Asia’s Capital Markets: Strategies for Sustained Growth
November 2013

ASIFMA is an independent, regional trade association with over 70
member firms comprising a diverse range of leading financial institutions
from both the buy and sell side including banks, asset managers, law firms
and market infrastructure service providers. Together, we harness the sharedinterests of the financial industry to promote the development of liquid,
deep and broad capital markets in Asia. ASIFMA advocates stable,
innovative and competitive Asian capital markets that are necessary tosupport the region’s economic growth. We drive consensus, advocate
solutions and effect change around key issues through the collective strengthand clarity of one industry voice. Our many initiatives include consultations
with regulators and exchanges, development of uniform industry standards,
advocacy for enhanced markets through policy papers, and lowering the costof doing business in the region. Through the GFMA alliance with SIFMA in the
US and AFME in Europe, ASIFMA also provides insights on global bestpractices and standards to benefit the region.

Table of Contents

Executive Summary2

Summary of Recommendations

5

Introduction

7

Equities

16

Fixed Income

23

Foreign Exchange

32

Commodities

40

Derivatives

48

ASIFMA would like to extend its gratitude to all of the individuals and member firms who
contributed to the development of this white paper

Paper compiled and edited by:
Larry YuManaging Director, Wordsmith

ASIFMA – November 2013

1

Asia's Capital Markets: Strategies for Sustained Growth
EXECUTIVE SUMMARY
Deep, liquid and efficient capital markets
are critical to the continued developmentof Asia’s 1 economies. Encouraged byregional organizations such as APEC,ASEAN and the ADB, Asia’s markets havebenefitted from increased openness anda range of reform efforts over the lasttwo decades.
While the pace of economic growth in
Asia continues to exceed that of otherregions, the structural development of its
capital markets has not kept pace. This
needs to change if growth is to continue
at the accelerated pace necessary for theregion to compete effectively with themature economies in the West.
Asia’s rapid growth has led to significant
wealth generation, but key challenges
remain to be addressed for that growth
to continue in a sustainable fashion. The
substantial infrastructure still needed tospread development geographically,
improve productivity and sustain rising
wages is straining government fiscal
limits, and requires the efficientmobilization of private capital.
Asia’s intraregional trade is growing, andeconomic slowdowns in Europe and the
U.S. only highlight its increasing
importance, as regional economies look
to diversify away from traditional
Western export markets. Increasingly,
this trade will be denominated in local
currencies, requiring local currencyintermediation and hedging products,that in turn assume a higher level ofmarketinnovation
thancurrent
regulations allow.

Changes in demand and demographics,
along with critical social development
needs, are now altering future prospects
for the region. Success will be strongly
influenced by government policy
responses, market innovation and theavailability of appropriately priced capitalto support growth. To ensure this kind ofaccess to capital, Asian capital markets
should offer a wider and deeper array offinancing and investment possibilities tocomplement the current bank-lending
model. This requires government policies
that allow and encourage market
innovation, especially across borders. In
the era of the Internet, investors will
ultimately demand access to a greater
range of products offered throughout theregion.
A number of positive variables are
currently at work across Asia. Trade flows
are increasingly intraregional, creating amore balanced and stable growth modelin the future. In addition, pension andsocial security pools with longer-term
investment horizons are starting tomobilize domestic savings, aiding
investment in infrastructure.
However, for real sustainability, capital
markets
shouldbecomemore
harmonized, transparent, flexible andliquid. National jurisdictions need toensure genuine cross border flexibility tostimulateinvestor
interestandcommitment, while removing restrictions
on market access in favor of a more open
and innovative environment.
This paper focuses on the role, current
state of, and requirements for theongoing development of five major
markets: Equities, Fixed Income, Foreign
Exchange, Commodities and Derivatives.

1

References to Asia in this paper refer toAsia (ex-Japan)

ASIFMA – November 20132

Equities
Equity markets provide access to capitalfor a broad range of needs, including
infrastructure funding, investment incorporate growth, and driving innovationby channeling low cost capital to young,fast growing companies. For investors,
equity markets provide growth and yield
opportunities that span every industry,
sector and market worldwide.
Effective equity markets are key to thereal economy, providing funding forinnovation and growth, supporting job
creation, creating and distributing wealth,and ultimately enhancing financial
stability, security and improvement instandards of living.
Asia’s equity markets differ from eachother in numerous ways, and range fromthe developed markets of Hong Kong andSingapore, emerging markets such as
China, Indonesia and the Philippines andfrontier markets such as Sri Lanka and
Bangladesh. Continued efforts are
required to provide international
investors with confidence in and accessto open, efficient and attractive equity
markets.
Healthy, well functioning equity markets
are an essential element for Asia’scontinuing success.
Fixed Income
As economies mature, establishedgovernment and corporate bond markets
become increasingly important forcontinued, sustainable economic growth.
Developed bond markets contribute tofinancial stability and offer opportunities
to fund a wide variety of public
infrastructure and private sector
enterprise.
An active local currency (LC) bond market
becomes especially important as themain channel for long term investors
such as pension funds and insurance

ASIFMA – November 2013

companies. Other channels of financial
intermediation (such as equity markets
or bank financing) are generally more
short term in nature, and offer different
risk profiles. LC bond markets also
promote financial stability by allowing
policy makers to wield macroeconomic
measures and monetary policies more
effectively.
The current trend towards bank lending
disintermediation suggests corporates
will increasingly access debt capital
markets, paving the way for lower
issuance and funding costs, reduced
stress on the banking system andincreased investment opportunities forwholesale and retail investors. This trend
will only continue if local markets
enhance their liquidity and depth acrossthe product spectrum, broadening
investment appeal to a wider range ofparticipants and ensuring a larger portionof Asian savings (both personal andinstitutional) remains within the region.
Severalfactors
will
encourage
accelerated development in the bondmarkets: resolving retail market accessissues, harmonizing legal documentation,
implementing consistent and effective
regulatory and legal environments,
leveling playing fields for all participants,
freeing information flow, developing acredit culture, and improving thebankruptcy, insolvency and resolution
regimes.
Foreign Exchange
Today, the Foreign Exchange (FX) market
is the largest and most liquid financial
market in the world, acting as a global
payment system and a key tool ininternational trading, currency hedging,and corporate cash flow and balance
sheet management.
Due to the truly global andgeographically diverse nature of themarket, FX trading is a fundamental

3

financial activity that underpins global
economic and commercial systems.
Following the Asian financial crisis,countries throughout the region
responded by building foreign exchange
reserves and establishing extensive swap
lines among the regional central banks toovercome short term liquidity stresses.
Additional flexibility in exchange rate
regimes has allowed Asian currencies tofluctuate more freely.
When the global financial crisis
decimated markets in 2008, Asian
countries were better prepared towithstand the pressures arising from thefallout of the Lehman Brothers collapse.
Increased currency flexibility and deeper
USD liquidity in Asian central banks’
reserves – built up as a result of the firstcrisis in the 1990s – sufficiently
contained crippling currency fluctuations.
As recovery took hold, several Asiancurrencies saw strong inflows resulting in
rallies meeting post Asian crisis highs.
Going forward, Asian FX markets should
strive to adopt international standards
and practices, and address current
roadblocks to market development.
Issues such as excessive regulation, theintroduction of centralized clearing andunnecessary
marginrequirements,
lagging development in e-trading and alack of currency convertibility all hinder
the growth of FX markets across theregion.
Commodities
Commodities markets play an importantrole in economies by reducing pricevolatility and risk, enabling pricediscovery and balancing production
versus consumption. Presently, Asia’scommodities markets vary in terms ofsophistication, size and integration with
global markets.

ASIFMA – November 2013

Regional markets are relatively large andsophisticated in base metals and certain
agricultural commodities, where Asia is amajor factor in trade flows. However, inother areas such as energy, Asia lacks
sophisticated trading markets andconsiderable effort will be required todevelop them to their full potential.
Asia accounts for more than half theworld’s consumption flows in mostcommodities traded today, but theregion’s commodity markets generally do
not reflect this reality.
Even in Asia’s “better developed”
commodity markets, price discovery lags
behind Western exchanges and volumes
remain lower than justified by theregion’s significance, resulting in far
higher volatilities and costs to users. This
only encourages the trend of domestic
capital flowing offshore to purchase
relevant hedging instruments, only toreturn onshore to purchase the actual
underlying commodity. It clearly makes
more sense for all of the capital to staywithin the region.
To support further development of Asia’scommodities markets, countries aroundthe region should seek to implement a
consistent
regulatory
framework,
improve regional market infrastructure
and implement a consistent, regionallyharmonized tax regime.
Derivatives
Derivatives markets create a number of
economic benefits. Not only do they
provide investors with an indication of
future prices, but they also allow for
effective hedging of risk – which in turn
attracts more market participants, higher
transaction volumes and greaterliquidity.
Derivatives markets in Asia are, withsome notable exceptions, small andrelatively underdeveloped, especially4compared to those of the US and Europe.
Although exchange traded derivatives
are present in various forms (options,warrants, futures) in several markets,
those markets are also fairly small.
Like all Asian and many other financial
markets, the over-the-counter (OTC)
derivatives market is highly fragmented,
with different groups of countries having
their own characteristics and levels of
maturity.
In the aftermath of the financial crisis,
the G-20 focused considerable attention
on the role of the OTC derivatives market
in the spread of systemic instability.
Asian
countries
have
respondeddifferently to the proposed changes, andsome participants may choose to scale
down or even withdraw from markets if
new regulatory hurdles, capital charges,
reporting requirements and rising costs
make their businesses untenable.
For derivatives markets to continue togrow, the region should address legal
uncertainties and strengthen contract
enforceability, manage extraterritoriality
issues streaming from US and EU
regulations, prevent fragmentation of
Asian Central Counter Parties (CCPs), andaccelerate development of credit
derivatives markets.
SUMMARY OF RECOMMENDATIONS
1. Asian financial markets should
harmonize
andconvergetoencourage
mutually
beneficial
growth.
A common thread across all asset
classes is the importance of
convergence and harmonization in aregion that has no overarching
governmental or even a single panregional organization to drive such a
process. The historical tendency tocompete between the region’s
jurisdictions may no longer serve theASIFMA – November 2013

best
interestsofmarketdevelopment. Instead, the region will
benefitmore
fromcommonstandards and approaches that foster
region wide development andgrowth.
Mutual recognition
agreements and moves towards
implementingasubstitutedcompliance regime throughout theregion will pave the way forestablishing global standards thatwork for Asia. Greater cooperationand participation by Asian policy
makers at global multilateral forums
such as IOSCO, G20 and the FSB may
also help this process. There seems
to be a real need for a more assertive
regional voice amongst Asia’s
regulators to ensure the views andconcerns of market participants andregional governments are heard,
understood and acted upon at the
global level.
2. Increase
regionallevelsoftransparency
andcorporate
governance.
To enhance investor confidence andpromote successful capital raisingacross asset classes, there is a needto continue promoting common
standards and lifting the generallevel of corporate governance acrossthe region. Better transparency inreporting and disclosure, along withconvergenceinaccounting
standards, will ensure that regulators
are operating in a more unified
fashion based on shared data, thus
improving capital market quality,
consistency and resiliency. A morecoordinated and common approach
toward listing rules, multiple shareclasses and the relaxation of
restrictions on foreign investors will
also enhance the region’s capitalraising environment – one in which
capital raised is more likely to remain
within the region.

5

3. Continue economic and policy
reforms to stimulate capital markets
growth.
Markets across Asia operate under awide variety of laws, rules andrestrictions. Reforms that permit thedevelopment of more market
competition are likely to stimulate
larger and more liquid capital
markets for all types of investments.
Policymakers will want to consider
tradeoffs that may exist between
measures that protect existing local
market structures and those that
may stimulate growth in new areas
with which they may be less familiar.
Financial market participants have aclear interest in articulating ideas forconstructive
reform;therefore,
initiating greater dialogue withmarket participants will help to build
theprivate/public
partnerships
critical to ensuring sustainable
capital market development.
4. Develop infrastructure to support
intraregional market transactions
and risk management.
Changes now underway as a result ofBasel III and other new measures areintended to drive new attitudes andapproaches toward risk. Asianmarkets may become beneficiaries ofsome of these changes if they areable to create logical and efficient
structuresforintraregional

ASIFMA – November 2013transactions. This will require acoordinated and consistent approachto new requirements for regional
trading, central clearing, tradereporting and regionalized risk
management. Policymakers will also
want to consider a common legal
approachtocounterparty
responsibilities
andcontract
enforceability across the region.
5. Collectively address laws withextraterritorial implications in Asia
from a regional perspective.
The application of extraterritorial
laws (Dodd-Frank, Volker, EMIR,
MiFID, etc.) that will have impact inAsian markets represents a source ofconcern across all markets and asset
classes.
Regional
governments
should exert greater collective efforts
to maintain the momentum required
to address these extraterritorial
encroachments.
The
shift
of
economic power to Asia puts
regional policymakers in a farstronger position today, especially inlight of desire to consolidate risk
management responsibility moreclosely
withlocales
wheretransactions actually arise. These
efforts will be most effective whenpursued jointly.

