Keynote Address by

YBhg Dato’ Zarinah Anwar, Chairman, Securities Commission

at the

RAM Annual Bond Conference
“Malaysian Bond Market: Weathering the Storm”
14 August 2008, Mandarin Oriental, Kuala Lumpur

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

YBhg Tan Sri Datuk C. Rajandram, Executive Deputy Chairman, RAM Holdings Berhad

Distinguished guests and speakers

Ladies and gentlemen

Good morning
1. Let me start by thanking RAM Holdings for inviting me to deliver the keynote address at this year’s RAM Annual Bond Conference and share with you some of my views on developments in our bond market.

Since July last year, many of us have been preoccupied with the dislocations in financial markets in the U.S and Europe . What began as a repricing of risks in sub-prime mortgages evolved into a credit crisis affecting a wide range of instruments including structured finance products, auction-rate securities and credit derivatives. As a consequence, many of the world’s largest financial institutions have suffered major losses with an adverse impact on the cost of borrowing. The weaknesses in financial markets have intensified flows of institutional funds to alternative asset classes such as commodities contributing to the inflationary pressures that we have observed in the global economy.

3. Even though the direct exposure of our financial institutions to this credit crisis is minimal, Malaysia is not isolated from these broader global events. Our economy and markets are feeling the effects of stresses in the global financial markets. However, we have developed a well-diversified economy, a strong institutional infrastructure and robust regulatory and supervisory arrangements. The institutionalisation of investors in the financial system has also enabled us to withstand the pressures in the market.
4. I also believe our financial intermediaries are comparatively more resilient today than a decade ago and are thus able to withstand the effects of challenging market conditions and may even be well placed to seize opportunities when they arise.
5. Against this backdrop, in my remarks today, I will focus on three broad areas – first, assessing the performance of our corporate bond market in the context of the current market conditions. Second, drawing out the key lessons from the credit turmoil in the global markets for players in our market, particularly in the area of securitisation. And finally, sharing with you some thoughts on the way forward for the Malaysian bond market, within the perspective of the Capital Market Masterplan and our efforts to be an international Islamic financial centre.
Current assessment of the market
6. Over the past decade, various initiatives have been taken to strengthen our financial markets as well as to address some of the weaknesses observed during the course of the Asian financial crisis. As a result, we now have a more developed, diversified and deeper capital market that complements our domestic banking sector in meeting the funding needs of the economy as well as the investment needs of investors. The presence of these two strong pillars in the financial system must play their role in ensuring access to cost-efficient financing from either the capital market or the banking system, in all economic conditions.
7. Specifically, the development of the bond market has been aimed at providing corporations with long term funding opportunities. Through various initiatives driven by the Securities Commission, Bank Negara and other authorities over the years, the bond market has witnessed remarkable progress and become a key segment of the capital market. Many of our market intermediaries have benefited significantly from the growth of the bond market.
8. The bond market has now reached a size of more than RM500 billion as at end-June 2008, which is almost four times its size as at end of 1997. Corporate bonds represent 51% or RM258 billion of total outstanding bonds. Out of the total corporate bonds, sukuk comprise 55% or RM132 billion, reflecting the wide acceptance of and positive trends within the domestic sukuk market.
9. In 2007, we saw issuance activities in the corporate bond market achieve a record level of RM69.4 billion of bonds issued, and a total of RM158.8 billion of bonds approved by the Securities Commission. The growth trend continued in the first half of 2008 where a total of RM33.5 billion of bonds were issued, which is higher than the total of RM29.6 billion recorded in the corresponding period last year. Notwithstanding this growth , market players have cited prevailing conditions including inflationary concerns and interest rate outlook as having an impact on the bond market. These issues may in turn affect issuance activities as well as trading and secondary market liquidity in the ensuing months.
10. However, I believe the market has sufficient resilience and maturity, and we have more competitive and dynamic players in the industry to be able to go through this market cycle. Indeed, t here are many proactive measures that could be initiated by market players to smoothen out this adjustment process we are now experiencing. For instance, to encourage corporate bonds issuances, there is a need for the industry to be more innovative in coming up with structures and risk management instruments that mitigate interest rate exposure of issuers and investors.

On the part of the regulators, we are open to working with the industry on proposals and recommendations to address issues and concerns affecting the growth and development of the industry. The SC has placed strong emphasis on the development of institutional arrangements which enhance price discovery and transparency in the secondary market. These efforts have resulted in the introduction of an electronic trading platform by Bursa Malaysia and the establishment of a bond pricing agency that provides an independent valuation for the bond market, and complements prices traded on the OTC market.

