The Development of Corporate Bond Markets in Emerging Market Countries

THE DEVELOPMENT OF CORPORATE BOND MARKETS IN EMERGING MARKET COUNTRIES The Emerging Markets Committee of the International Organization of Securities Commissions MAY 2002 2 Table of Contents Chapter 1 : Objective of this paper ................................................................................. 1 Chapter 2 : Rationale for developing a domestic bond market.................................... 3 2.1 An alternative source of domestic debt finance .................................................. 3 2.2 Lower cost of capital........................................................................................... 4 2.3 Reduced risks associated with maturity and currency mismatch........................ 4 2.4 Broadening of capital markets ............................................................................ 5 2.5 Efficient pricing of credit risk............................................................................. 5 2.6 Promotes financial stability................................................................................. 6 Chapter 3 : The survey ..................................................................................................... 7 3.1 Background ......................................................................................................... 7 3.2 Survey findings ................................................................................................... 8 3.2.1 Financial and economic development......................................................... 8 3.2.2 Bond market size, structure and liquidity ................................................. 13 3.2.3 Benchmark securities ................................................................................ 20 3.2.4 Regulatory and tax framework for the corporate bond market................. 26 3.2.5 Corporate bonds: Issuers and investors..................................................... 38 3.2.6 The impact of macroeconomic policies on bond market development .... 48 3.2.7 Market microstructure............................................................................... 53 Chapter 4 : Issues and initiatives................................................................................... 64 Chapter 5 : Appendix ..................................................................................................... 71 5.1 Introduction....................................................................................................... 71 5.2 Economic environment ..................................................................................... 72 5.3 Size and structure of the debt securities market................................................ 76 5.4 Liquidity ratios.................................................................................................. 78 5.5 Benchmark and government debt securities ..................................................... 80 5.6 Legal, regulatory and tax framework for the bond market ............................... 84 5.7 Corporate bonds: Issuers and investors............................................................. 99 5.8 Macroeconomic policies and bond market development................................ 109 5.9 Market microstructure..................................................................................... 113 Chapter 1 : Objective of this paper This paper was prepared under a mandate from the Emerging Markets Committee (EMC) of the International Organization of Securities Commissions (IOSCO), given to the EMC Working Group on Secondary Market Regulation (Working Group 2), to examine issues concerning the development of domestic bond markets in emerging market jurisdictions. The mandate was driven by several considerations. First, the financial and economic events during 1997–98 drew attention to the over-dependence of several EMC member economies on their respective domestic banking systems as a source of financing. In many cases, this implied the need for broader and deeper capital markets, in particular, the further development of their domestic bond markets. A second consideration is that information on bond markets in EMC jurisdictions is not as readily available as information on other market segments, notably the equity market. There is, therefore, also substantial scope for compiling fundamental information about the current state of bond market development across these jurisdictions. In the last decade or so, major structural changes have taken place in the organizational and regulatory framework of domestic bond markets in many EMC jurisdictions. The mandate seeks to collate this information and provide a brief analysis with regards to the overall d