2. A Brief Profile Of Bond Market
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The bond market in Malaysia has developed significantly in terms of market size, range of
instruments and efficiency.
• The development of the bond market centres on the need to establish a well-diversified
financial base to meet the changing needs of the Malaysian economy.
• Concerted measures to develop the bond market were taken by the Government, and success
of these efforts are reflected in the significant growth of the bond market, marking Malaysian
bond market as one of the fastest growing bond markets in Asia.
• Among the recent key initiatives are:
– The Government issued its inaugural Callable MGS 5NC3 in December 2006 and followed by
MGS 10NC5 in February 2007;
– The Government introduced switch auction in January 2007 to improve the overall market
liquidity by replacing the off-the-run MGS with the on-the-run MGS;
– Bank Negara Malaysia issues its first Sukuk Ijarah Notes in February 2006, as an additional tools
to manage liquidity in the banking system;
– Bank Negara Malaysia issued the inaugural Bank Negara Monetary Notes (BNMNs) to replace
the Bank Negara Bills and Bank Negara Negotiable Notes in December 2006. BNMNs can be
issued on discount-to-value, fixed-rate or floating rate coupon bearing bonds. In July 2007, the
first floating rate BNMNs were issued
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3. • As at end-July 2007, the size of the bond market reached
RM527.3 billion, approximately 92.1% of GDP.
• The bond market has a balance mix of both public sector and
private sector bonds each contributing 55.5% and 45.5% share
of total bond outstanding respectively.
• Today, the corporate bond market makes up approximately a
quarter of the total debt financing (including bank loans) to the
economy compared with around 10% in 1997.
• Such rapid growth is a reflection of the expanding private sector
financing needs, especially the considerable infrastructure
development needs in Malaysia, which require more long-term
financing, have provided a strong impetus to the market.
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4. • A wide variety of debt securities products are available in the
Malaysian bond market, such as fixed coupon bearing bonds, floaters,
asset-backed securities, convertible bonds, callable bonds, etc. Bond
issuers include, among others, the Government of Malaysia, Bank
Negara Malaysia, quasi government institutions, corporations as well
as multilateral development banks (MDBs).
• To date, a total of seven issuances of MDB bonds, totalling RM3.7
billion have been issued in Malaysia.
• More importantly, Malaysia, among the key Islamic financial centres,
offers a wide variety of Islamic bonds that are based on Shariah
compliant concept.
• As at end-July 2007, Islamic bonds accounted for 33% of total bond
outstanding.
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5. Government Debt Securities
• Malaysian Government securities are marketable debt instruments issued by the
Government of Malaysia to raise funds from the domestic capital market to
finance the Government's development expenditure and working capital.
• The central bank, Bank Negara Malaysia in its role as banker and adviser to the
Government, advises on the details of Government securities issuance and
facilitates such issuance through various market infrastructures that it owns and
operates.
• Currently, the various forms of Government securities in Malaysia are:– Malaysian Government Securities (MGS) - interest bearing long-term bonds
issued by the Government of Malaysia to raise funds from the domestic capital
market for development expenditure.
– Malaysian Treasury Bills (MTB) - short-term securities issued by the
Government of Malaysia for working capital.
– Government Investment Issues (GII) and Malaysian Islamic Treasury Bills
(MITB) - long-term and short-term non-interest bearing Government securities,
respectively, issued based on Islamic principles by the Government of Malaysia.
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6. Objective of issuance
• MGS were initially issued to meet the investment needs of the Employees
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Provident Fund (EPF), local banks and insurance companies.
In the late 1970s and early 1980s, MGS were issued to finance the public
sector's development expenditure.
In contrast, by the 1990s, the purpose of MGS issuance was extended to
funding part of the Government's budget deficit and prepayment of some of the
Government's external loans.
The Government continued to issue MGS during the fiscal surplus of 19931997 to meet the market demand for MGS.
GII and MITB, on the other hand, were issued to allow Islamic banks to hold
liquid papers that meet their statutory liquidity requirements.
The issuance of these papers also enabled them to invest their liquid funds in
instruments that are issued based on Shariah principles as they are unable to
purchase or trade in Malaysian Government Securities (MGS), Malaysian
Treasury Bill (MTB) or other interest-bearing instruments.
