Measures of the Secondary Domestic Market Development Steering Committee and Sub-Steering committee
The Bank of Thailand has been tasked with the responsibility of developing an active secondary market. To meet this challenge, the Bank of Thailand has set up several sub-working groups. Some measures undertaken so far include
1. Increasing the liquidity and market players in the secondary domestic bond market
Although the Bank of Thailand has appointed financial institutions to act as market makers and provide daily price quotations, primary dealers cannot work to their full potential due to limited debt instruments. Also, there is no incentive for primary dealers to make short sale due to the limitation of bond borrowing in the private repo and Securities Borrowing and Lending (SBL). To improve liquidity in the secondary market, the steering sub-committee in this area has determined plans as follows.
1.1 Improving the primary dealer system
To improve primary dealers’ role as market makers, obligations and privileges given should be reviewed to ensure that they are in a strong position to perform their functions as market makers.
1.2 Developing the private repo market
The private repo market is an important part of the infrastructure to develop the domestic bond market as it brings liquidity to the bond market as collateralized bonds are transferred to lenders, thus enabling him to use bonds for further transactions. It stimulates the financial institutions as short sellers can borrow bonds through repo market for delivery.
To develop the private repo market, the Bank of Thailand, in collaboration with various government agencies such as the Securities and Exchange Commission, the Thai Bond Dealing Centre, the Ministry of Finance and commercial banks, have been working to develop the Global Master Repurchase Agreement (GMRA), solve tax problems and provide training on private repo transaction for market players.
1.3 Promoting investments by institutions, non-resident and retail investors
To increase the variety and number of market players and liquidity in the bond market, the working group has adjusted certain regulations and limitations in the bond market. In addition, government bonds are also part of the Global Emerging Market which is the reference investment index for international investors. For retail investors, they will enhance the distribution channel in the primary and secondary bond market and corporate with private sector to provide regional investors the seminar and training program.
1.4 Improving the information and trading system in the secondary market
The Ministry of Finance has appointed the Stock Exchange of Thailand (SET) to develop the Electronic Trading Platform (ETP), which can offer the investors more trading channels and increase the information disclose system more transparency.
2. Setting up of the Bond Lending Unit and Collateral Management Unit
A bond lending unit will act as an intermediary for borrower and lender matching, provide the payment and delivery system and report the status of investors. Meanwhile, the collateral management unit is responsible for mark-to-market collateral, calling margin payment, as well as designing the selection criteria and allocation of collateral debt instruments. The operations of Bond Lending Unit and Collateral Management Unit have started since December 2006 and May 2006 respectively.
3. Developing the Interest Rate Swap (IRS) market
Under the IRS working group, the Bank of Thailand has hired PricewaterhouseCoopers (PwC) as consultant and assistant for technical problems pertaining to the development of the derivatives market. Results have been published in a paper entitled “Building the OTC Market for Interest Rate Derivatives.” The paper studies the problem of low liquidity in the derivatives market and one-way market type. In addition, the IRS working group together with the ACI committee are coordinating to improve the Derivatives Manual which will offer a standard reference in the derivatives market.
4. Integrating the Securities Depository and Clearing and Settlement System
The Bank of Thailand in cooperation with the Thailand Securities Depository (TSD) had transferred the clearing and settlement system for government sector’s debt instruments to the TSD, where the clearing and settlement system for corporate bonds and equities have been located, to integrate the clearing and settlement operations of all securities in one place. The integrated clearing and settlement system is aimed to further enhance market efficiency, i.e. enabling the TSD to provide the collateral management and bond lending services, and reduce transaction costs to investors. The integrated system also provides an important foundation for future regional clearing and settlement system linkages. The integration process has been completed since May 2006.
5. Setting up the Asian Bond Fund 2 (ABF2)
Eleven Executives’ Meeting of East Asia and Pacific Central Banks (EMEAP) has launched ABF2 to develop the regional bond market. Under ABF2, EMEAP will invest a fraction of their reserves in the local currency denominated bond issued by sovereign and quasi-sovereign entities in eight EMEAP markets, namely China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand.
The passively managed style of ABF2 will follow the Asian Bonds Index created by the International Index Company (IIC). This fund is divided into two parts comprising (1) Pan Asian Bond Index Fund (PAIF) which will invest in the local bond market in eight EMEAP markets. (2) Fund of Bond Funds (FoBF) which is distributed into 8 individual funds managed by fund managers in the local country. ABF2 will help attract the interests of both domestic and international investors in the Asian bond markets, and would also help expedite market development and regulatory reforms at both domestic and regional levels.
In Thailand, the ABF2 working group has set up the ABF Thailand Bond Index Fund (ABFTH) offering a new product which is transparent, replicable, and a credible Asian Bond Indices with will be an important bond market infrastructure for the region.
Conclusion
To continuously develop Thailand’s bond market for the long-term, the public sector and private sector should closely corporate and develop various elements such as increasing the liquidity, creating hedging instruments in the private repo market and derivatives market, setting up efficient intermediaries and an effective Securities Depository and Clearing and Settlement System. This is important as a developed bond market would increase alternatives available for funding sources, provide an additional means of diversifying risk for institutions and market players. This would thus result in a more sustainable financial system for Thailand.
