4. Marketplaces for corporate bonds in Asia
This chapter focusses on key aspects of marketplaces for corporate bonds, benefiting from the insights of the OECD Survey conducted among 19 regulators from 18 Asian jurisdictions and Australia. It covers issues such as listing fees, derivative markets, market makers, government bond markets and research on growth companies.
Marketplaces for corporate bond issuances and trading, along with securities designed to hedge associated risks, are essential in supporting company financing and enhancing the attractiveness of bond markets for investors. In Asia, many jurisdictions made great efforts to develop their fixed income markets to provide corporations with an important source of funding. The OECD Survey explores these aspects of the marketplaces for corporate bonds in Asia.
Sixteen1 jurisdictions have a dedicated segment for corporate bonds on their stock exchange, except for Thailand and Philippines. And thirteen jurisdictions reported having OTC markets, only Bangladesh, Lao PDR, China and Sri Lanka do not have an OTC market (Figure 4.1, Panel A).
Some jurisdictions have also implemented special markets. For example, in the Philippines the Dealing Exchange, an electronic trading platform for fixed-income instruments, plays a key role as a dedicated fixed income exchange and over-the-counter market operator. India has an alternative platform for corporate bonds which is called “Request for Quote”. On the platform, participants request a quote from multiple counterparts, and then negotiate and confirm the trade. Malaysia has both an exchange and an OTC market for corporate bonds. In addition to these marketplaces, the Malaysian Securities Commission has also introduced a regulatory framework for a peer-to-peer financing (P2P). On the electronic P2P platform, companies can access market-based financing to fund their projects or businesses. Indonesia offers a dedicated fundraising method for SMEs. In 2018, the Indonesian authority established securities crowdfunding. The scope of the crowdfunding was initially restricted to equity, but it expanded to include debt securities and sukuk in 2020. Companies that can use securities crowdfunding are limited to smaller companies, based on criteria related to ownership and asset size.2 In contrast to standard bond issuance arrangements such as public offerings or private placements, offerors of debt securities are not required to obtain a credit rating. Moreover, the appointment of a trustee, which is also a requirement for a standard procedure, is not necessary for securities crowdfunding (OJK, 2020[1]; 2020[2]).
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
Asian corporate bond markets are characterised by low secondary market liquidity, with regulators from only four jurisdictions (Indonesia, Malaysia, Chinese Taipei and Viet Nam) mentioning that large-company bonds are “often” traded in the secondary markets (Figure 4.1, Panel B). Japan, Korea and Singapore acknowledged that the secondary market for large-company bonds is more liquid than the one for growth-company bonds.
Most corporate bonds are primarily traded OTC and do not trade daily. Therefore, the lack of frequent pricing of corporate bonds can make it challenging for investors to access information about these securities and therefore discourage them to invest and trade. Moreover, lack of market prices could make pricing of the holdings in investors’ balance sheets very difficult. To facilitate transparency, regulators and self-regulatory organisations (SROs) often require the reporting of detailed trade information, and therefore they try ensuring that this information is disseminated to market participants. Common practice includes the reporting of reference prices or bid and ask prices before a trade is executed. The financial authority in Korea introduced a bond pricing agency that provides mark-to-market information on various bonds, including corporate bonds, to the market. In Indonesia, for example, reference pricing is reported through an electronic platform and disseminated by the Indonesian Bond Pricing Agency (IBPA). Additionally, other transaction details such as the transaction price, yield, and volume of the bonds must be reported and are made public immediately after the transaction (ICMA, 2022[3]; OJK, 2015[4]). In Japan, OTC transaction information is shared via the website of the Japan Securities Dealers Association (JSDA), an SRO, while transactions on the exchange are disseminated through the Japan Exchange Group (JSDA, 2019[5]).
