Keynote Address


Y Bhg Tan Sri Zarinah Anwar

Chairman, Securities Commission Malaysia


RAM Annual Bond Conference

11 January 2011, Kuala Lumpur


“Malaysian Bond Market – Pushing Boundaries in the Next Decade”



YBhg Tan Sri Dato’ Seri Siti Norma binti Yaakob, Chairman, RAM Holdings Berhad

Board of Directors of RAM Holdings Bhd

Dato Abdullah Mat Noh, Chairman, RHB Investment Bank Bhd

Mr Steven Choy, CEO, Cagamas Bhd

Distinguished guests

Ladies and gentlemen

Good morning


I am delighted to be able to address all of you at this year’s Annual Bond Conference, and I would like to thank RAM Holdings for inviting me to deliver the keynote address this morning. RAM has been a pioneer in the credit rating industry in Malaysia and I would like to congratulate them for 20 years of contribution towards the development of credit rating practices and the development of the Malaysian bond market.


The Malaysian corporate bond market has come a long way since the maiden issuance by Cagamas Berhad in 1987. From a relatively modest RM143 billion in the 1990s, the issuance of corporate bonds and sukuk has risen sharply to reach RM518 billion in the last decade. These issuances have provided the critical long-term financing which has enabled Malaysia to undertake many landmark projects and catalytic economic activities, resulting in the country having one of the best infrastructures in the region, from international airports and highways to power plants and telecommunications.The bond market is also a source of financing support in the capitalisation of banks and corporations, thus directly contributing to the expansion of the financial sector.


The growth and resilience of the Malaysian bond market did not happen by chance. Over the last fifteen years, the Securities Commission has progressively introduced measures to transform the market. Today, I am proud to say that the legal, regulatory and institutional framework supporting the continued deepening and broadening of the bond market is one that has been benchmarked to international standards.


A facilitative issuance framework introduced in 2000 afforded the market a disclosure-based framework, which enhances efficiency and transparency, with very clear requirements and conditions for approval providing greater certainty and clarity for issuers, thus allowing them to tap the bond market in a timely and cost-efficient manner. These efforts have resulted in the phenomenal growth of the corporate bond market within a relatively short period of time. From a size of RM128 billion in bonds outstanding in 2001, the market had grown to RM309 billion by the end of 2010, with 56% of the instruments structured as sukuk. This represents a robust growth of more than 10% on an annual average basis over the last ten years.


In terms of bonds outstanding, our market, at 97% of GDP, is the third largest in Asia. Financing GDP growth by the bond market has expanded to reach 31% of total financing of the economy in 2009, a significant expansion when compared to a share of only 17% in 1997. Bond tenures which average more than 5 years, with an average size of RM 700 million, have helped reduce maturity mismatches whilst continuous improvements in regulatory requirements, particularly in terms of adequacy of disclosures, have enabled appropriate risk management assessments to be made by investors.


The Malaysian bond market is one of the few markets in the region that has taken early steps to attract participation from foreign investors. The SC’s initiation of the removal of withholding tax on foreign investors, and the introduction of a facilitative approval framework, together with the progressive liberalization of foreign exchange administration rules have promoted a healthy flow of cross-border activities in our bond market. This development has also helped to improve the capacity and ability of Malaysian advisors and intermediaries in closing international transactions. Since 2004, a total of RM12 billion bonds and sukuk have been issued by foreign issuers comprising multilateral development banks, financial institutions as well as corporations from Korea, the Middle East, Singapore and India. Malaysian advisors also played a leading role in the landmark foreign currency sukuk issued by the Islamic Development Bank (or IDB) in December last year. Today, we see Malaysian institutions reaching a confidence level that has enabled them to progressively pursue the offering of advisory services outside Malaysia.


As at the end of November 2010, foreign investments in local currency bonds amounted to RM118 billion, comprising mainly of Malaysian Government Securities at RM73 billion and corporate bonds at RM14 billion. This is in stark contrast to the RM4 billion of foreign investment recorded in early 2004 when we first liberalised the market. As a result, we are increasingly recognised as an important hub for cross-border investments and issuances in the region.