6

INTRODUCTION

continue at the accelerated pacenecessary for the region to compete
effectively with the mature economies in
the West.

Development of Asia’s Capital Markets
Deep, liquid and efficient capital markets
are critical to the continued developmentof Asia’s economies. Encouraged byregional organizations such as APEC,ASEAN and the ADB, Asia’s markets havebenefitted from increased openness and arange of reform efforts over the last two
decades. While the pace of economic
growth in Asia continues to exceed that ofother regions, the structural developmentof its capital markets has not kept pace.
This needs to change if growth is to20

Asia’s rapid growth has led to significant
wealth generation, but key challenges
remain to be addressed for that growth tocontinue in a sustainable fashion. The
substantial infrastructure still needed tospread development geographically,
improve productivity and sustain rising
wages is straining government fiscal
limits, and requires the efficientmobilizationofprivatecapital.

Real GDP Growth in Asia, US & EU (1980 - 2012)%

Australia
China

15

Hong Kong
India

10
Indonesia
South
Korea
Malaysia

50Philippines
Singapore-5

ThailandTaiwan-10
UnitedStates
Japan
2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

-15

SOURCE: Haver, CEIC and United Nations
Despite diversity in the region’s
economies, further development of Asia’s
capital markets will bring widespreadbenefits to the region. Government
policies can encourage the developmentof capital markets in ways that will
supporteconomicandsocialdevelopment objectives. Sound financial
policies can also reduce concentrations ofrisk in the banking system, improve

ASIFMA – November 2013

government and corporate credit ratings
and through greater transparency,
provide a better governance and control
environment to the benefit of all market
participants and stakeholders.
As an added benefit, effective andexpanded capital markets will help tomanage rising pressure to extend social
safety nets. In part, this extension is7needed to encourage individuals to saveless and spend more, but will also
decrease traditional reliance on exports
to mature markets in favor of domestic
consumption.

less public money available for
infrastructure, education, health care andother needs – which in turn will require
the support of larger capital markets.
However, investing in the capital markets
now through pensions and insurance tosupport the needs of an aging populationin the future can ultimately be the longterm funding source for infrastructure
projects that are needed throughout theregion.

Developed capital markets are also
particularly important in areas where thedemographic profile is aging. Programs toaddress the needs of aging populations
will stretch government finances, making

Median Age in Asia (1980 - 2012)45

Australia
China

40
Hong Kong
India

35

Indonesia
30

South
Korea
Malaysia

25

Philippines
Singapore

20

ThailandTaiwan
2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

15

SOURCE: Haver, CEIC and United Nations
A more efficient and comprehensive
institutionalized private pension andinsurance system will provide a stronger
and less costly social safety net, as
opposed to overreliance on government
support or personal savings. This willallow the region’s high savings rate to be
redirected towards greater domestic
consumption, thereby driving economic
growth and closing the gap with themature economies while redeploying
savings within the region. This transitionneeds access to a wider array ofdomestic and foreign investment options
rather than simply the reliance on
governments or bank lending.

ASIFMA – November 2013

The development of robust, well
regulated capital markets reduces key
risks in the financial system and improves
governments’ credit profiles. Up to thepresent day, capital to support Asian
growth has predominantly come fromtraditionalbanklending,
which
concentrates credit risk in the banking
sector. As the global financial crisis has
shown, this can also accumulatecontingent
liabilities
ontoagovernment’s balance sheet, which inturn may adversely affect government
credit ratings. Banks also traditionallylend short term, which limits theduration of debt available in the8economy.
Underdeveloped
capitalmarkets mean that infrastructure
projects and corporations large andcreditworthy enough to obtain term debt
financing generally do so in international
syndicated loan or bond markets,
typically in a G3 currency, which likely
adds to cross border transfer and foreignexchange risk.
Reliance on relationship banking for
funding lacks transparency, which maylead to SMEs and startups (the drivers ofgrowth) being squeezed for funding;whereas large, often state controlled
companies
receivepreferential
treatment in lending that may not be
warranted by their business models.
Robust capital markets require greatertransparency, that in turn supports
better corporate governance and better
pricing of risk, which in turn allocates

capital more effectively. In addition,
stable, long term foreign investment ismore readily attracted to countries withwell regulated, diverse markets thanthose heavily reliant on bank lending,which can trap capital within borders.
Asia’s intraregional trade is growing, andthe economic slowdowns in Europe andthe U.S. only highlight its increasing
importance, as regional economies look
to diversify away from traditional
Western export markets. Increasingly,
this trade will be denominated in local
currencies, requiring local currencyintermediation and hedging products,that in turn assume a higher level ofmarketinnovation
thancurrent
regulations allow.
So far, thedevelopment of greater intraregional
capital market flows has not kept up withthe growing pace of intraregional trade.

Value of Asian Intraregional Trade (ex. Japan)
Imports & Exports

US$ mn3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
01988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Asia (ex. JP): Exports to Asia

Asia (ex. JP): Imports to Asia

SOURCE: Haver, CEIC and United Nations

ASIFMA – November 2013

9

Changes in demand and demographics,
along with critical social development
needs, are now altering future prospects
for the region. Future success will bestrongly influenced by government policy
responses, market innovation and theavailability of appropriately priced capitalto support growth. To ensure this kind of
capital access, Asian capital markets
should offer a wider and deeper array offinancing and investment possibilities tocomplement the current bank lending
model. This requires government policies
that allow and encourage market
innovation, especially across borders. In
the era of the Internet, investors will
ultimately demand access to a greater
range of products offered throughout theregion.
A number of positive variables are
currently at work across Asia. Trade flows
are increasingly intraregional, creating amore balanced and stable growth modelin the future. Pension and social security
pools with longer term investment
horizons are starting to mobilize
domestic savings, aiding investment ininfrastructure. As good regulation andsupervision are the hallmarks of strong
markets, regional governments andregulators should ensure the highest
quality people in supervisory roles. The
strength of human capital in these
positions is critical to the development oftransparent, sustainable markets.
However, for real sustainability, capital
markets will need to become morediverse, flexible and liquid. National
jurisdictions should ensure genuine crossborder flexibility to stimulate investor
interest and commitment, whileremoving restrictions on market access infavor of a more open and innovativeenvironment.
Encouraging
greatercompetition in trading venues would also

ASIFMA – November 2013

assist in lowering transaction costs forinvestors across Asian markets.
Macro-Financial Environment
The macro-financial backdrop for Asia
has changed in response to a variety offactors over the last several years. Manyof these developments have resulted
from the global financial crisis andresultant government and market
responses.
Among these changes, a number of new
constraints have appeared that will
inhibit the availability of financing for
Asian growth. New Basel III requirements
have reduced bank appetite for credit
provision and risk, at the same time that
overall economic growth rates in theregion have remained relatively high. In
addition, many banks based outside theregion, especially European based firms,
have withdrawn lending capacity from
Asia to support activities closer to home
– and in some cases, in response to homecountry regulatory initiatives. As a resultof these changes, there has been
increasing demand for non-bank sourcesof capital to fund growth, but notnecessarily the policy responses required
to encourage supply.
While Asia has witnessed relatively highrates of growth, economic activity hasvaried considerably. For example, themix of activities generating growth inThailand is significantly different fromthat witnessed in Hong Kong, despite
broadly similar aggregate growth rates.
While diversity is in many ways astrength, it also underscores thefragmented nature of the region: a wide
variety of key industries and significant
differences in government policy
approaches and regulatory regimes,
compounded by significant diversity inlocal financial market infrastructures.

10

Differences in Yield Curves%
7

Indonesia
65Philippines
4

China
Thailand

Malaysia

US
Singapore
Germany

Korea

3
2

Japan

Hong Kong
1
0
0

5

10

15
Maturity (years)

20

25

30

SOURCE: Bloomberg as of 14 March 2013
The annual “Ease of Doing Business”
rankings published by the World Bank
andthe
International
Finance
Corporation starkly illustrate thediversity of Asian markets, with Singaporeand Hong Kong at the top of the global
rankings, some near the middle, and yetothers in the bottom half.

Ease of Doing Business Index, June 2013
EconomyEase of Doing
Business Rank
Starting a
Business
Dealing with
Construction
Permits
Getting Electricity
Registering
Property
Getting Credit
Protecting
Investors
Paying Taxes
Trading AcrossBorders
Enforcing
Contracts
Resolving
Insolvency

SG(Country Rankings of 189 Countries)
HK
KR
MY
TW
TH

CN

ID

IN

PH

1

2

8

12

16

18

91

128

132

138

1

2

24

8

3

11

21

23

173

22

2

1

26

17

4

5

24

13

182

18

2

1

3

6

3

4

16

21

105

12

7

11

75

6

5

4

8

15

94

19

3

2

12

1

7

7

7

16

23

16

1

2

49

3

6

4

15

8

49

18

2

1

30

4

9

18

20

22

152

24

1

2

3

3

5

4

11

6

127

8

2

1

2

6

14

4

3

19

184

16

1

3

14

6

2

8

10

17

116

20

SOURCE: Doing Business, IFC, World BankASIFMA – November 201311

Corporate Governance (CG) also varies
considerablyacrosstheregion.
Improving CG has also been correlated

to higher market valuations, withdividend yield for upper half CG
markets almost 50% higher comparedto the lower half.2

Asia Market Valuations as Percentage of GDP

%
80
70
60
50
40
30
20
10
0
SG

HK

TH

JP

MY

TW

IN

2007

2010

2012

KR

CN

PH

ID

SOURCE: ACGA Watch market scores 2007-12
Markets across Asia vary greatly in termsof CG – with Singapore and Hong Kongscoring near 70% in CG Watch market
scores,while
China,
Indonesia,
Philippines and Korea scored below 50%.

While governance continues toimprove on a regional scale,development of individual markets
remains uneven with inconsistent
direction over the past five years.3

CG Watch Market Scores: 2007 - 2012
Countries
SG
HK
TH
JP
MY
TW
IN
KR
CN
PH
ID
SOURCE: ACGA Watch market scores 2007-12

2
3

2007

2010

2012

65
67
47
52
49
54
56
49
45
41
37

67
65
55
57
52
55
48
45
49
37
40

69
66
58
55
55
53
51
49
45
41
37

ACGA/CLSA: CG Watch 2012
ACGA/CLSA: CG Watch 2012

ASIFMA – November 201312

An obvious but essential characteristic ofAsia is that it is not a single national
jurisdiction with unified standards orapproaches as in the EU. There is no
single regulator, nor is there a single setof rules under which economic activities
take place.
Differingtax
structures,
varying
constraints on investment ownership andflows,
limitationsoncurrency
convertibility and different legal systems
explain why there are no simple, single
stroke solutions to the challenges facing
the region. There are, however, fairly
common issues and solutions that can beapplied in each individual market, as well
as regional approaches that can beaddressed through greater convergenceand regional harmonization of policies

and practices. Given the wide range ofinfrastructure and sophistication acrosslocal markets,
Asia shouldbecomfortable developing at different
paces across the region, with various
tiers of development across its markets.
Specialization
may
also
benefiteconomies around the region, especiallyin smaller countries which may havedifficulty attracting deep liquidity to theircapital markets. Smaller European
nations have found advantage in
specialization addressing niches such as
back office functions, asset management,
providing jurisdictions for hedge funds,
concentrating on FX or commodities, etc.
This same concept could be applied tothe smaller Asian economies, with eachjurisdiction contributing towards market
completeness on a regional scale.

SOURCE: McKinsey Global Institute Financial Assets Database; McKinsey Global InstituteAnalysisToday’s Asian capital markets are often
underdeveloped
andunderutilized
relative to the region’s economic needs,
and roughly half the level seen in matureeconomies. There is much room for
growth. However, there is also a generally
positive attitude towards reform insupport of economic progress.

ASIFMA – November 2013

Asia’s receptiveness towards change, andthe clear intellectual and resource
capacity to support it, means that market
developments could occur quickly in theright conditions. This paper aims to help
define those conditions and some of theinitiatives that could be taken to facilitate
future growth.

