SINGAPORE - Officials from central banks, regulatory agencies, global clearing houses and investment banks met in Singapore today to explore whether Asia needs a regional bond clearing and settlement system to reduce foreign exchange risks to investors and make them less vulnerable to market fluctuations.
At a conference organized by ADB, experts from government and private sector discussed whether a regional settlement system would help strengthen market infrastructure for bond trading in Asia.
The participants at the conference discussed current developments, challenges and risks and ways to improve the region's bond clearing and settlement infrastructure.
The impressive growth and high returns offered by local currency denominated Asian bonds in recent years has caught the attention of both global and regional investors.
"Asian debt as an asset class is maturing. The growing number of first time issuers underscores the shift away from excessive dependence on bank financing," said Foong Hock Meng, President and Director of PIMCO Asia Pte Ltd.
As Asian investors, both institutions and individuals, buy more foreign currency and regional bonds, both private sector and governments are looking to reduce financial vulnerabilities and improve efficiency of regional bond markets.
"The buildup of a cost-effective and secure settlement system can significantly improve investors' confidence, and this in turn can contribute to the development of domestic and regional bond markets in the region," said Mr. Jong-Wha Lee, Head of ADB's Office of Regional Economic Integration.
Under the ASEAN+3 Asian Bond Markets Initiative, ADB was requested to examine the linkage between cash and securities settlement and also look into the option of setting up a regional settlement system.
While local settlement arrangement systems for various instruments, regional and global custodians can handle current transaction volumes, as regional markets mature and investors do more cross-border transactions, the importance of a regional settlement system will assume significance.
Investment banks and global custodians have also lent their support to efforts to improve the regional settlement and clearing system as it could help improve trading of foreign currency bonds in the Asian time zone and improve the depth of the market.
"A full range of securities finance possibilities is necessary for the trading activity that generates liquidity. Securities finance requires collateral to alleviate risks, so a regional solution that could provide centralized collateral management services will help to enhance liquidity in the region's bond market," said Diana Chan, Managing Director of Global Transaction Services at CITI in London.
A regional system could also be a conduit to international markets for issuers and investors in the less-developed parts of the region.
"In a world of index funds, ETFs, CDOs, and complex cross border transactions, the creation of robust clearing and settlement platforms becomes a critical success factor," said Hon Cheung, Regional Director of the Official Institutions Group for State Street Global Advisors in Asia.
The inputs gathered from the conference will be used by ADB, regional government officials and central banks to help formulate policies to strengthen market infrastructure for more vibrant Asian bond markets.