This international dimension of our bond market could not have been achieved if professional standards of Malaysian advisors and intermediaries have not improved correspondingly over the years. The Malaysian regulatory framework is one of the few in the world which imposes stringent standards on advisors in relation to their qualifications, conduct of due diligence and adequacy of information disclosure to investors. Steps have also been taken to improve supervisory oversight over key intermediaries in the bond market including the credit rating agencies (CRAs), trustees, bond pricing agency and bond dealers. In fact the SC’s oversight on CRAs is ahead of many jurisdictions. The registration system introduced in 2006 have enabled our CRAs to measure up against global CRAs; and in a survey conducted by an IOSCO Task Force in March 2009, Malaysian CRAs fared equally with seven other global CRAs which have complied with the latest IOSCO Code of Conduct.


Ladies and gentlemen,

Emerging Developments in the New Decade


As we push forward into the next decade, one of the major consequences of the global financial crisis is the lingering impact on economic activities and on financial markets. While there have been encouraging signs of stability and confidence in the past year, uncertainty in developed markets still prevails given the challenge of achieving self-sustaining recovery with the diminishing effects of the massive policy support. Imbalances in the regional distribution of savings, consumption and investment can de-stabilise global markets, weakening global risk appetite, and affecting the return of confidence and investments.


Malaysia’s economy and financial markets, however, have recovered much of their pre-crisis strengths. The crisis holds many lessons for us, but it has also afforded us opportunities to take stock of the competitive environment ahead. Emerging economies are aggressively undertaking liberalisation and economic reforms, engendering greater competition and deepening the integration of markets across borders. Malaysia is addressing these challenges through various transformation measures as outlined in the New Economic Model which anticipates a sizeable flow of productive private investment activities required to fuel GDP growth of 6-7% per annum over the next decade. The corporate bond market can therefore be expected to play the strategic role of matching the vast investment needs of the private sector and the long gestation period of major projects of the scale anticipated.


An emerging development is the more rapid growth of cross border activities, facilitated by an equally rapid development of technology driven trading platforms. It is significant that growth of cross border activities is even more pronounced in the region, with institutional investors in the region diversifying their overseas investment away from developed markets to increase investment holdings in the Asian markets. This development will support our own regional efforts to move towards greater integration of financial markets within ASEAN. Savings rates in Asian economies are still high.In addition, funds and investments within the Asian region tend to have much lower leverages generally compared to global funds operating in developed markets and therefore can provide a more stable source of investment and liquidity for our bond market.


Needless to say, Malaysian advisors and intermediaries need to become more pro-active in marketing their capacity and particular advantages in order to attract these regional funds into the Malaysian bond market. With greater ease of undertaking cross border transactions, Malaysian advisors and intermediaries should also seek to expand businesses and create scale in operations through partnerships. In the NEM, it has been identified that the old way of competing through constantly matching incentives of competitors is no longer appropriate. The new way to expand is through partnerships with and amongst competitors to realise the benefits of combined advantages of individual countries and firms.


Ladies and Gentleman,

A More Vibrant Sukuk Market



An important emerging trend is Islamic finance. Within this fastest growing sector in the capital market, the sukuk market has emerged as the most vibrant segment of the Islamic capital market, not only in Malaysia but in the international arena. Having achieved an annual average growth of more than 21% over the past ten years, our sukuk market has now evolved into the world’s largest. Bursa Malaysia is also the largest market in the world for listed sukuk in terms of value.


Today, more issuers are seeing sukuk as an attractive means for raising capital, while a growing number of investors are including it as a new asset class in diversifying their investment portfolio. In addition to pricing advantage as seen in some of the domestic sukuk deals, one of the main attractions of sukuk is the Shariah compliance process which results in additional disclosures relative to conventional bond issuances. Multi-layered instruments (like CDOs) which are complex and lacking in clarity would not have found their way into the market given the strong emphasis by Shariah on disclosure and transparency.As was seen, a great deal of contractual ambiguity surrounded these instruments that fed the worst of the global financial crisis. It is the prohibition of undue ambiguity in contracts that excluded these types of instruments in Islamic finance.


The Malaysian sukuk market represents a unique value proposition that we ought to build on to attract greater flows of funds, both from within and outside the domestic financial system. This includes encouraging Malaysian intermediaries to participate actively in cross-border transactions through offering of advisory services and placement of sukuk across the region, where we have both the comparative and first mover advantages. A few of these cross border deals have been brought to the market by Malaysian intermediaries, such as the sukuk issued by the World Bank, the International Finance Corporation (IFC), the National Bank of Abu Dhabi (NBAD), and most recently the IDB. I hope to see issuances of this nature taking place on a much more regular basis in the near future.

