New SC measures to strengthen corporate bond market – Greater investor protection through enhanced price transparency and professional standards

Following the announcement by the Minister of Finance II on 24 January 2006 regarding the new measures to be introduced to strengthen the corporate bond market, the Securities Commission (SC) today released the implementation details of these key measures. These measures comprise the release of a new set of guidelines to facilitate the introduction of bond pricing agencies (BPA) and a practice note detailing the regulatory requirements for recognition of credit rating agencies (CRA) in Malaysia.

These measures are part of the SC’s continuous efforts to develop the Malaysian corporate bond market, with greater emphasis on price transparency and professional conduct of intermediaries that will enhance the level of investor protection and soundness of the bond market in general.

Introduction of Bond Pricing Agencies

Under the Guidelines on the Registration of Bond Pricing Agencies (BPA Guidelines), a BPA must be registered with the SC to provide independent and objective fair value prices, on a daily basis, for all Ringgit-denominated bonds traded in the over-the-counter (OTC) bond market.

The BPA Guidelines, issued pursuant to the Securities Industry (Bond Pricing Agency) Regulations 2006, provide the registration procedures and regulatory requirements to be met by BPAs. These regulatory requirements include fulfilling the requirements on independence, expertise, due process in bond pricing, fees and fit and proper requirements in respect of its directors and key management.

This measure will benefit the fund management industry, in particular the unit trust industry, as a reliable and independent set of fair value prices is now available for licensed fund managers and institutional investors to mark-to-market their bond portfolios on a daily basis. Arising from this, investors will have timely, consistent and comparable information on the net asset value of funds which invest in OTC bonds.

Recognition of Credit Rating Agencies

The SC has also released a Practice Note on Recognition of Credit Rating Agencies by the Securities Commission for the Purpose of Rating Bond Issues. This Practice Note provides a set of recognition criteria to ensure that CRAs exercise high standards of professionalism and due diligence in rating and monitoring corporate bonds and Islamic securities as well as provide adequate and timely dissemination of rating information to the investing public. As CRAs play a critical role in the bond market and their credit opinions have significant impact on investors and the bond market as a whole, it is vital that the credibility and integrity of CRAs are maintained at all times.

Towards this end, the SC will exercise greater oversight over CRAs through the set of recognition criteria in the Practice Note. The Practice Note is released pursuant to the Guidelines on the Offering of Private Debt Securities, and the Guidelines on the Offering of Islamic Securities where ratings of such bonds and Islamic securities must be obtained from CRAs recognised by the SC.

The recognition criteria place importance on the quality and integrity of the rating process, transparency and timeliness of rating disclosure, monitoring and updating process, independence and avoidance of conflict of interest, adequacy of expertise and resources of the CRAs, and are in line with the principles set out in the International Organization of Securities Commission’s Code of Conduct Fundamentals for Credit Rating Agencies (IOSCO CRA Code). CRAs are also required to adopt the IOSCO CRA Code in their own codes of conduct and disclose how they have implemented the various provisions of the IOSCO CRA Code.

The new Guidelines and Practice Note are available on the SC website.