Debt Capital Markets Reform – Introduction

Financial Market Research
Dictum meum pactum

Debt Capital Markets Reform


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.


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?


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
Ratings; Capital controls
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