13

As a region, Asia has high investment
needs and high savings rates, but
relatively inefficient transfer mechanisms
to mobilize capital. This results in savings
being funneled to the deeper and better
developed capital markets of the matureeconomies, instead of remaining within
the region to fund local companies andinfrastructure. Therefore, identifying thegaps in the funding chain (between banklending and capital markets, and between
construction funding and ongoing funding

for infrastructure) will be a key challenge
in keeping funds within Asia. A
convergence of policies and regulation
would help alleviate the situation, and avariety of mechanisms can assist in thisprocess. Multi-lateral organizations canplay a key role in providing forums to
advocate for and promote convergenceand harmonization, as demonstrated by
the FSB in driving G-20 global financial
regulatory reform.

Total Portfolio Investments into Asia Region ($M USD)
1,000,000
900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0

2010

2011

SOURCE: Coordinated Portfolio Investment Survey (CPIS)
Following the Asian Financial Crisis, many
Asian economies implemented capital
controls due to concerns of “hot money”
disrupting their markets. While many
emerging economies express preference
in attracting only long term investment
into their markets (versus potentiallydestabilizing high volume inflows andoutflows), effectively mitigating hotmoney’s impact lies in creating deeper
and more liquid markets, not constricting
them with artificial barriers toinvestment.

hinder the growth of long term
investment in Asia. Foreign real money
investors, not willing to be locked into
prescribed long term investment periods,
will simply direct their attention to othermarkets offering greater liquidity andfewer restrictions. The key to attracting
long term investment is the developmentof open, deeper and more liquid capital
markets, as well as the establishment ofstronger corporate governance and theimplementation of the rule of law – which
will in turn draw more liquidity and realmoney participants to the market.

Attempting to block high volume flows
through capital controls only serves to

ASIFMA – November 201314

Asia needs to focus on creating anddeveloping new markets, improving
liquidity and transparency for investors,
and providing better access to capitalfrom a variety of sources. Moreharmonized regulatory regimes would
reduce costs and create a more consistentplaying field for all participants, attracting
investment both from within and outside
the region. For example, initiatives suchas APEC’s Asia Region Funds Passport aim
to facilitate cross border offers of funds
throughout the APEC region by allowing
fund managers of a Passport member
economy the ability to market their funds
in other Passport member economies
under a streamlined regulatory process.

Open and internationally accessible
capital markets are the key to attracting
investors, who will in turn create thedepth and liquidity necessary for Asia todrive growth from domestic consumption
and effectively compete with the matureeconomies of the West.
The following chapters focus on five
major capital market segments: Equities,
Fixed
Income,Foreign
Exchange,
Commodities and Derivatives; theircurrent state; their role in providing
capital for growth; and key constraints
that remain to be addressed formeaningful future development. Eachsection also includes recommendations
for change from a regional perspective.

While starting points vary by market, theend result should be broader, more liquidand more diverse capital markets to
support economic growth across theregion.

ASIFMA – November 201315

ASIAN EQUITY MARKETS
Importance of Equity Markets
Equity markets provide access to capitalfor a broad range of needs, including
government infrastructure funding andinvestment in corporate growth, as wellas driving innovation by channeling low
cost capital to young, fast growing
companies. For investors, equity markets
provide growth and yield opportunities
that span every industry, sector andmarket worldwide.
Effective equity markets are key to thereal economy, providing funding forinnovation and growth, supporting job
creation, creating and distributing wealth,and ultimately enhancing financial
stability, security and improvement instandards of living. Healthy, wellfunctioning equity markets are an
essential component of Asia’s continuing
success.
Enhancing Asian Equity Markets
Market Accessibility
A basic requirement for healthy market
functioning is accessibility to investors;
however, not all regimes provide equal
access to their equity markets.
Ownership Limits
Some Asian markets enforce restrictions
on the amount of foreign ownership
permitted in certain sectors andcompanies, and the rights associated withsuch ownership (e.g. voting rights).
While the desire to retain national control
over certain companies and industries isunderstood, current mechanisms andmodels employed to limit foreign
ownership are due for review as they
inhibit quality inflow of investment, bothinternational and intraregional. Some ofthese mechanisms not only prevent
international investment but also regional
inflows, which inhibit the development of

ASIFMA – November 2013

greater intraregional cooperation. As aresult, savings and investment outflows
tend to flow to the developed markets,
rather than being recycled within theregion.
Ownership Identifiers
Certain Asian markets require advanceregistration and approval for regional andinternational investors (also referred to as
Restricted/ID markets). Registration at theindividual fund level creates delays andadded costs in registering, on-boarding
and trading – especially for international
fund managers that manage large
numbers of funds. Removing theseownership registration requirements, or
permitting regional and global investors
to register at a parent/manager level,
would enhance market efficiency andpromotegreaterregionalandinternational investment.
Gross Settlement
Settlement at the individual fund level
creates additional credit exposure, cost
and time lag, leading to inefficiencies inpost trade processing. Regional equity
markets could remove these obstacles by
eliminatingownership
registration,
permitting parent level registration or anominee structure at broker level forsettlement, and mitigating investors’market and credit risk by supporting DVP(Delivery Versus Payment) settlement.
Investment Quotas
Some markets operate to a fixed total
amount of permitted foreign ownershipby operating a quota system, typicallyreferred to as a Qualified Foreign
Institutional Investors or QFII system.
While QFII quotas, as well as the numberof qualified institutions, have been
increasing rapidly, restrictions remain on
investable products. In addition, foreign
investors hold limited voting power andare limited to minority status. Collectively
these measures limit inflow of regionaland global investment.

16

Global Indices
Many of the largest regional and global
investors choose to model their funds
investment on investible indices (e.g.
MSCI, FTSE), investing in the markets andcompanies according to the weightings
assigned by the index provider. To be
included in a given index, market
structure must conform to the index
provider’s requirements. Asian markets
seeking index inclusion should understandandimplementthesestructuralrequirements, which will in turn lead togreater investment interest from regional
and international institutions.
Market Efficiency
Investors, and intermediaries that operate
on behalf of investors, expect to incur
reasonable business and operating
expenses.
As larger global andincreasingly regional investors are able tocompare costs and efficiencies acrossmarkets worldwide, Asian markets should
remain cost competitive to encourage
inbound international investment.
Capital Efficiency
Asian markets need to offer efficient use
of capital, while setting appropriate
capital measures to safeguard the overallmarket and its participants. Capitalrequirements for market participants
need to be in line with capital required tomitigate the actual risk to the system. For
example, capital requirements for agency
business models should be low, in linewith the low risk to the financial systemthat agency brokerage activity represents.
Agency brokers and Alternative Trading
Systems (ATS) capital requirements
should be significantly lower thanrequirements for firms that, for example,
hold principal trading positions.
Where intermediaries invest in different
classes of product on behalf of theircustomers and themselves, offsets are
required to ensure that the cost of capitalfor a given market is both efficient andASIFMA – November 2013attractive; and that requirements to post
guarantee funds, default funds andinitial/variation margin are calculated ona net basis.
Operational Efficiency
Remote Membership
Large global and regional investors
typically transact with larger international
brokers and custodians, who generally
operate from regional hubs. In order tobe licensed, a number of Asian markets
require brokers to be physically domiciledon shore. This is achieved by either
prohibiting brokers’ systems from being
located offshore, prohibiting certain
support functions from being performed
offshore, or by mandating minimum levelof staffing and particular roles to beretained onshore.
As a result, many international brokers
avoid becoming members of these Asianmarkets, instead routing their trades to
one or more locally incorporated brokers.
This practice raises a number of concerns
for both international investors andbrokers: 1) the risk of information leakage
and thus impact price loss; 2) the credit
risk for international brokers facing asmaller broker, as opposed to the stock
exchange
andclearing
house;
3) operational inefficiencies in additional
back-to-back settlements; and 4) reliance
upon and lack of transparency of thetechnical platform and capabilities of thelocal broker.
Asian securities market regulators shouldcollaborate to allow substitute regulatory
approval; i.e. where the brokers’ approval
and regulation under another regional
regulator will be taken into account as
part of their assessment for remotetrading membership.

17

Electronic Trading
Prohibiting the use of Direct Market
Access (DMA) 4 adds to international
investors’ operational challenges andcosts. Therefore electronic trading should
be encouraged, as well as the regional
consistency of controls and measuresrequired to support it. Sharing of bestpractice across markets and with industry
groups will facilitate enablement,
standardization and control of electronic
trading.
Cost Efficiency
It is important to understand cost froman investor’s perspective. Explicit costs,
often referred to as the “frictional cost”
ofinvesting,includeexchangetransaction fees, clearing fees andtransaction taxes (stamp duties). Implicit
costs, often referred to as “impact costs”
or “slippage”, arise from market liquidity
characteristics, the impact on prices fromtransactions and information leakage.
Explicit Costs
A number of Asian markets exhibit
unusually high transaction costs relative
to other regional and global markets, andin some cases they are among the highest
in the world. In Hong Kong and Singapore,for example, transaction costs are very
high relative to other developed markets.
High transaction costs and transaction
taxes are a barrier to market
development, and should be reduced toenhance Asia’s cost competitiveness
relative to global markets.

Total Transaction Costs Incl. Tax (bps) vs. Turnover Velocity (%)
50

250%

45
40

200%

35
30

150%

25
20

100%

15
10

50%

5
0

0%

Trading Fee

Post Trade

TAX

Market Turnover Velocity (%) - (Annual Turnover/Market Cap)SOURCE: Singapore Stock Exchange, Shenzhen Stock Exchange, Taiwan Stock Exchange, Korea Stock
Exchange, Philippines Stock Exchange, Indonesia Stock Exchange, Bursa Malaysia Stock Exchange,
Shanghai Stock Exchange, Bombay Stock Exchange, Hong Kong Stock Exchange, Stock Exchange ofThailand, National Stock Exchange of India, Australia Stock Exchange, Tokyo Stock Exchange, Osaka
Securities Exchange, World Federation of Exchanges
4

Direct Market Access (DMA) is where brokers allow
clients access to their order routing infrastructure fortrading. Clients may enter orders themselves either
manually or using computer algorithms.

ASIFMA – November 201318

Total Transaction Costs ex-Tax (bps) vs. Turnover Velocity (%)
45

250%

40
200%

35
30

150%

25
20

100%

15
10

50%

5
0

0%
SZSE SGX

Trading Fee

SSE

IDX Bursa TSE
Malay

OSE

ASX HKEX PSE TWSE SETKRX BSE NSE

Post Trade

Market Turnover Velocity (%) - (Annual Turnover/Market Cap)SOURCE: Singapore Stock Exchange, Shenzhen Stock Exchange, Taiwan Stock Exchange, Korea Stock
Exchange, Philippines Stock Exchange, Indonesia Stock Exchange, Bursa Malaysia Stock Exchange,
Shanghai Stock Exchange, Bombay Stock Exchange, Hong Kong Stock Exchange, Stock Exchange ofThailand, National Stock Exchange of India, Australia Stock Exchange, Tokyo Stock Exchange, Osaka
Securities Exchange, World Federation of Exchanges

Asian Exchange Trading Volume (Total & Avg. 2012 $M USD)
3,000,000

12,0002,500,000

10,0002,000,000

8,000

1,500,000

6,000

1,000,000

4,000

500,000

2,000

0

-

SOURCE: World Federation of Exchanges

ASIFMA – November 201319

Implicit Costs
Impact cost is typically the single mostimportant cost to institutional investors,
and is incurred when knowledge of thetransaction itself changes the price of theasset. Impact cost is comparatively high in
Asia, and in some cases exceedingly highrelative to other regional and global
markets. Measures to reduce impact costs
would greatly enhance the attractivenessof Asian markets to regional andinternational institutional investors.
An important measure to reduce impact
costs is to reduce information leakage,the inappropriate and premature
exposure of information regarding
investors’ intentions. This results ininvestors’ returns being compromised bypaying higher prices for purchases or
receiving lower prices for sales.
One proven approach to reduce impact
cost is via block trading. Block trades
allow institutional investors to negotiate alarge transaction of a stock, usually withanother institution as counterparty. Such
trades can be far more efficient and costeffective than entering them into thecentral order book of the stock exchange,
which may or may not be sufficiently
liquid at the time the trade is desired. By
eliminating these situations, block trading
serves to enhance overall market liquidity.
Closely linked to block trading is access to
Alternative Trading Systems (ATS). ATSs
reduce impact cost by a) operating as
non-displayed venues, in that details oforders are only put into the public domain
after a trade has completed thereby
minimizing the potential for prematureleakage of an investor’s intentions, and b)
midpoint matching, where both buyer
and seller benefit from improved prices
by matching at the midpoint between thebid and offer available on the stock
exchange. Numerous studies indicate thatASIFMA – November 2013in addition to reducing impact costs, ATSs
also reduce price volatility.5
Although market regulators need to seetimely and accurate information on all
trades, information in the public domainshould protect the investor’s identity tolimit information leakage and curtail
impact cost. In many developed markets,
investors’ identities remain anonymousand protected on both a pre trade andpost trade basis (other than whererequired for regulatory disclosure).
Competition and Choice
In Asia, the legal or de facto monopoly
position of many stock exchanges cancontribute to the high costs relative toother markets. Where alternative trading
venues are permitted, they are often
restricted to certain classes of investor,
which limits participation and inhibits
growth. Competition, in the form ofcompeting stock exchanges, alternative
trading venues and clearing houses, hasbeen shown to significantly lower costs
and increase both innovation andefficiency in other regions.
With the benefit of hindsight, Asianmarkets could learn from some of themistakes made in the West to ensure thatcompetition, innovation and consumer
choice are introduced, balanced withappropriate regulatory structure.
Market Completeness and ProductBreadthProvision of a range of financial
instruments is essential in attracting
institutional investors that require a fullmenu of products, including derivatives,short selling and other financial tools, to

5

A recent such study, for example, is “Howbeneficial has competition been for theAustralian Equity Marketplace”, Michael
Aitken, Haoming Chen, and Sean Foley,
Australian School for Business, University of
NSW, Australia, May 2013.

