Asia Local Markets Guide 2012

PLEASE REFER TO THE LAST PAGE FOR DISCLAIMER
EMERGING MARKETS RESEARCH

December 2011
ASIA LOCAL MARKETS
2012 GUIDE
Barclays Capital | Asia Local Markets Guide 2012

27 December 2011 1
FOREWORD
Representing more than 20% of global GDP and expected to contribute around 60% of
global growth in 2012, Emerging Asia continues to be a focal point for international
investors. However, the idiosyncratic nature of Asian policies and markets makes it
challenging for many to get a sufficiently deep understanding of the markets and the subtle
differences among various instruments. Our Asia Local Markets Guide 2012 is intended to
provide such an understanding and better position investors to take advantage of the many
opportunities that exist in the region.
In this publication, we detail the monetary, currency and fiscal policies as well as the
regulatory environment in key Emerging Asia bond and currency markets. We also provide
insights into the transmission of monetary policy into financial markets, detailing the
various instruments that are traded in each market and identifying the main drivers.
This guide is intended to help facilitate a dialogue with our analysts and with the trading
and sales professionals at Barclays Capital who are dedicated to serving your investment
needs providing you with the information and analysis that we hope will lead to more
informed investment decisions.
We welcome feedback and look forward to working with you in 2012 and beyond.

Jon Scoffin
Head of Research, Asia Pacific and Head of Credit Research


27 December 2011 2
TABLE OF CONTENTS
CHINA 4
Monetary policy environment ................................................................................................................. 4
Money markets and policy rate transmission...................................................................................... 7
Interest rate derivatives...........................................................................................................................12
Bond markets ............................................................................................................................................14
Fiscal policy and credit ratings..............................................................................................................18
Fixed income instruments reference guide........................................................................................19
Currency policy and foreign exchange markets................................................................................20
FX reference guide...................................................................................................................................22
HONG KONG 24
Monetary policy environment ...............................................................................................................24
Money markets and policy rate transmission....................................................................................27
Bond markets ............................................................................................................................................31
INDIA 38
Bond markets ............................................................................................................................................45
INDONESIA 55
Bond markets ............................................................................................................................................61
Fiscal policy and the sovereign credit rating......................................................................................66
MALAYSIA 70
Policy rate transmission..........................................................................................................................73
Bond markets ............................................................................................................................................77

27 December 2011 3
PHILIPPINES 88
Bond markets ............................................................................................................................................92
SINGAPORE 98
Policy transmission............................................................................................................................... 102
Interest rate derivatives........................................................................................................................ 105
Bond markets ......................................................................................................................................... 107
Fiscal policy and credit ratings........................................................................................................... 111
Fixed income instruments reference guide..................................................................................... 112
Currency policy and foreign exchange markets............................................................................. 113
FX reference guide................................................................................................................................ 114
KOREA 115
Monetary policy environment ............................................................................................................ 115
Money markets and policy rate transmission................................................................................. 119
Bond market ........................................................................................................................................... 125
TAIWAN 135
Money markets and policy rate transmission................................................................................. 138
Bond markets ......................................................................................................................................... 144
THAILAND 153
Policy rate transmission....................................................................................................................... 157
Bond markets ......................................................................................................................................... 162
APPENDIX: USEFUL LINKS 172


27 December 2011 4
China
FI Strategist: Ju Wang +65 6308 2801; ju.wang@barcap.com
Monetary policy environment

Policy objectives
Price and currency stability; relatively fast and stable growth;
full employment; balance in international payments.
MPC frequency and membership
The MPC meets quarterly, but policy decisions can be
made at any time. Decisions are recorded in "meeting
minutes; the PBoC can decide RRR and discount rate
changes on its own but State Council approval is required
for annual credit growth/money supply, interest rate,
exchange rate targets.
The MPC comprises the governor of the Peoples Bank of
China and two deputy governors, a deputy secretary-
general of the State Council, a vice minister of the NDRC, a
vice finance minister, the administrator of SAFE, the
chairman of the CBRC, the chairman of the CSRC, the
chairman of CIRC, the commissioner of the NBS, the
president of the China Association of Banks and an
academic expert. (For details on the PBoC, see Asia-Pacific
Central Banks: 2012 Guide, 4 November 2011).
Monetary policy tools
Policy rates: Both lending and deposits are regulated in
China. Policy rates are the 1y lending rate (Bloomberg
ticker: CHLR12M) and 1y deposit rate (Bloomberg Ticker:
CNDR1Y). Since 2004, commercial lending rates have been
allowed to vary by 0.9-1.7 times the 1y lending rate for
commercial banks and by 0.9-2 times the 1y lending rate
for rural credit cooperatives. Deposit rates up to 5y are still
regulated. The spread between the lending and deposit
rates, a key source of banking system profits, remains
wide and largely unchanged 15 years after China began
the interest rate liberalisation process in 1996.
Open market operations: The PBoC began conducting
open market operations (OMOs) in October 1998. Cash
bond trading initially was the most common tool, but was
replaced by bond-based repo transactions to avoid
affecting the bond market. The PBoC began auctioning
central bank bills to conduct OMOs in 2003, when it ran
out of government bonds issued by the Ministry of
Finance in the face of large FX inflows.
The frequency of OMOs has been kept at twice a week
(Tuesday and Thursday) since 2003. Currently, 52 primary

Summary table of monetary policy
Objective
Maintain price and currency stability, economic growth,
high employment, balance in international payments
Policy rate 1y lending and deposit rates
2011 monetary
targets
M2 growth of 16% and an implicit new loan target of
CNY7-7.5 trn
MPC
The PBoC's MPC is a consultative body for setting
monetary policy. Its responsibilities, composition and
working procedures are prescribed by the State Council
MPC frequency Meets quarterly
Policy tools
Reserve requirement ratio, open market operations,
discount window, "window guidance"
The People's Bank of China (PBoC)
Source: PBoC

Policy rate, RRR, discount rate and inflation (%)
-2
0
2
4
6
8
10
2001 2003 2005 2006 2008 2010 2011
%
0
5
10
15
20
25
1y deposit rate 1y lending rate
CPI (y/y) RRR ratio (%, RHS)
Source: CEIC, Bloomberg, Barclays Capital

1y deposit rate and spread vs 1y lending rate
0
1
2
3
4
5
6
7
8
9
Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 Jun-11
0
50
100
150
200
250
300
350
400
1y lending - deposit rate spread (bp, RHS)
1y deposit rate

27 December 2011 5
dealers participate in the bill auction process (most are
domestic commercial banks, but policy banks, securities
firms, insurance companies and asset management firms
are also included; two locally-incorporated foreign banks
have also been selected as PDs). The PBoC inquires about
the primary dealers interest (level and size) one day in
advance and announces the auction size (Dutch style) at
4:30pm local time on that day.
Currently, instruments used for OMOs are 3m, 1y and 3y
PBoC bills. 1y bills are auctioned every Tuesday and 3m bills
on Thursday. The 3y bill is used to lock in liquidity for longer
periods and is seen as a powerful tool. Its issuance has
varied from weekly to no auction at all. The 1y bill auction
yield is widely seen as a leading indicator of the policy rate,
particularly in hiking cycles. Primary and secondary market
bill yields can diverge, depending on market expectations of
future rates and interbank liquidity conditions.
Other key OMO instruments are repos and reverse repos.
Compared to bills, repos have shorter terms and are used for
fine-tuning liquidity purpose. In repo transactions, which
are held on Tuesdays and Thursdays without prior notice, the
PBoC sells securities to the market with an agreement to buy
them back at a specified date. Repos take liquidity out of the
system, which is returned when the contract matures.
Reserve repos have the opposite impact on market liquidity.
They are rarely used and are conducted only with select large
banks when liquidity is deemed as too tight. The interest rate
charged by the PBoC for reverse repos tends to be
significantly higher than bill and repo rates to discourage
over-reliance on the central bank to provide liquidity.
Reserve requirement: The reserve requirement ratio
(Bloomberg Ticker: CHRRDEP) is the percentage of
deposits banks are required to place with the central bank.
Only cash is acceptable. The PBoC currently pays 1.62%
on required reserves, 0.72% on excess reserves and 0% on
foreign currency reserves. Banks adjust their reserves with
the PBoC on the 5th, 15th, and 25th of every month
depending on their deposit base and RRR levels.
On 25 April 2004, the PBoC adopted a system of
differentiated reserve ratios. Different required reserve
ratios were applied to financial institutions according to
their capital adequacy ratio and asset quality, with weaker
institutions subject to higher RRRs. In an effort to sterilise
FX inflows and fight inflation in 2011, the PBoC hiked the
RRR to a historical high of 21.5% for big banks and 19.5%
for small banks. In September 2011, PBoC broadened the
RRR deposit base to include margin deposits for bank
acceptances, letters of credit and guarantees, absorbing
Monthly OMO drains and injections (CNY bn)
-1400
-1200
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
1200
2014 2013 2012 2011 2010 2009
Maturing bills Maturing repo Issued bills Issued repo
Policy deposit rate, PBoC bill auction and secondary market
yields (%)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jul-
09
Nov-
09
Mar-
10
Jul-
10
Nov-
10
Mar-
11
Jul-
11
Nov-
11
1y PBoC bill secondary market rate
1y deposit rate
1y PBoC bill auction yield

Monthly FX inflows, RRRs and net OMOs (CNY bn)
-1200
-800
-400
0
400
800
1200
2011 2010 2009 2008 2007 2006 2005 2004
RRR (incl. margin deposits RRR) Net OMOs FX inflows


27 December 2011 6
an estimated CNY900bn of liquidity. On 30 November
2011, the PBoC cut the RRR for all banks by 50bp,
reversing the tightening trend.
Rediscount and relending rates: The rediscount rate
refers to the rate at which the PBoC discounts bills for
financial institutions while the relending rate is the rate at
which the PBoC relends to financial institutions on an
outright basis. Rediscount and relending rates are not
changed as frequently as policy rates. The last move was
on 30 December 2010 when the PBoC raised the
rediscount rate by 45bp, to 2.25%, and 1y relending rate
52bp, to 3.85%. Due to structurally high excess liquidity
and concerns about raising regulatory attention, banks in
China rarely resort to the PBoC for relending or
rediscounting funds.
Credit quota, M2 and total social financing: Credit
instruments are the most important policy tool in China,
including loan targets and administrative measures such
as window guidance to guide the pace and sometimes
direction (industries or regions) of bank lending. Over the
past 20 years, the implementation of credit policies has
become more indirect to avoid distortion. The PBoC
targeted M2 growth of 16% for 2011 and new loans of
CNY7.0-7.5trn.
However, the PBoC has increasingly monitored total social
financing, a broader indicator of the financial system that
includes banks off-balance-sheet lending and direct
financing, as well as bank loans.
In October 2011, the PBoC expanded the definition of M2
to include deposits at non-depository financial institutions
and social housing funds. Given the rapid development of
nonbank financing activity, the PBoC is still considering a
creating a broader money supply measure, M2+.
Administrative measures: The government also uses
administrative measures to control inflation, which is an
increasingly important policy objective in China.
Rediscount rate vs. policy deposit rate (%)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11
Rediscount rate 1y deposit rate
Source: CEIC, Barclays Capital

Credit and money growth trends
5
10
15
20
25
30
35
2001 2003 2004 2006 2007 2009 2010
-200
200
600
1000
1400
1800
New loans (CNY bn, RHS)
M2 y/y
Source: Bloomberg, Barclays Capital

Total social financing (CNY trn)
0
3
6
9
12
15
2
0
1
1

(
Q
1
-
Q
3
)
2
0
1
0
2
0
0
9
2
0
0
8
2
0
0
7
2
0
0
6
2
0
0
5
2
0
0
4
2
0
0
3
2
0
0
2
New yuan loan Loan in foreign currency
Entrusted loan Trust loan
Bank acceptance Corporate bond
Equity financing Others

27 December 2011 7
Money markets and policy rate transmission

Interbank and repo market yearly turnover (CNY trn)

0
20
40
60
80
100
120
140
2011 2009 2007 2005 2003 2001 1999 1997
Bond repo Interbank


Term structure of national interbank borrowing (CNY bn)

Overnight 1w 2w 3-4w 1m 2-3m 4-12m
2002 202 852 - 100 29 11 12
2003 642 1,456 189 57 44 10 3
2004 283 1,041 64 28 19 9 3
2005 223 896 46 61 30 7 2
2006 635 1,290 147 38 19 12 1
2007 8,030 2,178 274 50 34 35 7
2008 10,651 3,500 474 111 114 45 19
2009 16,167 2,135 598 102 205 54 6
2010 24,486 2,427 506 65 161 47 20
2011 26,089 3,924 906 215 269 109 31

Note: *Figures are total trading volume over certain period.

Interbank market participants by volume (November 2011)
Overview
The money markets in China underwent drastic
developments towards the end of the last century when
the country started to liberalise its interest rate system.
The major money markets include interbank lending and
borrowing, the repurchase market, the securities markets
and the bill market. The bond repo market is the largest
with a current daily turnover of CNY400-500bn. The PBoC
manages reserve requirement ratios and conducts OMOs
in the interbank market to influence the monetary base to
achieve its monetary targets. The correlation between
OMO interest rates and money market rates has been
strengthened. However, as interest rates offered by
commercial banks on deposits and loans are still subject to
control, the transmission between the policy and money
market rates remains weak.
Interbank lending and borrowing
A unified national interbank market was formed in China
in 1996. It arranges non-guaranteed financing among
financial institutions, which is settled through the CFETS
trading system. Various terms are available: 1d, 7d, 14d,
21d, 1m, 2m, 3m, 4m, 6m, 9m and 1y. The majority of
borrowing is overnight and within one week.
Starting in June 1996, financial institutions were allowed to
fix rates for interbank lending and borrowing. These rates
(Chibor) are published regularly. However, Chibor, which
is based on transacted rates, has failed to become
established as a useful benchmark in China.
On January 4 2007, the PBoC formally launched the Shibor
(Shanghai interbank offer rate; Bloomberg Ticker: SHIF1W)
aiming to develop a benchmark market rate for the rapidly
growing bond and money markets. Shibor is a simple,
non-guaranteed, wholesale interest rate calculated by
arithmetically averaging all the interbank RMB lending
rates offered by the price quotation group of banks with a
high credit rating. Currently, Shibor consists of eight
maturities, overnight, 1w, 2w, 1m, 3m, 6m, 9m and 1y.
The National Interbank Funding Centre is responsible for
the Shibor calculation and fixing disclosure at 11:30am
each trading day. The price quotation group of Shibor
consists of 16 commercial banks. These quoting banks are
primary dealers for open market operations or market
makers in the FX market, with robust information
disclosure processes and active RMB transactions in
China's money market.

