Asia's stock exchanges are ramping up efforts to boost liquidity in the region's local currency bond markets as they target a greater share of fixed-income trading. Bourses from India to New Zealand are rolling out initiatives, ranging from online bookbuilding to retail trading, to fill the gap left by the exit of traditional market makers.
"Banks and broker-dealers have pulled back from making markets in bonds, so anything that serves as a source for liquidity is a good thing," said Vijay Chander, executive director for fixed income at the Asia Securities Industry and Financial Markets Association. Last December, Singapore Exchange launched SGX Bond Pro, an over-the-counter trading venue for Asian bonds. The platform, which began with US dollar and euro credits, plans to expand into local currencies - expected to include Singapore dollars.
SGX is also working on providing on-exchange electronic bookbuilding for Singapore dollar bonds, sources have told IFR, though exchange officials say a launch is not imminent. "It's just an idea at the moment," said Tng Kwee Lian, head of DCM at SGX. "We need to see what the market wants." Similar moves are afoot elsewhere in Asia. The Securities and Exchange Board of India has called for bookbuilding of large issues of rupee bonds to be conducted through exchanges from next month.
"Sebi has mandated all issues above 5 billion rupees ($74 million) to be conducted through the electronic bookbuilding mechanism," said Huzan Mistry, strategic business head for currency, currency derivatives and fixed income at the National Stock Exchange of India. "This has to be made available by July 1." The Australian Securities Exchange has also looked into providing on-exchange bookbuilding for bonds and hybrids - as it already does for some equity offerings. However, it has no immediate plans to change the current format, according to a spokesperson.
Using such a platform for primary offerings raises the chances that investors will use it to trade bonds in the secondary market. Participants are hopeful that SGX's Bond Pro platform will drive secondary activity in the Singapore dollar bond market. Global bond trading platform MarketAxess reported $1.04 billion of trading volume in Asian local currency bonds from January to April this year. Malaysian ringgit bonds were most active, with Indonesian rupiah notes next, then Thai baht paper and Singapore dollar bonds trailing in fourth place.
"If they (SGX) promote it as a trading platform, as opposed to an exchange listing, that could provide a fillip to trading volumes, and that is to be encouraged," said Chander. Others say bookrunners first need to take some responsibility for providing liquidity in the issues they bring to market. "The idea is good, but the underlying problems of Singapore dollar bonds are how the deals are originally placed and whether the originators have a commitment to provide liquidity," said a Singapore-based former credit trader.
"Repo facilities are needed so that you can borrow bonds to make a market. The underlying problems need to be addressed before you will see the liquidity come." Hong Kong Exchanges and Clearing is also working on a Bond Connect trading link to allow locally based investors to trade renminbi bonds out of China, but has yet to give details. This follows its Stock Connect platform for equities, which allows Hong Kong and PRC investors to trade in stocks from the other jurisdiction, subject to a daily cap on flows.
SGX estimates that around 80 percent of all Asian bond trading is done through voice orders, but the trend towards electronic trading of local currency bonds is growing, and exchanges hope to benefit from this. In Australasia, exchange trading of domestic bonds has grown after broadening the investor base to include more retail investors.
Australia's Financial System Enquiry recommended in December 2014 that large listed corporations should benefit from a simplified disclosure regime to make it easier for them to sell so-called "simple" corporate bonds. Australian government bonds have been quoted and traded on the ASX since May 2013, helping to increase trading activity. The number of bonds traded on the New Zealand Exchange grew 33.7 percent year on year in April on the back of an increase in issuance as companies have found that listed notes tend to price at slightly lower yields than unlisted ones.
The Financial Markets Conduct Act has made it easier for issuers to sell to both institutional and retail investors in the same offering. Late last year, the Local Government Funding Authority's NZ$5.6 billion ($3.8 billion) bond increased by 40 percent in one swoop the amount of debt securities on the NZX. SGX, too, has opened up many of its bond offerings to retail investors. There have been several primary offerings with tranches reserved for individual saver and, last month, it introduced a "seasoning" framework, which allows retail investors to trade certain existing corporate bonds from large, established issuers six months after the paper is listed.
One of the factors driving European banks and traders to buy and sell bonds on electronic platforms is not expected to be significant in Asia. The European Union's MIFID II regulations, which require greater pre-trade and post-trade transparency, will cause some over-the-counter trading to move to regulated platforms, but that is not expected to have much of an effect on Asia at present. "Most Asian bonds will not meet the liquidity threshold to come under the purview of MIFID II, but we are most definitely focused on it," said Asifma's Chander. One of the tests is that bonds must have traded on at least 80 percent of days in a quarter to be considered liquid and subject to the rules, which will put most Asian bonds out of contention.
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