20

execute their strategic objectives andappropriately hedge risk.
Deviations from fundamental value, ineither direction, are detrimental to themarket. Therefore, market symmetry (theability to go short as well as long) is vitalto the healthy functioning of the market
and also helps to reduce overall
transaction costs. The ability to go shortat low cost requires a well developed
supporting infrastructure including repo
markets, securities lending, margin
trading and ideally, derivatives. Shortselling attracts critics, especially during
periods of market stress, as companies
seek to discourage downward pressure on
their stock prices. Critics may seek tojustify restrictions on short selling on the
grounds that it is manipulative, or that it
increases volatility. Most independentstudies do not support such claims, and infact more commonly find degradation inmarket quality after a ban on short-sellinghas been instituted.6 From an economic
standpoint,
pricesshouldreflect
underlying fundamentals and short-selling
plays a crucial role in balancing overpriced
assets.
Futures, options and over-the-counter(OTC) derivatives are also useful tools
essential to any fully developed market.
Futures and options serve to increase theliquidity of underlying markets, enable
6

Academic studies consistently find declines
in market quality resulting from short selling
restrictions. See for example, “Shackling Short
Sellers: The 2008 Shorting Ban”, Ekkehard
Boehmer, Charles M. Jones, and Xiaoyan
Zhang, October 2012, cited on the blog for theHarvard Forum on Corporate Governance andFinancial Regulation. “All but the smallest
quartiles of firms subject to the ban suffer asevere degradation in market quality, as
measured by quoted spreads, effective
spreads,
andvolatility”.
(http://blogs.law.harvard.edu/corpgov/2013/05/23/shackling-short-sellers-the-2008shorting-ban/).

ASIFMA – November 2013

portfolio managers to better manage
asset exposure, and allow market-makers
to narrow bid-ask spreads because they
can hedge their net exposures. (Theliquidity enhancing effect of futures haslong been observed, for example, in the
U.S. Treasury market, where cash market
liquidity declines significantly when
futures are not trading.)
Regulatory Transparency
Transparency and consistency in market
practices, standards and rules provide thebenefit of an even playing field for all
market participants; and consistency ofregulation across Asia’s diverse markets
would allow for greater efficiency andlower cost of trading in the region. Asian
securities regulators and self-regulatedorganizations, such as stock exchanges,
should seek to harmonize regional market
structure and regulation by incorporating
best practice in terms of engaging with
the international investor and broker
community
throughinclusive
consultations, expert committees andindustry associations.
Initiatives such as the “ASEAN Exchange”
are creating linkages between ASEAN
markets and are to be commended, withfurther regional collaborative efforts to be
encouraged.
Helping
international
investors through collaboration, sharing
and partnership ultimately facilitates
regional and international investment in
Asia as a whole.
Recommendations
Accessible, fair, efficient and orderly
equity markets are essential to Asia’scontinued growth. As providers of low
cost funding, equity markets facilitate theallocation of international and domestic
capital to the drivers of growth. Globallycompetitive cost structures and regionallyconsistent regulatory regimes will serve toencourage future development acrossAsian equity markets.

21

1. Provide and promote equal access to
Asian Markets.
Increased institutional investment will
support the creation and distributionof wealth, financial, economic andsocial security. Barriers to regional
and international investor accessshould be removed to encourage
greater market participation andliquidity.
2. Remove/reduce the sources of implicit
cost.
Improve the confidence of regional
and international investors andprotect
investor
returnsbyeliminating the causes of information
leakage.

ASIFMA – November 2013

3. Encourage innovation, choice andcompetition.
Maintain pricing tariffs that are
globallycompetitive,
introduce
legislation and regulation to permit
appropriate levels of competition, andreduce or eliminate transaction taxes.
4. Encourage
collaboration
andconsistency in regulation and market
infrastructure region wide.
Share best practices across the region.
A more proactive role in developing
the region’s markets is required – notby merely following Western markets,
but by introducing and supporting
Pan Asian solutions. At the same time,
regional equity markets would benefit
from greater consistency in theregulatory approach, as well as
improved corporate governancestructure.

22

ASIAN FIXED INCOME MARKETS
Importance of Fixed Income Markets
As economies mature, establishedgovernment and corporate bond markets
become increasingly important forcontinued, sustainable economic growth.
Developed bond markets contribute tofinancial stability and offer opportunities
to fund a wide variety of public
infrastructure and private sector
enterprise.
Active local currency (LC) bond markets
are especially important as the main
channel for long term investors such aspension funds and insurance companies.
Other
channelsoffinancialintermediation (such as equity markets
or bank financing) are generally more
short term in nature, and offer different
risk profiles. Fixed income flows are also
generally less capricious. LC bondmarkets promote financial stability byallowing policy makers to manage
macroeconomic measures and monetary
policies more effectively. The current trend
towards bank lending disintermediationsuggests corporates will increasingly accessdebt capital markets, paving the way forlower issuance and funding costs, reduced
stress on the banking system and increased
investment opportunities for wholesale andretail investors. This trend will only continue
if local markets enhance their liquidity anddepth across the product range, broadening
investment appeal to a wider range ofparticipants and ensuring a larger portion of
Asian savings (both personal andinstitutional) remains within the region.
Also supporting this trend is Asia’s favorable
risk environment for investors. Moody’s
Credit Transition Model (CTM) projects thatthe default rate for Asia Pacific (ex-Japan)
high-yield non-financial corporates willremain low, ending 2013 at 1.6%.7

Asia Pacific Cross Border Fund Registrations (non-Domestic
Funds) by Domiciles
Singapore
Hong Kong
Taiwan
Macau
Korea
Japan
Australasia*
Luxembourg

IrelandUK

Other Domiciles

SOURCE: PricewaterhouseCoopers, Global Fund Distribution 2010
7

Moody’s Special Comment “High-Yield
Corporates in Asia Pacific (ex-Japan)
Expected to End 2013 with Low Default
Rate” (September 12, 2013)

ASIFMA – November 201323

A Decade of Development in Asia
Asian bond markets have matured anddeveloped over the last decade, aided bychanging investor perceptions, revised
attitudes toward emerging market (EM)risk and structural changes in the global
economy. The past decade has seen
steady improvement in ratings of Asian

EM countries and lower credit-defaultswap (CDS) spreads (an indicator of lower
perceived risk), in marked contrast to thedeveloped markets.8
At the end of 2011, Asian EM’s share of
the global LC bond market was 8.4%, led
by China, Korea and India.9

Size of Asian Local Currency Bond Markets
as of Dec 2012

Market Size,
USD mn
4500
4000
3500
3000
2500
2000
1500
1000
500
0
CN

KR

MY

TH

SG

HK

ID

PH

VN

SOURCE: J.P. Morgan
LC bond markets in emerging Asia havegrown at an annual average rate of
16.5% since 200110, and at a CAGR of
21% over the past three years inparticular. 11 In 2012, Asian corporate
bonds accounted for 46% of all large
capital debt raised during the year12, andtotal LC bonds outstanding in Asian EMs
reached USD6.5 trillion.13
However, with the notable exception of
Korea, Asian bond markets remain
undersized on a GDP per capita basis
relative to developed economies.14

8

Allianz Sep 2012
ADB Sep 201210
BIS Jan 201311
MS May 2013
12
ibid
13
ADB March 201314
ADB May 2012
9

ASIFMA – November 201324

Corporate versus Sovereign LC Bond Markets in Asia
as of Jun 2013

% to GDP
140
120
100
80
60
40
20
0
KR

MY

SG

TH
Sovereign

HK

CN

PH

VN

ID

Corporate

SOURCE: J.P. Morgan
It remains to be seen whether foreign
investment continues to flow into Asian
LC bonds, fuelled by the search for yield ina low interest rate environment and astructural shift towards greater weightingof Asian bonds in investment portfolios.15
Government Bond Markets
Effective government bond markets not
only supply access to liquidity for
infrastructure development, but canalso provide a benchmark yield curvefor the broader credit market.
Benchmarking can lower the cost ofcapital across the spectrum of financial

15

BIS Nov 2012; Jan 2012

ASIFMA – November 2013

products, freeing governments andinvestors to put additional capital to workand supporting real economy growth.
In fact, ADB research indicates that one of
the most significant variables affecting
development of a country’s corporatebond markets is the presence of a welldeveloped government bond market.16
Currently, China’s bond market is thefastest growing in the world, accounting
for two-thirds of Asia’s total government
bond market and three-fifths of theregion’s overall bond market.17

16
17

ADB May 2012
ADB Sep 2012, Mar 201325

Total Bond Issues (% GDP)

SOURCE: ADB May 2012, page 48

Government Bond Issues (% GDP)

SOURCE: ADB May 2012, page 48

ASIFMA – November 201326

Corporate Bond Markets
Whether corporates choose to accesslocal or foreign debt markets often
hinges on the scale and depth of themarket, and its ability to accommodate
borrowers’ requirements. Accordingly,
measures to improve depth and liquidity
in the local bond markets are likely to beeffective in increasing issuance andmarket size.

regional leadership in core market areas
such as regulation and market practices.
The keys to a sustainable bond market
include:The size of the investor base in local
markets – and in particular foreign
investor presence – depends heavily on
the investment climate, corporate
governance and transparency andwhether tax environments encourage orinhibit foreign investment.18

Meeting the Challenges
Achieving a mature and effective bondmarket in the region is a long term
project requiring commitment from both
policy makers (government and nongovernment) and the full spectrum of
market participants.
Regional bond market development
continues to receive critical government
support, including the Asia Pacific
Economic Cooperation (APEC) initiativeon regional bond market development
and the ASEAN+3 member countries
under the Asian Bond Markets Initiative(ABMI), as well as supranationalorganizations such as the Bank forInternational Settlements (BIS) and AsianDevelopment Bank (ADB).
The successful development of an Asiandebt market requires effective financial
market infrastructure across the region.
Bodies such as the ASEAN +3 Bond
Market Forum (ABMF) are currently
working
tounderstandmarketdifferences, and promoting the need for

18













Credible government, implementing
sound fiscal and monetary policies
within a liberalized financial system
including liberalized interest rates
Efficient regulatory, legal, accounting
and tax environment
Well developed government bondmarket, with a benchmark interest
rate and yield curve
A well developed classic repo market
and bond futures market as efficient
shorting and hedging tools
Transparency in pricing and valuation,
efficient and cost effective trading,clearing
andsettlement
infrastructure
Broad, active domestic and foreign
investor base
A broad, diversified base of bondissuers
Product innovation
Credit risk analyses tools andreferences, including credit ratings

Stable Government and Liberalized
Financial System
In recent years the stability of regional
governments, the strength of theireconomies and banking and financial
systems, and their policy responses tothe volatile global economy have taken
center stage.
Domestic and foreign investors are
reluctant to purchase government
securities, especially medium and longterm instruments, when there are
expectations of high inflation, large
devaluations, or high uncertainty over
the risk of default.

