Time ripe for Singapore to become Asian corporate bond trading hub

THE corporate bond market in Asia is still in a nascent stage of development. Although many international portfolio managers have mandates for pan-Asian investments, the Asian bond market itself is fragmented, with multiple, conflicting regulatory regimes, market structures and tax laws.

Equally important is that the Asian corporate bond market lacks price transparency, liquidity, and a central regulator with statutory authority to require reporting of secondary market transaction data. This is in contrast to the United States, where the Trade Reporting and Compliance Engine (TRACE), set up by the Financial Industry Regulatory Authority (FINRA), fulfills that role by providing detailed information about almost all transactions in the US corporate bond market, which trades over-the-counter with no central trading platform.

Since 2002, US broker-dealers registered with FINRA have an obligation to report all corporate bond transactions to TRACE under the watchful eyes of the Securities and Exchange Commission (SEC).

Several published research evaluating TRACE's impact on liquidity, valuation, market impact, transaction costs and other aspects of the US corporate bond market, have shown improvement in transparency and efficiency in this important market. Indeed, such research not only forms the basis for regulatory policy making in the US, but serves as an input for business development strategies for the broker-dealers themselves.

The Singapore Exchange (SGX) is a truly unique pan-Asian exchange with a fully-integrated value chain, which includes trading and execution, clearing and settlement, and depository services. Apart from being Asia's most international exchange for equities, with over 40 per cent of listings originating from outside of Singapore, it also boasts of a robust derivatives exchange hosting the world's biggest offshore market for Asian equity index futures.

Not many may be aware that the China, India and Japan equity index futures contracts on the SGX are some of the most actively-traded derivative contracts in the world, and contribute to equity price discovery in this important region. The predecessor of SGX, the Singapore International Monetary Exchange, was Asia's first financial futures exchange and launched the first Japanese equity index futures, the Nikkei 225. This is something Singapore should be proud of, particularly since there is no other pan-continental equity derivatives exchange of a similar nature in the world.

These exchange-related accolades are not just happenstance. Singapore became a centre for financial excellence, including in pan-Asian derivatives trading, due to its reputation for being Asia's most globalised city with a highly-educated, talented and professional workforce, a prudent regulatory environment, and an incorruptible, market-based system with strong institutions of character.

Of course, the increasingly rare stellar AAA sovereign credit rating by the rating agencies has also helped Singapore become the leading Asian counterparty for the clearing of financial and commodity products.

There are several other tangible examples of the pan-Asian initiatives of several Singapore companies, including Singapore Telecommunications, Singapore Post, Changi Airport and Port of Singapore Authority. Financial markets and investors, as connected by the SGX, also fit this general pattern of Singapore's primacy in Asian economic affairs.

PRIVATE-PUBLIC-ACADEMIC PARTNERSHIP

Given the aforementioned reasons, we think the opportunity and time are nigh for Singapore to be the Asian bond trading hub.

The needs are evident: an ageing population seeking retirement adequacy; Asian corporate and sovereign bond issuers' searching for global capital; and the region's dire need for institutional and retail investors' working capital and liquidity management, and infrastructure financing - both of the multilateral lender sort and capital markets-driven ones. These call for the development of a transparent, deep and liquid pan-Asian corporate bond trading platform.

To get such a lofty pan-Asian initiative truly off the ground, there needs to be deep collaboration between industry, the exchanges, government and the academe.

This was indeed the case when the SEC and FINRA, in partnership with the industry and the academe, developed the now successful bond trading, reporting and compliance framework for the US. The celebrated TRACE platform not only helps better regulate the bond market, but along with the academic research emanating from the database, informs market participants on the reliability and quality of the trading data, liquidity and transparency, and overall trading and execution efficiency of the US bond markets.

To this end, the SGX has already announced its intention to launch an Asian corporate bond trading platform, which is to be done in close consultation with the industry.

What is needed alongside this platform is the development of a research-quality database on Asian bonds, akin to TRACE, which will enable academics and researchers to pursue value-adding and impactful research on issues such as Asian bond liquidity, valuation, market impact and transaction costs. Some Asian markets, like Malaysia, South Korea and Thailand, have recently enacted reporting requirements that are akin to TRACE, but this is primarily for bond dealers only.

The database will also lead to the hosting of industry-related events and forums that share and disseminate research ideas with the industry that will further improve financial market performance.

The private-public-academic partnership approach proposed here will lead to Singapore not just being a trading and execution hub for Asian bonds, but a thought leader in financial knowledge creation and innovation, especially when it comes to fixed income markets and products.

Singapore has achieved its Most Favourite Nation status in business and finance because it has long-resisted the temptation to be inward-looking or insular, a trap some of the major economies in Asia frequently fall into, especially during periods of financial economic stress, such as today.

We think the time and opportunity are ripe for Singapore to step up to become the pre-eminent Asian corporate bond trading and research hub.