The listing fees associated with corporate bond issuance vary across markets. In general, ten jurisdictions apply an initial listing fee, and six jurisdictions also charge an annual listing fee. The initial listing fee is charged when corporate bonds are admitted to the market, and an annual fee is charged for each subsequent year of listing. Of the 11 jurisdictions with information available, only Chinese Taipei does not impose an initial listing fee. Of the other jurisdictions, six have a fixed initial listing fee, whereas four adjust the fee depending on the amount issued (Table 4.1). For example, in Australia, issuances below AUD 3 million incur a fee of AUD 45 000, with any amount exceeding this being subject to an additional proportional charge, and the proportion decreases as the base amount increases. In China, the fee is 0.01% of the issuance amount, with a minimum fee of RMB 5 000 and a maximum fee of RMB 20 000. An annual listing fee is charged in six jurisdictions, with five jurisdictions basing the annual listing fee on the issuance amount and only Japan charging a fixed annual fee. Five jurisdictions do not impose an annual listing fee. It is noteworthy that while Hong Kong (China) does not have an annual listing fee, the initial listing fee is determined by the maturity period for each corporate bond. This approach ensures that the fee structure takes into account the length of time the bonds will be listed on the stock exchange which could be considered equivalent to imposing an annual fee.
As an illustrative exercise, Table 4.2 compares the fees across different jurisdictions for bond issuances of USD 10 million and USD 50 million, both with a projected maturity of five years. Among the jurisdictions examined, only Australia has a listing fee surpassing 1% of the issuance amount. Korea has the lowest initial and annual listing fees with its maximum initial fee capped at KRW 1.7 million (approximately USD 1 316). China’s fees are also competitive, for a bond issuance of USD 10 million, the fee is a mere 0.02% of the amount issued, and it is 0.04% for an issuance of USD 50 million.
A well-functioning derivative market plays an important role by allowing investors to manage the risks associated with investments in corporate bonds. For instance, foreign investors can use currency derivatives to hedge their exposure to corporate bonds denominated in local currency. Moreover, credit default swaps (CDS) enable further investors to manage default risks (IMF, 2004[6]).
Thirteen jurisdictions have a functioning derivative market available to help manage risks associated with corporate bond investment (Figure 4.2, Panel A). Both financial instruments for mitigating currency risk and interest rate risk are offered in the markets of 11 jurisdictions, while CDS are available only in seven jurisdictions (Figure 4.2, Panel B).
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
Market makers contribute significantly to providing liquidity in capital markets and they could play important role, in particular, in underdeveloped corporate bond markets. In 11 of the surveyed jurisdictions (Australia, Bangladesh, China, Indonesia, Korea, Mongolia, Pakistan, Philippines, Singapore, Chinese Taipei and Viet Nam) the legal or regulatory framework includes certain provisions regarding market making activities (Figure 4.3, Panel A). Despite the presence of such provisions, market makers in these jurisdictions tend not to be very active. In fact, regulators in over half of the jurisdictions with market making provisions (Australia, Bangladesh, Indonesia, Korea, Mongolia and Pakistan) acknowledge that the market makers are not active in their corporate bond markets. For instance, in the Philippines, although registration of at least one market maker is included in the listing requirement for corporate bonds, market makers are not active. While market making activities are potentially profitable, such provisions tend to include financial incentives to further support their activities. In Korea, for instance, market makers are exempted from trading fees and the stock change will provide financial incentives depending on their market making performance (Korea Exchange, 2015[7]).
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
The development of government bond markets generally improves the financial intermediation capacity of a market by establishing the required informational, legal and financial infrastructure. This enables the introduction of new financial products, including money market instruments, derivates and more importantly corporate bonds. At the same time, well-functioning corporate bond markets require a liquid benchmark local currency government bond yield curve. A domestic risk-free yield curve allows the pricing of risky securities, including corporate bonds.
Fifteen jurisdictions responded already have a well-established local currency government bond market whereas in Bangladesh, Cambodia, Mongolia and Pakistan, the local currency government bond market is still immature and currently developing (Figure 4.4).
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
Significant differences exist across jurisdictions when assessing the size of the government bond market (measured by the general government bond debt-to-GDP ratios) (Figure 4.5). In the region, Japan has the highest ratio of general government bond debt-to-GDP (261%). In six jurisdictions, the general government bond debt represented less than 50% of their respective GDP in 2022: Indonesia (40%), Bangladesh (39%), Cambodia (37%), Viet Nam (37%), Chinese Taipei (27%) and Hong Kong (China) (4%). In terms of outstanding amounts, China has the largest market for government bonds with almost USD 14 trillion, followed by Japan and India with outstanding amount of USD 11 trillion and almost USD 3 trillion, respectively. In the rest of jurisdictions, the size of the government bond market is less than USD 1 trillion.
