Options for regional bond settlement discussed at Asian Development Bank conference

By Angela McDaniels

Seattle, April 16 - Officials from central banks, regulatory agencies, global clearing houses and investment banks met in Singapore on Monday to explore whether Asia needs a regional bond clearing and settlement system, according to an Asian Development Bank news release.

At a conference organized by the bank, participants discussed whether Asia needs a regional settlement system to reduce foreign exchange risks to investors and whether such a system would strengthen market infrastructure for bond trading in Asia.

The bank said that impressive growth and high returns offered by Asian bonds denominated in local currency in recent years has caught the attention of 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," Foong Hock Meng, president and director of Pimco Asia Pte Ltd., said in the release.

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, according to the bank.

"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," Jong-Wha Lee, head of the bank's office of regional economic integration, said in the release.

Under the ASEAN+3 Asian Bond Markets Initiative, Asian Development Bank was asked to examine the linkage between cash and securities settlement and to look into the option of setting up a regional settlement system.

The bank said that while local settlement arrangement systems for various instruments, regional and global custodians can handle current transaction volumes, the importance of a regional settlement system will assume significance as regional markets mature and investors do more cross-border transactions.

Investment banks and global custodians have also lent their support to efforts to improve the regional settlement and clearing system because it could help improve trading of foreign-currency bonds in the Asian time zone and improve the depth of the market, according to the release.

"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," Diana Chan, managing director of global transaction services at CITI in London, said in the release.

A regional system could also be a conduit to international markets for issuers and investors in the less-developed parts of the region, the bank noted.

"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," Hon Cheung, regional director of the official institutions group for State Street Global Advisors in Asia, said in the release.

The inputs gathered from the conference will be used by the bank, regional government officials and central banks to help formulate policies to strengthen market infrastructure for Asian bond markets.

Asian Development Bank is a Manila-based multilateral development finance institution.

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