Peter Pang: Pilot platform for cross-border investment and settlement of
debt securities
Remarks by Mr Peter Pang, Deputy Chief Executive of the Hong Kong Monetary, at the
Press Conference on Pilot Platform for Cross-border Investment and Settlement of Debt
Securities - Hong Kong, Malaysia and Euroclear Bank, Hong Kong, 13 March 2012.
* * *
Deputy Governor Muhammad Ibrahim, Mr Anso Thiré, ladies and gentlemen,
Good afternoon. Let me welcome you all to this press conference to announce the launch of
the strategic alliance of the cross-border bond investment and settlement platforms in Hong
Kong, Malaysia and Euroclear Bank.
The Pilot Platform to be launched on 30 March under this strategic alliance goes well beyond
commercial cooperation amongst the partners. It will advance the important policy objectives
of fostering bond market development and promoting financial stability at both global and
regional levels.
There are strong demand and supply side factors that focus global investors' attention on
bond markets in Asia. On the demand side, the European sovereign debt problems and
successive downgrades of sovereign credit ratings of the advanced economies underscore
the need for geographical diversification by global investors. Asia is the obvious choice as it
stands out as the bright spot and engine for global growth. According to IMF' s forecast,
emerging Asia, with China as the core, will contribute about 57% of the world' s GDP growth
by 2016. Augmenting this favourable demand factor is the improved credit ratings of Asian
sovereign issuers. There are now 14 Asian economies at investment grades, of which, nine
are at or above the single A rating.
At the same time, the supply side factors are also highly favourable. The huge financing
needs of Asia will support a continuous expansion in bond issuance. According to the Asian
Development Bank, Asia' s infrastructure financing needs alone amounted to USD 8 trillion
from 2010 to 2020. Equally important is the emergence of new and attractive bond asset
classes. The two products that have caught most attention of global investors are the sukuks
in Malaysia and the RMB dim sum bonds in Hong Kong. This is rightly so as these products
connect the global market with the vast and increasingly prominent financial systems in the
Islamic world and China.
We have seen very encouraging development of the sukuk market in Malaysia, the symbol of
Islamic financing. The amount of outstanding sukuks in Malaysia increased substantially from
MYR 146 billion (USD 41.3 billion equivalent) at the end of 2006 to MYR 361 billion
(USD 113.9 billion equivalent) at the end of 2011. Meanwhile, the growth of the RMB debt
securities market has been phenomenal. In a short space of 5 years, the annual issuance
amount lodged with the Central Moneymarkets Unit (CMU) in Hong Kong increased by
16 times from a modest amount of RMB 10 billion (USD 1.4 billion equivalent) in 2007 to
RMB 172 billion (USD 27.3 billion equivalent) in 2011. The growth momentum is expected to
pick up further after China' s announcement to formalise the use of RMB in foreign direct
investment (FDI) in 2011. The upside is very significant as China' s total FDI amounted to
USD 116 billion in 2011, or RMB 750 billion equivalent.
Besides facilitating the rapid development of the sukuk and dim sum bond markets, more
importantly, the Pilot Platform will contribute significantly to financial stability in the Asian
region. With the advanced economies undergoing structural adjustment and fiscal
consolidation, the two-speed recovery will continue to entice portfolio flows into Asia. The key
challenges for Asia are to channel such flows to productive use, reduce concentration in
short-term positions of the more volatile asset classes, and to avoid such flows spiking up a
property price bubble. Channelling the inflows into the bond market will serve these useful
purposes as the investors are typically institutional investors who take long-term positions in
strategic economic sectors.
The global financial crisis has reminded us of the destructive powers of a liquidity crunch and
the need for quick access to local currency liquidity in times of stress. In particular, the
increased risk aversion arising from the recent financial crises and heightened alertness to
the counterparty exposure have raised the demand for secured lending. As an illustration,
the average tripartite collateral management deals outstanding administered by Euroclear
Bank increased substantially from EUR 76 billion in 2001 to EUR 325 billion in 2011. An
important function of the Pilot Platform is to enable financial institutions to make use of
securities held in one of the partner systems as collateral to conduct secured borrowing in
the local currency of another partner economy. As an example, a European bank can make
use of its securities held with Euroclear Bank as collateral to borrow Hong Kong dollar to
meet the liquidity needs of its Hong Kong subsidiary. The cross-border and cross-currency
collateral management service to be provided by the Pilot Platform is a timely solution to
meet this market need, and will be a powerful tool to enhance financial stability in the partner
economies.
Talking about the alliance we have, we are indeed very fortunate to have three strong
institutions to be the founding partners of the Pilot Platform - the RENTAS in Malaysia, the
CMU in Hong Kong, and the Euroclear Bank. Each will bring unique and valuable
contribution to the partnership and the potential synergy would be substantial. Through
RENTAS, global investors will have convenient access to Islamic bonds. In the other
direction, Euroclear Bank' s clients will benefit from the large and increasingly wealthy
investor base in Southeast Asia and the Islamic world. Likewise, the CMU will provide an
easy access to RMB bonds and highly rated bonds in other currencies for the global
investors and enrich Euroclear' s investor base with the fast expanding investor clusters in
greater China. Euroclear Bank, with over 300,000 securities in 2011 and holds clients' assets
valued at EUR 10.8 trillion, provides a huge reservoir to support cross-border cross-currency
collateralised lending. Its large investor base will also provide a powerful platform for global
investors to access the markets in Hong Kong and Malaysia. I would like to take this
opportunity to thank Bank Negara Malaysia and Euroclear for sharing our vision and working
with us to bring it to fruition.
The platform will offer a wide range of services to global and domestic investors. These
services include a global securities database containing information of international and
domestic securities, provision of a single point of entry to allow investors to buy and hold
international and domestic bonds through their accounts of the local system, cross-border
issuance and settlement of bonds in foreign currencies on a delivery-versus-payment basis,
provision of an effective and efficient channel for cross-border cross-currency collateralised
lending and borrowing between financial institutions, and automation and standardisation of
the corporate action processing such as interest payments and redemption, distribution of
corporate action notices, and exercise of custody instructions. My colleague Esmond will
explain these arrangements in greater details shortly.
Finally, I would like to stress that the Pilot Platform to be launched is meant to be inclusive,
not exclusive, and we welcome the participation of more parties. The benefits in promoting
bond market development and financial stability can only increase with more bond
investment and settlement systems in the region joining as partners. We will continue to work
closely with Bank Negara Malaysia and Euroclear Bank to promote the platform to other
central banks and securities settlement systems in the region and to implement additional
services to the platform to meet evolving market needs.
Thank you.