Friday, October 8, 2010

Market Participants in the Malaysian Bond Market




Yesterday, you were introduced to the key infrastructure in the Malaysian bond market. Today, let us focus on the various players in the market. Below are the key players:
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1.  Principal Dealers
Bank Negara Malaysia (BNM) introduced this system in 1989. Principal Dealers are the intermediaries between BNM and investors in the Government bond and Government sukuk markets. They are required to participate in both the primary and secondary  markets. They are also required to take part in money-market auctions.
 Principal Dealers are authorised depository institutions for investors. To qualify for this status, which is renewable annually, they must bid for at least 10% of the securities made available during the primary auction. They are also required to bid for Malaysian Government Securities (“MGS”) on behalf of clients at the primary level. Principal Dealers must provide acceptable 2-way price quotations, to create liquidity in the secondary market. They must also maintain a minimum 5%-share of the secondary market’s traded volume.

2.  Non-Principal Dealers
Commercial banks, investment banks and Cagamas Berhad (the national mortgage corporation) are the other approved inter-bank institutions that are allowed to deal in the inter-bank market. Although they are not obliged to continuously quote 2-way prices, they are encouraged to participate actively in both primary auctions and secondary trading. Investors can appoint Non-Principal Dealers to act as agents, to buy and sell securities in the inter-bank market. Non-Principal Dealers are also authorised depository institutions for investors.


3.  Bond-Pricing Agencies
Bond-pricing agencies provide daily independent and objective fair values for all ringgit-denominated bonds. With this service, bond investors are able to conduct daily mark-to-market valuations for their portfolios. Currently, there is only one bond-pricing agency registered in Malaysia – Bond Pricing Agency Malaysia Sdn Bhd.

4.  Shariah Advisers
Prominent Shariah scholars, jurists or market practitioners are certified by the Securities Commission (“SC”) to provide Shariah advisory services. These advisers must provide follow Shariah principles that have been approved by the Shariah Advisory Council (“SAC’). Established in 1996 by the SC, the SAC is the ultimate body responsible for advising the SC on matters relating to the Islamic capital market, and to provide Shariah guidance on Islamic capital-market transactions and activities.

5.  Money Brokers
Money brokers help arrange deals between 2 or more approved inter-bank institutions. Money brokers may also arrange deals between banking institutions and foreign counterparties in the international money market. There are at present 8 money brokers in Malaysia.


6.  Underwriters:
Underwriters provide guarantees to issuers that there will be a minimum level of subscription or price for bond or sukuk issues . Underwriting fees will vary, depending on the amount issued, the credit rating assigned and the security provided to the underwriter.

7.  Lead Arranger
A lead arranger is appointed by the issuer to structure, arrange and manage their bond or sukuk issue. The lead arranger’s primary objective is to advise the issuer on the optimum financing structure. They help coordinate the underwriters, guarantors, trustees, lawyers, Shariah advisers and rating agencies. They also submit applications (to the regulators) vis-à-vis the bond or sukuk issuance. Upon obtaining the necessary approval from the regulators, the lead arranger will prepare the requisite information memorandum to potential investors, and execute the transaction.

8.  Facility Agent
The facility agent manages the overall coordination of the debt issue. It is the intermediary between the issuer and the Tender Panel Members. Generally, the facility agent is also the lead arranger, but not always.

 
9.  Tender Panel Members 
These are institutions that have been pre-approved to tender for the bond or sukuk issue at the primary level. The Tender Panel Members consist of eligible financial institutions, corporates, insurance companies, takaful operators, statutory bodies, pension funds and foreign corporations.

10.  Trustee
Trustees are the guardians of bond and sukuk holders ; they safeguard and enforce the rights of the latter. Trustees also convene bond and sukuk holders ’ meetings and, based on compliance (or lack thereof) with the trust deeds, declare defaults on bond or sukuk issues  on the instruction of the bond and sukuk holders  .

11.  Rating Agencies
Rating agencies conduct credit assessments on bond and sukuk issuers. They will maintain surveillance on the issuer throughout the life of the bond or sukuk. The assigned ratings provide an indication of the level of credit risk of the bond or sukuk. On their part, bond-pricing agencies use the rating information to accurately price bonds and sukuks. For investors, ratings can be used as a form of investment criteria to hold, buy or sell a particular bond or sukuk issue.


12.  BNM
BNM is the agent for Government bonds, including sukuks. The Central Bank is also an active issuer and investor, as part of the management of the country’s monetary policies. BNM used to be the regulator of the Malaysian bond and sukuk markets. Nevertheless, it still has responsibility over FAST and RENTAS. 

13.  SC
As the regulator of the Malaysian bond and sukuk markets, the SC is also the supervisor of some of the key market players, such as unit-trust management companies as well as rating and bond-pricing agencies.

14.  Commercial, Investment and Islamic Banks
These institutions have been the cornerstone of the Malaysian bond and sukuk markets. They represent both the “buy” and “sell” sides of the transaction, and are also a major group of bond and sukuk issuers in the local market.

 
15.  Provident and Pension Funds
These constitute the largest bond and sukuk investors in Malaysia. They play a pivotal role in the demand for long-term bonds and sukuks due to their long-dated liability profiles. Kumpulan Wang Simpanan Pekerja, more commonly known as the Employees Provident Fund or EPF, is the biggest investor in the Malaysian bond market.

16.  Insurance Companies and Takaful Operators
These entities are another type of long-term investors in the Malaysian bond and sukuk markets. Their investment strategies strictly follow the requirements set out by the Insurance Act 1996 and Takaful Act 1984, as well as the supervisory guidelines issued by BNM.
17.  Bursa Malaysia
Responsible to maintain the bond and sukuk markets trading data since March 2008. It also provides an electronic trading platform for market participants to trade bonds and sukuks via an exchange.

18.  Other Investors
Other participants in the Malaysian bond and sukuk market include large corporates such as Petroliam Nasional Berhad (or Petronas), asset-management companies and foreign organisations.

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