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Tuesday May 8, 2012

Plan to introduce exchange traded bonds excites local market


SINGAPORE: After years of talk, Malaysian bond market players are excited that Bursa Malaysia has come out with a draft that will amend the regulatory framework that will allow Malaysian retail investors buy and trade conventional and Islamic bonds.

This is, however, still a work in progress as Bursa Malaysia is keen to obtain market feedback to the amendments before it fine tunes and finalises the rules.

Last Friday, it invited market public feedback on a host of changes planned that will also allow listed bonds to trade on the main exchange and on the over-the-counter exchange.

The plans would introduce exchange traded bonds (ETBs) aimed at offering greater choices for investors who were seeking investment grade products that yield stable returns with capital protection, said the announcement.

The deadline for comments on the consultation paper will be May 18.

“From an asset diversification point of view, the idea for ETBs is great,” said one Kuala Lumpur-based investor. “It gives retail investors another asset class, and another avenue to invest.”

Bursa pointed out that the new class of sukuk and bonds, as lower risk instruments such as equity securities, opened up a new world of fixed-income investment alternatives, and since the bonds would be listed and traded, would give visibility on the order book depth and bid-offer level, which made it an efficient price discovery of the listed sukuk andbonds.

The consultation paper seems to address a key issue raised by the debt market players - the fungibility of bonds listed on the main stock exchange and to be traded on the OTC markets.

Both markets operate on completely different platforms, and lot sizes are vastly different, making risks much higher for the market maker in the far smaller OTC markets.

Bursa seems to have anticipated that barrier and is proposing that market makers be given fungibility between the two exchanges to move sukuk or debt securities.

“Movement of sukuk or debt securities between ETBs and OTC will be facilitated by Bursa Depository together with the facility agent using similar mechanics that is already in place for dual-listed companies,” said the consultation paper.

That seemed to please some debt market players.

“If they say that, then the bonds can be moved through OTC or the exchange, and that means the bonds will be fungible through both markets which will make life much easier for us,” said one local debt trader.

But market players raised another barrier - the expected increase in transaction costs for the issuers as a list of requirements may have to be met especially for retail issues.

A debt syndicate banker noted that a full prospectus could be needed if the issuer decides to go for the retail or public offering, which makes an issuance more time-consuming and expensive than going to the institutional market.

Other things that may add costs for an issuer of ETBs is the appointment of trustee, the hiring of a paying agent based in Malaysia even for foreign issuers and the appointment of an agent or representative in Malaysia by a foreign issuer to communicate with Bursa.

Guarantors of bonds might also be required to disclose financial statements on a semi-annual basis as well, which became cumbersome for guarantors but this, said Bursa, was to further protect the interests of investors, particularly retail investors that the ETBs plan to capture.

The consultation paper spells out the proposed key features of ETBs, under which approvals will be needed from Securities Commission on an issuance and from Bursa Securuties for the listing with automatic quotation to be granted for government-guaranteed bonds.

In addition, a prospectus will be required for all private debt securities, excluding those guaranteed by the Federal Government or state governments or Bank Negara Malaysia.

Bonds with retail offerings will still require nods from SC and Bursa for listing and quotation of the bonds.

Under the proposed amendments, no minimum size or public spread will be imposed, while only bonds with over a one-year maturity can be listed and traded. Listing of bonds are limited to those with local ratings of AA or AAA or international rating of BBB and above. - Reuters

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