Debt Capital Markets Reform – Introduction

Financial Market Research
Dictum meum pactum

Debt Capital Markets Reform

Introduction

Financial market reform in Asia relates not only to efficient fundraising and financing patterns among governments, enterprises and investors. It addresses important aspects of resource allocation and is significant in the promotion of greater financial stability. Partly to avoid dislocations of the kind that followed the 1997-98 financial crisis, these questions are the subject of considerable official concern and attention.

AIIFL’s research includes detailed analysis of legal systems and financial regulation, including aspects of comparative legal origins, and the effectiveness of enforcement. Active, liquid markets would help lessen contagion risk arising from an over-reliance on the banking sector, and improve the efficiency of allocating savings.

Contacts

Douglas Arner, Professor, Faculty of Law, The University of Hong Kong. Telephone +852 3917 2923.

Paul Lejot, Visiting Fellow, AIIFL. Telephone +852 3917 1890.

Contemporary policy questions can be general or technical

	Will markets evolve in sophistication through an organic process of development, or is deliberate reform necessary?
	Are active Asian debt capital markets infeasible due to factors in corporate culture, patterns of finance, or weaknesses in law?
	Do weak markets indicate underdevelopment? Is a benchmark yield curve essential to market growth?
	How best to assist SME funding and the recovery on ban non-performing loans?
	Do potential gains in economic welfare justify the costs of strengthening Asia’s debt markets?

Concerns

	Impediments to growth in market activity:
	Financial structure and system architecture
	Use and enforcement of regulatory guidelines
	ssues of national law, operation of law, differences between national laws that influence investor behaviour
	Political, fiscal and special interest factors

Policy recommendations

	Agreement for essential legal, fiscal, systemic and regulatory measures to remove identified impediments to market participation and growth, and introduce reforms to encourage harmonisation and regional usage
	A collaborative regional public debt market for domestic and major currency issues, monitored by confederal regional regulation in an established Asian financial centre
	A regional body allowing credit enhancement to support credit risk transfer, encourage securitisation and create new sources of well-rated risk

Essential reforms

	Standardise bonds and notes as to issuers and maturities
	Establish benchmarks and debt issuance programmes
	Remove restrictions on trading techniques
	Standardise settlement practice to encourage confidence
	Remove obstacles to securities financing
	Market-makers must provide trading liquidity in benchmarks
	Day-to-day central bank operations must not hinder liquidity
	Seek an open price discovery mechanism, rather than a closed circle of central and commercial banks
	Promote securitisation legislation to allow pooling of risks (to enhance weak credits and assist risk and liability management by banks)
	Remove investment restrictions on non-bank institutions
	Remove barriers preventing investors establish a legal basis for trading, ownership and settlement
	Remove (or as a minimum standardise and simplify) withholding taxes on securities
	Support common portfolio accounting standards among investor groups

This table shows examples of the range of reforms essential for effective debt markets

	Obstacles	Omissions	Disparities
Legal	Enforcement issues Rights in bankruptcy Bars to true sale	Certainty of title Rights of transfer Notice issues	Creditor status Risks of set-off Unpredictable review
Fiscal	Withholding taxes Duties & stamp taxes	Clear debt issuance Transparent rates Tax neutrality	Taxes on repurchases, foreign parties, issuer or investor classes
Regulatory	Restrictions on instruments, investors & issuers Competing authorities	Disclosure Reporting Derivatives	Ratings; Capital controls Mark-to-market Reserve requirements
Systemic	Bank cartels & moral hazard. Credit rating methodology Trading practices	Price visibility Price mechanism in primary bond sales	Variable practice for settlement & custody Fragmented government issuance