Share
holding
commercial
bank
44%
City
commerical
bank
16%
State-
owned
commerical
bank
18%
Foreign
funded or
joint funded
insititution
9%
Other
financial
institution
12%
Rural
commerical
bank and
cooperative
bank
1%


27 December 2011 8
Relative to Chibor, Shibor is a more market-sensitive
benchmark as it is based on quoted rates, with maturity
extending to one year. However, Shibor is less liquid than
the repo market and carries a higher credit risk premium as
it is uncollateralised. As no actual transactions are needed to
set reference rates, Shibor fixing is at risk of manipulation.
Banks have the incentive to set the fixing higher as to price
Shibor-linked loans at higher rates. Floaters, rediscount
rates, and short-term bills are linked to Shibor.
Repo market
Bond repo transactions first started in China in 1991 and
were carried out via the Shanghai Stock Exchange. At the
beginning of 1997, the PBoC ordered commercial banks to
transfer repo trading from the stock exchange to the
interbank bond market. Compared with interbank
borrowing, repos are more active and the interest rates
more stable, and represent the full liquidity of the financial
market. Pledged repos are the dominant format. Large
state-owned banks tend to be the main suppliers of liquidity
in the repo market, while smaller banks, insurers, securities
firms and fund managers are net recipients.
Pledged repos are a financing act in which a borrower
(positive party) pledges bonds to a lender (reverse repo
party) in return for funds. The two parties also agree that
when the positive repo party returns the borrowed funds,
calculated at the specified repo rate, the reverse repo party
lifts their rights over the pledged bonds. Terms for pledged
repos range from 1 day to 365 days but overnight
transactions are dominant and actual deals longer than
three weeks are very rare.
Based on data from the trading system, volumes and prices
for pledged repo transactions are publicly released
according to 11 term periods: 1d, 7d, 14d, 21d, 1m, 2m, 3m,
4m, 6m, 9m and 1y. Trading hours are 9:00-12:00am and
1:30-4:30pm, excluding Chinese statutory holidays.
Market participants include commercial banks, rural credit
cooperatives, urban credit cooperatives and other deposit-
taking financial institutions, insurance companies, securities
companies, fund management companies, financial
companies and other non-bank financial institutions with
bond trading licences, and foreign-funded financial
institutions that conduct RMB business. The two trading
parties, at the specified deal termination date, handle the
gross settlement of funds at their own risk in accordance
with the deal sheet. Depository bond settlement is carried
out through the China Central Depository & Clearing Co.,
Ltd, while funds settlement is conducted through the China
National Automatic Payment System of PBC.
Collateralised and noncollateralised market borrowing rates (%)
-5
0
5
10
Oct-06 Oct-07 Nov-08 Nov-09 Dec-10 Dec-11
-10
10
30
50
bp
7d Shibor
7d repo
7d Shibor - 7d repo (RHS)

Interbank bond market daily turnover (CNY bn)
0
100
200
300
400
500
600
700
800
900
1000
Dec-11 Aug-11 Mar-11 Nov-10 Jul-10 Mar-10
Spot Pledged repo Outright repo

Pledged bond repo borrowing term structures (by trading
volume)
14y
4%
1m-1y
1%
21d
2%
1d
75%
7d
18%


27 December 2011 9
Pledged repo market participants by volume (Nov 2011)
Share
holding
commercial
banks
17%
State-
owned
commercial
banks
17%
City
commercial
banks
24%
Rural
commercial
and
cooperative
banks
9%
Foreign
funded or
joint funded
institutions
2%
Other
financial
institutions
31%

Bill discount rate vs. other money market rates (%)
0
2
4
6
8
10
12
May-08 Jan-09 Oct-09 Jun-10 Mar-11 Nov-11
Rediscount rate
6m bank note discount rate
7d repo
3m Shibor
0
2
4
6
8
10
12
May-08 Jan-09 Oct-09 Jun-10 Mar-11 Nov-11
Rediscount rate
6m bank note discount rate
7d repo
3m Shibor

Policy rate, PBoC bill auction yield, monetary market rate and
interest rate paid by PBoC on excess reserves (%)
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Jan-07 Oct-07 Aug-08 Jun-09 Apr-10 Feb-11 Dec-11
7d repo
1y PBoC bill (primary market)
Interest paid on excess reserves
1y deposit rate
Outright repos refer to a bondholder (positive repo party)
selling bonds to a buyer (reverse repo party), which the
former will repurchase from the latter at a specified future
date and at a predefined price. Terms for outright repos
range from 1 day to 91 days. Based on data from the
trading system, volumes and prices for outright repos are
published according to seven terms: 1d, 7d, 14d, 21d, 1m,
2m and 3m. Trading hours, market participants and
settlement procedures are the same as for pledged repos.
The daily repo fixings use the median of all repo prices
transacted via the China Foreign Exchange Trade System
(CFETS) between 9:00 and 11:00. Most trades occur in the
morning session, and all trades must be transacted over
CFETS. The overnight repo (R001), 7d repo (R007), and
14d repo (R014) is posted on the CFETS website at 11:00
am on each trading day. The 7d repo fixing includes all
trades with 2-7d tenors (inclusive). The 7d repo fixing is
also used as a benchmark for the IRS curve (Bloomberg
Ticker: CNRR007).
Bills market
The commercial paper market, including bank
acceptances, bills of exchange, discount and rediscount
bills, has developed rapidly since the late 1990s. Typical CP
maturities are 9m to 1y. Since December 2010, short-term
commercial paper (SCP) with maturities of less than 270
days were launched by the National Association of
Financial Market Institutional Investors (NAFMII).
In China, the cost of issuing bills is determined by the
market, hence bills are seen as superior for financing
compared with controlled short-term lending rates.
FX deposits and swaps
Banks, non-bank financial institutions, non-financial
enterprises or their authorised branches that have FX
interbank lending business licences, can all take FX
deposits. Lending transactions for USD, EUR, HKD, JPY,
GBP are allowed.
Policy rate transmission
As commercial banks interest rates on deposits and loans
are still subject to control, there is a loose relation between
the policy deposit rate and the interbank rate.
Instead, the PBoCs quantitative tools (RRRs, OMOs) have
more impact on interbank rates. Compared with OMOs,
where participation is voluntary, RRR changes are a
stronger tool, as they are imposed on all banks and can
squeeze the smaller banks, which tend to be net
borrowers.


27 December 2011 10
The PBoC achieves its monetary aggregate targets
through adjusting its degree of sterilisation of FX inflows
via changes in reserve requirements or open market
operations as well as credit quotas. This sets the basic
tone for market liquidity. However, government fiscal
spending patterns, seasonality in currency in circulation,
regulations on banks loans and deposits as well as fund
flows such as IPOs/bond issuance/state company
dividend payments also influence liquidity from time to
time. Fluctuations in money market rates tend to be more
visible when excess liquidity is low (for more details see
the What drives financial system liquidity in China?
section).
Banks hold PBoC bills as part of their liquid assets, and
higher bill auction rates increase the opportunity cost of
lending funds to other banks. Therefore, PBoC bill rates
tend to guide money market rates particularly when
liquidity is tight. The 1y bill auction yield is seen as a
leading indicator of the policy rate. However, when
liquidity is extremely flush, money market rates can trade
much lower than policy rates and only find a bottom at the
interest rate paid on excess reserves (72bp currently) by
the PBoC.
The high volatility in the Chinese money market points to an
underdeveloped system. In particular, policy rates do not
necessarily reflect the true cost of funds. And there is a
shortage of efficient balancing mechanisms for interbank
liquidity. The PBoCs discount window is rarely tapped, as
access is limited to commercial banks and policy banks with
the right to participate in lending and bill financing activities,
whereas borrowers are concerned about negative
regulation implications. The PBoC conducts reserve repos,
but they are expensive and infrequent.
Factors affecting liquidity (CNY bn)
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2500
3000
Dec-11 Oct-11 Aug-11 Jun-11 Apr-11 Feb-11
OMO drain RRR tightening Fiscal impact
Change in liquidity Maturing OMO FX inflows
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2500
3000
Dec-11 Oct-11 Aug-11 Jun-11 Apr-11 Feb-11
OMO drain RRR tightening Fiscal impact
Change in liquidity Maturing OMO FX inflows

Factors affecting liquidity - Currency in circulation, change
m/m (CNY bn)
-1500
-1000
-500
0
500
1000
1500
2000
Jan-07 Feb-08 Mar-09 Apr-10 May-11


27 December 2011 11
What drives financial system liquidity in China?
The PBoC achieves its monetary aggregate targets through adjusting its degree of sterilisation of FX inflows via changes in
reserve requirements or open market operations, as well as credit quotas. This sets the basic tone for market liquidity.
However, government fiscal spending patterns, seasonality in currency in circulation, regulations on banks loans and
deposits as well as fund flows such as IPOs/bond issuance/state company dividend payments also influence liquidity from
time to time. Fluctuations in money market rates tend to be more visible when banks excess reserve ratios fall below 2%.
FX inflows and PBoC intervention have been the main drivers of growth in Chinas base money supply over the past 10
years. On average, monthly inflows have been CNY200300bn since 2002, divided between trade surplus (50%), FDI
(20%) and hot money (30%) flows by our estimations. This translates into around CNY2-3trn expansion pa of the base
money supply.
The PBoC has frequently adjusted RRR levels and conducted OMOs to offset money expansion from such inflows. A 50bp
RRR hike absorbs roughly CNY380-400bn of liquidity from the system. Changes in RRR levels are a powerful tool as the
impact on interbank liquidity is continuous given that banks need to tender additional reserves as long as their deposit
bases are growing. In particular, the impact on banks with weaker liquidity tends to be stronger compared with other
liquidity measures such as OMOs, where individual bank participation is usually voluntary.
In 1995. China passed a law banning fiscal overdrafts, hence government fiscal activities do not constitute base money
supply. However, government spending patterns do have a significant seasonal impact on banks liquidity. Fiscal revenue
tends to be collected at the beginning of the year and each quarter, while payment for spending tends to happen at
quarter- and fiscal year-ends. Government spending results in a drop in the governments deposits with the PBoC but an
increase of its deposits with commercial banks. This increase in banking system liquidity is temporarily until government
bond auctions/tax collections take it out. On a separate note, the MoF occasionally auctions treasury cash deposits to
commercial banks (this activity totalled CNY400bn in 2011).
Currency in circulation also has strong seasonality in China, as demand for cash tends to be strong during holiday seasons,
which sees money flowing out of the system and a tightening in interbank liquidity.
Banks have showed a tendency to move deposits into off-balance-sheet activities in recent years, which are not subject to
reserve requirements. Each quarter end, banks would move deposits back onto their balance sheets to meet loan-to-
deposit ratios set by the CBRC. This pattern has tightened liquidity at quarter ends. To close this loophole, the CBRC
switched from quarterly monitoring to monthly at the beginning of 2011 and introduced a daily LDR monitoring system on
a trial basis in June. These measures are likely to make RRR more effective and reduce fluctuations in interbank liquidity.
Similar to other markets, large sized IPOs/bond issuance/dividend payments also cause temporary squeezes in liquidity as
these events tend to freeze large amounts of funds for short periods.
Liquidity in the financial system (CNY bn) Banks excess reserves with PBoC
01-Oct-11 01-Sep-11 01-Aug-11 01-Jul-11 01-Jun-11
Net OMOs 89 236 167 9 399
Regular RRR (incl.
snow ball effect)
48 -157 -152 144 -794
Margin account
deposit RRR
-225 -144 0 0 0
Fiscal impact -308 309 -84 -342 -27
FX inflows -25 247 377 220 277
Currency in
circulation
114 -224 -62 -52 -17
Change in liquidity -307 267 246 -71 -112
PBOC announced
excess reserve ratio
1.40% 0.80%

0.0
0.5
1.0
1.5
2.0
2.5
3.0
Oct-11 Oct-09 Oct-07 Oct-05 Oct-03
CNY trn
0
1
2
3
4
5
6
7
% Excess reserves in banking system
Excess reserve ratio (RHS)


27 December 2011 12
Interest rate derivatives

Monthly turnover of IRS of different fixings (CNY bn)

0
50
100
150
200
250
300
350
400
Nov-
11
May-
11
Nov-
10
May-
10
Nov-
09
May-
09
Nov-
08
May-
08
Nov-
07
7d repo Overnight Shibor
3m Shibor 1y depo
Lending rate


7d repo fixing, 1y repo IRS and 1s5s curve slope (%)

-2.00
-1.00
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
2006 2007 2008 2009 2010 2011
-100
-
100
200
300
400
500
600
700
800
900
NDIRS 1s5s (RHS, bp) 7d repo 1y NDIRS


Shibor IRS, repo IRS, and spread (%)

-
1.00
2.00
3.00
4.00
5.00
6.00
Jan-07 Dec-07 Dec-08 Nov-09 Nov-10 Oct-11
-100
-
100
200
300
400
500
Shibor-repo ND IRS spread (RHS, bp)
2y Shibor IRS
2y repo IRS
Overview
The CNY IRS market started in 2006 and has since grown
significantly. The first three quarters of 2011 saw 16,925
swap transactions with a total notional value of
CNY2.15trn, up 170% compared with the previous year.
Tenors of 1y and below remain the most active part of the
market, accounting for 70% of all transactions. Repo IRS
remains the most liquid and popular format, accounting
for 56% of the market, but Shibor IRS is catching up,
taking 40% of the market (up from 13% in 2007, its first
year). Deposit and lending rates based IRS trade only
occasionally, and represent just 4% of the market.
Repo IRS
Fixing: CNRR007 Index; Bloomberg ticker: CCSWNI1
(offshore) and CCSWO1 (onshore).
The main onshore participants are banks and securities
firms. Hedge funds and interbank dealers are significant
participants in the offshore market. Trade size tends to be
larger in the offshore market but onshore volume is larger.
Front-end repo IRS yields depend more on systemic
liquidity, but back-end IRS yields are more influenced by
global risk appetite and the performance of A-shares
versus bonds.
Shibor swaps
Fixing: SHIF3M; Bloomberg ticker: CCSH1 (offshore) and
CCSHO1 (onshore).
Shibor is uncollateralised, and market participants include
small banks that tend to have weaker liquidity positions and
are the main borrowers in the interbank market. As such,
the Shibor curve is more influenced by banking system
liquidity compared with repos. Also, as Shibor is meant to be
a benchmark for Chinas money markets, most financial
instruments and rates, including floaters, rediscount rates,
and short-term bills are linked to Shibor. This has created
more hedging demand using the Shibor curve.
Depo IRS
Fixing: CNDR1Y Index; Bloomberg ticker: CCSDF2
(offshore) and CCSDO2 (onshore); Very illiquid, but is
widely used to assess rate hike expectations. It is also used
by insurance companies to hedge their floating rate assets
linked to the deposit policy rate.



