RAM-SIDC Bond Conference
15 July 2019  |   By: Datuk Syed Zaid Albar, Chairman, Securities Commission Malaysia
Special Address by Yang Berbahagia Datuk Syed Zaid Albar
Chairman of Securities Commission Malaysia
at the RAM-SIDC Bond Conference
in Kuala Lumpur on 15 July 2019

Yang Berbahagia Tan Sri Amirsham Abdul Aziz
Chairman, RAM Holdings Berhad;

Puan Sharifatul Hanizah Said Ali
Chief Executive Officer, Securities Industry Development Corporation;

Distinguished guests, ladies and gentlemen.
Assalamualaikum warahmatulahi wabarakatu and a very good morning.

1. It is a pleasure for me to be at this RAM-SIDC Bond Conference 2019, and I would like to thank the organisers for inviting me here.
2. My speech will centre around three broad issues:
(i) building a deep, and liquid bond and sukuk market;
(ii) broadening the credit spectrum and widening the retail access; and
(iii) financing sustainable and green development and of course our SRI sukuk framework.
3. As a regulator, the SC believes that the pursuit of progress in the capital market is a shared endeavour. And it benefits from diversity of perspectives, as well as open conversations in the capital market.
4. In particular, while the SC is responsible for driving market regulation and development, the continuous feedback from market participants is not only essential, but I think is absolutely critical.
5. So by bringing together participants, including policymakers, investors, issuers and practitioners, forums such as this play a valuable role in catalysing conversations in this regard.
6. In this respect I would like to congratulate RAM and SIDC for organising this event, and for your continuous commitment to capacity-building and thought leadership.
7. I have no doubt that the insights gleaned from the innovations, challenges and best practices discussed in this conference today shall provide useful lessons for everyone.

Ladies and gentlemen,
Building a deep and liquid domestic bond market

8. The development of the bond and sukuk market is a long-standing policy priority for the SC.
9. From a macro perspective, the bond and sukuk market's ability to provide cost-efficient and long-term financing to both the public and private sector makes it integral to economic development and market resilience.
10. The depth and availability of onshore long-term financing not only diversifies the financing opportunities available to issuers, but also mitigates currency and maturity mismatch risks that could arise from offshore borrowings.
11. At the same time, the establishment of a local corporate bond and sukuk market has already benefited the buy-side by assisting to unlock domestic pools of liquidity.
12. Recognising the need for vibrancy, the SC has built an ecosystem of issuers, investors and intermediaries; all which operate within a facilitative regulatory framework.
13. A vital component are the rating agencies such as RAM. These information intermediaries have enabled greater transparency, and contributed towards building confidence in what was then a nascent segment of the capital market.
14. Now, these efforts have resulted in one of the deepest bond markets in Asia, with bonds and sukuk outstanding amounting to RM1.49 trillion as at end-June 2019.
15. And also, from a comparison perspective, as a percentage of GDP, the Malaysian bond market remains third-largest in Asia ex-Japan as at end-2018.
16. Concerted policy efforts have allowed Malaysia to emerge as the world's leading Islamic capital market. I am proud to say that as at end-2018, Malaysia accounted for 50.4% of the world's sukuk outstanding.
17. The depth of the bond and sukuk market, as illustrated by its size, has enabled it to become an important source of financing for the real economy.
18. Despite periodic bouts of volatility in the broader market, financing activities in the corporate bond and sukuk market remain relatively resilient with RM78.4 billion raised in the first six months of 2019.

Ladies and gentlemen,
Broadening the credit spectrum

19. The bond and sukuk market has had a transformative impact on the Malaysian economic landscape.
20. Our regulatory framework, ample liquidity and capital-raising infrastructure have even attracted foreign issuers into tapping this market.
21. These well-established elements provide a solid foundation to pursue the next phase of bond market development.
22. Our efforts are aligned with SC's own aspiration to build a AAA market, which is Accessible, Agile and Accountable.
23. From an accessibility perspective, one area of interest is widening the credit spectrum. While the bond and sukuk market is deep, the credit profile is, however, relatively narrow, with RM384 billion in papers rated as investment grade as at June 2019.
24. This has important policy implications, as the inability of lower-rated issuers to access the bond market may result in an inequitable two-speed financial system, where lower-rated issuers face constraints in accessing both market-based and non market-based financing.
25. This may impact the ability of Malaysia's emerging corporates to scale-up and grow into future blue-chip companies.
26. This is no doubt a complex and multi-faceted issue, which requires a market-based solution. This is for us to avoid potentially adverse long-term implications for the capital market at large.
27. For such issuers to come to market, however, they must be confident that sufficient demand exists from investors with the necessary risk capabilities and appetite for non-investment grade papers.

