The development of an Asian bond market has been a focal point for regional financial cooperation since the Asian Financial Crisis of 1997. The Asian Bond Market Initiative (ABMI) has been endorsed by ASEAN +3 Finance Ministers but the lack of a regional securities settlement system represents a key challenge to the development of a regional bond market.
Junichi Shukuwa, lead consultant on a working group on regional securities settlement issues for the AMBI, will present an interim report on his recommendations at the end of October.
At Sibos 2004 he explained why he will be recommending the development of a regional settlement linkage, called Asia Link, and described the form this linkage would take.
The existing system of settlement consists of a number of national Central Securities Depositaries (CSDs). Although some of these have established operational networking, their settlement mechanisms differ as they were designed to serve domestic needs rather than driven by the idea of a regional system. "The Asia Link should be a concept which will bridge this gap between the reality and the policy design," said Shukuwa. In effect it would supercede existing systems by bringing national CSDs up to a certain level and then linking them.
"The Asia link is a symbolic concept of the linkage and integration of the Asian bond settlements system, and has the potential to become the precursor to the financial highway in Asia... The Asia Link must be designed to enable rapid and efficient settlement of securities transactions across the region at fairly reasonable cost," said Shukuwa.
"At present most of the investors have been using global custodians but some people complain that the fees of the global custodians are very high and you still have to take a credit risk with a global custodian. For CSD linkage there is no credit risk because you are dealing with central banks."
As a second stage development, Shukuwa recommends that a new Asian CSD, along the lines of International CSDs Euroclear or Clearstream, be put in place. "Of course a set of feasibility studies need to be conducted in which the potential costs as well as the governance of the organization will be the core issues.
The reporting of Shukuwa's working group will be just the start of a long process that could eventually make the ABMI a reality explains Masato Miyachi, senior manager of the South East Asia department at the Asia Development Bank. "From the ADB's point of view this is the very beginning of the study," says Miyachi. "I know some people really want to have a European style system in Asia because we don't have one right now. But we have to study this very carefully."
He acknowledges that among the obstacles to development are currency issues and question marks over the demand for such a system. Investors also currently exhibit a strong home bias, but this may change if a system was in place to reduce credit and currency risks.
The project is at this stage spearheaded by financial ministers who are keen to avoid a repeat of the Asian financial crisis. To that end they want to eliminate the mismatch between maturity and currency between debt and revenue for borrowers and also excessive dependence on bank financing. "ASEAN +3 Ministers of Finance at a high level really have the political will because if we do nothing we will have a real crisis again," says Miyachi.
Though there is a danger that a government led initiative fails to generate demand in the market, Miyachi believes that the market is ready for a regional bond market. "The ADB conducted a study seven years ago and concluded that it was still premature. Since then we have seen a lot of volume increasing in the Asian bond market. I'm sensing demand is there," he says.
Seminars seeking feedback from market participants are already planned for Tokyo, Hong Kong and Singapore.