12. We have had various consultative discussions with industry participants and are open to receiving your views and suggestions. There should be a healthy discourse between regulators and market players to ensure that there is orderly growth of our markets over the long-term and this can only be achieved through a constructive, responsible and measured raising and discussion of issues.
Key lessons from credit turmoil in the US and Europe

Ladies and Gentlemen,

13. Let me now turn to the second area I wanted to make some comments about and that is on lessons from the sub-prime crisis. Our market, particularly the developing securitisation market, has been influenced by the changing sentiments towards the securitisation instruments as a consequence of the credit crisis in the US and Europe . The sub-prime crisis has not only delivered some hard lessons for market players in these jurisdictions, but also provided a timely reminder to all of us. I believe taking heed of these lessons is critical to foster investor confidence in this important segment of our market and to ensure continuous growth in the securitisation market.
14. There are three key areas that need to be looked at closely and addressed. As affirmed by the International Organisation of Securities Commissions or IOSCO, these are in origination, credit ratings and transparency standards. Let me elaborate on each of these areas.
15. First, integrity in origination or underwriting standards. Taking the sub-prime experience, the interest of investors is severely affected by the weak origination standards, as reflected by the wider use of loan features, such as higher loan-to-value ratio and adjustable interest rates. There seems to be little incentive for banks, as originators to maintain strong origination standards, knowing that these loans would be ultimately funded by investors of the securitised paper, and not by the banks themselves. Hence, this prompted banks to adopt a business model that churned out loans as quickly as possible before securitising the assets into the capital market for a fee, without sufficient consideration on the long term credit worthiness of the borrowers and the implications that it may bring to the market place.

Originating banks should adopt vigorous industry standards and best practices that are applied in their credit approval when originating loans in a securitisation transaction. The Securities Commission has issued the necessary guidelines to raise the relevant standards. These should be complemented by the industry having in place their own robust standards.

17. Second, credit rating agencies should also be more vigilant and responsive to events occurring at issuer and industry wide levels. There should be continuous enhancement of rating methodologies, quality and standards, and timely disclosure of such methodologies, standards and other rating actions for better transparency. The IOSCO code for rating agencies has been enhanced recently to strengthen the integrity of the rating process and independence of rating agencies. It is most appropriate that our domestic rating agencies comply with these higher standards as expected by regulators and investors.
18. Third, lack of transparency in dealing with excessively complex products, which in some cases even exceeded the comprehension of credit rating agencies, investors and regulators. In many cases, the disclosure about the risk exposure to the underlying assets and their post-issuance performance turned out to be inadequate and difficult to interpret. The industry should uphold high standards of transparency and ensure complete and accurate disclosure of information to investors at all times. Investors, on the other hand, should actively demand for the relevant information before investing in these instruments.

These are fundamental pillars in any bond transaction and given the experience of the sub-prime crisis, we will need to address them if we are to expect the bond market, especially the securitisation market, to establish a stronger presence in our financial system.

20. I cannot overemphasise the importance of integrity among players in a truly competitive capital market environment. Investor confidence in the integrity of our capital market as well as the ethical way in which it functions provides a strong foundation for the capital formation process. In contrast, widespread misconduct will inevitably undermine investors’ confidence. Distress market conditions may lead to market professionals indulging in unethical practices and misconduct. These have been observed in other markets where regulatory authorities have seen issues such as mis-selling, breach of trust and placing self interest ahead of clients in the course of their investigations. I t is important therefore that market players exercise strong discipline and observe high standards of conduct at all times.
21. Key players in the bond market all have important roles to play. Trustees are expected to exercise greater diligence in assessing compliance by the issuers with transaction documents. As custodian of investors’ interest, trustees should engage more regularly with issuers and advisors, and provide a strong challenge process in various areas, from compliance with the terms and conditions of the issue, to valuations of investment portfolios. They also need to be more pro-active by seeking to be the “first to know” on the latest development of the issuer, and to be able to act immediately, independently and consistently with the terms of the trust deeds.

Advisors, as highlighted earlier, should strictly adhere to sound origination standards and due diligence practices, in addition to exercising high standards of professionalism when distributing and trading such products. There is in fact stronger motivation from advisors to observe these standards to preserve their reputation in the market place.


Finally, investors must also play their part by rigorously pursuing their rights under the terms of the issue, and providing clear signal through their investment decisions, of any shortcomings in both the primary and secondary markets. I believe some of our investors are already exercising this role, but the involvement of a larger number of investors will certainly be more effective in enforcing discipline in the market place.

Long term direction for the Malaysian bond market

Ladies and Gentlemen,


Malaysia has the third largest bond market in the Asian region, as a percentage to GDP,1 and one of the most successful corporate bond markets among emerging countries. Even countries with significantly larger economies are using our experience as a model towards developing their own domestic bond markets. We need to build on this position of relative strength to promote the bond market as a key value proposition of our capital market.