27 December 2011 13
Nondeliverable cross-currency swaps (NDS)
Fixing: USD Libor 6m; Bloomberg ticker: CCSWN1; largely
trades on CNY appreciation expectations.
Onshore CCS
Cross-currency swaps are also available onshore but are
very rarely traded. In early 2011, SAFE issued a Circular to
expand the use of cross-currency swaps beyond the
interbank market to allow CCS trading between banks and
their clients. The convention is quarterly fixed rate (Act/
365) versus 3m US Libor (Act/360) (Bloomberg Ticker:
CCUSWO1). Cross-currency basis swaps are also available.
Bond-IRS swaps
IRS is used in both bond hedging and speculation. The
IRS-bond spread is very directional, narrowing when rates
fall and widening when rates rise.
CNH CCS
Tenors up to 2y are frequently traded. Quarterly fixed
(Act/360) versus 3m US Libor (Act/360) (Bloomberg
Ticker: CGUSSW1). Increasing access between onshore
CNY and offshore CNH market is likely to lead to gradual
convergence of onshore and off rates.
Depo IRS, repo IRS, and spread (%)
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Jan-08 Sep-08 Jun-09 Feb-10 Nov-10 Jul-11
-150
-100
-50
0
50
100
150
2y repo IRS - 2y depo IRS (bp, RHS)
2y repo IRS
2y depo IRS

Bond yield, IRS yield and spreads (%)
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Jan-07 Dec-07 Dec-08 Nov-09 Nov-10 Oct-11
-100
-50
-
50
100
150
200
250
300
350
400
5y IRS - bond spread (RHS, bp)
5y repo IRS
5y government bond


27 December 2011 14
Bond markets

Outstanding onshore RMB bonds (USD trn)

0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jun-98 Sep-00 Dec-02 Mar-05 Jun-07 Sep-09
Government Corporate

Source: Asian Development Bank

Outstanding onshore RMB bonds by type

Central
Bank bills
51%
Treasury
bonds
18%
Corporate
bonds
4%
MTN
5%
Commercial
paper
2%
Commercial
Bank bonds
2%
Policy Bank
bonds
18%

Source: CEIC

Book-entry treasury bonds issued since 2006, by tenor (CNY bn)

0
200
400
600
800
1000
1200
9
1
d
1
8
2
d
2
7
3
d
1
y
2
y
3
y
5
y
7
y
1
0
y
1
5
y
2
0
y
3
0
y
5
0
y
2011 2010 2009 2008 2007 2006 2005
Overview
Chinas onshore RMB bond market started when the
government resumed bond issuance in 1981 and has
experienced significant growth over the past 10 years. By
outstanding amount, Chinas USD3.2trn bond market is
the largest in Asia ex-Japan. The main types of bonds are
government bonds, PBoC bills, local government bonds,
financial bonds, corporate bonds (divided into enterprise
bonds and listed-company bonds), medium-term notes
(MTNs), commercial paper, asset-backed securities,
convertible bonds and bonds with warrants. Compared
with government securities (eg, CGBs, PBoC bills and
quasi-government issues), the private sector bond market
is still underdeveloped, accounting for 23% of the total
outstanding at September 2011.
Currently, Chinas bond market consists of three main
markets: the interbank bond market, the exchange
market and the commercial bank OTC market. The
interbank market accounts for 90% of the total
outstanding and transactions, and is dominated by banks
and nonbank financial institutions (including some foreign
institutions). The exchange market consists of both
institutions and individuals, and the OTC market can be
viewed as an extension of the interbank bond market.
Bond categories
Treasury bonds (CGBs, issued by the Ministry of
Finance)
There are two types of treasury bonds: book-entry bonds
and certificate savings bonds. Book-entry bonds are sold
through financial institutions via auctions. The Ministry of
Finance announces issuance plans at the beginning of the
year (details are released quarterly) and chooses a group
of underwriters to form a syndicate to auctions the bonds.
The syndicate usually includes commercial banks,
securities firms and insurance companies. Most of the
book-entry treasuries are issued in 3-10y tenors, but the
longest tenor available is 50y (the MoF has issued 50y
bonds since November 2009). On the other hand,
certificate savings bonds are sold to retail customers and
are not tradable after the sale. Most treasury bonds are
fixed rate.
PBoC bills (issued by the central bank for OMOs)
For more details see the Monetary policy section.

Source: CEIC

27 December 2011 15
Breakdown of policy financial bonds issued by policy banks
ADBC
18%
EXIM
12%
CDB
70%

Monthly local government bond issuance (CNY bn)
0
10
20
30
40
50
60
70
80
90
100
Nov-11 May-11 Nov-10 May-10 Nov-09 May-09

Financial bonds (issued by policy banks and financial
institutions)
More than half of all financial bonds are issued by policy
banks. Among the three policy banks, China Development
Bank (CDB) is the largest issuer, but Agricultural
Development Bank of China (ADBC) and Export-Import
Bank of China (EXIM Bank) have been gaining share.
Commercial banks are allowed to issue tiered bonds,
which include senior, subordinated and hybrid tranches.
Local government bonds
According to the budget law adopted in 1994, Chinas
local governments are forbidden from borrowing in capital
markets. As a result, local governments have relied on
government-owned entities to borrow.
Since 2009, the Ministry of Finance has issued bonds on
behalf of local governments. Issuance sizes were kept at
CNY200bn for 2009 and 2010.
In October 2011 the government allowed the local
governments of Shanghai, Shenzhen, Guangdong, and
Zhejiang to sell bonds directly. These four governments
issued a total of CNY22.9bn of bonds in November at
yields lower than comparable central government bonds.
Corporate bonds
Enterprise bonds include corporate bonds issued by
unlisted companies and bonds issued by enterprises that
are not incorporated in accordance with Chinas Company
Law. Most enterprise bonds are issued by large state-
owned companies, such as the state railway and State Grid
Corp. All enterprise bond issuance is subject to NDRC
approval.
Publicly listed companies are allowed to issue bonds on
the exchange market.
Medium-term notes (MTNs)
In 2008, corporates were allowed to issue regularly via
medium-term note programmes without obtaining
regulatory approval in each case.
Commercial paper
Securities firms and nonfinancial institutions are also
allowed to issue commercial paper for short-term
financing. Commercial paper is a key instrument in the bill
market with tenors mostly shorter than 1year.

Corporate bond vs. government bond yield (%)
0
1
2
3
4
5
6
7
Mar-06 Apr-07 Jun-08 Aug-09 Oct-10 Dec-11
0
100
200
300
400
500
Corporate - government spread (bp, RHS)
10y fixed rate government bond
10y fixed rate (AAA) corporate bond
Source: CDYC, Bloomberg, Barclays Capital


27 December 2011 16
Monthly CNH bonds issuance (CNY bn)
41
5
9
3
15
22
27
10
34
18
11
11
2
0
5
10
15
20
25
30
35
40
45
2
0
1
0
J
a
n
F
e
b
M
a
r
A
p
r
M
a
y
J
u
n
J
u
l
A
u
g
S
e
p
O
c
t
N
o
v
D
e
c
2011
Source: CMU, Barclays Capital

CNH bonds by issuer
Sovereign/
Quasi
16%
Corporates
35%
Financials
48%
Supranationals
1%
Sovereign/
Quasi
16%
Corporates
35%
Financials
48%
Supranationals
1%
Source: CMU, Barclays Capital

The offshore RMB market
The offshore RMB bond market (CNH, or dim sum) was
launched in 2007, when mainland financial institutions
were allowed to issue RMB-denominated bonds in Hong
Kong. However, the market took off in July 2010 when
most restrictions on offshore RMB transactions were lifted.
Since then, multinational corporations and international
financial organisations have tapped the market. For
issuers, the dim sum bond market offers a low-cost source
of funding. Most bonds issued are less than 5y, given that
investor interest lies more in potential FX gains.
Restrictions on access to the mainland bond market for
offshore investors with QFII licences have increased
demand for CNH-denominated assets, where there are no
such restrictions. Despite fast growth, the supply of CNH
bonds has fallen short of the growth in the deposit pool.
The lengthy and strict regulatory process for remitting the
proceeds onshore is a key bottleneck, but the approval
process is likely to be speeded up, given Premier Lis
comments made during a visit to Hong Kong. (For details
of the offshore RMB market please see CNH Market
Primer: Food for thought, 8 November 2011).
Market participants for onshore bonds
Special members: Include the PBoC, Ministry of Finance,
policy banks, and China Government Securities Depository
Trust & Clearing Co.
Banks: Banks hold about 70% of Chinese government
bonds. The fact that banks are the dominant investors,
subjects the bond market to the credit cycle. Banks have a
preference for bonds with tenors below five years.
Insurance companies: These companies hold 5% of
government bonds and have a strong preference for
bonds with tenors longer than five years.
Pension funds: The National Insurance Law mandates
that at least 50% of social security funds be invested in
bank deposits and government bonds, 40% in equities,
and 10% in corporate bonds.
Investment funds: The Securities Investment Fund Law
requires that 80% of fund assets be invested in the equity
and bond markets, and at least 20% invested in treasuries.
As investment funds are profit-seeking investors, their
participation in the bond market has stronger correlation
with actual bond prices (see first chart in next page). They
are more flexible on tenor length.
Others: Credit unions, securities firms, individuals.
Onshore government bond holdings among major investors
0%
20%
40%
60%
80%
100%
120%
1999 2001 2003 2005 2007 2009 2011
Special member Commercial bank
Trust Cooperatives Nonbank financial institution
Securities company Insurance company
Fund house
Note: * Special members: PBoC, Ministry of Finance, policy banks, the Exchange,
China Government Securities Depository Trust & Clearing Co.

27 December 2011 17
Foreign participation
QFIIs: Starting in late 2002, FIIs were allowed to invest in
government bonds, convertible bonds and corporate
bonds listed on the exchange market. A local custodian
and broker are required for QFIIs. So far, very few bond
QFIIs have been approved. IFC and ADB were allowed to
issue CNY-denominated bonds in China in 2005.
As part of the effort to internationalise the RMB, foreign
central banks and selected commercial banks that are
involved in RMB trade clearance and settlement are
allowed to access onshore interbank bond market. A
quota is assigned by PBoC, but details are not disclosed.
The RMB QFII (mini-QFII) is likely to be finalised soon,
with an initial size of CNY20bn.
CNH bonds: Not accessed onshore; foreign investors only.
Auction procedure
The primary market for treasury bond issuance is largely
conducted through syndication. Government bonds are
typically underwritten by the four stated-owned banks,
and other commercial banks and securities companies
play active roles in forming a syndicate.
Bond settlement
Onshore settlement: China Government Securities
Depository Trust & Clearing Co. Ltd has responsibility as
the general custodian. Bonds typically settle at T+1.
CNH bonds: Via CMU or Euroclear or Clearstream; T+3.
Taxation
Onshore bonds: Government bonds are exempt from the
25% income tax. A 5% sales tax is applied. The
government recently exempted local government bonds
from income tax and cut the income tax by half for bonds
issued by the Ministry of Railway.
CNH bonds: No tax is applied.
Regulation
There are numerous regulators in Chinas onshore bond
market, depending on the category of the bonds and
whether it is primary market or secondary. This has to
some extent created a heavy regulatory burden and
segregation of markets.
Bonds held by investment funds vs bond price index
-100%
-50%
0%
50%
100%
150%
200%
250%
Jan-04 Jan-06 Jan-08 Jan-10
-15%
-10%
-5%
0%
5%
10%
15%
20%
Growth in bonds held by funds (y/y)
Treasury bond index (y/y return, RHS)

Chinese onshore bond markets and respective regulators
Primary market Secondary market
Treasury bonds MOF CSRC, NAFMII
PBoC bills PBoC NAFMII
Financial bonds PBoC, CBRC, CSRC NAFMII, CSRC
Enterprise bonds NDRC CSRC, NAFMII
Listed-company bonds CSRC CSRC, NAFMII
CP & MTNs NAFMII NAFMII
Interbank market PBoC
Exchange market CSRC
China Government Securities
Depository Trust & Clearing
PBoC, MOF, CBRC
*MOF: Ministry of Finance
CSRC: China Securities Regulatory Commission
NAFMII: National Association of Financial Market Institutional Investors
NDRC: National Development and Reform Commission
CBRC: China Banking Regulatory Commission
Source: Barclays Capital


27 December 2011 18
Fiscal policy and credit ratings

Book-entry treasuries issuance and fiscal trends

0.0
0.5
1.0
1.5
2.0
2.5
2003 2004 2005 2006 2007 2008 2009 20102011E
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
Yearly gross issuance Fiscal % of GDP (bp, RHS)


Chinese governments estimated contingent liabilities

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of GDP
Local government debt
China Development Bank
SOE debt (loan default est.)
Bank NPLs
Ministry of rail debt
Official public debt
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of GDP
Bank NPLs
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of GDP
Bank NPLs

Fiscal policy
The Ministry of Finance sets fiscal policy in China. The
fiscal deficit as a percentage of GDP fell until 2007 as a
result of fast economic growth and an improving
government tax system. However, it picked up on the back
of the proactive fiscal policy initiated after the 2008 credit
crisis. Issuance of book-entry treasuries has been around
CNY 1.5-1.8trn per year since then.
The central governments balance sheet remains solid,
with outstanding debt at just 19% of GDP, although the
number would rise to 80-90% if contingent liabilities
including local government debt were taken into account.
But the risk from government contingent liabilities would
appear to be lessened by the rapid growth in government
revenues (31.2% y/y in H1 11) and value of assets owned
by the government.
The government recently announced a series of measures
to ease concerns about rising local government debt,
including categorising Ministry of Railway bonds as
government bonds (instead of corporate bonds), cutting
the income tax for local government bonds and allowing
four provinces to issue bonds on a trial basis (the MoF has
issued CNY200bn bonds a year on behalf of local
governments since 2009). These measures were taken
positively by rating agencies.
Credit ratings
Chinas long-term foreign-currency sovereign debt is rated
AA- (Stable) by S&P, A+ (Stable) by Fitch and Aa3 (Pos) by
Moodys.
Chinas long-term local-currency sovereign debt is rated
AA- by S&P, Aa3 by Moodys and AA- by Fitch.

