, and six times before then. The schedule of SF2 is shown in Table 1.1.

Table 1.1 Schedule of Sub-Forum 2

Methodology and Approach of the Survey

Possible Goals of SF2

One of the possible goals of ABMF SF2 is to promote STP (Figure 2.1). In order to promote STP, SF2 has clarified the differences among ASEAN+3 economies over DVP and interest payment flows, message items, and market practices. Moreover, SF2 defines typical DVP and interest payment flows for the reference of operators of bond market infrastructure. Another goal is to promote ISO 20022 and related international standards, in particular ISIN and BIC, based on the survey results.

Figure 2.1 Possible Goals of Sub-Forum 2

Note: International standards (e.g., ISO20022) will be the focal point and hub of local standards.

Through the Phase1 and Phase2 studies, SF2 has revealed that each ASEAN+3 economy has its own DVP flows and market practices. Differences in these matters could be a barrier to achieving STP. Not all ASEAN+3 economies have adopted the same rules since they each have unique legal and business requirements. To promote STP, ASEAN+3 economies are expected to adopt the same DVP and interest payment flows to the extent possible as they upgrade their existing bond market infrastructure. If all ASEAN+3 economies were to comply with typical flows as defined by ABMF SF2, the barriers to promoting STP across the region would be reduced significantly.

Concerning message format and items, and numbering and coding, ASEAN+3 proprietary practices (local standards) show differences with international standards, including ISO20022. Also, proprietary practices differ across ASEAN+3 economies and markets.

Therefore, the proprietary practices of ASEAN+3 economies should be changed to meet international standards. It is important to harmonize practices in the region to make existing differences narrower. International standards such as ISO20022 should form the basis of local standards to make harmonization a reality. Also, practices in ASEAN+3 that have been identified as being on par with international standards should be considered as benchmarks.

Figure 2.2 Contribution of ASEAN + 3 to International Standard

Source: ABMF SF2.

Methodology Overview

Phase2 activities of ABMF SF2 are divided into six stages as illustrated in Figure 2.3.

Figure 2.3 Methodology

Figure 2.4 Generic Model of Cross-border Bond Transaction Flow