BIS Dec 2012

ASIFMA – November 201327

Asia has largely left the global financial
crisis behind, supported by generally
strong domestic demand. The overall
political situation also remains stable. In
the face of cross border tensions, wehave recently witnessed relatively
smooth power transitions and electionsin the region (e.g. China, Japan, Northand South Korea, Singapore, Malaysia).
A liberalized financial system is importantin ensuring optimum allocation of market
resources to match the real economy. To
improve pricing of risk in primary andsecondary markets, as well as sharing ofrisk among issuers, intermediaries andinvestors, interest rates should be
liberalized
dependingonoverallmacroeconomic and financial conditions.
Also, government bonds should not be
issued with coupons at negative realinterest rates.
In addition, central banks must be
independent – and be seen to be
independent – in setting interest rates.
Effective Market Infrastructure
Savings will only stay within Asia when
they can be invested in deep, liquid bondmarkets. Therefore, the region should
move towards the creation of Pan Asian
trading platforms and clearing andsettlement systems that will be more
efficient, stable and less costly thanpurely domestic systems.
Effective
market infrastructure is also critical forelectronic price discovery, trading andclearing and settlement.
The development of local currency
markets has been impressive of late, but
for them to rival the depth of mature
markets, they will need to attract foreign
and regional investors, which is best
accomplished through a standardized
regional
trading
infrastructure.
Otherwise, markets (in particular in thesmaller countries) will remain expensive

ASIFMA – November 2013

andilliquid,
decreasing
attractiveness to investors.

theirEnhancing pre and post tradetransparency on government andcorporate bond trading has also beenshown to be helpful in expanding market
liquidity. However, balance is essential as
unfettered transparency would besuboptimal for liquidity and market
development. Investors clearly need tounderstand where the price of themarket is at any given point of time.
However, if large trades (or trades in
illiquid instruments) are disclosed, themarket may move against the purchaser,which will likely result in participants not
being willing to make the trade initially.
Given the potentially damaging impact
on market liquidity, the correlation
between transparency and liquidity
needs to be well understood andcalibratedfor
efficientmarketdevelopment.
The ABMF is building on its regionalstraight-through-processing (STP) work
to harmonize cross border messaging
and market practices. Whilst there is stillwork to be done at a national level, theresults have been encouraging so far,including19:











19

Robust
and
sound
bond
infrastructure
Listed and OTC trading
Connection between trade systems
and CSD
Cross border STP and DVP
Matching
Settlement cycle
Harmonization of terminologies anddefinitions
Institutional framework
Reporting facility
Monitoring new issues and standards

ABMF 201228

Ratings Agencies
Ratings agencies are widely used indeveloped and developing markets
across Asia, including China, Korea, India,
Malaysia and Thailand. Credit ratings
play a role in the functioning of the credit
markets by providing investors with acommon language of credit to use in
making informed credit decisions. They
also provide issuers with a benchmark
against which to assess their own
creditworthiness.
The G20 has stated: “All Credit Rating
Agencies whose ratings are used forregulatory purposes should be subject toa regulatory oversight regime that
includes registration. The regulatory
oversight regime should be establishedby end 2009 and should be consistent
with the IOSCO Code of Conduct
Fundamentals. IOSCO should coordinate
full compliance.”20
As such, policymakers that have notalready done so should be encouraged to
put in place regulatory regimes
overseeing credit ratings firms that areconsistent with the IOSCO Code of
Conduct Fundamentals.
An open and level playing field would
encourage competition amongst CRAs
and the development of best practices,while responding to intraregional andinternational
investorneeds
forconsistency in credit risk benchmarks.

essential to the development of deepand liquid bond markets.
Building an Active Investor Base
It is vital to continue to encourage abroader and active domestic and foreign
investor base (including retail investors
where
technologicalinfrastructure
permits) in the overall development ofbond markets.
A diversified investor base for fixedincome securities is imperative to ensurehigh liquidity and stable demand in themarket. A heterogeneous investor basewith different time horizons, risk
preferences, and trading motives ensures
active trading, reduces trading costs,
provides more timely risk and pricing
information and improves liquidity.21
Recommendations
1. Resolve retail market access issues.
Technology infrastructure permitting,an important policy choice iswhether to enable direct retailinvestment in corporate bonds, or tochannel investment through fundmanagement intermediaries which
participate in the wholesale market
as primary dealers and market
makers. If an issuer defaults, theprincipal on the bond is lost.
Therefore, most mature economies
encourage
retailparticipation
through the fund management
industry, or indirectly via pension
funds or insurance companies.

Mandatory rating requirements forissuance,minimum
ratingsforinvestment
eligibility
and
other
references to ratings in regulations
should be removed. While wellintentioned, these regulatory stipulations
actually hinder development of adiversified, broad investor base withvaried risk-reward preferences – which is

2. Implement consistent and effective
regulatory and legal regimes.
In
order
to
promotethedevelopment of an active investor
base, sound regulation of corporatebond markets is important. Investors
should be afforded protection
through adequate disclosure regimes,

20

21

G20 April 2009 London: Leaders’ Statement- G20 Action Plan for Recovery and Reform

ASIFMA – November 2013

IMF/World Bank Sep 2001; ADB May 201229

certainty
surrounding
closeout
netting and insolvency and fair andtimely access to a robust legal systemshould the issuer default. For retailinvestors, regulatory redress against
misconduct or poor behavior on thepart of investment advisers thatserve them is also required.
3. Improve the bankruptcy, insolvency
and resolution regimes.
At present, creditor rights andprotections in the event ofbankruptcy are not very well defined,
and the ability to access secured
assets (especially when they are held
onshore but used to support offshore
financing) remains difficult in several
countries. Also, well connectedmajority or large shareholders often
use their positions to stymie
restructurings, which could result in
more favorable resolutions forbondholders (for example, by
preventing debt/equity swaps which
would
dilutetheirmajority
ownership). Finally, bank resolution
regimes should be updated to clarify
the timing and extent of bondholder
bail-ins in the context of the new
Basel III regulations.
4. Develop market friendly
environments.
Consideration should be given to
promoting retail investor interest
through new distribution channels,
including debt mutual funds andautomated trading formats; avoiding
excessive
consumerprotection
regulationinretailmarkets;
implementing coordinatedwithholding tax policies for retail andinstitutional investors regarding bothincome and capital gains; andrepealing unfair transaction taxes
which stifle demand – such as
taxation of investment in foreign
securities, and equal treatment ofgovernment and corporate bondincome.22
5. Improve
marketinfrastructure,
standards and liquidity.
Greater consistency in standards andpan-regional trading and settlement
infrastructure will improve access forforeign/regional investors, thereby
increasing liquidity and driving trading
innovation. More liquidity will attract
more investors, including domestic
investors. At the same time, improved
transparency in disclosure willencourage
bettercorporate
governance, which enhances theoverall development of the market.
6. Standardize
marketpractices,preferably regionally.
Fixed income investors are especiallysensitive to a harmonized market
environment and would react
positively to improvements in market
practice and taxation. However forbond markets to achieve their realpotential, all jurisdictions will need tofoster the creation of classic repo
markets that facilitate marketmaking – along with appropriate
hedging structures – for bothgovernment and corporate bonds(i.e., bond futures, interest rate
swaps, and credit default swaps).

22

ASIFMA – November 2013

ICMA March 201330

7. Encourage the development of acredit culture.
Robust, deep and liquid debt capital
markets can only develop within
environments where a broadly
diversified base of investors is free tomake decisions based on wellinformed and objective risk reward
considerations – not on explicit or
implicit assurances of support. Suchinvestor accountability needs to bebuilt around the holistic pursuit oftransparency, the free flow of
information and opinions, and highstandards
of
disclosure
andgovernance.

ASIFMA – November 2013

There is still much to do in developing
Asia’s local (and increasingly regional)
currency
government,
credit,securitization,
coveredbondandmunicipal bond markets. However,focusing on the development of thesemarkets will help to keep capital in theregion by providing more attractive
alternatives for domestic investors.

31

ASIAN FOREIGN EXCHANGE MARKETS
Importance of Foreign Exchange Markets
Today, the Foreign Exchange (FX) market
is the largest and most liquid financial
market in the world, acting as a global
payment system and a key tool ininternational trading, currency hedging,and corporate cash flow and balance
sheet management. Due to the truly
global and geographically diverse natureof the market, FX trading is a fundamental
financial activity that underpins global
economic and commercial systems.

Net-Net Basis,1 Daily Averages in April, in Billions of US Dollars
Instrument

1998

2001

2004

2007

2010

2013

Foreign exchange
instruments

1,527

1,239

1,934

3,324

3,971

5,345

1

Adjusted for local and cross border interdealer double- counting (i.e. “net- net” basis).

SOURCE: BIS April 2013Market participants range from central
banks,
commercial
enterprises,
international
investors
andcommercial/investment banks through to
global hedge funds, retail investors andprofessional currency traders. Central
banks play a pivotal role in the FX market
and are charged with controlling the
supply of their country’s currency: fixing
overnight lending rates, purchasing andselling
government
securities
tomoderate the supply of money anddetermining their currency’s interest rateby buying or selling it in the open market.
FX Markets Today
Centralbanks,
commercialandinvestment banks (the largest market
participants), corporations and global
funds all participate in the institutional

ASIFMA – November 2013

market – the largest of the foreignexchange markets. Participants at thislevel are the most active and drive amajority of the total volume available
each day.
Although it is predominately an over-thecounter market, FX has been at theforefront of the electronic trading
revolution over the last decade, which
has brought substantial levels oftransparency and efficiency to allparticipants. Electronic trading platforms
began to emerge in the late 1980s, andtoday platforms, such as EBS and
Reuters, are capturing a majority of
dealer-to-dealer volumes globally alongwith other platforms, including FXAll andCurrenex, which have evolved in the
dealer-to-customer space.

32

To further increase efficiency andmitigate settlement risk (the mostsignificant source of systemic risk inforeign exchange), central banks,
supervisors and commercial banks jointly
introduced / developed a global financial
market infrastructure (FMI) – the CLSBank – which went live in 2002. Now
overseen by the 17 central banks, CLS iscurrently the world’s dominant Payment
versus Payment (PvP) FX trade
settlement system, settling the majority
of interdealer FX trades globally in 17
currencies.

The World’s Largest Financial Market
The global FX market is the world’s
largest financial market in terms of
average daily value traded. According to
the most recent April 2013 BIS study,
overall wholesale FX daily trading volume
totaled USD5.3 trillion in 2013. This is up
from USD4.0 trillion in April 2010 and
USD3.3 trillion in April 2007. FX swaps
were the most actively traded
instruments in April 2013, at USD2.2
trillion per day, followed by spot tradingat USD2.0 trillion.

Currency Distribution of Global Foreign Exchange Market Turnover
Net-Net Basis,1 Percentage Shares of Average Daily Turnover in April2
1998
Currency

2001

2004

2007

2010

2013

Share
%

Rank

Share
%

Rank

Share
%

Rank

Share
%

Rank

Share
%

Rank

Share
%

Rank

CNY³

0.0

30

0.0

35

0.1

29

0.5

20

0.9

17

2.2

9

HKD³

1.0

8

2.2

9

1.8

9

2.7

8

2.4

8

1.4

13

SGD³

1.1

7

1.1

12

0.9

14

1.2

13

1.4

12

1.4

15

KRW³

0.2

18

0.8

15

1.1

11

1.2

14

1.5

11

1.2

17

INR³

0.1

22

0.2

21

0.3

20

0.7

19

1.0

15

1.0

20

TWD³

0.1

21

0.3

20

0.4

18

0.4

22

0.5

23

0.5

23

MYR⁴

0.0

27

0.1

26

0.1

30

0.1

28

0.3

25

0.4

25

THB⁴

0.1

19

0.2

24

0.2

22

0.2

25

0.2

26

0.3

27

IDR⁴

0.1

25

0.0

28

0.1

27

0.1

29

0.2

30

0.2

30

PHP⁴

0.0

29

0.0

29

0.0

31

0.1

31

0.2

28

0.1

31

Total

200.0

200.0

200.0

200.0

200.0

200.0

1

Adjusted for local and cross border interdealer double counting (i.e. “net-net” basis). 2 Because two currencies are involved in eachtransaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%. 3 Turnover for years prior to2013 may be underestimated owing to incomplete reporting of offshore trading in previous surveys. Methodological changes in the2013 survey ensured more complete coverage of activity in emerging market and other currencies. 4 Turnover may beunderestimated owing to incomplete reporting of offshore trading.