Ladies and gentlemen,
Widening retail access

28. Accessibility may also be considered from the investors' point of view.
29. While the Malaysian bond and sukuk market is traditionally regarded as a wholesale market, the SC believes that there is a place for fixed income instruments to be part of a well-diversified retail investment portfolio.
30. However, since the introduction of direct retail access to the bond and sukuk market in 2012, retail participation has remained low.
31. To further drive the impetus in the retail segment, in October 2018 the SC further liberalised our retail bond and sukuk framework by revising issuance requirements in the primary market, and introduced a seasoning framework to facilitate bond distribution in the secondary market.
32. Eligible bonds include conventional plain vanilla, subordinated and perpetual bonds and sukuk issued by licensed financial institutions.
33. Issuers, however, have continued to prefer issuing their papers in the wholesale market and in larger denominations.
34. This is driven by the ready availability of institutional demand in the primary market and the cost considerations involved in "slicing" up bonds into smaller denominations which are more appropriate for retail investors.
35. In this regard, we believe that investments in technology can help provide a potential solution. This can be evidenced by the entry of a technology-based platform in retail bond distribution.
36. And indeed, the application of fintech in the bond and sukuk market extends beyond distribution models.
37. As you may be aware, distributed ledger technology has already been utilised in a number of innovative transactions. For example, the launch of a blockchain bond by the World Bank and Commonwealth Bank Australia in August 2018, with secondary trading enabled in May this year.
38. From a buy-side perspective, advances in artificial intelligence and analytics have also driven better trading decisions, as well as efficiency in terms of pricing and lowering transaction costs.
39. To facilitate further efficiency, transparency and greater awareness, the SC has also launched, as what Tan Sri Amirsham said, the BIX in 2017. This provides the public access to information on bonds and sukuk issued in Malaysia, at the moment, for free, at no charge.

Ladies and gentlemen,
Financing sustainable development

40. Such initiatives, while important, are focused on improving existing market segments. However, it is important for us to take a step back and appreciate how the bond and sukuk market can play a much more fundamental role in the real economy.
41. One of the most pressing issues here today is the world's need to transition to a sustainable growth path.
42. This requires urgent, yet far-reaching transformation of our economic philosophy, values and business models. Climate resilience, for example, is an issue that used to be regarded as only a reputational risk, but is now increasingly accepted as a financial risk.
43. To illustrate the magnitude of losses arising from climate-related events, Lloyd's City Risk Index estimated that almost US$123 billion of the worlds' major cities' GDP could be at risk from threats such as drought, floods and heatwaves. Now, with the necessary investments in this area, exposure of global GDP could drop by US$73.4 billion.
44. Strengthening climate resilience requires significant investments in infrastructure and innovative endeavours such as waste management and renewable energy – all of which must be market-ready and scalable.
45. The level of financing required in this area is tremendous.
46. From a Malaysian perspective, the demand for financing will remain substantial, given the government's 20% renewable energy target by 2030.
47. For this to be possible, it is essential for the capital market to be equipped to mobilise private capital into financing sustainable investments.
48. To facilitate the deployment of private capital, we at the SC introduced an SRI Sukuk Framework which focuses on projects that will benefit the environment and society in general.
49. It recognises a wide range of projects pertaining to renewable energy and energy efficiency, natural resources, community and economic development, as well as waqaf assets and properties.
50. I am pleased to note that at the ASEAN level, a Sustainable Capital Markets agenda has been developed under the auspices of ASEAN Capital Markets Forum (ACMF) to guide the transition towards an inclusive and sustainable regional economy.
51. This has resulted in the release of the ASEAN Green Bond Standards, followed by the ASEAN Social Bond Standards and ASEAN Sustainability Bond Standards.
52. While this is still an emerging segment, interest has been growing. As at end-June 2019, eight issuers have come to market under the SC's SRI Sukuk Framework. Three of the issuances are also concurrently recognised as ASEAN Green Bonds.
53. Moreover, a total of 11 issuances have been made under the ASEAN Green and Sustainability Bond Standards, with issuers from Malaysia, Philippines, Thailand and Singapore.
54. Given the steadily growing investor interest in this space, there is a clear value proposition for issuers and green project sponsors in issuing a green SRI sukuk.
55. In addition to benefiting from tax incentives and a green sukuk grant, a green sukuk would enable such investors and fund managers to identify investible issuers, thus broadening their investor base and increasing their profiles.
56. This would also create awareness for the SRI agenda in the capital market, thus creating a virtuous cycle of greater interest and liquidity.
57. Nevertheless, notwithstanding the burgeoning interest, it is important to recognise that any asset class will still be exposed to ordinary commercial risks.
58. Hence, it is important for investors to continue to undertake robust due diligence and for our capital market intermediaries to uphold high standards of professional obligations.
Ladies and gentlemen,
59. In conclusion, I hope that my remarks have provided you with an overview of the SC's policy direction with respect to the Malaysian bond and sukuk market and helped to provide some context in the discussions that will ensue over the rest of the day.
60. So I wish you a productive conference ahead.
   
Thank you
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