The government bond market is in its very early stages of development in Bangladesh, Cambodia, Mongolia and Pakistan. Lao PDR despite not stating the non-existence of a local currency bond market has only active bonds denominated in non-domestic currency. Currently, Mongolia does not have a local currency government bond market, and until September 2022, Cambodia did not either. Some of the important components of a well-developed government bond market include extending the yield curve, setting up issuance calendars to improve transparency, increasing the disclosure of information on public debt issuance and statistics, holding regular meetings with dealers, institutional investors and rating agencies, introducing a system of primary dealers, and establishing a repurchase (repo) market in the government bond market.
In Asia, governments can borrow with maturities ranging from 15 years in Sri Lanka to 50 years in Korea and Singapore. The average maturity for the outstanding debt stock (where available) ranges between 6.7 years in Singapore to 11.9 years in India (Figure 4.5). Extending government debt maturities can mitigate refinancing risks, stabilise funding costs, and enhance investor confidence, fostering long-term fiscal planning. Additionally, the longest maturity in the yield curve serves as a crucial benchmark, influencing various financial instruments and providing insights into long-term market expectations and economic conditions. While the longest maturity may not necessarily indicate the level of market development, well-established government markets often have the capacity to issue longer maturities.
While credit ratings for domestic long-term government borrowing provide insights into the creditworthiness of a government and could include assessment of certain factors related to the level of the development of the market, they alone may not fully capture the overall development of government bond markets. Figure 4.5 provides information on the most recent rating for domestic long-term government debt, except for Cambodia, where the rating pertains to foreign currency long-term government debt. The majority of jurisdictions have an investment grade rating, except Bangladesh, Cambodia, Mongolia, Lao PDR, Pakistan, Sri Lanka and Viet Nam.
Note: Credit rating refers to the most recent rating displayed on the LSEG Issuer Ratings' screen for domestic long-term government debt, except for Cambodia, where the rating pertains to foreign currency long-term government debt. The average maturity of outstanding stock information is based on the latest available data. Specifically, for Japan, India, Malaysia, Australia and Indonesia, data is provided for the year 2023. For Korea and Viet Nam data refers to 2021, while for Bangladesh, data refers to 2020, for Singapore and Thailand data refers to 2019.
Source: IMF World Economic Outlook Database, LSEG.
The most developed markets in Asia have measures in place to improve the transparency and promotion of government bond markets. For example, the Australian Office of Financial Management (AOFM) employs various means to engage with financial markets. Weekly announcements provide details on upcoming transactions, while broader guidance on issuance plans, including annual volumes and the introduction of new bond lines, is disseminated a few times annually. Additionally, the release of weekly notices for forthcoming transactions maintained a consistent schedule, ensuring predictability, and all tenders and syndications were conducted in accordance with the information provided in those notices (AOFM, 2023[8]). Likewise, in Japan, following established debt management policies, the government carefully communicates with the market through various meetings for the formulation and operation of the issuance plan. The aim is to align issuance closely with market requirements and address the diversification of bondholders (MOF Japan, 2023[9]). Additionally, Japan, has a system of primary dealers to ensure secure and stable issuance, while sustaining and enhancing liquidity in government bond markets. This system grants specific privileges to select auction participants who undertake essential responsibilities aligned with debt management policies (MOF Japan, 2023[10]). In Korea, the financial market hosts various government bond-related markets, including the repo market, STRIPS,3 futures, and ETFs, which have been introduced by the Korean government to contribute to the overall promotion and enhancement of the primary government bond market and the broader market ecosystem (Korean Ministry of Economy and Finance, 2021[11]).
The availability of research on companies issuing securities can facilitate the development of corporate bond markets by providing investors with information on companies and therefore supporting informed trading. This is particularly important for growth companies as they often lack analyst coverage that could introduce these companies to the market and keep investors updated. To mitigate the information gaps between growth companies and investors, jurisdictions in many parts of the world, including Asia, have introduced measures to provide research coverage for smaller companies. For example, in Europe, the Hungary’s stock exchange subsidises the research activity of brokerage companies. Furthermore, in Romania, the Bucharest Stock Exchange developed a programme called BVB Research Hub, with the purpose of facilitating research coverage for small and mid-cap companies (OECD, 2022[12]).
More than half of the jurisdictions (Australia, China, Hong Kong (China), India, Indonesia, Japan, Lao PDR, Malaysia, Chinese Taipei and Viet Nam) have an institution or intermediary that provides research on growth companies (Figure 4.6, Panel A).