SOURCE: BIS Triennial Survey 2013

ASIFMA – November 2013

33

The BIS's 2013 Triennial Survey of FX
markets continued to show strength inglobal FX activity with growth reported bya number of FX Market Committees, withconcentration of trading in London, New
York, Tokyo, Singapore and Hong Kong. In
the aftermath of the crisis, newly
instituted and expanded central bankswap lines appear to have substantiallymitigated the issue of USD shortages –demonstrated by a well performing
market during the financial crisis as wellas during the stresses of the Euro debt
crisis. According to BIS: “The US dollar
remained the dominant vehicle currency;
it was on one side of 87% of all trades in
April 2013…. The turnover of the Japanese
yen increased significantly between the2010 and 2013 surveys. So too did that ofseveral emerging market currencies….,
with the Chinese renminbi entering thelist of the top 10 most traded currencies.”
FX Markets in Asia
Prior to the Asian financial crisis of thelate 1990s, most Asian economies (andASEAN countries in particular) ran quasifixed rate currency regimes against the US
dollar (USD) and/or a basket of currencies
heavily weighted towards the USD. With
Asian currencies generally offering higher
interest rates than the USD, many Asian
corporates borrowed in USD to reduce
costs. At the time, most borrowers
believed these “fixed rate” regimes would
last, and the funds raised were used in arange of projects with little regard for
duration mismatches or the embedded
currency risks.
The Asian financial crisis was triggered by
the devaluation of the Thai baht in July
1997, and contagion quickly spread toother countries throughout the region.
Due to the severe devaluation of Asiancurrencies, many corporates could nolonger afford to repay their USD debts,
leading to a cascading chain of defaults
throughout the region.

ASIFMA – November 2013

As a result of the crisis, some countries in
Asia learned that a buffer of USD liquidity
was needed to offset currencypressure. They responded in kind bybuilding up their foreign exchange
reserves and establishing extensive swap
lines among the regional central banks toovercome short term liquidity stresses.
Exchange rate regimes were also mademore flexible which allowed Asiancurrencies to fluctuate more freely – bothup and down.
Additionally, Asian countries focused on
developing local currency bond markets
anddomestic
corporates
were
encouraged to borrow in these markets to
help offset currency risks. Although Asian
local currency markets have seen successover the last decade, they have not grownto sufficient size and depth to displace the
USD as the primary currency for bondissuance in the region.
When the global financial crisis decimatedmarkets in 2008, Asian countries were
better prepared to withstand thepressures arising from the fallout of theLehman Brothers collapse. Increased
currency flexibility and deeper USD
liquidity in Asian central banks’ reserves –built up as a result of the first crisis in the
1990s – sufficiently contained cripplingcurrency fluctuations. As recovery took
hold, several Asian currencies saw strong
inflows resulting in rallies meeting post
Asian crisis highs (such as the Thai baht).
Regulatory Developments
Historically, FX markets have been
overseen and supervised by central banks,
taking into account national sovereignty
and monetary policy, as well as the FX
markets’ importance to global stability.
Following the global financial crisis,international regulatory efforts to prevent
another crisis have worked their way fromthe credit markets into the FX market.
Liquidity requirements, clearing and34

execution
requirements,
marginrequirements,
capitalreserverequirements and even executive
compensation caps have all had an impact
on the FX market. One of the current
major focal points is the Margin Proposal
issued by BCBS-IOSCO in October 2012.
BCBS-IOSCO Margin Proposal
In October 2012, BCBS-IOSCO issued aconsultation
paper
regardingtheintroduction of margin requirements for
non-centrally-cleared OTC derivatives,
which would also cover FX forwards andswaps. This was finalized in September
2013 with a recommendation not tosubject FX forwards and swaps to a
mandatory Initial Margin regime.
Variation margin on these derivatives
should be exchanged in accordance withstandards developed after considering theBasel Committee supervisory guidance formanaging settlement risk in FX
transactions. The framework also
exempts from initial margin requirements
the fixed, physically settled FXtransactions that are associated with theexchange of principal of cross-currency
swaps which is extremely important for
Asia as many markets still rely heavily on
US dollar bond issuance. However, thevariation margin requirements that aredescribed in the framework apply to allcomponents of cross-currency swaps.
The key issues taken into account during
the consultation and final decisionfocused on the fact that physically settled
FX forwards and swaps differ from other
OTC derivatives in several material
respects, namely:
1) The unique and integral role ofphysically settled FX forwards and swaps– cash products settled through theexchange of two currencies – in the global
payment system, international trade,cross border activity and monetary policy.

ASIFMA – November 2013

2) The risks associated with the FX market
are appropriately mitigated by the current
regime, which encourages prudent
supervision, practice guidelines andcapital implications – and continuously
reviews and enhances supervision.
Settlement risk is the main source ofsystemic risk for the FX market and istherefore the priority focus area for bothglobal regulators and market participants.
Replacement cost risk is appropriately
mitigated through collateral exchange
under credit support annexes (“CSAs”),
with a trend towards increased CSA
usage.
Subjecting physically settled FX forwards
and swaps to a mandatory initial margin
regime would be inconsistent withestablished central bank strategies foraddressing systemic risk in the FX market(which are predicated on removing
settlement risk), and could also create
unsafe structural economic incentives
that can harm the integrity of themarket.
A mandatory initial margin regime would
incentivize central clearing for FX
products in the absence of an approved,
robust and safe clearing solution, and also
jeopardize the use and role of CLS in
reducing systemic risk, as the costs
associated with mandatory replacement
cost risk reduction via initial margin
moves focus away from non-mandatory
settlementrisk
reduction.
Implementation of initial margin would
also discourage legitimate trading in FX
products, which might adversely affectglobal trade and cross border activities,
and potentially disrupt the activities ofcentral banks.
The short term nature of most deliverable
FX forwards and swaps provides
considerable flexibility in managing
counterparty exposures in comparison toother OTC derivative contracts. However
any mandatory margin regime based on35tenor would only result in a bifurcated FX
market: an ineffective and undesirable
outcome as market participants would be
encouraged to hedge their currency risk
using shorter term FX products thandesired.
Given the FX market’s position as theworld’s largest, most standardized andliquid financial market – and as a centralcomponent of the global payment systemthat underpins all economies worldwide –the potential consequences of any
proposed changes to today’s physicallysettled FX market would need to bethoroughly analyzed and assessed.
Emergence of a Non-G10 Currency:
Internationalization of the RMB
Since 1994, China has embarked on
foreign exchange reform by unifying its
dual exchange rates and introducing amarket based, unified floating exchange
regime. Rapid development of thedomestic financial market has paved theway for further capital accountliberalization.
Senior officials have made it clear that
Beijing aims to continue the gradual
opening of the capital account during the12th Five year Plan (2011-15), a policythat goes hand in hand with increasing
the convertibility of the RMB. Former
Premier Wen Jiabao has spoken of
promoting RMB convertibility “in a steadyand orderly manner”, a sentiment echoed
by PBoC Governor Zhou Xiaochuan. In aninterview with Caixing magazine in 2010,
PBoC Vice Governor Yi Gang stated: “Aconvertible yuan remains the ultimate
goal for the nation’s currency exchange
rate reform.”

These reforms have also been beneficialfrom a trade settlement perspective. A
small pilot RMB trade settlement scheme
introduced in July 2009 saw a four foldincrease in total RMB trade settlement,reaching RMB2.1 trillion (USD330 billion)in two short years – or about 9% of
China’s total trade 2011. RMB growthcontinues its rapid development wherevolumes are likely to reach new records in2013. The RMB has become the world’s
9th most actively traded currencies; andRMB trade settlement accounted fornearly 15% of China’s total trade by 4Q
2013. Pledging continued strong support
for the RMB program, China has signed
RMB2.2 trillion worth of bilateral currency
swaps with 20 jurisdictions including Hong
Kong, Singapore, Taiwan, Thailand,
Malaysia, Indonesia and London, totaling
more than USD360 billion.23
According to SWIFT, a currency is typicallyconsidered “international” when it is used
as a unit of account (corporate invoices),a medium of exchange (to settle crossborder trade) and a store of value(deposits, reserve currency). The RMB still
has some distance to go before it can beconsidered truly international.
The increasing use of the RMB as aregional currency for trade settlement, as
well as the future full convertibility of theyuan, will be highly welcomed
developments in the long term.
Increasing standardization of cross border
RMB related documentation will facilitate
crossbordertransactions,while
increasing the fungibility of offshore RMB
liquidity pools and liberalizing policy will
help to establish more transparent andstandardized legal frameworks for RMB
payments and investments.

23

ASIFMA – November 2013

SWIFT, HSBC, BIS Triennial Survey 201336

Foreign Exchange Market Turnover by Currency and Currency Pairs 1
Net-Net Basis, Daily Averages in April, in Per Cent

Selected Currencies2
pars
0

20

40

60

Selected Currency
80

100

0

10

20

30

87.0

USD

84.9

24.1
USD / EUR

27.7

33.4

EUR

14.3

23.0
19.0

JPY

18.3

USD / JPY

39.1

8.8
9.1

USD / GBP

11.8
12.9

GBP
8.6
7.6

AUD

6.8
6.3

USD / AUD
USD / CAD

3.7

USD / CHF

3.4

4.6

5.2

CHF

6.3
4.6

CAD

2.2

NZD

2.0

SEK

1.8
2.2

RUB

1.6

2.1

USD / CNY

1.3

CNY

2.4

USD / MXN

2.5

MXN

4.2

0.8

USD / NZD

1.5

USD / RUB

1.5

USD / HKD

1.3

USD / SGD

1.2

2.1

1.4
HKD

2.8
EUR / JPY

2.4

2.8

SGD

1.4
1.4

EUR / GBP

1.9

TRY

1.3
0.7

EUR / CHF

1.3
1.8

0

3

6

9

12

2.7

0

15

2013

3

6

9

2010

1 Adjusted for local and cross border interdealer double-counting, ie “net-net” basis. 2 As twocurrencies are involved in each transaction, the sum of shares in individual currencies will
total 200%. The share of currencies other than the ones listed is 12.2% for 2013 and 13.7%
for 2010. 3 Turnover for 2010 may be underestimated owing to incomplete reporting ofoffshore trading. Methodological changes in the 2013 survey ensured a more complete
coverage of the indicated currencies.

SOURCE: BIS April 2013

ASIFMA – November 201337

Share of Electronic Trading per Instrument per Counterparty% ofelectronic
tradingInterdealer
1
(40%)

Asset
managers(16%)

Client
banks
(14%)

Hedge
funds
(12%)

Corporate(12%)

Aggregator
(6%)

% of
etrading
perproduct

Spots
2
(38%)

90%

80%

85%

80%

75%

100%

89%

Forwards
(12%)

80%

70%

75%

40%

50%

100%

72%

FX swaps
(45%)

50%

35%

45%

20%

25%

100%

41%

Options
(5%)

15%

10%

15%

10%

5%

100%

14%

% of
e-trading
per counter
party

70%

51%

60%

38%

38%

100%

58%

1
2

Counter-party market share in terms of trading volume
Instrument market share in terms of trading volume

SOURCE: BoE, Celent, Greenwich Associates, Oliver Wyman analysis

Electronic Trading Platforms
As the FX market continues to grow anddevelop, the use of electronic trading
platforms will also increase due toinvestment and commercial bankadoption, the rise of High Frequency
trading and Algorithmic trading, ease ofaccess, increased transparency andcheaper execution costs.
However, the uptake of electronic
trading in Asia is still relatively lower thanin the US and Europe, where electronic
trading accounts for more than half oftotal trading volume. There is still muchroom for growth. Most importantly, as
currencies begin floating more freely andcapital accounts open up, greater use of
e-trading will facilitate integration withASIFMA – November 2013global best practices and leading trading
platforms, such as EBS and Reuters.
Recommendations
FX markets are unique due to theirimportance to economies, national needs
and global development. As a truly global
market, trading 24 hours a day, 6 days aweek, the movement of capital throughthe FX markets will be greatly enhanced
through truly integrated, consistently
regulated infrastructure.
1. Strive to adopt international
standards and practices.
Asian FX markets should focus onconvergence and harmonization withinternational
standards
andpractices, and should consider the
possibility of integration with existing
global trading platforms, and38

settlement infrastructure such as
CLS.
2. Address current roadblocks to market
development.
Excessive
regulation,
theintroduction of centralized clearing
or unnecessary margin requirements,
lagging development in e-trading andthe lack of currency convertibility
would hinder the growth of FX
markets across Asia.

ASIFMA – November 2013

3. Support the internationalization of
the RMB.
Increase standardization of crossborder RMB related documentationtofacilitate
crossbordertransactions; increase fungibility ofoff shore RMB liquidity pools; andintroduce
additional
policyliberalization to establish moretransparent and standardized legal
frameworks for RMB payments andinvestments.

39

ASIAN COMMODITIES MARKETS
Importance of Commodities Markets
Commodities markets play an importantrole in the real economy by reducing
price volatility and risk, enabling pricediscovery and balancing production
versus consumption.
Commodities markets act as key pricediscovery mechanisms that underpin
virtually all world trade; and the relianceon them by producers, traders andconsumers to efficiently translate supply
and demand into price is a cornerstoneof their business models.
Banks provide liquidity in commodities
markets through market making
activities, bringing together buyers andsellers that have different needs, risks,time horizons and incentives. Market
making activity provides liquidity to
exchanges and the OTC markets, plus theavailability of hedging, financing andother intermediation services. Increased
liquidity is associated with lower pricevolatility, narrower bid-ask spreads andreduced basis risk for hedging
strategies.24
Markets have evolved over substantial
periods of time and historically havebeen located in traditional western
centers of trade, but more recently withthe emergence of the dominantconsuming markets we are seeing these
traded markets move eastwards. This
move reflects trading patterns, growth of
emerging markets and time zone
preferences for key decision makers.