Moody's S&P Fitch
Aa3 (Nov 2010) AA- (Dec 2010) A+ (Nov 2007)
A1 (Jul 2007) A+ (Jul 2008) A (Oct 2005)
A2 (Oct 2003) A (Jul 2006) A- (Dec 1997)
A3 (Sep 1993) A- (Jul 2005)
WR (Oct 1992) BBB+ (Feb 2004)
Baa1 (Nov 1989) BBB (Jul 1999)
A3 (May 1988) BBB+ (May 1997)
BBB (Dec 1992)
Foreign currency debt - rating history
Source: Ratings agencies

27 December 2011 19
Fixed income instruments reference guide
BONDS
Primary market information Secondary market information
Instrument Issuer Purpose
Tenor /
maturity Coupon
Day
count
Issuance
calendar
Auction
type Settlement Liquidity
Avg. trade
size
Bid-offer
spread Settlement Outstanding Bloomberg
Govern-
ment bonds
(CGB)
Ministry of
Finance
Fiscal deficit
financing
Up to 50y, 3-
7y most
liquid tenors
Annual/
Semi-
annual
Act/act,
Act/365
Wednesday Dutch T+1 CNY30-
40bn per
day
CNY
30-100mn
5bp T+1 CNY7.3trn CGB Govt
PBoC bills PBoC Sterilising FX
intervention
3m, 6m, 1y,
3y
Discount,
Annual
Act/act Tuesday
and
Thursday
Dutch T or T+1 CNY30-
50bn per
day
CNY
30-200mn
3bp T or T+1
(standard
T+1)
CNY2.0trn PBOC Govt
Policy bank
bonds
Policy banks
in China
including
CDB, ADBC,
EIBC
Project
financing
up to 20y Annual/
semi-
annual/
quarterly
Act/act Ad hoc Dutch T+1 CNY30-
80bn per
day
CNY
30-100mn
5bp T+1 CNY6.4trn SDBC Govt;
ADBCH
Govt;
EXIMCH
Govt
Corporate
bonds
Banks/
corporates
Corporate
financing
3-30y Annual Act/act Ad hoc Book
running
T+1 CNY3bn
per day
CNY
30-100mn
10-20bp T+1 CNY4.7trn
1
N/A
CNH bonds
(offshore)
Government/
financial/
corporates
financing 1-10y,
including
CDs
Semi-
annual
Act/365 Ad hoc Book
running
T+3 CNY 50mn
per day
CNY
1-5mn
20-30bp T+3 CNY 100bn N/A
INTEREST RATE DERIVATIVES
Floating leg details Fixed leg details Market characteristics
Instrument
Floating
leg
Bloomberg
ticker
Day
count
Reset
frequency
Day
count
Pay
frequency
Liquid
tenors Effective
Daily trading
volume
Bid/offer
spread
Bloomberg
ticker (5y)
Onshore repo IRS 7d repo CNRR007 Act/365 7d Act/365 Quarterly 1-5y T+1 CNY1-2bn 3-5bp CCSWO5
Offshore repo IRS 7d repo CNRR007 Act/365 7d Act/365 Quarterly 1-5y T+1 CNY1bn 3-5bp CCSWNI5
Onshore Shibor IRS 3m Shibor SHIF3M Act/360 3m Act/365 Quarterly 1-5y T+1 CNY0.5-1.0bn 5-10bp CCSHO5
Offshore Shibor IRS 3m Shibor SHIF3M Act/360 3m Act/365 Quarterly 1-5y T+1 CNY0.5-1.0bn 5-10bp CCSH5
Onshore deposit IRS 1y deposit CNDR1Y Act/360 1y Act/365 Annual 1-5y T+1 CNY0.2bn 10-15bp CCSDO5
Offshore deposit IRS 1y deposit CNDR1Y Act/360 1y Act/365 Annual 1-5y T+1 CNY0.2bn 10-15bp CCSDF5
Onshore CCS 3m USD Libor US0003M Act/360 3m Act/365 Quarterly 1-5y T+1 N/A N/A CCUSWO5
CNH CCS 3m USD Libor US0003M Act/360 3m Act/360 Quarterly 1-5y T+2 USD100mn
daily
20bp CGUSSW5
NDS 6m USD Libor US0006M Act/360 6m Act/365 6m 1-5y T+1 USD150mn 20bp CCSWN5
Note: 1. Includes CP and MTN. Source: Barclays Capital

27 December 2011 20
CNY nominal and real effective exchange rates
90
100
110
120
130
2008 2009 2010 2011
CNY NEER
CNY REER

Source: Barclays Capital Live
CNY spot and NDFs
6.0
6.2
6.4
6.6
6.8
7.0
7.2
7.4
2008 2009 2010 2011 2012
USD/CNY USD/CNY NDFs
PBoC FX reserves (USD trn)
1.5
2.0
2.5
3.0
3.5
2008 2009 2010 2011

Currency policy and foreign exchange markets
FX Strategists: Olivier Desbarres +65 6308 2073 olivier.desbarres@barcap.com; Nick Verdi +65 6308 3093 nick.verdi@barcap.com
Exchange rate policy
On 21 July 2005, the PBoC revalued the CNY by 2.1% and
moved from a USD peg to a managed float based on
market supply/demand and with reference to a basket of
currencies. On 19 June 2010, the PBoC resumed reform of
the CNY regime to enhance exchange rate flexibility, after
about two years of a soft peg to the USD. The USD/CNY
daily trading band was widened to 0.5% around the
USD/CNY daily fix from 0.3% on 21 May 2007.
The government is promoting RMB internationalisation,
through greater use of RMB in trade and investment. The
CNH market continues to thrive, helped by strong RMB
appreciation expectations. Regulation changes since mid-
2010 have largely reflected regulators preference for a
firm but measured pace of RMB internationalisation.
Further liberalisation of Chinas capital account is likely to
accelerate development of the offshore market (see CNH
Market Primer: Food for Thought, 8 November 2011).
Foreign exchange rate markets
Before the recent development of a deliverable offshore
RMB market, the offshore NDF market was the traditional
market for investors to hedge RMB exposures. The daily
spot fixing rate for NDFs is the same as the onshore PBoC
fixing. The USD/CNY forwards are nondeliverable and
dollar-settled against this fixing rate. The NDFs are driven
by supply and demand, which in turn are driven by RMB
appreciation expectations and are decoupled from the
interest rate differential between RMB and USD.
The deliverable RMB spot rate against the USD quoted in
the offshore market (for all practical purposes, Hong
Kong) is referred to as the USD/CNH spot rate.
The CNH and onshore CNY markets are similar as the RMB
is deliverable in Hong Kong. There are no requirements for
underlying trade activity to access RMB via this market.
But, if the RMB is to be repatriated to mainland China,
documentation supporting trade or an approved capital
account item is needed. The gap between CNH and CNY
spot rates reflects different fixing dynamics in these two
markets and expectations for CNY appreciation. Improving
access between the onshore and offshore RMB markets
and creation of a complete regulatory framework should
help keep the basis steady longer term.
The CNH FX market has seen significantly improved
liquidity and a broadening in key instruments, with

27 December 2011 21
tradable tenors now extending to three years, with the
average interbank deal size about USD10mn and daily
interbank liquidity estimated at USD1.2bn. Investors can
also access deliverable FX forwards and FX swaps.
CNH forward points closely track CNY NDF points and are
influenced by NDF curves. RMB appreciation pressures and
offshore arbitrage activities tend to translate into a more
downward-sloping CNH curve. The CNH forward curve is
ultimately a function of: a) interest rate differentials
between offshore RMB and USD interbank deposits; and
b) RMB appreciation expectations. The divergence
between CNY and CNH forwards is likely to continue until
China fully lifts its capital account controls.
The CNH FX option market is still nascent but developing
rapidly, with the increase in RMB liquidity in Hong Kong.
USD/CNH option-implied vols were lower than onshore
USD/CNY vols until September 2011. The Hong Kong
Treasury Market Association has published a daily
USD/CNH fix since 26 July 2011. However, the current
market convention for settling USD/CNH options is to use
the Tokyo 3pm USD/CNH rate (as per Reuters Screen) as
the option settlement fixing.
Restrictions: Only entities registered in China can trade
CNY onshore. Nonresident investors are limited to
offshore nondeliverable forwards (NDFs), CNH and swap
instruments. Repatriation of principal and proceeds
derived from CNY-denominated equity and bond
investments is subject to strict controls. Sales and
proceeds from B-shares denominated in USD and HKD
can be repatriated freely. In the onshore FX market, CNY
forwards and FX swaps are available to onshore
institutions to hedge FX exposure.
Banks are permitted to engage in FX swaps (CNY against
foreign currency) after registering for the record only if
they have had the qualification for RMB forward business
transactions for more than six months. The State
Administration of Foreign Exchange (SAFE), under PBoCs
supervision, enforces exchange controls.
Corporates
Exposure for multinationals in China
Equity inflows: An overseas parent entity can hedge its
foreign direct investment (FDI).
Intercompany loans: Hedged by Chinese subsidiaries.
Trade- and operations-related flows: Can be hedged by
Chinese subsidiaries; subject to State Administration of
Foreign Exchange (SAFE) classification.
Equity and dividend repatriation: Can be hedged by Chinese
subsidiaries; subject to tax bureau and regulator clearance.
Regulations governing transactions
Foreign direct investment: A parent entity can hedge its
investment in its Chinese entities. Investments fall under
the regulatory domain of SAFE and the Ministry of
Commerce under FDI regulations.
External commercial borrowing (ECB): A Chinese entity
can hedge loans from the parent company. Subject to
SAFE approval.
Trade receivables and payables: A Chinese entity can put
on a hedge but needs to undertake Know Your Client
verification and provide proof of actual underlying exposure.
Repatriation regulations
Dividends: Companies may remit dividends overseas to
foreign investors after they have been declared by the
board of directors. Companies may also hedge the FX
exposure on this dividend on behalf of foreign investors.
Companies can remit dividends to nonresident
shareholders after all applicable taxes are paid and tax
bureau clearance and SAFE approval is received.
Interest: A local entity is permitted to remit interest (on
parent entity loan/bond) to its overseas parent, subject to
SAFE clearance.
Principal: Remittance of principal is allowed as per the
original loan agreement. Tax-clearance documentation
must be submitted for non-trade-related payments.
Recent change in regulations CNY hedging for
overseas corporates
The creation of the CNH market has significantly increased
the use of CNY in trade transactions.
Advantages to multinational corporates: By virtue of CNH
billing, current legislation allows the transfer of currency
risk from Chinese subsidiaries to parent companies.
Potential cost savings for importers of Chinese
goods/services: Due to the significant interest rate
differential between most G7 currencies and the CNY,
importers of Chinese goods/services can use the high
forward premium to achieve potential cost benefits by
billing in CNY and hedging the payables with a sell
USD/buy CNH forward contract.
Taxation
There is a 5% business tax on gains from FX transactions.

27 December 2011 22
FX reference guide
MARKET CHARACTERISTICS
Overview
CNY is a managed, nondeliverable currency with a +/-0.5% intra-day trading band on the USD/CNY cross. Banks bid/offer spread of USD/CNY
on quotes to non-bank clients is also limited to 1% of the USD/CNY fixing rate, which is announced by the PBoC at 09:15 Beijing time every day.
Security
Liquidity
(daily volume)
Bid/Offer
spread
Tenor/
Maturity
Local open/
closing times Settlement
Reuters
page Additional information
Onshore
FX spot
USD20bn 5-10 pips Spot 09:30 16:30 T+2 CNY=CFXS
CN/CONT4
Available only to domestic corporates
and institutions. Must be executed
with a designated FX bank (DFXB).
DFXBs can square the net CNY position
in the China Foreign Exchange Trade
System (CFETS).
Onshore
FX
forwards
USD6bn 10-30 pips
(1-3m)
30-50 pips
(3m-1y)
Some
quotations
beyond 1y
but poor
liquidity
09:30 16:30 T+2 CNYFWD=
CN/CONT6
Previously, this market was restricted
to the four major state-affiliated
banks and corporates hedging for
underlying external trades in goods
and services. On 2 August 2005, PBoC
expanded the participation to all
policy banks, city and rural
commercial banks, rural cooperative
banks and select foreign banks.
Onshore
FX swaps
USD3-5bn 10-30 pips
(1-3m)
30-50 pips
(3m-1y)
Up to 1y 09:30 16:30 T+2 CNYFWD=
CN/CONT6
In the onshore market, CNY forwards
and FX swaps are available to onshore
institutions to hedge FX exposure.
Onshore
FX Options
The onshore options market is in its infancy. Onshore corporates are only allowed to buy options from local banks, who are in turn
allowed to cover their risk with offshore banks.
Non-
deliverable
forwards
USD2bn Depends on
tenor and size
(20-130 pips)
Liquid to 2y;
traded up to
10y
24 hours a day T+2 PNDF
PBOCA
SAEC
CHIBOR
The CNY nondeliverable forward is
restricted to foreign investors and the
offshore market only. Cross-border NDF
needs to be approved by the SAFE.
Non-
deliverable
swaps
USD100mn 15-20bp (up
to USD10mn),
50-70bp
(USD50mn)
Illiquid
beyond 5y
09:30 16:30 T+2 PNDS
PBOCA
SAEC
CHIBOR
The CNY nondeliverable swap market
is restricted to foreign investors and
the offshore market only. SAFE needs
to approve cross-border NDS.
Security
Liquidity
(daily volume)
Bid/Offer
spread
Tenor/
Maturity
Local open/
Reuters
Non-
deliverable
FX options
USD600mn 0.2-0.4 vol up
to 2y
No liquidity
beyond 5y
09:30 16:30 T+2 PBOCA
SAEC
CHIBOR

CNH
Deliverable
spot
USD1-1.5bn 10 pips for
USD20mn
Liquid to 2y;
traded up to
5yr
09:30 16:30 T+2 CNHFIX= Most interbank deals are around
USD10mn.
CNH
deliverable
forwards
USD2bn for
whole curve
1y bid/offer
30 pips for
USD20mn
Liquidity
extends to
3y
24 hours a day T+2 CNHFWD= Interbank liquidity has improved
significantly. Typical size is USD20mn.
CNH Cross-
currency
Swap
(CCS)
Not liquid 1y CCS
bid/offer
about 10bp
Most active
traded tenor
is 1y; traded
to 3y
24 hours a day T+2 CNHUSCS=I
CHK
No active interbank market.
CNH
FX options
USD100-
150mn
0.8 vol Liquid to 1y 24 hours a day T+2 N/A