Source: OECD Survey on Access to Corporate Bond Markets for Growth Companies in Asia, see Annex B for details.
In 80% of the jurisdictions having an institution in charge of providing research on growth companies, investors are able to access this information at no cost or at a reasonable price. The cost of this research can represent a barrier to accessing such information. In Asia, investors in Australia and Indonesia can access some information on growth companies at no cost, while it is perceived as costly in Lao PDR and Viet Nam (Figure 4.6, Panel B). In Australia, China, Hong Kong (China), India, Japan, Malaysia and Chinese Taipei, investors are able to access some research on growth companies at a reasonable price. In particular, in Indonesia, all market participants can access data about SMEs as it is provided at no cost by the Ministry of Cooperatives and SMEs. Malaysia implemented a research programme on SMEs via governmental agencies (Malaysia External Trade Development Corporation and SME Corporation Malaysia) to accelerate the reputation and credibility of growth companies.
References
[8] AOFM (2023), Australian Office of Financial Management - Annual Report 2022-23, https://www.aofm.gov.au/sites/default/files/2023-10-19/AOFM%202022-23%20Annual%20Report_WEB.pdf.
[3] ICMA (2022), ICMA Bond Market Transparency Directory, https://www.icmagroup.org/market-practice-and-regulatory-policy/secondary-markets/market-transparency/global-overview-of-bond-market-post-trade-transparency-regimes/.
[6] IMF (2004), Emerging Local Securities and Derivatives Markets, International Monetary Fund, https://doi.org/10.5089/9781589062917.083.
[5] JSDA (2019), Rules Concerning Publication of Over-the-Counter Trading Reference Prices, etc. and Trading Prices of Bonds, https://www.jsda.or.jp/en/rules-guidelines/E45.pdf.
[7] Korea Exchange (2015), KRX BondsALL, https://global.krx.co.kr/contents/GLB/06/0604/0604010100/GLB0604010100.jsp#d3f4f32f89474168cc558d9631a5d5a0=5.
[11] Korean Ministry of Economy and Finance (2021), Korea Treasury Bonds, https://ktb.moef.go.kr/eng/publications.do.
[9] MOF Japan (2023), Debt Management Report 2023, https://www.mof.go.jp/english/policy/jgbs/publication/debt_management_report/2023/esaimu2023.pdf.
[10] MOF Japan (2023), JGB Market Special Participants Scheme, https://www.mof.go.jp/english/policy/jgbs/debt_management/pd/index.html (accessed on November 2023).
[12] OECD (2022), Capital Market Review of Romania: Towards a National Strategy, OECD Publishing, Paris, https://doi.org/10.1787/9bfc0339-en.
[1] OJK (2020), Regulation No. 20/POJK.04/2020 Concerning Trustee Contracts for Debt Securities and/or Sukuk, https://ojk.go.id/id/regulasi/Documents/Pages/Kontrak-Perwaliamanatan-Efek-Bersifat-Utang-dan-atau-Sukuk--/POJK%2020-2020.pdf#search=20%2FPOJK%2E04%2F2020.
[2] OJK (2020), Regulation No. 57 /POJK.04/2020 Offering securities through technology-based crowdfunding services, https://ojk.go.id/id/regulasi/Documents/Pages/Penawaran-Efek-Melalui-Layanan-Urun-Dana-Berbasis-Teknologi-Informasi/pojk%2057%20-%2004%20-%202020.pdf#search=No%2E%2020%2FPOJK%2E04%2F2020.
[4] OJK (2015), Regulation X.M.3 Reports of Securities Transaction Decision of the Chairman of the Capital Market and Fiancial Institutions Supervisory Agency Number: KEP - 123/BL/2009 Concerning Reports of Securities Transaction, https://ojk.go.id/en/kanal/pasar-modal/regulasi/klasifikasi-bapepam/peraturan-lainnya/Documents/01TerjemahanPeraturanXM3_1420162665.pdf.
Notes
← 1. Out of the 18 jurisdictions providing information in this chapter.
← 2. The eligibility for using securities crowdfunding is restricted to companies that meet the following criteria: i) a legal entity independent of another legal entity; ii) a non-public company; and iii) a legal entity with net worth less than IDR 10 billion (c. USD 645 thousand).
← 3. A financial instrument that separates the principal and interest of bonds and enables trading of them as marketable securities.