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7. Private Debt Securities
• In the late 1980s, Bank Negara Malaysia was the Government
agency responsible for the regulation of corporate bond issuance.
In March 1993, the Securities Commission (SC) was established to
act as the single regulatory body to promote the development of
the capital market, in particular to rationalise securities market
regulations.
• Spurred by strong economic growth, and supported by the efforts
of regulators and market participants, the corporate bond market
has expanded considerably over the years. The corporate bond
market registered an average annual growth of 8% since 2000,
reaching the size of RM209.7 billion as at end-June 2006.
Corporations have turned their attention towards the bond
market as a viable alternative to bank borrowings and the equity
market. Investors are also able to adjust their risk-return profile
through the trading of various securities available in the market.
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8. Key Participants
• Financial institutions are the key players in the bond market, in
bond originations and secondary market trading.
• The Principal Dealership system was introduced since 1989.
Under this system, Bank Negara Malaysia appoints on an annual
basis selected banking institutions as Principal Dealers (PDs) based
on a set of criteria, including their capabilities to handle large
volume transactions as measured by their shareholders' fund, their
secondary market trading volume and the overall risk
management capabilities. The PDs are obliged to participate
actively in the primary and secondary market, to bid for at least
10% of the instruments specified in the primary auction (MGS,
GII, MTB, MITB) and to provide reasonable two-way price
quotations under all market conditions in order to ensure liquidity
in the secondary market.
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There are six money brokers in the Malaysian market currently, in charge of arranging deals
between two or more approved interbank institutions. Money brokers may also arrange deals
between banking institutions and foreign counterparties in the international money market. Money
brokers charge brokerage fees for services provided.
Cagamas Berhad ("Cagamas"), the National Mortgage Corporation and leading
securitisation house, was established in 1986 to promote the secondary mortgage market in
Malaysia. Cagamas has, through the years, evolved and diversified its business model from that of a
national mortgage corporation seeking to aid Malaysians with affordable housing, to becoming a
leader in securitisation.
Cagamas issues debt securities to finance the purchase of housing loans and other consumer
receivables from financial institutions, selected corporations and the Government. The provision of
liquidity, capital and risk management tools at a reasonable cost to the primary lenders of housing
loans encourages further financing of houses at an affordable cost.
Cagamas is the second largest issuer of debt instruments after the Government of Malaysia and its
debt securities have been rated AAA by RAM Rating Services Berhad and Malaysian Rating
Corporation Berhad.
The role of Cagamas in today's market has evolved to include playing an important and active role
as a catalyst for the Governments' and Bank Negara Malaysia's initiative for the economy and
financial sector.
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10. • To ensure all Islamic capital market products are in compliance with the
Shariah principles, the Shariah Advisory Council (SAC) was established in 1996
by the SC for the onshore market. The SAC comprises prominent Shariah
scholars, jurists and market practitioners and their role is to advise the SC on
matters relating to the Islamic capital market and to provide Shariah guidance
on Islamic capital market transactions and activities.
• Rating agencies provides independent opinions on the credit risks and potential
default risk of specific issuers. To promote transparency in the bond market,
information on ratings is widely disseminated to all existing and potential
private debt securities investors on a timely manner. The first rating agency,
Rating Agency Malaysia Berhad (RAM) was established in November 1990,
while the second rating agency, Malaysian Rating Corporation Berhad (MARC)
was incorporated in October 1995. Currently, all issues, offers or invitations of
private debt securities must be rated by a rating agency recognised by the
Securities Commission, unless exemptions were given the Securities
Commission.
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11. Types of Securities (Conventional)
Bank Negara Monetary Notes (BNMN)
Malaysian Treasury Bills (MTB)
Malaysian Government Securities (MGS)
Khazanah Bonds
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12. Islamic
Bank Negara Monetary Notes-i (BNMN-i)
Malaysian Islamic Treasury Bills (MITB)
Government Investment Issue (GII)
Sukuk Bank Negara Malaysia Ijarah (SBNMI)
Merdeka Savings Bonds
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13. Comparison between
Conventional and Islamic
Government Securities
• The conventional securities and the Islamic securities differ
only in its structure in terms of complying with Islamic
principles in its issuance.
• Islamic Government securities are similar to conventional
Government securities in terms of their effective cash flows,
issuance structure, legal status in being a direct obligation of
the Government, its holdings and nature of transaction as
financial products.
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