Interbank Dealer Broker - IDB David Rogers July 25-26, 2000 Jakarta, Indonesia

Forces underlying bond growth Local demand  High savings rate  Predictable cash flows  Asset/Liability Matching  Bonds provide the right risk profile Foreign Demand  Attractive yields  Improved Sovereign risk outlook  Policy Liberalisation  Portfolio diversification

Supply Factors  Increase in Government borrowing  Need for benchmark yield curves  Falling interest rates/tighter spreads  Exchange rate stability  Increased market liquidity/interest  Maturity mismatch between loans and investments  Long-term infrastructure needs

Development of a Government Bond Market Primary Markets /Market Makers Developing Process

Development of a Government Bond Market Primary markets/ Market Maker  Essential in building deep liquid markets Expertise  Distribution  Pricing  Market Making

Development of a Government Bond Market Benchmarks Primary Markets /Market Makers Developing Process

Development of a Government Bond Market Benchmarks  definition : reference securities with exact dates, issued in a wide range of maturities with adequate size for the market to trade in.

Development of a Government Bond Market BenchmarksRepurchaseAgreements Primary Markets /Market Makers Developing Process

Development of a Government Bond Market Benefits of REPO’s  Ability to service customer flow  Liquidity  Investment alternative for investors  Financing positions at a lower cost  Arbitrage [cash (vs) futures]

Development of a Government Bond Market BenchmarksRepurchaseAgreements SecondaryMarkets Primary Markets /Market Makers Developing Process

Development of a Government Bond Market Secondary Markets  Liquidity - Are there enough players participating in the market to show competitive prices?  Depth - Are there adequate issues placed into the market? Do 2-way prices still exist after the first or second week of the original issue date?  Transparency - Who has a clear picture of what an issue is really worth at any given time?

Development of a Government Bond Market BenchmarksRepurchaseAgreements SecondaryMarketsInter-BankDealers Primary Markets /Market Makers Developing Process

Development of a Government Bond Market Role of Inter-Dealer Broker  Brings the various market makers together  Disseminates to the market via telephone, screen or a combination of the two  Facilitates the development of the secondary market  Liquidity  Depth  Transparency  Earns commission for arranging trades at pre-agreed fees

IDB vs Market Marker IDBs  No positions in the market.  Bi-partisan, independent role  Best efforts, best execution  For a pre-agreed commission Market Maker  Willing to support or participate in market by giving two way prices  Takes positions  Trades for a spread

Markets without an IDB Yes, they can and do exist…  Without an IDB in the market it may at times be difficult to execute trades  Finding out the value of securities could be difficult  IDBs’ help offshore investors to understand the limitations of a market. Help with liquidity and execution

Development of a Government Bond Market BenchmarksRepurchaseAgreements SecondaryMarketsInter-BankDealers Clearing and Settlement Primary Markets /Market Makers Developing Process

Development of a Government Bond Market Clearing / Settlement System  Securities - usually issued and held in scriptless form/computer format  Transfers placed over a wire system, such as money transfers  Central Bank/Govt entity usually provides electronic book-entry format system  These systems contribute to liquidity, and settle securities quickly and effectively

Development of a Government Bond Market BenchmarksRepurchaseAgreements SecondaryMarketsInter-BankDealers Clearing and SettlementRegulations Primary Markets /Market Makers Developing Process

Development of a Government Bond Market Market Regulation  Creating a framework conducive for dealers/brokers  A committee comprised of dealers, IDBs, and regulatory groups to deal with any trading situations by general consensus  US - National Association of Securities Dealers, (NASD) a division of the Securities Exchange Commission (SEC)  UK - (SFC) Securities & Futures Commission regulates market

Regional Bond Markets Hong Kong  US$14bn outstanding/ Daily turnover US$2.0 bn  100+ Recognized Dealers  29 market-makers / two-way prices  Govt auction/can trade via CMU with links to Euroclear and Cedel  7 IDBs [5 international/ 2 local]  Screens + name-give-up on completion  Small repo market

Regional Bond Markets Hong Kong  promote efficiency, integrity, and development of the financial system  promote development of the local debt market through improving market infrastructure and promote issuance of high quality debt instrument

Development of a Government Bond Market BenchmarksRepurchaseAgreements SecondaryMarketsInter-BankDealers Clearing and SettlementRegulations Primary Markets /Market Makers An Effective Government Bond Market Developing Process

Prebon Yamane Group No substitute for knowing the market  Foreign exchange, money markets, derivatives, securities (fixed-income and equities), energy and emerging markets  Brokers transactions exceeding US$55 trillion annually - world-wide client base  31 international offices, 10 in Asia  New Products and Regional specialist  Leader in fixed income, illiquid debt, credit and debt derivatives