Asian Bond Market Development: Risk Management Dimension

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Asian Bond Market DevelopmentRisk Management
Dimension

• Alfred Wong
• Hong Kong Monetary Authority

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Risk management dimension

• Developing the bond market
• Not about increasing sales or purchases of
  traditional issues
• But about helping buyers and sellers meet
• Filling a liquidity gap
• Filling a credit gap
• Managing credit risks
• Credit guarantee
• Securitisation
• Credit derivatives

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Securitisation

• Making products that people can buy (and sell)
• home loans (mortgage)
• car loans
• consumer loans
• credit card receivables
• Making products that people would buy (and sell)
• over-collateralisation
• collateralised debt obligations (CDOs)

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A typical securitised transaction
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Credit derivatives

• Credit default swap (CDS) a contract that the
  buyer pays a periodic fee in return for a
  contingent payment by the seller upon a credit
  event happening
• Total return swap (TRS) a contract between two
  parties whereby they swap periodic payments
• Credit-linked note (CLN) a CDS except that the
  contingent payment is in the form of a note.
• CDS swaption a CDS option

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Putting the cart before the horse?
Source BIS
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Securitisation in Asia

• Asset-backed securities (ABSs)
• ABSs are mostly triple-A over 90
• Dominated by Japan, Australia and Korea over 65
• Followed by Hong Kong, Malaysia and Thailand
• ABSs are mostly MBSs, especially Australia and
  Malaysia
• Diversifying into all sorts of credits, including
  non-performing assets!
• Collateralised debt obligations (CDOs)
• Demand highest quality of credits
• Supply lower quality credits and/or less
  diversified credits
• Credit enhancement requirement tends to be high
• Structural issues, e.g., tax, regulatory, legal
  or corporate governance

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Securitisation in Asia
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Credit guarantee in Asia

• Before the Asian financial crisis
• Overpricing by US monoline insurers
• Mandatory for bond issuers in Korea
• Asian Securitisation and Infrastructure Assurance
  (ASIA)
• First multilateral guarantee agency in Asia
• Effects of the Asian financial crisis
• Failure of major guarantee agencies in Korea
• Heavy losses on Indonesian and Korean exposures
  by ASIA
• Credit downgrade of ASIA

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By counterparty
By maturity
By reference entity
Source BIS
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By counterparty
By maturity
By sector
By rating
Source BIS
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Credit derivatives in Asia

• Size of the CDS market about US1.37 billion by
  end-2005
• Activities mainly taking place in Korea, Hong
  Kong and Singapore

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Regional cooperation and initiatives

• APEC Initiative on Development of Securitisation
  and Credit Guarantee Markets
• Spearheaded by Korea, Thailand and Hong Kong
• Objective was to promote the understanding of
  these markets
• Channel was to provide advice through panel
  visits APEC economies
• Sponsored by Australia, China, Hong Kong, Korea,
  Thailand, and US, and World Bank
• Two visits each to China, Mexico and Thailand
• Recommendation son changes in tax, regulatory and
  legal structures
• Establishment of interdepartmental taskforces in
  Thailand and China
• Two policy dialogues Korea and Hong Kong

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Regional cooperation and initiatives

• Asian Bond Market Initiative (ABMI) under ASEAN3
• Developing credit guarantee facilities
• Led by Korea
• East Asia-Regional Financial Sector Flagship
  Study by the World Bank
• Securitisation
• Asset management
• Regulatory regimes

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East Asian Financial Markets the Next
Frontier June 22-23, 2006, Hong Kong

• Regional initiatives to promote financial
  integration and the broadening and deepening of
  the financial sector
• The contractual savings industry and the asset
  management industry and their role in developing
  capital markets
• Developing securitization and derivatives
  markets for risk management and risk sharing
• Developing the securities markets
• Attendance will be limited to about 120
  participants drawn from central banks, financial
  market regulatory authorities, high ranking
  officers finance ministries, investment banks,
  rating agencies, money managers, institutional
  investors and academic institutions.