27 December 2011 23
FX MARKET PARTICIPANTS IN CNY MARKET
Description
Corporates Corporates are allowed to engage in spot and forward transactions.
Banks Banks use spot, forward and swap transactions to hedge FX risk.
PBoC The central bank intervenes to maintain USDCNY in daily trading band of +/-0.5%.
FX MARKET PARTICIPANTS IN CNH MARKET
Description
Clearing bank, the Bank of
China (HK)
The clearing bank, Bank of China (HK), brings RMB from mainland China into Hong Kong. A participating
authorised institution (AI) is allowed to hedge its trade-related flows with the clearing bank. So, if a corporate
wants to hedge its exports denominated in USD or imports denominated in CNY, it will sell USD/CNY (at the
onshore USD/CNY spot rate) to a participating AI bank. The participating AI will, in turn, sell USD/CNY to the
clearing bank ie, Bank of China (HK). The clearing bank hedges its risk through its branch in the mainland,
thus bringing RMB liquidity into Hong Kong. Corporates are also allowed to buy USD/CNY from participating
AIs if they have relevant trade documents. The PBoC established a settlement quota for BoC (HK), initially set at
CNY8bn per annum is 2010. This was later changed to CNY4bn for each of the first three quarters of 2011 and
then set at CNY8bn for Q4 2011 in response to increased market demand.
Hong Kong Monetary Authority
(HKMA)
The HKMA has a CNY400bn swap line with the PBoC valid until November 2014. If trade settlement flows
require more CNH than the quota with the clearing bank, the HKMA will use its CNH swap lines with the PBoC,
allowing participating AIs to hedge their open positions with the former. Thus, the HKMA acts as another
source of CNH liquidity in Hong Kong if the trade settlement flow exceeds the clearing banks quota.
Offshore-domiciled exporters Mainland importers that have trade settlement in USD can obtain approval to remit RMB out of China into
Hong Kong to buy USD for their import needs. Given the demand for RMB liquidity in Hong Kong, these
importers are incentivised to not use their trade documents to buy USD in Hong Kong. These importers are
suppliers of RMB to the CNH market as they try to capture the differential between onshore CNY and CNH
markets, providing RMB liquidity in Hong Kong in addition to that provided by the clearing bank. Onshore
importers then buy USD in the CNH market. However, the onshore importer is not permitted to buy USD in the
offshore market itself and pay the offshore exporter (although the onshore importer can set up a financing
entity offshore to meet its USD buying purposes).
Individuals Hong Kong citizens who might have accumulated RMB deposits with Hong Kong banks, provide the market
with RMB liquidity. Other groups are investors and tourists from mainland China bringing in cash RMB, which
is a significant source of the Chinese currency in Hong Kong.
Multi-nationals FX hedging
Hong Kong domiciled importers Hong Kong domiciled importers (from mainland China) who settle trade in RMB will absorb RMB out of Hong
Kong and remit it back into mainland China.
Bond issuers Proceeds from RMB-denominated bond issues will most likely be repatriated to mainland China for investment
purposes, thereby draining RMB from Hong Kong. RMB bond issuance has expanded rapidly since 2009. As of
July 2011 there was CNY150bn outstanding of such paper. Although this is a significant source of RMB
demand, it is still well short of the rapid growth of RMB deposits in Hong Kong.
CNH interbank participants More than 10 foreign banks (including foreign central banks) now have access to the onshore interbank bond
market. While the details have not been confirmed by the Chinese authorities, the quotas are likely to have
been kept small to limit the near-term impact on the CNH market. Over time, the greater access to the onshore
market should promote the convergence of onshore and offshore rates, and FX levels.
CNH equity issuers Similar to bond issues, if equity issuance proceeds are transferred to mainland China, this takes RMB liquidity
out of Hong Kong. If the proceeds are not remitted to mainland China, the liquidity impact is temporary from
the funds being locked up during the issue process. Hui Xian REIT became HKs first IPO denominated in RMB
when it raised USD1.6bn (CNY10.48bn) with a yield of 4.33%.

27 December 2011 24
Hong Kong
FI Strategists: Rohit Arora +65 6308 2092; rohit.arora3@barcap.com; Ju Wang +65 6308 2801; ju.wang@barcap.com;
Kumar Rachapudi +65 6308 3383; kumar.rachapudi@barcap.com

Monetary policy
Hong Kong Monetary Authority (HKMA) and the
currency board
1
: The HKMA is responsible for achieving
monetary policy objectives in Hong Kong. The HKMAs
main objectives are: 1) currency stability, which is defined
as a stable value for Hong Kongs currency in terms of its
exchange rate against the USD, within a band of 7.75
7.85, and 2) managing the Exchange Fund (Hong Kongs
official reserves). The financial secretary is the ex-officio
chairman of the HKMA, which also has a chief executive
and an additional nine members appointed by the chief
executive of the SAR.
The Linked Exchange Rate System: Hong Kong operates
a linked exchange currency exchange rate system (a
currency board) instead of implementing policy via
interest rates (monetary policy committee). The system
was established in 1983. The structure of the monetary
system is characterised by a currency board arrangement,
which requires the monetary base to be at least 100%
backed by USD reserves held by the Exchange Fund.
Changes in the monetary base are matched by
corresponding changes in USD reserves held by the
Exchange Fund
2
at the fixed exchange rate of 7.80.
Convertibility: Since September 1998, the HKMA has
provided a clear undertaking to licensed banks to convert
HKD in their clearing accounts into USD. On 18 May 2005
the HKMA introduced a strong-side convertibility
undertaking (CU) to buy USD from licensed banks at 7.75,
and announced the shifting of the existing weak-side
convertibility undertaking from 7.80 to 7.85, to achieve
symmetry around the linked rate of 7.80. Within the
convertibility zone, defined by the levels of the
convertibility undertakings, the HKMA may choose to
conduct market operations consistent with currency board
principles with the aim of promoting the smooth
functioning of the money and foreign exchange markets.

Summary of monetary policy
Objective
(i) Currency stability (USDHKD within a band of 7.75-7.85)
(ii) Managing the Exchange Fund
Policy rate Base rate (Bloomberg ticker: HKBASE Index)
Decision
making
Formula based: MAX (US fed funds target rate + 50bps, 5d
average of overnight and 1m Hibor)
Other
tools
(i) Open Market Operations (overnight and intraday repos,
issuing and buying EF paper, direct buying and selling in the
FX market;
(ii) Under the convertability undertaking, HKMA undertakes
to buy USD from banks at 7.75 (on strong side), and sell USD
at 7.85 (on weak side)
Hong Kong Monetary Authority (HKMA)
Source: HKMA
USD/HKD exchange rate
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Linked exchange rate 1983 onwards
HKD during the floating
years (1974-1983)
7.60
7.65
7.70
7.75
7.80
7.85
2003 2004 2005 2006 2007 2008 2009 2010 2011
Spot USD/HKD 1y forward USD/HKD
Convertibility zone
Source for both charts: Bloomberg, HKMA

1

a m on e ta ryau t ho rit y
C
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e
n
c
y

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o
a
r
d
:

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c
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r
r
e
n
c
y

b
o
a
r
d

i
s

a
m on e ta ryau t ho rit y

m on e ta ryau t ho rit y
m
on e ta ryau t ho rit y
o
n e ta ryau t ho rit y
n
e ta ryau t ho rit y
e
ta ryau t ho rit y
t
a ryau t ho rit y
a
ryau t ho rit y
r
yau t ho rit y
y
au t ho rit y

au t ho rit y
a
u t ho rit y
u
t ho rit y
t
ho rit y
h
o rit y
o
rit y
r
it y
i
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t
y
y

that is required to maintain a fixed exchange rate with a foreign currency. This policy objective requires
the conventional objectives of a central bank to be subordinated to the exchange rate target.
2
Exchange Fund: The Exchange Fund's primary objective is to affect the exchange value of the currency of Hong Kong. The HKMA, under the delegated authority of
the Financial Secretary and within the terms of the delegation, is responsible for the use and for the investment management of the Exchange Fund.

27 December 2011 25
The monetary base comprises:
Certificates of indebtedness, which provide full
backing to the banknotes issued by the three note-
issuing banks: Bank of China, HSBC and Standard
Chartered.
Government-issued notes and coins in circulation.
The aggregate balance, which is the sum of the
balances of banks clearing accounts maintained with
the HKMA for the purpose of clearing and settling
transactions among themselves, and also between
banks and the HKMA. The balance, therefore, varies
with the flow of funds in and out of HKD. Since there is
no reserve requirement for banks in Hong Kong, the
aggregate balance earns no interest from the HKMA.
Hong Kong Exchange Fund (HKEF) bills and notes:
These are issued by the Exchange Fund and
guaranteed by the government. These bills and notes
are considered liquid assets for banks to meet their
liquidity ratio requirements. In addition, the Hong Kong
Futures Exchange accepts HKEF paper as margin
collateral for trading purposes.
Intervention through interest rate adjustments: Under
the currency board system, the stability of the HKD
exchange rate is maintained through an automatic interest
rate adjustment mechanism and the firm commitment by
the HKMA to honour the convertibility undertakings (CUs).
When demand for HKD is strong, ie, the exchange rate
strengthens to the strong side CU of HKD7.75, the
HKMA stands ready to sell HKD to banks for USD. The
aggregate balance will then expand and push down
HKD interest rates, which creates the monetary
conditions that move the HKD away from the strong-
side limit to within the convertibility zone of 7.75-7.85.
Conversely, if the supply of HKD is greater than
demand and the market exchange rate weakens to the
weak-side CU of HKD7.85, the HKMA will buy HKD
from banks. The aggregate balance will then contract
and drive HKD interest rates up, pushing the HKD away
from the weak-side limit to stay within the
convertibility zone.

Monetary base (HKD bn)
0
200
400
600
800
1000
1200
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
Outstanding exchange fund bills and notes
Aggregate balance before discount windows
Coins in circulation
Certificates of indebtedness
Source: CEIC, HKMA

The currency board mechanism
Capital Inflow Capital Outflow
Hong Kong dollar
exchange rate stability
Capital outflow
Interest rates fall
Monetary base expands
Currency board sells
Hong Kong dollars
Upward pressure on the
Hong Kong dollar exchange rate
Market participants buy
Hong Kong dollars
Capital inflow
Market participants sell
Hong Kong dollars
Downward pressure on the Hong
Kong dollar exchange rate
Currency board purchases
Hong Kong dollars
Monetary base
contracts
Interest rates rise
Hong Kong dollar
The currency
board
mechanism
Capital Inflow Capital Outflow
Hong Kong dollar
Capital outflow
Interest rates fall
Monetary base expands
Currency board sells
Hong Kong dollars
Upward pressure on the
Hong Kong dollar exchange rate
Market participants buy
Hong Kong dollars
Capital inflow
Market participants sell
Hong Kong dollars
Downward pressure on the Hong
Kong dollar exchange rate
Currency board purchases
Hong Kong dollars
Monetary base
contracts
Interest rates rise
Hong Kong dollar
The currency
board
mechanism
Source: HKMA


27 December 2011 26
Policy rate (base rate): Under the currency board system,
interest rates in Hong Kong are driven by the US Federal
Reserves monetary policy, which heavily dilutes the
independence of monetary policy. The base rate is set at
50bp above the prevailing US Fed funds target rate (was
150bp above prior to October 2008) or the average of the
5d moving average of the overnight and one-month Hibor,
whichever is higher. The HKMA announces the base rate
every day before the interbank market opens.
Discount window and discount rate: The facility through
which banks can borrow HKD funds overnight from the
HKMA via repurchase agreements using Exchange Fund
bills and notes as collateral. The interest rate at which
banks obtain overnight HKD liquidity from the HKMA via
the discount window is called the discount rate. The
discount rate consists of two tiers: 1) for the first 50% of
Exchange Fund paper held by a bank, the applicable rate is
the base rate; 2) for the other 50% of Exchange Fund
paper, it is the base rate plus 5% or overnight Hibor for the
day, whichever is higher. Theoretically, the discount rate
acts as an upper bound for o/n Hibor. This two-tiered
system enables the market to adjust HKD interest rates
higher whenever there is significant weakening pressure
on the HKD.
Open market operations: Open market operations are
used to control the monetary base. These include the
purchase or issuance of Exchange Fund bills for liquidity
management purposes, repos, and direct intervention in
the FX market. FX swaps and term repurchase agreements
are also incorporated into the HKMAs continuing market
operations. This provides HKD liquidity assistance to banks
with eligibility assessed on a case-by-case basis.
USD/HKD and aggregate balance
7.75
7.76
7.77
7.78
7.79
7.80
7.81
7.82
7.83
7.84
7.85
1998 2000 2002 2004 2006 2008 2010
0
50
100
150
200
250
300
350
Aggregate balance (USD bn, RHS, inverted)
USD/HKD
Weak HKD, aggregate balance
falls post intervention
Strong HKD, aggregate balance
rises post intervention
Source: CEIC, Bloomberg
Aggregate balance vs. the exchange fund bills/notes
(sterilisation)
100
200
300
400
500
600
700
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
0
50
100
150
200
250
300
350 Outstanding exchange funds and bills
Aggregate balance (RHS)
Source: CEIC, Bloomberg
HKMA base rate vs US Fed funds target rate (sterilisation)
0
1
2
3
4
5
6
7
8
9
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
0
20
40
60
80
100
120
140
160
180
Fed funds rate - HKMA base rate (bp, RHS)
Fed funds target rate
HKMA base rate
Source: Bloomberg


27 December 2011 27

HKD money markets
Placements/
borrowing
FX swaps CDs
Credit
risk
Unsecured
lending
Secured by foreign
currency principal
Depends on credit
rating of the issue
Cost Hibor Hibor (implied rate) Hibor + liquidity
premium +
arrangement fees
Maturity
profile
1-3 months Overnight to 1y, but
progressively more
important beyond 3m
1y and above
Source: CEIC, HKMA, Barclays Capital
HKD interbank transactions
0
50
100
150
200
250
300
350
1994 1996 1998 2000 2002 2004 2006 2008 2010
HKD bn
Interbank placements and borrowings
Interbank swap transactions
Source: HKMA, Barclays Capital
Certificates of deposit: outstanding

0
50
100
150
200
250
300
350
400
2001 2003 2005 2007 2009 2011
HKD bn
CDs held by AI
CDs held by public
Money markets
Hong Kong money markets are among the most liquid in the
region and interbank funds have always been an important
source of HKD funding for the banking system. The Hong
Kong interbank bid/offer spreads are important indicators of
liquidity conditions in the financial system and are central to
the pricing of HKD credits.
HKD interbank transactions: The HKD interbank market
is an active money market in which wholesale HKD funds
are transacted between authorised institutions (AIs) within
Hong Kong and with banks outside of Hong Kong. There
are two basic modes of transaction in the interbank
market: 1) placements and borrowings of HKD funds (ie,
interbank borrowings and deposits); and 2) FX swaps.
These mechanisms are equally popular, accounting for
around 50% of interbank transactions each. However, the
tenor of transactions is different, with placements and
borrowings the preferred way to obtain funds below 3m
and FX swaps preferred in the 3m-1y segment.
Hibor: The Hong Kong Interbank Offer Rate (Hibor) is the
annualised rate at which banks offer HKD in the interbank
placement and borrowing market. This is the most
important money market rate followed in HKD and the 3m
HIBOR is used as a floating leg for interest rate derivatives.
(For details on fixing, please see the interest rate
derivatives section.)
CDs: Certificates of deposit (CDs) are instruments issued
by banks. These are essentially large deposits sold to
institutional investors, including other banks, to raise
longer-term (typically >1y) interbank funds. Currently,
around HKD377bn of CDs are outstanding, of which 40%
(HKD152bn) are HKD-denominated and the rest are in
foreign currency. Usually, CDs are issued by the Hong
Kong branches of foreign banks that do not have access to
a local deposit base. Typical buyers of CDs are banks with
a local presence as well as the public via money market
funds.
Liquidity adjustment facility (LAF): Established in 1992,
this was the previous version of the discount window.
Under the LAF, banks could borrow o/n funds from the
HKMA through repurchase agreements using eligible
securities at the offer rate set by the HKMA. They could
also place surplus funds overnight with the HKMA at the
bid rate. The LAF was replaced by the discount window in
September 1998.