Regulatory and Developmental Efforts



Moving forward, the Securities Commission will ensure that measures are put in place to enable us to remain competitive. Our approach is to balance regulation to promote orderly markets and build financial resilience and stability with the equally important development objectives of broadening and deepening the capital market to finance economic growth as well as developing niche capital market services to drive higher contribution of financial services to GDP growth. We are cognizant of the changing global environment, the increasing competition and the new emerging risks from increasing cross border flows, more diverse and sophisticated players and instruments, as well as the technology risks posed by new trading platforms and faster and more complex transaction processes.


These challenges must be managed, requiring us to both adjust regulatory frameworks to reduce friction costs, as well as introduce new initiatives to support capital market development and expansion, without compromising investor protection.


In this regard, I would like to highlight a few areas which require attention. First is the need to enhance market standards and practices. It is important that pro-active steps are undertaken by our advisors and intermediaries to vigorously benchmark the bond market against international standards and best practices. This, in turn, would enhance confidence of investors in the corporate bond market. One area for review is the documentation and disclosure standards of our bond issues. Widely acceptable standards such as those applied in Eurobond offerings should be closely looked at whilst post-issuance disclosure by issuers needs to be improved.


Second, with the growing maturity of the Malaysian capital market, in particular the corporate bond market, it is now appropriate from a regulatory perspective to widen the investor base and investment spectrum. An option which is being considered in this regard is to provide the infrastructure which can facilitate direct participation of retail investors in new issues. I believe this development will provide an important source of growth for the market in the coming years. As outlined in the Economic Transformation Programme, our economy will stand to gain by having a portion of our large but mostly untapped savings in the banking system utilised for longer-term investments that promote economic growth. To retail investors, investing in corporate bonds will provide a viable opportunity to seek higher returns in consideration of some exposures to credit and market risks.


Towards this end, the SC has commenced discussions with the relevant stakeholders to identify a suitable framework to implement the offering of corporate bonds to retail investors. Key issues that needs to be looked at ranging from eligible issuer base, mode of offering, format of offering documents, price transparency, to investor protection and education activities need to be addressed before retail offerings can be allowed.


The level of investor sophistication and expediency of the recovery process in our market is set to increase over time. With the enhanced standards and sophistication amongst Malaysian advisors and intermediaries, it is crucial that our institutional investors are able to widen their investment spectrum beyond the traditional credit exposures of AAA and AA. These include investment considerations, for example in the SME sectors that demonstrate business viability, as well as long term growth prospects.


The establishment of Danajamin is clearly a right step towards this direction as it enables viable companies to access the bond market with lower credit ratings. More importantly, it provides a platform for such companies to establish their credibility before issuing bonds on their own credit strength. In the long run, it is hoped that more companies with diverse credit spectrum would be given the opportunity to enjoy cost efficient funding from the bond market.


The impact from the developmental and regulatory initiatives that are being pursued for the bond market will not be optimised if the level of liquidity and transparency in the secondary market is not increased in tandem with the growth in primary market activities. As seen in many developed markets eg in the United States and Europe, greater transparency has enhanced the level of liquidity in the secondary market. In these markets, the use of information technology as well as communication innovation has been prolific in an electronic trading environment that is characterised by an active price discovery process. Following this, players in these markets are now able to benefit from lower cost of transaction, greater liquidity and wider reach of investor base.


Taking the cue from this development, it is hoped that our intermediaries would capitalise on the existing mechanisms that are already in place, such as the electronic trading and reporting platform for bonds that is operated by Bursa Malaysia, the bond pricing agency, and other trading facilities that will be introduced soon to promote greater activities in the secondary bond market.


Malaysia must benefit from growing integration of markets by further facilitating cross border transactions. On the international front, the SC, as an active member of the ASEAN Capital Market Forum (ACMF) and as a co-chair of a Task Force in the Asian Bond Markets Initiatives (ABMI), will work together with our regional counterparts and the private sector to deepen the regional bond markets, by enhancing market linkages, market access and market liquidity. It is our ultimate aim that a conducive framework and infrastructure is established to facilitate cross-border transactions among capital markets in the region. In ASEAN, we have a common objective in realizing the implementation of the Roadmap for an ASEAN Community by 2015.


