The Flow of a Bond Issuance - Part 3 - Secondary Level - Trading process and market conventions

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Once issued at the primary level, investors are free to sell it down at the secondary market level. Here is where the bond market trading (as we know it) happens.

Government securities and other scripless debt instruments, including sukuks, are traded in the secondary or "over-the-counter" (“OTC”) market - either via a money broker, direct dealing through telephone or via the Electronic Broking System (“EBS”). Principal Dealers are committed to continuously providing 2-way prices for MGS. Every morning, Principal Dealers will submit and advertise their indicative bids and offers on all benchmark securities in the BIDS system. Financial institutions that are Non-Principal Dealers may also choose to become market makers by quoting 2-way prices in the BIDS system. All trading done via the OTC market must be captured by the BIDS system, where the sellers of securities will key in the deal and the buyers will confirm the same within a stipulated 10-minute cut-off time from trade execution.

Normal business hours for a regular Government securities trade is for standard settlement or value spot, i.e. 2 business days (T+2) settlement, from 9.00 am to 4.30 pm Mondays to Fridays, excluding holidays. Government securities can also be traded based on value today, value tomorrow or value forward.

All trades are settled on a DvP basis, although free-of-payment (“FoP”) settlement is also available where necessary. As the securities are scripless, ownership and transfer of Government securities are reflected as book entries in the ADIs’ custody accounts with BNM in RENTAS. Non-RENTAS members, such as institutional investors and other financial institutions, can transact scripless securities via their ADIs. Cash payments of coupons and redemption proceeds will be passed to the investors via their respective ADIs.

Payment Settlement

Investors can purchase debt securities in the primary market by submitting bids to Principal Dealers, which are all members of FAST. In 2005, FAST was upgraded to a web-based application, thus allowing better dissemination of information and transparency vis-à-vis primary-market activities.

 Meanwhile, the settlement of primary and secondary market transactions for Government securities and unlisted PDS - including sukuks - take place through the Scripless Securities Trading System (“SSTS”), which is part of RENTAS. Established in 1999 by BNM, the payment system comprises the Inter-bank Funds-Transfer System ( or IFTS), which deals with large-value fund transfers, and the SSTS, which allows the book-entry settlement and record-keeping of holdings of scripless debt securities. A sale or purchase of securities from one party to another involves a book entry and intra-day settlement of funds in the cash-settlement account maintained with BNM. The RENTAS system, which has straight-through-processing (or STP) capability, will process, transfer and settle inter-bank funds and scripless transactions simultaneously, in real time. The RENTAS system is a DvP system, i.e. securities and funds are settled throughout the day.

For custody, the securities issued are in the form of Master Certificates and lodged by the issuer directly with BNM, as the authorised depository for custody. BNM will hold the Master Certificate on behalf of all the holders and their scripless securities accounts, for the purpose of trading and transfers. For non-RENTAS members, the function of recording the holdings and transactions is undertaken by ADIs, which maintain aggregate cash and securities holdings accounts with BNM. The ADIs maintain a separate account for every holder that is their customer.

Market Convention

Long-dated Government securities are traded on a “clean price” basis, but settled on a “dirty price” basis that includes accrued interest or dividends. Treasury bills are traded on a “discount yield” basis and quoted in maturity bands of 1 to 10, depending on the number of days to maturity. Treasury bills that fall under the same maturity bands are equally acceptable for delivery for any band-based quotations. Prices and discount yields are typically quoted up to 2 decimal places for all transactions. The standard settlement period is T+2, although trades can also be settled on the same day or the next day, or forward settlement of usually not more than T+5. The standard market lot per transaction between market participants is RM5 million. Odd-lot amounts of less than RM5 million are also traded, but not as frequently and at potentially wider bid-offer spreads under normal market conditions.

Coupons on individual Government securities are usually paid semi-annually, and the day count is actual/actual. At present, there is no standard coupon-payment date. Coupons are paid at semi-annual intervals, determined backwards from the maturity date of the issue. MGS and GIIs are typically issued in a precise number of years, with the maturity date being the exact date of the issue’s anniversary. As such, there is naturally no odd-first or odd-last coupon period, with only a few exceptions. A business day is defined as any working day from Monday to Friday in the Federal Territory of Kuala Lumpur, excluding any day which is a public holiday or bank holiday.