27 December 2011 28
Given the linked exchange rate system and the free flow of
funds into and out of Hong Kong, money market rates
closely track US money market rates. In the last five years,
3m USD Libor and 3m HKD Hibor exhibited a 98%
correlation. Whenever there are fund flows into Hong
Kong, there is pressure on the HKD to appreciate and
USD/HKD will start moving towards the lower
convertibility undertaking of 7.75. Once the rate hits the
CU, the HKMA will intervene by increasing HKD money
supply in the system, which reduces HKD interest rates.
Once interest rates are sufficiently lower, interest rate
parity theory means that USD/HKD buyers will emerge.
The opposite occurs whenever there is depreciation
pressure on the HKD and USD/HKD moves towards 7.85.
However, there are times when HKD rates actually rise as
demand for HKD assets also rises (eg, in the case of IPOs).
But these instances only cause a temporary lock-up of
HKD liquidity (eg, with the IPO book-running banks) and
do not usually last for a sustained period.
RMB appreciation and HKD interest rates: An
appreciating RMB can increase speculation about the HKD
peg as well as demand for Hong Kong assets linked to RMB
(eg, H-shares, CNH-denominated assets). Rising Chinese
stocks can also spur capital inflows into Hong Kong. Such
inflows can increase the money supply in Hong Kong,
especially if USD/HKD is trading close to the strong side of
the convertibility undertaking (7.75), and lower money
market rates. The opposite happens during capital outflows
Offshore RMB market and HKD interest rates: The
introduction of deliverable RMB in Hong Kong has led to a
shift of commercial bank deposits from HKD to RMB
deposits. RMB deposits now form around 10% of the total
deposit base and in the last year growth in RMB deposits
was 1.2x total deposit growth, indicating a decline in HKD-
denominated deposits. However, borrowing needs are still
denominated in HKD. Over time, this phenomenon should
put upward pressure on HKD rates as incremental HKD
loans outpace incremental HKD deposits by a wider
margin.
Given the key role of the interbank market in the financial
intermediation process, other marketable interest rates and
commercial bank lending rates are highly correlated with
Hibor. Hence, the transmission of changes in money
market rates into the real economy is rapid.
HKD interest rates (reflected by 12m FX points)
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
Jan-06 Jan-07 Jan-08 Dec -08 Dec -09 Dec -10
7.70
7.72
7.74
7.76
7.78
7.80
7.82
7.84
12m FX implied yield US~HK differential
USD/HKD (RHS)
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
Jan-06 Jan-07 Jan-08 Dec -08 Dec -09 Dec -10
7.70
7.72
7.74
7.76
7.78
7.80
7.82
7.84
12m FX implied yield US~HK differential
USD/HKD (RHS)
Hibor vs Libor spread
-4
-2
0
2
4
6
8
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
%
-50
50
150
250
350
450
3m Libor - 3m Hibor spread (bp, RHS)
3m USD Libor
3m HKD Hibor
RMB appreciation expectations drive HKD forwards and
money market rates (pips)
-1200
-1000
-800
-600
-400
-200
0
200
400
600
800
2005 2006 2007 2008 2009 2010 2011
-100
-80
-60
-40
-20
0
20
40
60
HKD 12m fwd points
CNY 12m NDF points (RHS)


27 December 2011 29

Interest rate swaps (IRS)
Due to the linked exchange rate system, HKD IRS markets
move broadly in line with US IRS markets, and for the
same reason are also the most liquid IRS market in EM
Asia. The IRS is readily used as a duration hedging
instrument in Hong Kong, with the floating leg being 3m
Hibor (Bloomberg Ticker: HDSW5 Curncy).
Floating leg (3m Hibor): Fixings are made at 11.00am
each business day on the basis of quotations provided by
20 banks designated by the Hong Kong Association of
Banks (HKAB) as reference banks. Daily fixings are made
available for each monthly HKD deposit maturity between
1 and 12 months. In calculating Hibor, the middle 14
quotations from the reference banks are averaged and the
result rounded up, if necessary, to the fifth decimal place.
Participants: The main market participants are domestic
banks and financial institutions, for duration hedging
needs. Hedge funds are also active, especially in HKD
versus USD IRS spread products.
Conventions: The convention for quoting IRS is on a
quarterly basis with an actual/365 day count. The average
trade size for an IRS transaction is around USD10k DV01.
The IRS curve is liquid out to 10y.
Hibor-Libor basis swap spreads and cross-currency
swaps (CCS)
Conventions: This is a floating versus floating cross-
currency swap with 3m USD Libor as one leg and 3m HKD
Hibor plus the Hibor-Libor spread as the other. The basis
swap is liquid in the 1y-5y sectors, while FX forwards are
more liquid in tenors less than 1y (Bloomberg Ticker:
HDBS5 Curncy).
Participants: The most active issuers of the basis swap are
foreign institutions issuing in HKD and swapping back into
USD. There is a similar opposite use of the basis swap by
domestic institutions issuing in a foreign currency like SGD
or USD, and swapping the proceeds back into HKD.
Cross-currency swaps: Just like the basis swap, there is
also a cross-currency swap, though the basis swaps are
more liquid and commonly used by domestic/foreign
issuers and even hedge funds. A fixed versus floating
cross-currency swap is quoted as Fixed HKD vs Floating
3m USD Libor, on a quarterly basis. (Bloomberg Ticker:
HDUSSW5 Curncy).

Front end USD vs. HKD IRS spreads and USD/HKD FX
forwards
7.74
7.75
7.76
7.77
7.78
7.79
7.80
7.81
7.82
7.83
7.84
2006 2007 2008 2009 2010 2011
-40
-20
0
20
40
60
80
100
120
140
12m USD/HKD forward USD-HKD 2y IRS (bp, RHS)
Source: Bloomberg
USD vs. HKD IRS spreads
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2006 2007 2008 2009 2010 2011
0
20
40
60
80
100
120
140
10y USD - HKD (bp, RHS)
10y USD (%)
10y HKD (%)
Source: Bloomberg
USD vs. HKD IRS curve slopes
-50
0
50
100
150
200
250
300
2006 2007 2008 2009 2010 2011
-160
-140
-120
-100
-80
-60
-40
-20
0
20
40
60
2s10s USD - HKD (bp, inverted, RHS)
2s10s USD (bp)
2s10s HKD (bp)
Source: Bloomberg

27 December 2011 30
Other instruments
Futures: Hibor (1m, 3m) and 3y EFN futures are available
and traded in the derivatives market operated by Hong
Kong Exchanges and Clearing, but in small volumes as
compared with OTC derivatives.
OIS: Overnight Index Swaps (OIS) is a fixed/floating
interest rate swap with the floating leg computed using
the HKD Overnight Index Swap Reference Rate
(Bloomberg Ticker: H$ONWGHT Index). Liquidity is
extremely low in these instruments.
Interest rate options
Similar to the IRS markets, the interest rate options
markets in Hong Kong are also among the most liquid in
EM Asia, due to the linked exchange rate system and high
correlation between US and Hong Kong IRS markets. The
most liquid areas are vanilla products ie, caps, floors and
swaptions.
Participants: The main supply of volatility comes from
banks, institutional clients, corporates and retail banks,
mostly from yield enhancement products or cheaper
funding. The supply of volatility from such products is
generally transferred to dealers and banks, which might
warehouse it or pass it over to hedge funds looking to
express market views via swaptions. However, unlike
Koreas swaption market, the supply of volatility is not high
enough to exert downward pressure on the vega part of
the volatility curve.
Structured products market: This is not a very active
area, with the most common types of structured notes
being simple callable notes, Hibor/Libor linked floaters,
inverse floaters, range/spread range accruals and equity
linked notes.
History: The historical ratio of USD vs. HKD implied
volatility has been in the range of 0.81.0 (except 2008)
making the HKD vs USD implied vols spreads an actively
traded spread by hedge funds.

Hibor, EFN futures overview
Features 1m Hibor Futures 3m HIBOR Futures 3y EFN Futures
Underlying interest
rate
1m Hibor 3m HIBOR 3y notional EFN with a
coupon of 6%
Bloomberg ticker HJA Index HRA Index
Contract size HK$15mn HK$5mn HK$1mn
Contract months Spot month and the next
five calendar months
Spot month, the next two
calendar months and
seven quarterly months on
the Mar, Jun, Sep, Dec
calendar quarter cycle
Quarter months on the
Mar, Jun, Sep & Dec cycle
such that there are always
four months listed at any
one time
Price quotation One hundred (100.00)
minus the interest rate
As a percentage of the
contract size, quoted to 2
decimal places. The value
of each whole percentage
point is HK$10,000
Trading hours 8:30am - 12:00noon &
1:30pm - 5:00pm
(expiring contract month
closes at 11:00am on the
last trading day)
Final settlement
day
The third Wed of the
contract month
Position limits Nil Nil 5,000 open contracts, in
any one contract month
(for the spot month
contract during the last 6
trading days, 1000 open
contracts)
Source: Hong Kong Exchange
HKD vs. USD implied 5y5y vols ratio
0
20
40
60
80
100
120
140
160
180
2006 2007 2008 2009 2010 2011
0.70
0.75
0.80
0.85
0.90
0.95
1.00
HKD/USD 5y5y vol ratios (RHS)
USD 5y5y normalised vol
HKD 5y5y normalised vol
Source: Bloomberg
HKD vols outperform USD vols during times of increased
global volatility
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
2011 2010 2009 2008 2007 2006
0
10
20
30
40
50
60
70
HKD/USD 1y1y vol ratios (1mma, RHS)
VIX (1mma)
Source: Bloomberg

27 December 2011 31
Bond markets

Overview
The Hong Kong debt market is one of the most liquid in
the region. The Central Money Markets Unit (CMU) was
established in 1990 and is operated by the HKMA to
provide a clearing and custodian system for Exchange
Fund bills and notes (EFBNs) and other private debt
securities. The outstanding amount of EFBNs was about
HKD655bn at end-November 2011, with daily turnover in
this paper averaging HKD300bn. A total of HKD1.3trn in
debt securities was outstanding as of end-2010, which
included bank, local corporate and overseas issuer paper
besides the EFBNs.
The most significant development in the Hong Kong
market is the fast growing CNH debt market (for more
details please see CNH Market Primer: Food for thought,
8 November 2011).
Instruments
Exchange Fund bills and notes (EFBNs): These are HKD
debt securities issued by the HKMA.
They constitute direct, unconditional and general
obligations of the Hong Kong Special Administrative
Regional Government for the account of the Exchange
Fund and have the same status as all other unsecured
debt of the government. The bills and notes are for the
account of and payable from the Exchange Fund.
The Exchange Fund bills and notes issuance
programme ensures the supply of a significant
amount of high quality HKD debt paper, which can be
used for trading, investment and hedging purposes.
Authorised Institutions that maintain HKD clearing
accounts with the HKMA may use their holdings of
Exchange Fund paper to borrow HKD overnight from
the discount window. Active primary and secondary
markets for Exchange Fund bills and notes and the
establishment of a reliable benchmark rate for up to
15 years have facilitated the development of a
sophisticated HKD debt market.
The Exchange Fund bills programme was introduced
in March 1990. Under the programme, bills of 91d-,
182d-, and 364d- maturity are regularly auctioned by
public tender. Two-year and three-year Exchange
Fund notes were introduced in May and October
1993, respectively. This was followed by the issue of
five-year Exchange Fund notes in September 1994,
seven-year in November 1995, 10-year in October
1996 and 15-year in August 2007.