In many commodities, the construct ofthe markets incorporates a physicalelement to this discovery mechanism,
ensuring the convergence of financial
market prices with the physical markets.
Other financial markets often look to thecommodity markets for indicators of
economic direction, and so through thismechanism their impact is amplified
across the world’s financial markets.
Moving towards greater use of capital
markets also frees up bank balance
sheets, allowing for more real world
assets to be put towards SME lending,ultimately driving domestic growthwithin local economies.
Building Volume and Liquidity in Asia
Asia’s existing commodities markets varyin terms of sophistication, size andintegration with global markets.
Regional markets are relatively large andsophisticated in base metals and certain
agricultural commodities, where Asia is amajor factor in trade flows. However inother areas, such as energy, Asia lacks
sophisticated trading markets andconsiderable effort will be required todevelop them to their full potential.
Even in Asia’s “better developed”
commodity markets, price discovery lags
behind Western exchanges and volumes
remain lower than justified by trade
actualities, resulting in far higher
volatilities and costs to users. This only
encourages the trend of domestic capitalflowing offshore to purchase relevant

24

IHS Global, “The Role of Banks in PhysicalCommodities”, 2013

ASIFMA – November 201340

Hedging instruments, only to returnonshore to purchase the actual
underlying commodity. It clearly makes
more sense for that capital to stay within
the region.

Asian Commodity Markets Today
Across Asian commodities futures
exchanges today, there are 23 organizedcommodity futures exchanges or trading
platforms in 9 jurisdictions. The oldest
and most established are in Japan andSingapore, while some of the newest andfastest growing are in China. 25

Asian market segments vary in terms ofsophistication and market knowledge.
For example, commodity traders andcorporates in the energy segment (large
players) tend to be highly sophisticated –in contrast to base metal consumers(primarily China and Korea), who have adomestic focus and are very regionallycentered. Closing these gaps will lead tobetter markets.

Asia accounts for more than half theworld’s consumption flows in mostcommodities traded today, but theregion’s futures markets generally do notreflect this reality.

World Copper Consumption by Region
Most Growth from Asia (Metric Tons per Month)
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,0000
Jan-96

Jan-98Jan-00

Jan-02EuropeJan-04Asia

Jan-06
Jan-08America

Jan-10Jan-12

SOURCE: Standard Chartered/Bloomberg

25Standard Chartered, Barclays and Deutsche BankASIFMA – November 201341

Energy demand – The rise of non-OECD
crude oil demand (million barrels per day)will soon overtake OECD demand, largely
reflecting Asia’s growing oil consumption.

World Crude Oil Demand (mn Barrels per Day)
55.0
50.0
45.0
40.0
35.0
30.0
25.0
Q1-00

Q3-02

Q1-05

Q3-07
OECD

Q1-10

Q3-12

Q1-15fNon-OECD

SOURCE: Standard Chartered/Bloomberg
Despite the above, volumes at the largest
Asian exchanges lag behind their westerncounterparts
acrossvirtually
allcommodities and exchanges. Volumes at
the Shanghai Futures Exchange (SHFE) areprobably closest to those of comparable

Western exchanges, given China’s
dominance as a base metals consumer.
On the other hand, the closed nature of
China’s commodity markets provides acaptive market for their trading venues.

Volume of Copper Exchange Traded (Metric Tons)
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,0000
Nov-05SHFE

Nov-06
LME + COMEX

Nov-07

Nov-08Nov-0990 per. Mov. Avg. (SHFE )Nov-10Nov-11

Nov-1290 per. Mov. Avg. (LME + COMEX)SOURCE: Standard Chartered/Bloomberg

ASIFMA – November 201342

Volume of Exchange Traded Aluminum (Metric Tons)
18,000,000
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,0000
Nov-05SHFE

Nov-06

Nov-07LME

Nov-08Nov-0990 per. Mov. Avg. (SHFE )Nov-10Nov-11

Nov-1290 per. Mov. Avg. (LME)

SOURCE: Standard Chartered/Bloomberg

Volume of Zinc Exchange Traded (Metric Tons)
20,000,000
18,000,000
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,0000
Nov-05SHFE

Nov-06LME

Nov-07

Nov-08Nov-0990 per. Mov. Avg. (SHFE )Nov-10Nov-11

Nov-1290 per. Mov. Avg. (LME)

SOURCE: Standard Chartered/Bloomberg

ASIFMA – November 201343

In contrast to base metals, volumes for
agricultural commodities in the region(where China is also a large consumer)are only a small fraction of those of
primary Western markets.

Volume of Soybean Exchange Traded (Metric Tons)
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,0000
Nov-05
DalianNov-06
CBOT

Nov-07

Nov-08Nov-0990 per. Mov. Avg. (Dalian)Nov-10Nov-11

Nov-1290 per. Mov. Avg. (CBOT)

SOURCE: Standard Chartered/Bloomberg
Today, Asian markets tend to be driven
by Western markets. The chart below
shows how SHFE returns for a given time

period are highly correlated with the LME
returns for the previous time period, but
not vice versa.

Indirect Correlation between SHFE Returns and LME Returns
100%
80%
60%
40%
20%
0%
-20%
-40%

Corr( LMEt, SHFEt)

Corr( LMEt, SHFEt-1)

Corr( LMEt-1, SHFEt)

SOURCE: Standard Chartered/Bloomberg

ASIFMA – November 2013

44

Key Ingredients for Asian Market
Development
A few key factors have a dominating
impact on the development of successfulcommodity futures markets:
Market Participation Factors
Trading volume is important to amarket’s success because in futures
markets, volume begets liquidity, which
in turn attracts more participation.
However, volume is also typicallysensitive to the currency denominationof contracts. The contract currency
needs to be associated with a majorcommodity country with a free and liquidcurrency used widely in global trade.
Conversely, limiting contracts to local
currency hinders market development
and volume, largely due to the liquidity
spillover from the more liquid currency
to the futures product.
Infrastructure
Development
andStandardization
All tiers of government and industry
should work together to ensure
consistent infrastructure relating to the
production, export and import ofcommodities, including:
Product Standardization – Encouraging
market participation by ensuring eachfutures contract has the same quality
specifications as the products in the cash
market that are traded in that
commodity. This is to ensure that therelevance of the futures contract remains
high, that genuine users have cause to
generate sufficient liquidity in thecontract, and that there is priceconvergence between the financial andphysical markets.
Transportation – Investment in air, port,
road and rail networks. There needs to
be interaction and collaboration between
futures and physical markets, which rely

ASIFMA – November 2013

on the smooth functioning of storage anddelivery systems.
Warehousing – Common infrastructure
for deliverable locations, including thestandardization and classification ofstorage facilities.
Participant Diversity – Attracting a large
and diversified population of participants,
both consumers and producers, helps toensure a balanced trading environment,
improve price discovery and avoid
circumstances that can lead tomanipulation. The dominance of local
players and a lack of international
participation that typifies Asia’s physicalcommodity markets can lead to reduced
liquidity, higher volatility and lower
volumes, which further discourage
trading in the region’s cash and futures
markets.
A key challenge in Asia is the importanceof individual/small investors and market
makers. Commodity futures markets
need both individual/small investors andmarket makers to provide liquidity andenable full price discovery. Althoughlarge market makers have built anincreasingpresencein
Asiancommodities markets over the last few
years, government attitudes andregulations restricting their participation
remains a serious obstacle to building
liquidity.
Legal Environment
A market based in a jurisdiction with arobust and well understood legal
structure that provides a strong dispute
resolution process will be inherently
more attractive than a jurisdiction withless clear or certain legal arrangements,
especially in contractual certainty andconsistent application of the legal
process. Some jurisdictions in Asia,
notably Hong Kong and Singapore, havesuccessfully built their positions as45

commodity trading centers by offering alegal and regulatory structure thatprovides these assurances, attracting
trading from other areas with less robust
or transparent legal and regulatory
regimes.
TaxationTransaction taxes restrict market
development, undermine effective pricediscovery
andreducehedging
effectiveness. In Asia today, high andcomplex tax environments in Korea andChina have had a significant and negative
impact on market development while
Hong Kong and Singapore have clearly
benefitted from a very different
approach. Asia may be facing a unique
opportunity to capture additional futurebusiness if its various jurisdictions canprovide a tax neutral environment formarket participants.
Trading Environments
The trading environment includes theactual exchange or electronic platform,
the ways in which they interface andintegrate with the payment system andmany other variables that together form
the market ecosystem. Commodity
markets require strong and well
regulated clearing and settlement
structures as part of their ecosystem, as
well as clear and supportive regulation inareas requiring bilateral transactions
where standardized futures contracts areunable to respond to trading needs.
Open access to markets is another key
component for long term development.
The trading ecosystem is a package ofmutually supportive components thatcan represent an important factor inmarket growth and success.
Benchmarks
Asia based benchmarks make sense
where there is a strong link between
production and demand centers in theregion. This suggests that benchmarks
for base metals could be developed given

ASIFMA – November 2013

the uniform standards that already exist
but where the HKEx-owned LME
dominates trade. Although more
complicated, new benchmarks for ironore or energy might be more realistic. In
these cases, consumer-usage-based
standards would need to be established,especially in China, as qualities for ore or
crude oil vary substantially depending on
production source. Close integration withproduction centers would be essential
wherewarehousing
andrisk
management issues represent significant
hurdles.
Market Support
While most of the observations up to thispoint are “hard” concepts – relatively
clear and definable, the ideas associatedwith market support are somewhat moreconceptual. For example, governments
wishing to develop markets as a national
policy priority might consider programs
to attract attention and volume to newmarkets.
Government-to-government
agreements that link producers andconsumers have a potentially powerful
impact on market development, andpolicy changes that permit theparticipation of day traders would
facilitate volume growth and pricediscovery.
Apart from government-led plans, theindustry itself should work to improve
the overall level of market knowledge
andsophistication
amongstallparticipants. Highly uneven levels ofmarket knowledge have an undesirable
impact on the price discovery processthat can also impact volatility.
Key Recommendations by Product
EnergyAs a massive and growing consumer ofenergy, Asia has the potential to develop
significantly larger futures markets inenergy commodities. While the region’senergy production is modest relative to46

its consumption, there are substantial
new sources of supply currently being
developed in Indonesia and various partsof the South China Sea. This may
stimulate a more natural balance ofinterest in the region if producers begin
to use local markets for hedging. As in all
markets, restrictions on day traders
reduces market attractiveness, which isparticularly a problem in India.
1. Develop exchange tradedbenchmarks to discourage market
manipulation – benchmarks should
be based on the usage andproduction of a region’s major
consumers and producers
2. Further develop infrastructure – build,organize and coordinate liquefaction,
storage and transport facilities
3. Enhance market support – improve
market sophistication to encourage
foreign participation, and improvethe collection of and distribution of
trade data across Asia
Agricultural Commodities
There
isstrongpotentialfordevelopment of agricultural commodity
futures markets, as significant production
and consumption exists in the region.
However, improvement is still needed in
tax treatment, regulations regarding
market participants (e.g. positions limits),
and the currency denomination of
futures contracts to allow for meaningfulmarket development.
1. Improve infrastructure – enhanceorganization
andinteraction
between futures and physicalmarkets which rely on the smoothfunctioning of storage and delivery
systems

ASIFMA – November 2013

2. Further market support – moresophisticated markets will attract
foreign participation and improve thecollection of and distribution of trade
data across Asia
3. Consistent taxation – implement a
consistentortax
neutralenvironment to mitigate the pricedislocation accentuated by taxes onimports and exports and encourage
market participation
MetalsThe Shanghai Futures Exchange is asignificant presence in the global basemetals market; however, its dominancerelies purely on Chinese domestic
participation. Volumes in Shanghai
remain below potential, while prices lag
the LME exchange and its global network.
Increased participation is required fromproducers and consumers outside of
China, but this is an uncertain prospect
for the time being.
1. Implement a consistent regulatory
framework – Allow direct foreign
participation in futures (without theneed for a domestic entity), as wellas in physical metal (including
ownership of LME warehouses in
China).
2. Improve infrastructure – enhanceinterconnectivity between cash andfutures at the physical delivery point,
quality and grade of the products.
3. Consistent taxation – implement
consistentortax
neutralenvironment to improve pricedislocation accentuated by taxes onimports and exports and encourage
market participation.