For this to happen, we need to address the underlying domestic issues and also move towards greater internationalisation of our market, especially in support of our aspiration to build a stronger position in the Islamic finance space. We have seen more cross border capital market activities being undertaken, including by our intermediaries, and various initiatives being pursued on regional market integration. These developments are compelling us to start preparing ourselves to compete in an internationalised environment.


Within the bond market, there has been a gradual approach towards internationalisation. In the past, the market has largely been a domestic market for bond issuance and investment. However, over the years and following on from a series of gradual liberalisation measures, well-established foreign issuers ranging from multilateral development institutions, sovereign and quasi-sovereign, and multi national corporations have become familiar names in our bond market. For the year to-date, we have seen eight foreign entities issuing long-term ringgit-denominated bonds amounting to RM6.6 billion bringing the total issuances to RM10.3 billion.


Similarly, foreign investments in our bond market, excluding short-term money market instruments, have increased by more than five times to RM66.5 billion as at end-April 2008 from only RM11.6 billion in 2004, when the liberalisation measures were introduced to open up the domestic bond market to foreign issuers. Of this amount, RM15.1 billion has been invested in the corporate bond market. It is clear that we have benefited from a net inflow of foreign investment into our bond market.

28. As regulators, we are constantly on the look out for any structural issues or impediments that may prevent the markets from operating effectively. The market however must find its own equilibrium and there are sufficient self-correcting mechanisms to address any temporary anomalies.
29. A key area within the bond market has been the sukuk market which now features prominently in our capital market. A greater international dimension to our bond market is integral to our vision of becoming a leading international Islamic financial centre, with the sukuk market playing an important and prominent role.

The global sukuk market offers Malaysia vast opportunities. The total amount of sukuk outstanding as at end of 2007 was about US90 billion, of which more than 60% originated in Malaysia . The growing wealth in the Middle East is expected to continue to generate demand for sukuk and other Shariah-compliant products. At the same time, the proliferation of Islamic financial institutions and investment funds that are looking for the same asset class for their investments and capital purposes, should also spur the demand for sukuk.


Sukuk issuance also has strategic importance in attracting long-term funds from the Gulf region looking for high returns in infrastructure development projects in Asia . The Asian Development Bank estimates that Asia will require about US$300 billion of annual investments in infrastructure and there will be a shortfall of financing in the region of US$200 billion. A substantial amount of this shortfall will undoubtedly be financed by investors from the Gulf region, providing opportunity for more sukuk issuance.

32. It is therefore not surprising that many governments in the region have urgently announced legislative initiatives or plans to facilitate issuance of sukuk in their markets. These even include developed markets such as Japan , Singapore and Hong Kong . The Indonesian Government has also recently announced its plan to issue US Dollar and Rupiah-denominated sukuk later this year. It is clear that the competition in the region for a larger share of the market is growing intensely.
33. While Malaysia has a comparative advantage over many countries in the region, we need to maintain our leadership in the sukuk market. We have implemented various initiatives, including under the MIFC banner, to consolidate our position in the sukuk market, and we will continue to do more.
34. Malaysia ‘s aspiration of becoming an international Islamic financial centre cannot be realised through policy and regulatory interventions alone. Market participants need to play an equally important role to realise this common aspiration in making our sukuk market, and also the bond market in general, attractive to the wider international financial community, and this could be achieved in several ways.
35. First, there must be further efforts made to enhance the depth and breadth of the sukuk market through a more intensified product innovation process. As I have alluded to earlier, we have a strong lead in the sukuk market and this has been contributed to a large extent by the continuous innovation as seen by the number of “world-firsts” that we have achieved. But in a highly competitive environment, there is no room for complacency as other markets are catching up fast. The industry must continue to focus on this area to maintain our leadership in the sukuk market.
36. Second, market intermediaries must also take the necessary steps towards further enhancing relevant skills and expertise to expand their distribution capabilities to tap additional pools of liquidity and investors who may not be familiar with sukuk. In line with the aspiration to make Malaysia a leading international Islamic financial centre, our intermediaries should expand their distribution capabilities by going beyond the domestic sukuk market and beyond the ringgit investors.
37. Finally, I believe a lot more can be done in the area of promotions and marketing of our sukuk market. All players must contribute towards highlighting, promoting and marketing the success story of Malaysian sukuk market to a wider audience. The promotion of our sukuk market to the world at large is the collective responsibility of all.


Ladies and gentlemen


The Malaysian bond market has made significant progress over the past decade and established itself not only as a major source of financing for corporates in Malaysia but has also in the process, become one of the largest bond markets in the Asia-Pacific region.


In moving to the next phase of development, we must enhance the value proposition of the bond market. In this regard, the industry and the regulators must work together to ensure we address structural, competitive and regulatory issues as we move on in further developing and strengthening the bond market. This is an area where Malaysia has a definite head start giving us enormous opportunity to achieve further success.

Thank you for your attention.


1 After Japan and Korea.