In the bond market area, the Roadmap includes consideration to promote a mutual recognition framework for offering documents of cross-border bond transactions. This can provide a viable option for bonds which are offered using specific offering documents and rated by credit rating agencies, authorized by the home country regulator, to be made available to investors in another member country.

Ladies and Gentleman,

The Role of CRA in Maintaining Market Confidence



The international community and regulators from across the globe are now appropriately concerned on activities of international CRAs. The practice of rapid and extensive downgrades on structured credit products during the crisis, have been devastating in its contagion impact throughout the global financial system.


As a regulatory response to this perceived lapse in standards by the CRAs, more vigorous supervisory oversight has been imposed on a global basis. The G20 Declaration, issued in April 2009, requires all CRAs to be subject to the IOSCO Code of Conduct, and that national authorities will enforce compliance. Following this, the IOSCO has made further revisions to its Objectives and Principles of Securities Regulation in June 2010 to subject CRAs to adequate levels of oversight, through a system of registration and ongoing supervision. This enhanced regime is intended to ensure that credit rating activities are conducted in accordance with principles of integrity, transparency, responsibility and good governance.


With hindsight, the vigorous supervisory oversights and regulatory standards that we have introduced on Malaysian CRAs prior to the financial crisis have proven to be effective. The strength of our domestic CRAs has contributed to the resilience of the domestic bond market. The rating performance of Malaysian CRAs, as reflected in their cumulative default probabilities, could well be regarded as the benchmark for their peers in the region.


While closely monitoring global responses and regulatory changes affecting CRAs, the SC also pays close attention to lessons to be learnt from developments in the more advanced capital markets and will continue to further rationalise regulatory standards on CRAs. The SC will soon introduce a set of guidelines that will require the CRAs to converge with the new international standards and best practices. The enhanced framework will cover key areas such as transparency of rating criteria and policies, rating review and governance structure of CRAs. I believe the framework will not only enhance the performance of Malaysian CRAs domestically, but will also allow them to expand their rating services more effectively across the region in line with the international expansion of the Malaysian bond market.




As we enter the new decade, we are seeing some early signs of stronger issuance activities in the bond market. The preliminary approval figures for 2010 indicate that RM64 billion worth of bonds and sukuk were approved for the year, compared to RM58 billion in 2009. More encouragingly is that out of the RM64 billion, RM28 billion or 44% were issued in the last quarter. We expect this improving trend to continue into the early part of this year and set the momentum for the year ahead.


The sustainable growth in the bond market will not be achieved without the active participation from a large pool of professional and experienced market intermediaries who are mostly represented in today’s conference. To keep up with this strong performance, it is important for the industry to continuously enhance its franchise as the preferred source of fund-raising for the corporate sector and the premier asset class for institutional investors. I am confident that with regulations that are internationally benchmarked and greater transparency and disclosures, Malaysian intermediaries will be more innovative and be able to compete more effectively than they were a decade ago.


The SC is committed to ensuring an orderly market and maintaining investor confidence, a fundamental pre-requisite in facilitating the further growth and development of the market. We are not only imposing international standards on markets and intermediaries. The SC is also benchmarking our own capacity against the best in the different aspects of regulation and supervision that exist among more experienced regulators. This practice of continuously improving expertise and capacity has enabled us to implement timely policies, introduce regulatory and developmental initiatives that are appropriate to domestic circumstances and enforce intermediary supervision and market surveillance programmes to ensure safe and sound markets.


Finally, it is important to reiterate that we will continue to ensure the orderly growth of the Malaysian bond market through various initiatives to widen the issuer and investor base, maintaining investor confidence, increasing the professional standards of our intermediaries and facilitating cross-border transactions across the region. To the extent possible, we will facilitate the market’s development through an efficient and facilitative regulatory and approval process. But it will be the initiatives of the private sector in pushing the boundaries that will take the bond market to new heights.


I hope our players will make full use of the Conference today to exchange and develop new ideas on the issues that are raised and to build consensus on new strategies and plans necessary to further expand and grow the Malaysian bond market. On this note, I wish you all a productive Conference ahead.