Debt Capital Markets Reform – Reports, Working Papers

Financial Market Research
Dictum meum pactum

Debt Capital Markets Reform

Well-intentioned Asian bond fund won’t work
Paul Lejot and Douglas Arner
International Financial Law Review, September 2004

Report on the planned Asian central bank local currency bond fund

Asia’s bond markets: reforms to promote activity and lessen financial contagion
Paul Lejot, Douglas Arner & Liu Qiao
Hong Kong Inbstitute of Business and Economics Strategy working paper 1090, May 2004

Asia’s economies may not suffer general capital shortages but poor resource allocation is pervasive and would be greatly improved by efficient national and regional financial markets. Seven years after its most profound financial crisis, Asia risks new contagion from any similar, unforeseen loss of confidence. Active debt capital markets would help limit such risks. The world’s foremost bond markets developed as a result of intense national needs, and while economic growth will inevitably lead to greater bond issuance and trading this will be insufficient for the region’s wider requirements without official sponsorship of active cooperative market reform.

This paper contains three linked policy proposals: a matrix of steps to remove legal, fiscal, regulatory or systemic obstacles or omissions that hinder market usage; measures to encourage the development of a unified regional offshore market for local and major currency risk; and the concept of a regional body to promote the creation of asset-backed securities on a scale not previously contemplated and greatly expand activity in Asia’s debt markets.

Making Markets: Reforms to Strengthen Asia’s Debt Capital Markets
Paul Lejot, Douglas Arner & Liu Qiao
July 2004

This paper seeks to explain the factors that obstruct or deter debt capital market activity in East Asia. It then describes major reform proposals to advance development of the region’s financial markets, and so help guard against financial contagion from unforeseen losses of confidence similar to the experience of the 1997-98 crisis.

The central argument is twofold:

1. Until recently Asia’s principal economies have had insufficient reason to develop active debt markets. However, the profound wish to avoid financial contagion of the kind widely experienced in 1997-98 has provided motivation on the scale needed to make reform effective, both nationally and collaboratively.

2. Deliberate effort is needed to create sophisticated debt markets: this has been observed since the late 17th century. Contrary to some views, economic growth or gradual development will not organically produce sophisticated markets. Asia’s governments need therefore to facilitate and encourage system development (as some have begun), legal reform and usage.

This new paper identifies a matrix of steps to remove legal, fiscal, regulatory and systemic obstacles or omissions that hinder market usage, and which would, for example, constrict the operation of the EMEAP group of regional central bankers’ proposed local currency Asian Bond Fund.

Its reform proposals include:

1. A regional agency allowing credit enhancement to facilitate credit risk transfer, encourage securitisation and create new sources of well-rated risk. This market-orientated initiative would assist the securitisation of a wide range of credit risks, including non-performing loans, and finance for infrastructure development and medium-scale enterprises. It would avoid direct credit guarantees, which is essential to prevent unwanted moral hazard.

2. A collaborative regional public debt market for domestic and major currency issues, monitored by confederal regional regulation in an established Asian financial centre. This represents both a means to remove impediments to market participation and growth, and a path to encourage national harmonisation and regional usage using accepted Euromarket practice.

Asia’s debt capital markets: appraisal and agenda for policy reform
Paul Lejot, Douglas Arner, Liu Qiao, Mylene Chan & Marshall Mays
Hong Kong Institute for Monetary Research working paper 19/2003, October 2003

Markets for debt securities exist in a comprehensive way in no Asian economy other than Japan, even though short or medium-term bonds have been issued in almost all and Asian borrowers are established (though not prolific) international issuers. The region’s markets provide no guard against crisis or contagion, nor act as a balance to banking systems that are susceptible to distortion, moral hazard and event risk.

The paper examines the condition of the domestic and offshore debt capital markets for Asia-Pacific risk. It traces common patterns of development among the established and nascent public debt securities markets in the region, and looks at the dynamics that will affect these markets in the medium term. Last, it seeks to identify whether Asian markets can be made to accommodate continuous issuing and trading activity typical of advanced economies, and to consider the associated advantages and considerations.

Nine steps to strengthen Asia’s bond markets
Paul Lejot, Douglas Arner & Mylene Chan
International Financial Law Review, November 2003

Asian bonds: the case for harmonising minimum standards
Paul Lejot & Douglas Arner
Asia Asset Management, December 2003