A project to introduce standardised documentation across multiple Asian jurisdictions may help to reduce trading costs in the region’s fixed-income markets, says Jason Lee Seung-jae, adviser to the office of regional economic integration at the Asian Development Bank.
Lee, a former official at the Korean finance ministry, works on behalf of the Asean+3 Bond Markets Forum (ABMF), a group of the Association of Southeast Asian Nations plus China, Korea and Japan. The ABMF focuses on harmonising regulation and market practices regarding the region’s bond markets.
For more than 10 years, Asean+3 governments have attempted to agree to standards, with their respective finance ministries and central banks attempting multilateral negotiations. The effort has gone nowhere, foundering upon too many political problems and diverging agendas.
In 2010, governments instead decided to endorse ABMF to come up with policy recommendations. On the one hand, such recommendations are non-binding; on the other, agreement doesn’t require a formal treaty, allowing willing governments to opt in.
The AMBF, which involves both public and private-sector participants, spent the past year collecting data on treasury markets and, recently, publishing local market guides. Its first report, in April, was a 1,500-page tome full of information.
Now that the markets have been comprehensively mapped, the next three years are dedicated to developing standardised guidelines for issuing bonds, while expanding its research to corporate bonds, corporate actions and investment flows.
Documentation is small-bore stuff, but incremental harmonisation is better than another decade of zero progress, says Lee.
What it means is a borrower from, say, Malaysia could issue debt securities in both Korea and Singapore under a single level of documentation. Investors and issuers in markets agreeing to such standards would be able to trade those instruments freely. This would lower costs and encourage cross-border issuance and investment.
Other barriers will remain, including withholding taxes and capital controls. These are beyond ABMF’s remit. “There’s no success story of mutual cooperation in Asia,” says Lee. “It’s not like Europe. For now, we need to keep it simple.”
Given Asia’s history, even getting agreement on accepted documentation would be a real achievement, he adds.
To win such a deal, the ABMF is restricting its activity to professional, institution-only markets. It does not want to get stuck in the retail space where consumer-protection laws could make integration difficult.
As part of this initiative, the ABMF hopes to identify ways to reduce transaction costs in Asian bond markets. In 2010, it conducted a study of fees in transacting bonds worldwide.
Adding up fees for global custody, local custody, and clearing, it found the annual average transaction volume per market participant in the US, Japan and Europe was $50,000. The same set of fees vary throughout Asia, but are always greater: around $100,000 for Hong Kong and Singapore, to $250,000 for Indonesia and $400,000 for Vietnam.
Lee says it is not clear why custody fees are so high for Asian bond markets, and assumes there are multiple reasons. One of them is the cost of duplicative documentation. He hopes that market standards can play a role in bringing fees down, although Lee recognises that factors such as capital controls and taxes probably play a bigger part, along with market factors such as demand.
So far the ABMF has hosted Asean+3 government officials at its meetings just once; Lee says the mood was supportive, but that regulators are still trying to understand these issues. So there is still quite a learning curve to master.
The ABMF is inviting finance ministry officials to its next meeting, to be held in Bangkok on November 21-22. “Some countries are ready,” Lee says. “We’ll start with those.”