47

ASIAN DERIVATIVES MARKETS
Importance of Derivatives Markets
Derivatives markets create a number of
economic benefits. Not only do they
provide investors with an indication of
future prices, but they also allow for
effective hedging of risk – which in turn
attracts more market participants, higher
transaction volumes and greater liquidity.
Over-the-counter(OTC)
derivatives
products, specifically, enable industrial
companies and governments to effectively
finance and manage risk in theiroperations and activities, and help
pension funds meet their obligations toretirees. They also support economic
growth by enabling banks to lend tocorporate and individual customers. These
products play a vital role in virtually every
industry – from financial services tointernational trade to home mortgages.

compared to those of the US and Europe.
OTC derivatives are the largest
component of the derivatives sector in
Asia (ex Japan) capital markets: however
they still account for only about 7% of the
global total. At the end of 2012, there
was USD42.6 trillion of OTC derivatives innotional outstanding in the Asianfinancial markets (Australia, China, Hong
Kong, India, Indonesia, Malaysia, New
Zealand, Singapore, South Korea, andTaiwan) 26 , compared to approximately
USD633 trillion globally.27
Although exchange traded derivatives arepresent in various forms (options,warrants, futures) in several markets,
those markets are also fairly small. In
2012, annual turnover of exchange
traded derivatives across Asia 28
amounted to approximately USD30
trillion29 compared to USD186 trillion in
turnover for OTC derivatives.30

The Asian Derivatives Market Today
Derivatives markets in Asia are small andrelatively underdeveloped, especially

Value of OTC Derivatives Notional Outstanding
2012 - US $tn
43
48

Asia ex-Japan
Japan
319

US
Europe/UK/Other223

SOURCE: BIS, ISDA, Bank of Japan, Office of the Comptroller of the Currency

26

The Asian OTC Derivatives Markets published by ISDA in April 2013
See the Asian OTC Derivatives Markets published by ISDA in April 2013, BIS, Deutsche Bank28
excluding Japan
29
Bank for International Settlements, World Federation of Exchanges
30
The Asian OTC Derivatives Markets published by ISDA in April 201327

ASIFMA – November 2013

48

Turnover of Asian (ex-Japan) OTC Derivatives Markets
2012 - US $tn
4 6 2
33
FX
Interest rate
Equity linked
Commodities
Credit default swaps
141

SOURCE: Celent, The Asian OTC Derivatives Markets published by ISDA in April 2013
Like all Asian financial markets, the AsianOTC derivatives market is highly
fragmented, with different groups ofcountries
havingtheirowncharacteristics and levels of maturity.
Dealers account for 57% of OTC
derivatives turnover in Asia31. Outside of
dealers, financial institutions (includingbanks and securities firms) dominate OTC
derivatives trading, and the contributionof corporates (i.e. the real sector) is
low. 32 This may be attributed toregulatory barriers related to OTC
derivatives trading, as well as a lack of
trading infrastructure in the large
economies (e.g. China, India, andIndonesia), particularly in the commodity
segment. Amongst the corporate sector,
knowledge about derivatives andexchange traded instruments is not welldeveloped outside the local markets.

76% of turnover in Asia34, with interest
rate derivatives a distant second (18% of
turnover), followed by commodities (3%),
equities (2%) and credit (1%).35
In the aftermath of the global financial
crisis, the G-20 focused considerable
attention on the role of the OTC
derivatives market in the spread ofsystemic instability. The FSB was tasked
with developing a new framework thatwould drive users towards exchange
traded derivatives and the use of more
standardised OTC instruments that could
be centrally cleared. Non-centrallycleared OTC derivatives transactions
would be subject to higher margin andcapitalrequirements
under
the
BCBS/IOSCO proposal and Basel III.

The primary driver of growth in Asianmarket turnover is OTC foreign exchange(FX) derivatives. 33 In 2012, FX OTC
derivatives accounted for a significant

Asiancountries
have
respondeddifferently to the proposed changes,
ranging from Hong Kong, Singapore,
Japan and Australia (which have decided
to implement most of the G-20
proposals) to China, India and Korea

31

34

32

35

excluding Japan
The Asian OTC Derivatives Markets
published by ISDA in April 201333
excluding JapanASIFMA – November 2013

excluding Japan
The Asian OTC Derivatives Markets
published by ISDA in April 2013Id.

49

(which are mostly focusing on central
clearing) and Indonesia, Malaysia andThailand (which have not madeproposals with respect to central
clearing, which is sensible given the sizeof their OTC derivatives markets). Several
countries have finalized, or are in theprocess of finalizing, new rules to govern
OTC derivatives transactions, including
requiring the establishment of newcentral clearing arrangements and thecreation of trade repositories. Thesechanges will have implications fordifferent market participants. Someparticipants may choose to scale down oreven withdraw from some markets if
new regulatory hurdles, capital charges,
reporting requirements and rising costs
make their businesses untenable.

global dealers are also the major liquidity
providers for the Asian markets. The
extraterritorial aspects of the new US
and EU OTC derivatives rules havecreated a number of issues for the Asianmarkets: notably third country CCP
recognition criteria being imposed by the
US (CEA 5b) and EMIR (article 25), as well
as regulatory conflicts between the US
and EU trade reporting requirements andthe local privacy laws in various Asian
jurisdictions.

Issues and Challenges

Fragmentation of Asian CCPs
To a large extent, proposed reforms to
OTC derivatives market are more
relevant to markets in the EU and US
than in Asia – where there is significantly
less OTC derivatives activity. However,the proliferation of Asian CCPs is aconcern given the relatively small size ofthe clearable market.
Mandatory
clearing in different locations throughout
Asia threatens to break up netting sets,fragment collateral and lead to higher
clearing charges in CCPs that are unable
to achieve scale. Moreover, too many
CCPs in the region may create
operational issues for participantsdealing in multiple countries, as each CCP
will have its own (and most likely
different) requirements.

Significant Legal Uncertainties and Weak
Contractual Enforceability
Not all Asian countries have the samelevel of maturity when it comes to thedevelopment of derivatives for financial
markets. Australia, Singapore, and Hong
Kong (the three jurisdictions with welldeveloped financial markets) are theleaders in Asia’s OTC derivatives
development; whereas China, India,
Indonesia, Malaysia, the Philippines,
Taiwan and Thailand lag behind. The
primary reason for the lack ofdevelopment of this second group is thatit has had a conservative regulatoryenvironment, which is often coupledwith significant legal uncertainties andweak contractual enforceability. Market
growth has also been stunted by issues
surrounding collateral.
Extraterritoriality of US and EU
Regulations
OTC derivatives market volumes areprimarily in the US and Europe (London);and as a result, those two jurisdictions
have a disproportionate impact on the
Asian markets. US and Europe-based

ASIFMA – November 2013

Some Asian regulators have been
understandably vocal in voicing concerns
to their US and EU counterparts, whereas
China and India have only recently begun
to engage in dialogue with EU and US
regulators.

Negative
ImpactofMarginRequirements on Non-Centrally-Cleared
OTC Derivatives
Regulatory proposals regarding margin
requirements for non-centrally-cleared
OTC derivatives pose significant threats
to the continued functioning of thismarket segment. While the carve-out forphysically settled FX forwards and swaps
was welcome news for Asia, there50

remains a number of other currently
unclearable products that will not benefit
from the same carve-outs and this will
impact Asian markets, namely: interest
rate options, commonly used by banks
and mortgage guarantors to hedge
prepayment risk; inflation swaps used bypension funds; plain vanilla local
currency interest rate swaps (e.g. THB,
MYR, CNY/CNH fixed versus floating
swaps); swaptions and Delta One accessproducts.
Underdeveloped Credit Derivatives
Markets
Creditderivatives
providemany
investment and hedging opportunities
that are not available in the cash market.
Given the difficulty in shorting bonds due
to underdeveloped repo markets in some
Asian countries, hedging through credit
derivatives is especially attractive for
emerging markets investors.36 The Asian(ex-Japan) credit derivatives market istiny, with Singapore enjoying a dominant
56% market share, followed by Hong
Kong (24%) and Australia (20%).37 Both
China and India have made efforts topromote credit derivatives trading in thepast few years, with limited success.
Restrictions on permissible market
makers(forexample,insurancecompanies are not allowed to trade CDS
in either country) and a lack of sellers
have been cited as key reasons why local
markets have not developed as
regulators initially hoped. In China, lackof historical data on bond recovery ratio
in bankruptcies – as well as a lack of
capital relief for banks buying CDS –contributed to the failure of the onshore
credit derivatives market.

Recommendations
1. Address legal uncertainties andstrengthen contractual enforceability(e.g. closeout netting, collateralrights).
Recognizing that legal enforceabilityof closeout netting is the cornerstoneof counterparty risk management, it
would be greatly beneficial for thederivatives industry to see netting
enforceability uncertainty issues in
China, India, Indonesia, Malaysia andVietnamresolved satisfactorily.
Netting enforceability is also a key
criterion in judging whether or notcentral counterparties (CCPs) are
CPSS-IOSCO compliant.
Allowing
counterparts to deal with each otheron a net – rather than gross – basis
would also allow for expanded
trading in deeper and more liquidmarkets. Enforcement of collateralrights remains problematic in many
jurisdictions in Asia, which threatens
to make any BCBS/IOSCO mandatory
margining
requirements
unenforceableincertainjurisdictions.
Counterparties should be able to
net their exposure and deal witheach other on a net versus gross
basis



Develop a robust legal /regulatory
frameworkfor
enforcing collateral rights

36

A Survey on Hedging Markets in Asia by
BIS, at page 278-279
37
The Asian OTC Derivatives Markets
published by ISDA in April 2013

ASIFMA – November 201351

2. Manage extraterritoriality of US and
EU regulations (including third
country CCP recognition criteria andconflicts between US/EU imposed
trade reporting requirements andlocal privacy laws).
There is a strong case for a global
standard setting agreement, and for
greater international co-ordination
amongst various regulators in orderto maintain market efficiency andeliminate
regulatory
conflicts
brought by extraterritorial rules. If
the regulatory conflicts are notresolved, it is likely some participants
will have no choice but to cease
operations in certain jurisdictions –which will impinge upon thedevelopment of the much needed
derivatives markets in Asia.


Encourage a global standard
setting agreement
Facilitate greater international
coordination among regulators

3. Prevent fragmentation of Asian
CCPs
Market growth would be best served
if clear and natural centers ofliquidity are allowed to develop.
Though geopolitically unrealistic at
the moment, a Pan Asian clearing
solution would bring regional
harmonization and lower the overall
cost of trading in the region,
facilitating growth in transaction
volumes while attracting investors
and liquidity.
A global standards body should beestablished to independently judge
CPSS-IOSCO compliance, which could
serve as a basis for levying all related
capital charges. This would address
mutual recognition issues amongst
Asian CCPs and regulators, making

ASIFMA – November 2013

the question of whether or not tojoin the CCP a purely economic
decision.


Avoid imposition of mandatory
local clearing regulations

Develop a Pan Asian clearing
solution

Establish a global standards bodyto independently judge CPSSIOSCO compliance

4. Refrain from imposing initial margin
in the region.
The best outcome would be a
combination of robust capital
structure and CVA charges under
Basel III, mandatory variation
marginingandclearingofstandardized, liquid OTC derivatives.
Imposing initial margin for noncentrally-cleared
derivatives
transactions is both pro-cyclical andfails any rational cost-benefit
analysis. In addition, mandatory
initial margin could potentially drive
pricing high enough to dissuade end
users from making prudent risk
management decisions.
If Asianregulators choose to implement
initial margin, a carve-out (i.e.
beyond the one contemplated in the
BCBS/IOSCO final report issued in
September 2013) would minimize
the negative impact on Asian end
users’ hedging needs.


Refrain from imposing initial
margin for non-centrally-cleared
OTC derivatives trades

If initial margin is required, there
should be a wider carve-out (i.e.
beyond the one contemplated in
the BCBS/IOSCO final policy
framework)52

5. Accelerate development of credit
derivatives markets, especially in
China and India.
If regulators want to see a morerobust credit derivatives market, theyshould address the issues of (i)permissible market-makers, (ii) lackof sellers, (iii) unavailability ofhistorical data on bond recovery
ratios in bankruptcies and (iv) thelack of capital relief for banks
hedging with credit derivatives.
More developed credit derivatives
markets can help promote theefficiency of the financial system andassist in the development of local
bond markets throughout Asia.
Introduce a less restrictive
regulatory
frameworkforapproving market-makers

Develop a more active universeof sellers

China specific: make capital relief
available for banks hedging withcredit derivatives

ASIFMA wishes to acknowledge ISDA
for its contribution to this section onderivatives.

ASIFMA – November 201353