Outstanding size of HKD debt instruments (HKD bn)
0
200
400
600
800
1,000
1,200
1,400
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Non-MDB overseas borrowers
MDBs
Local corporates
AI banks
Statutory bodies and government-owned corps
Government
EFNB
Source: HKMA
Monthly turnover of EFBNs by tenor (HKD trn)
0
5
10
15
20
25
2011 2010 2009 2008 2007 2006 2005
EFBs EFN 1y or below
EFN 1-3y EFN 3-5y
EFN 5-7y EFN 7-10y
EFN above 10y
Source: HKMA
Outstanding EFBNs (HKD bn)
0
100
200
300
400
500
600
700
91d EFB 182d EFB 364d EFB EFN
Source: HKMA


27 December 2011 32
The supply of EFBNs depends on FX inflows and
outflows and the HKMAs decision on whether to
sterilise the consequent change in system liquidity.
Since May 2010, the amount of outstanding EFNBs
has barely changed as the HKMA has only issued new
paper to meet redemption needs.
Government bond programme: Running a continuous
fiscal surplus, there is little need for the HKSAR
Government to issue debt for financing purposes. Instead,
the government bond programme is an initiative to
develop the local bond market through ensuring a steady
and consistent supply of public debt to satisfy demand for
long-term paper from insurance and pension funds as well
as to meet retail demand for stable investment options.
The programme began in 2009 and is intended to run
through 2014. Around HKD49bn has been issued so far in
the form of institutional and retail bonds.
Inflation-linked bonds (iBond): In July 2011, Hong Kong
issued HKD10bn of 3y inflation-linked bonds, the first
inflation-linked bond ever offered to domestic retail
investors. The reference CPI is the headline CPI index
(Bloomberg ticker: HKCPIY Index). Coupon is the higher
of 1) arithmetical average of the CPI y/y rate for the six
most recent preceding months, rounded to the nearest
two decimal places, and 2) a fixed rate of 1%. Coupon is
paid semi-annually with a day count of actual/365.
Certificates of deposit (CDs): These are issued by banks,
financial institutions and deposit-taking companies (as
explained in the money markets section).
Corporate bonds: These are issued by private sector or
government-owned institutions.
Market participants
Banks: Hong Kong maintains a three-tier system of
deposit-taking institutions: licensed banks, restricted-
licence banks and deposit-taking companies. They are
collectively known as authorised institutions (AIs) under
the banking ordinance. AIs may operate in Hong Kong as
either locally incorporated companies or branches of
foreign banks. As of December 2011, Banks in Hong
Kong hold 84% of outstanding EFBNs to meet statutory
liquidity ratios. EFBNs can be used as collateral to access
the HKMAs discount window. As such, banks tend to
hold short tenor EFBNs.
Insurance: Hong Kong is one of the busiest insurance
centres in the world. In August 2011, there were 164
authorised insurers, 86 of which were incorporated in
Hong Kong and the remaining 78 incorporated in 21
other countries. In recent years, Hong Kongs insurance
Outstanding EFNs by tenor
1y or below
25%
1-3y
40%
3-5y
15%
5-7y
5%
>7y
7%
>10y
8%
Source: HKMA
Issuer Exchange Fund
Tenors 91d, 182d, 364d for EFBs; 2y, 3y, 5y, 10y, 15y for EFNs
Weekly for 91d EFBs
Bi-weekly for 182d EFBs
Monthly for 364d EFBs
Quarterly for 2y, 3y, 5y EFNs
Semi-annual for 10y and 15y EFNs
Primary dealer
Two-tier dealership scheme with recognised dealers and
market makers
Issuance
method
Multiple-price system (but consideration is being given
to switching to single-price auction to encourage smaller
dealers)
Settlement CMU, Euroclear/Clearstream; T+1
As collateral
EFNBs are used by banks as collaterals to access HKMA's
discount window. The Hong Kong Futures Exchange has
accepted Exchange Fund paper as margin collateral for
trading in stock options and futures since 13 December
1999. Exchange Fund paper can be used as collateral in
Hong Kong dollar repurchase transactions. The use of
Exchange Fund paper as collateral for a wide range of
products increases the liquidity of the Hong Kong dollar
fixed-income market and helps reduce systemic risk
EFBNs Summary
Issuance
schedule
Source: HK MA
Issuance under government bond programme (HKD bn)
Retail bond
issuance
programme
Total
2y 3y 5y 10y 3y
Sep-09 3.5 - - - - 3.5
Nov-09 - - 2 - - 2
Jan-10 - - - 2.5 - 2.5
Mar-10 3.5 - - - - 3.5
May-10 - - - 3 - 3
Jun-10 - - 1.5 - - 1.5
Sep-10 3.5 - - - - 3.5
Oct-10 - - - 2 - 2
Dec-10 - - 2.5 - - 2.5
Mar-10 3.5 - - - - 3.5
May-10 - - 2.5 - - 2.5
Jul-10 - - - - 10 10
Aug-10 - - - 2.5 - 2.5
Sep-10 3.5 - - - - 3.5
Nov-10 - 3 - - - 3
Institutional bond issuance programme
Source: HKMA

27 December 2011 33
market has shown considerable growth, with gross
premiums totalling HKD205bn in 2010.
Asset management: Hong Kong is one of the largest
asset management centres in Asia. The fund
management business in the city managed HKD10.1trn
in assets as of end-2010, representing growth of 18.6%
over 2009. The introduction of the Mandatory Provident
Fund (MPF) system in December 2000 generated
significant amounts of retirement assets and created
additional demand for investment products as well as to
providing greater stability to financial markets. By July
2011, the accrued assets of MPF schemes totalled
HKD387.56bn.
Free access to foreign investors.
Taxation
There is no income or capital gains tax payable for locals
or foreigners investing in EFBNs.
Settlement
There are two distinct clearing and settlement systems in
Hong Kong: the Central Money Markets Unit (CMU) of
HKMA, and the Central Clearing and Settlement System
(CCASS) and Derivatives Clearing and Settlement System
(DCASS) of the HKEx.
The CMU is a central securities depository unit operated
by HKMA that provides electronic clearing, settlement,
and custodian services for HKD debt instruments. The
implementation of the Real Time Gross Settlement
(RTGS) System provides a real-time, delivery-versus-
payment (DvP) service. HKMA has also developed a USD-
clearing system linked to the CMU. The CMU has a two-
way link with Euroclear and Clearstream. In April 2004, a
cross-border debt securities settlement agreement
between the CMU and the Government Securities Book-
Entry System of China Government Depository Trust &
Clearing Co. Ltd (CDC) was reached. The one-way link
allows authorized CDC members to settle and hold HKD
and foreign debt securities with the CMU.
CCASS provides clearing, settlement, and depository
services for exchange-traded securities. All cash and
share transactions on the exchange go through CCASS.
DCASS is an integrated clearing and settlement system
for all HKEx options and futures contracts.
Banks holdings of FI instruments as % of assets
0%
5%
10%
15%
20%
25%
30%
2000 2002 2004 2006 2008 2010
Other debt
Government bills, notes and bonds
Floating rate notes and commerical papers
Acceptances and bills of exchange
NCDs
Source: HKMA
Regulatory system in Hong Kong
Institution Regulator Hong Kong United States
Deposit-taking Central Bank HKMA Various bodies
Banks " " Fed, OCC, FDIC,
State Banking
superintendents
Finance
companies
" " Office of Thrift
Supervision
Credit co-
operatives
Usually under
another ministry
Not applicable State level
supervision
Mutual
funds/asset
managers
Securities
Commission
Securities &
Futures
Commission
Securities &
Exchange
Commission
Investment
banking
Overlap HKMA/SFC SEC
Debt markets Overlap HKMA/SFC SEC
Insurance
companies
Insurance
Commission
Commissioner of
Insurance
State level
commissioners
Securities
houses
Securities
Commission
SFC
Provident/
Pension funds
Various bodies Secretary for
Financial
Services/Proposed
MPF Authority
Department of
Labor/Pension
Benefit Guarantee
Corp.
Futures &
options
Futures Authority SFC Commodities and
Futures Trading
Commission
(CFTC)/SEC
Source: HKMA

Regulation
The main regulators in Hong Kong are the HKMA,
Securities and Futures Commission (SFC), the Office of the
Commissioner of Insurance (OCI) and the Mandatory
Provident Fund Schemes Authority (MPFA). They are
responsible respectively for regulating the banking,
securities and futures, insurance and retirement schemes.


27 December 2011 34

Fiscal policy
The Hong Kong SAR Government runs a tight fiscal policy.
Outstanding government debt as a percentage of GDP is
minimal. The issuance of EFBNs is purely for monetary
policy operation purposes.
Credit ratings
Hong Kongs long-term foreign currency sovereign debt
rating is AAA (Stable) by S&P, AA+ (Stable) by Fitch and
Aa1 (Pos) by Moodys.
Hong Kongs long-term local currency sovereign debt
rating is AAA by S&P, AA+ by Fitch and Aa1 by Moodys.
Moody's S&P Fitch
Aa1 (Nov 2010) AAA (Dec 2010) AA+ (Nov 2010)
Aa2 (Jul 2007) AA+ (Jul 2008) AA (Jul 2007)
Aa3 (Sep 2006) AA (Jul 2006) AA- (Jun 2001)
A1 (Jul 2004) AA- (Jul 2005) A+ (Sep 1995)
A+ (Feb 2001) AA- (Oct 1994)
A (Aug 1998)
A+ (May 1997)
Source: Rating agencies

27 December 2011 35
BONDS
Tenor /
maturity Coupon
Day
count
Issuance
calendar
Auction
Avg.
trade size
Bid-offer
Exchange
Fund Bills
(EFBs)
HKMA Monetary
operations
91d, 182d,
364d
Zero Act/365 Weekly for 91d; bi-
weekly for 182d;
month for 364d
Multiple
price
T+1 HKD200-
300bn per
day
HKD200-
300mn
3bp T+0 before
11 AM, T+ 1
after
HKD625bn HKTB Govt
Exchange
fund notes
HKMA Monetary
operations
2y, 3y, 5y,
10y and
15y
Semi
annual
Act/365 Quarterly for 2y,
3y, 5y; Semi annual
for 10y and 15y
Multiple
price
T+1 HKD100bn
per day
HKD20-
50mn
3-5bp T+0 before
11 AM, T+ 1
after
HKD69bn HKGB Govt
Government
bonds
HK SAR Financing 2y, 3y, 5y,
10y and
15y
Semi
annual
Act/365 Monthly Multiple
price
T+1 HKD200mn
per day
HKD10-
50mn
5-10bp T+1 HKD48bn GBHK Govt
Corporate
bonds
Private
companies and
government
owned
institutions
Financing 1-30y quarterl
y/semi
annual/
annual
Act/365 Variable Book
running
T+2 HKD5bn per
month
HKD50-
100mn
10-20bp T+3 HKD570bn N/AA
Instrument
Floating
leg
Bloomberg
ticker
Day
count
Reset
frequency
Day
count
Pay
frequency
Liquid
tenors Effective
Daily trading
volume
Bid/offer
spread
Bloomberg
ticker (5y)
IRS 3m Hibor HIHD03M Act/365 Quarterly Act/365 Quarterly 1-10y, available up to 15y T+0 HKD500mn 2-3bp HDSW5
CCS 3m USD Libor US0003M Act/360 Quarterly Act/365 Quarterly 1-10y, available up to 15y T+0 HKD800mn 3-5bp HDUSSW5
Basis 3m Hibor/
USD Libor
HIHD03M (HKD)
US0003M (USD)
Act/365 (HKD)
Act/360 (USD)
Quarterly vs
Quarterly
1-10y, available up to 15y T+0 HKD800mn 2-3bp HDBS5
INTEREST RATE OPTIONS
Instrument Underlying Daily trading volume Reuters page Bloomberg Foreign access
Swaptions IRS HKD500mn GFIHKDP GIRP Option on ND IRS available
Caps/floors 3M HIBOR HKD200mn GFIHKDP GIRP ND caps, floors available

27 December 2011 36
HKD nominal and real effective exchange rates

85
90
95
100
105
2008 2009 2010 2011
HKD NEER
HKD REER
HKD spot and forwards
7.74
7.76
7.78
7.80
7.82
7.84
2008 2009 2010 2011 2012
USD/HKD USD/HKD Forwards

HKMA FX reserves (USD bn)
100
150
200
250
300
2008 2009 2010 2011

The objective of the Hong Kong Monetary Authority
(HKMA) is to ensure currency stability within the
framework of the Linked Exchange Rate system through
sound management of the Exchange Fund, monetary
operations and other means deemed necessary.
The HKMA implemented a currency board arrangement
on 15 October 1983, pegging the HKD to the USD at a rate
of 7.80. The Linked Exchange Rate system requires both
the stock and the flow of the monetary base to be fully
backed by foreign reserves.
The HKMA operates Convertibility Undertakings on both
the strong side and the weak side of the Linked Rate of
7.80. Under the strong-side Convertibility Undertaking, the
HKMA undertakes to buy USD from licensed banks at
7.75. Under the weak-side Convertibility Undertaking, the
HKMA undertakes to sell USD at 7.85. Within the
Convertibility Zone between 7.75 and 7.85, the HKMA
may choose to conduct market operations consistent with
currency board principles, with the aim of promoting the
smooth functioning of the money and FX markets.
The stability of the HKD exchange rate is maintained
through an automatic interest rate adjustment
mechanism. When there is a decrease in demand for HKD
assets and the HKD weakens to the convertibility rate, the
HKMA stands ready to purchase HKD from banks, leading
to a contraction of the monetary base. Interest rates then
rise, creating the monetary conditions conducive to capital
inflows so as to maintain exchange rate stability.
The Exchange Fund Advisory Committee (EFAC) Currency
Board Sub-Committee was established in August 1998 to
oversee the operations of the Currency Board system in
Hong Kong.
Exchange rate markets
Both residents and nonresidents are free to buy and sell
securities and other instruments on Hong Kongs capital
and money markets, with no restrictions on the types of
account available.
Corporates
There are no restrictions on the repatriation of capital, the
remittance of profits, overseas borrowing, nonresidents
borrowing locally, or nonresidents and residents holding
foreign currency in overseas accounts. Cross-border
remittances are permitted.

27 December 2011 37
Taxation
No specific taxes are levied on FX transactions.

FX reference guide
Overview
HKD is a freely tradable and convertible currency. The exchange rate is pegged to USD at 7.80, and the HKMA maintains a two-way
Convertibility Undertaking at a spread of 7.75-7.85.
Security
Liquidity
(daily volume)
Bid/Offer
spread
Tenor/
Maturity
Local open/
Reuters
FX spot Liquid; USD3bn 2-5 pips Spot 0830 1100;
1400 1600
T+2 AFX=
HKMAOOZ
Fully convertible market.
FX forward Liquid up to 1y;
USD2bn
3-10 pips
50-500 pips
Up to 1y
25y
0830 1100;
1400 1600
T+2 HKDF=
BARCHK1
Fully convertible market.
FX options Liquid up to 2y;
USD600mn
0.1-0.2 vol
(for 1m-1y)
Liquid up to 2y;
thin liquidity
from 2y to 5y
24 hours a
day
T+2 N/A Exotics are available but
continuous barriers are not.
FX MARKET PARTICIPANTS
Description
Licensed banks Active in FX forwards, swaps and HKEF paper. Banks also issue HKD paper to swap into USD.
Foreign nonbank institutional investors Mainly engaged in FX forwards/swaps and interest rate swaps.
Multinationals FX hedging.


