Firstly, large investment projects of long-term gestation by the private sector can now source financing mainly from the bond market as opposed to only relying on the banking system. As a consequence, the expansion of the private debt securities market has now exceeded the public debt securities market. With the recovery of private investment since 2003 and its increased momentum there has been growing expansion of the bond market. Secondly, the liberalisation of the bond market to allow non-residents to raise funds from our domestic bond market has also contributed further to the growth of the market. Thirdly, an important development of Islamic finance in Malaysia is the development of the sukuk market. In 2007, the sukuk issuance has exceeded the issuance of conventional bonds. This has increased the diversity of asset classes and instruments in the Malaysian bond market. Fourthly, there has been a major structural enhancement in the capital market intermediaries with the introduction of investment banking in 2006. With the permitted foreign interest in investment banking raised to forty-nine percent, foreign participation is encouraged. In addition, Islamic banking institutions, including Islamic subsidiaries may conduct investment banking activities. These capital market intermediaries are also reinforced by the strengthening of the institutional investors and the fund management industry. The growing sophistication of investors has resulted in increasing diversification of portfolios with growing interest in the bond market. Foreign holdings of debt securities outstanding have also increased from less than 1% in 2000 to 15% in 2007.

And finally, these developments have been continuously reinforced by the strengthening of the financial infrastructure, the settlement system, the legal and regulatory framework to ensure the robustness and vibrancy of the bond market. Malaysia has benefited immensely from the development of the bond markets. As an important source of financing, it contributes to the economic growth process. It also allows for more efficient mobilization and allocation of financial resources. With greater efficiency in the intermediation process, it reduces the cost of financing. It also allows for the increased diversification of risks both for issuers and investors. In addition, it enhances financial stability through potential diversification, increased transparency and greater market discipline. The development of the bond market also enhances the transmission mechanism  BIS Review 53/2008  1  of monetary policy. Finally, and most importantly, the more developed bond market has enhanced our resilience to the implications of increased volatility in the international financial markets. The Malaysian bond market has several distinguishing features. Firstly, it comprises both the conventional and Islamic bond market. Secondly, the secondary and repo market is now growing in significance. Turnover volume in the secondary market has been steadily increasing over the years marking the active participation in the bond market by investors. In 2007, total annual turnover volume increased by 46% to RM777 million. There is also an increased diversity of instruments being issued ranging from asset-backed bonds, bonds bearing features such as stepped-up coupons and "floaters" and pass-through ABS.