27 December 2011 38
India
FI Strategist: Kumar Rachapudi +65 6308 3383; kumar.rachapudi@barcap.com


Objective
Multiple objectives - price stability, growth and financial
stability; emphasis varies depending on situation
Function
Monetary authority, financial regulator and banker to
the government and banks
Policy rate and
frequency
Repo rate (current 8.50%). Once in one-and-a-half
months
Other relevant
rates
MSF rate (repo+100bp), reverse repo rate (repo-100bp)
Policy tools
CRR (current: 6%), SLR (current: 24%), LAF, refinancing
facilities, OMO, MSS and bank rate
Reserve Bank of India (RBI)

Source: Reserve Bank of India, Barclays Capital

Policy rate and inflation

3
4
5
6
7
8
9
10
2005 2006 2007 2008 2009 2010 2011
%
-2
0
2
4
6
8
10
12
%
Reverse repo Repo
MSF rate WPI (y/y, RHS)


Repo rate, M3 and credit growth

8
12
16
20
24
28
32
Jan-07 Nov-07 Oct-08 Sep-09 Aug-10 Jul-11
%, y/y
3
4
5
6
7
8
9
10
M3 growth Credit growth Repo rate (%, RHS)
Policy objectives
The Reserve Bank of India (RBI) has the basic function to
regulate the issue of bank notes and the keeping of
reserves with a view to securing monetary stability in India
and generally to operate the currency and credit system of
the country to its advantage.
The RBI's monetary policy is based on multiple
objectives: price stability, growth and financial stability.
The relative emphasis varies depending on evolving
macro-economic and monetary conditions. As
intermediate objectives, the RBI generally monitors broad
money (M3) expansion and credit growth, taking into
account its GDP and inflation projections.
RBI projects March 2012 WPI at 7% y/y and indicatively
targets 18% credit and 15.5% M3 growth for FY11-12.
Frequency and members
Frequency: The RBI conducts a quarterly policy review
along with releasing its assessment of global and domestic
macroeconomic and monetary developments. Additionally,
the central bank conducts a mid-quarterly review of policy
where it only announces its rate decision. Inter-meeting
rate changes have been made in the past, e.g. before RBI
introduced the mid-quarterly review in Sep 2010.
Board: The monetary policy committee, headed by the
governor and no more than four deputy governors, decides
policy. There is also a Technical Advisory committee,
appointed by the RBI, to help in the decision-making
process. Policy decision is the prerogative of the governor
(see Asia Pacific Central Bank Guide, 4 November 2011).
Repo rate: This is the RBIs policy rate for setting monetary
policy. Commercial banks can borrow from the RBI at this
rate using government bonds as collateral through the
LAF when required. (BBG Ticker: INRPYLD Index).
Reverse repo rate: The reverse repo rate is set 100bp
lower than the repo rate. Banks can park excess funds with
the RBI at this rate via the LAF. Previously, both repo and
reverse repo rates were policy rates, with the RBI changing
these rates independently. However, in May 2011 the RBI


27 December 2011 39
specified that the repo rate was its policy rate by setting
the reverse repo 100bp lower than the repo rate. (BBG
Ticker: RSPOYLD Index).
Marginal Standing Facility (MSF): Introduced in May
2011, the MSF rate is the repo rate plus 100bp. Banks are
allowed to borrow at this rate using SLR securities up to
1% of net demand and time liabilities (NDTL) when they
run out of excess SLR securities to borrow at the repo rate.
MSF auctions are conducted at 4:30pm daily. (BBG Ticker:
IMSFRATE Index).
Liquidity Adjustment Facility (LAF): This is the auction
process by which banks borrow from (at repo rate) or lend
to (at reverse repo rate) the RBI. Repo auctions are
conducted at 10:30am and reverse repo auctions at
10:30am and 4:30pm each day. There is a haircut/margin
of 5% for both repo and reverse repo transactions. The RBI
can decide to conduct a second LAF auction if required.
Cash reserve ratio (CRR): The share of net demand and
time liabilities (NDTL) that banks need to maintain as a
cash balance with the RBI. The RBI does not pay interest
on these balances. Banks should maintain these reserves
at the required level on a daily average basis over a
fortnight, with a minimum maintenance of 70% per day,
during the reporting period, which ends on every alternate
Friday. The CRR is used to drain/inject liquidity into the
system on a permanent basis. Currently the CRR is 6%.
(BBG Ticker: RBICRRP Index).
Statutory Liquidity Ratio (SLR): The share of NDTL that
banks must maintain in safe and liquid assets, such as
government securities, cash and gold. Unlike the CRR, the
SLR balances have to be maintained in full every day.
Given this, banks typically maintain an excess SLR buffer.
(currently ~3%). Currently, the SLR is 24%. However,
banks get a waiver of up to 1% if they borrow using these
securities under the MSF. (BBG Ticker: RBICSLR Index).
Market Stabilisation Scheme (MSS): This instrument was
introduced in 2004 to sterilise liquidity created by FX
intervention. The cash raised by issuance of these bonds is
held in a separate government account with the RBI and
cannot be used to finance the fiscal deficit. However,
under exceptional circumstances, the MSS account can be
de-sequestered and transferred into the government
account to be used for fiscal spending. The RBI and
government decide on limits on outstanding MSS
(currently 500bn) and review them when a threshold
(INR350bn) is reached. Current outstanding is zero on
account of de-sequestering in 2010.
Net daily liquidity injected/absorbed by RBI
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2007 2008 2009 2010 2011
Net liquidity injected by RBI via LAF (INR bn)

Historical trends in CRR and SLR
4
5
6
7
8
9
10
2005 2006 2007 2008 2009 2010 2011
23.0
23.5
24.0
24.5
25.0
25.5
26.0
CRR ratio (%) SLR ratio (%, RHS)

Outstanding MSS bonds
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10
INR bn

27 December 2011 40
Open market operations: Outright sales/purchases of
government securities by the RBI; used as a tool to
inject/drain liquidity over the medium term. RBI conducts
OMOs on an ad hoc basis as and when required to
inject/drain liquidity.
Bank rate: The rate at which the RBI is ready to buy or re-
discount bills of exchange or other commercial paper. This
is often considered a medium-term policy signal. However,
the use of this tool has decreased significantly in recent
years with the rising efficiency of the LAF window.
Refinance facilities: Sector-specific refinance facilities (eg,
for lending to the export sector) are provided to banks.

RBI open market operations in recent years (INR bn)
-100
0
100
200
300
400
500
600
Apr-08 Dec-08 Jul-09 Mar-10 Oct-10 May-11


27 December 2011 41

Interbank repo trades above CBLO

0
1
2
3
4
5
6
7
8
9
10
F
e
b
-
0
9
M
a
y
-
0
9
A
u
g
-
0
9
N
o
v
-
0
9
F
e
b
-
1
0
M
a
y
-
1
0
A
u
g
-
1
0
N
o
v
-
1
0
F
e
b
-
1
1
M
a
y
-
1
1
A
u
g
-
1
1
%
-200
-100
0
100
200
300
400
500
600
700
bp Interbank repo CBLO Spread


Interbank call market dominates money market volumes

0
200
400
600
800
1,000
1,200
I
N
R

b
n CBLO
Government bond repo
Interbank call money market

Source: CEIC, RBI, Barclays Capital

Banking system liquidity vs O/N call fixing spread over repo

Net LAF (INR bn, X axis) vs Repo~Call spread (bp)
-200
-150
-100
-50
0
50
100
150
200
250
300
-2000 -1000 0 1000
Overview
The main instruments of the Indian money markets are
uncollateralised borrowings and placements (o/n and
beyond), repos, T-bills, CDs, CPs and FX swaps. These
instruments range from one-day to one-year and are
issued by various entities, including the government,
banks and corporates.
Overnight borrowing (either collateralised or
uncollateralised) is the most liquid and most important
funding source for banks. Term money market (i.e. other
than overnight market) borrowing exists, but is less liquid.
The importance of the overnight money market also stems
from the flexibility banks have to maintain CRR (discussed
earlier), which leaves them with additional liquidity to lend
on days when they under-maintain CRR.
The overnight call money rate is targeted by the RBI to be
close to the policy rate (repo rate) by injecting/draining
liquidity to/from the banking system.
Money markets
Interbank call money market: The interbank call money
market is where participants place/borrow funds among
themselves. The o/n call money market is the most liquid.
Notice money (<14d) and term money (14d-3m) exist, but
are less liquid. Transactions are done on a negotiated
dealing system-call (NDS-call) screen. This is the only
uncollateralised market in India and is restricted to
interbank and primary dealers. (BBG Ticker for O/N call
fixing: NSERO Index).
Lending by commercial banks in the interbank market
should not exceed 25% of their capital base on a
fortnightly average basis, but can go up to 50% on any
given day. Similarly, borrowings by banks should not
exceed 100% of their capital fund or 2% of their aggregate
deposits, whichever is higher. However, banks are allowed
to borrow a maximum of 125% of their capital fund on
any given day.
Government bond repos: This is a collateralised market in
which banks, corporates, mutual funds and insurance
companies are allowed to participate. Transactions are
done on a platform called CHROMS.
Collateralised Borrowing and Lending Obligation
(CBLO): This is a collateralised secondary market and
trading is via the CBLO platform. The borrower places
securities as collateral with the Clearing Corporation of

Source: Barclays Capital, Bloomberg

27 December 2011 42
India Limited (CCIL) and borrows money via an instrument
called a CBLO. Only government bonds are eligible for
CBLO deals, and the market works on a haircut
determined by CCIL.
LAF: Banks can borrow o/n money (at repo) from or lend
to (at reverse repo) the RBI via the LAF.
The spread between the government bond repo rate and
CBLO is minimal as both are collateralised markets.
However, the spread between overnight call money and
CBLO rates is a reflection of systemic liquidity conditions,
excess SLR and availability of eligible repo collateral
among participants.
Transmission of the policy rate (repo rate) into overnight
money market rates is dependent on systemic liquidity
and excess SLR in the banking system. Banking system
liquidity is impacted by 1) the pace of government
borrowing and spending; 2) changes in currency in
circulation and CRR balances; 3) FX intervention; and 4)
OMO by the RBI.
If liquidity is loose, banks park excess funds at the reverse
repo rate with the RBI. They also find it profitable to lend
money in the interbank call money market slightly above
this rate. Thus, in case of excess liquidity, o/n rates will
likely trade close to the reverse repo rate.
If liquidity is tight, banks borrow funds from the RBI at the
repo rate using (excess) SLR securities (govt bonds) as
collateral. In this case, o/n rates trade close to the repo
rate. If banks do not have sufficient excess SLR, they need
to borrow in the interbank market. Thus, the level of
excess SLR at banks plays a key role in determining the
spread of the call rate over the repo rate. If liquidity is tight
and banks do not have sufficient excess SLR, they need to
borrow money from the RBI at the MSF. In such cases, o/n
rates will likely be significantly close to or even higher than
the MSF rate.
Overnight call rate versus LAF borrowing
0
1
2
3
4
5
6
7
8
9
10
Jan-09 Aug-09 Mar-10 Oct-10 May-11 Dec-11
%
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2500
INR bn Net LAF (inverted, RHS)
Repo rate
Call fixing
Reverse repo rate

Total systemic liquidity (TSL) flow of funds
Banks
Govt
RBI Public
Currency
with public
Foreign
capital flows
FX intervention by
the RBI will add to
INR liquidity
CRR
OMO
buyback FX
intervention
Auctions tax
payments
Credit
Deposits
Redemptions
coupons
Spending
TSL = Banks plus Govt
Banks
Govt
RBI Public
Currency
with public
Foreign
capital flows
FX intervention by
the RBI will add to
INR liquidity
CRR
OMO
buyback FX
intervention
Auctions tax
payments
Credit
Deposits
Redemptions
coupons
Spending
Banks
Govt
RBI Public
Currency
with public
Foreign
capital flows
FX intervention by
the RBI will add to
INR liquidity
CRR
OMO
buyback FX
intervention
Auctions tax
payments
Credit
Deposits
Redemptions
coupons
Spending
TSL = Banks plus Govt

27 December 2011 43

Overnight call money fixing versus 1y OIS swap

0.0
2.0
4.0
6.0
8.0
10.0
12.0
2005 2006 2007 2009 2010
0
2
4
6
8
10
12
Overnight fixing (%) 1y OIS yield (%, RHS)


5y OIS versus 10y G-sec yields

4.0
5.0
6.0
7.0
8.0
9.0
10.0
2005 2006 2007 2009 2010
0
2
4
6
8
10
12
10y G-sec yields (%) 5y OIS yield (%, RHS)


MIFOR vs OIS

-600
-500
-400
-300
-200
-100
0
100
200
2006 2007 2008 2009 2010 2011
bp
38
40
42
44
46
48
50
52
54
Mifor~OIS spread INR Curncy (RHS)
OIS swaps
The overnight indexed swap (OIS) is the most popular
derivative in India. The floating leg is o/n MIBOR (Mumbai
interbank offer rate) a polled fixing of o/n interbank call
money rates. OIS swaps are quoted on an annual basis for
1y and below and a semi-annual basis for tenors above 1y.
There is no exchange of principal.
The floating leg coupon is calculated by compounding the
daily overnight fixings (BBG ticker NSERO Index). For
business holidays, simple interest rate is used.
The main participants are interbank dealers, corporates
(which are typically receivers of the swaps as they hedge
their bond issues) and ALM books, which are typically
payers of these swaps to hedge SLR portfolio holdings.
Hedge funds and interbank dealers are significant
participants in the offshore market. OIS swaps are
nondeliverable offshore (NDOIS). While liquidity in
onshore and offshore markets is usually similar, there is a
basis between OIS and NDOIS given the one-sided nature
of offshore participants. This basis has increased
dramatically since 2010.
Front-end OIS yields depend more on RBI policy and
systemic liquidity, while back-end OIS yields are more
influenced by government bond yields and market
positioning.
CCS/MIFOR swaps
Mumbai interbank forward offer rate (MIFOR): This is
the INR rate implied by a polled fixing of 6m USD/INR FX
forwards. Interest rate swaps using MIFOR as the floating
leg are called MIFOR swaps. Due to the nature of the
fixing, the MIFOR swap is equivalent (but not identical) to
a cross-currency swap in terms of exposure.
Corporates with external borrowings (ECB) and
importers are typical payers of these swaps, while
exporters receive MIFOR swaps when hedging long-
dated receivables. Note that >1y USD/INR FX forwards
are derived from the MIFOR curve. However, typically
exporters are in the shorter tenor while ECB hedges are
in the longer tenor.
MIFOR swaps are nondeliverable offshore (NDMIFOR)
and trade with a basis to onshore swaps.



27 December 2011 44
Cross-currency swap (CCS): The USD-INR cross-currency
swap is quoted synthetically using MIFOR and FX swaps.
For instance, if an investor wants to pay fixed on the CCS
curve, then they pay fixed MIFOR and combines this with
buying USD/INR spot for the USD notional and pay 6m
USD/INR swaps. Given that the marginal propensity to
hold USD or INR has already been reflected in the spot and
forward rates, theoretically there is no basis between CCS
and MIFOR.
However, market makers do quote CCS (implied from
MIFOR) with a basis depending on positioning and
funding impact. Given that CCS is quoted synthetically,
banks utilise their aggregate gap limits and hence
charge a slippage. Also, in the CCS trade where the
customer is receiving INR, the banks end up paying
more INR upfront and receiving back later in the life of
the trade. Given that onshore INR funding cost is
higher than that implied by MIFOR, banks charge a
basis while quoting synthetic CCS.
Nondeliverable swap (NDS): The USD-INR cross-currency
swap quoted as a fixed INR rate against the floating USD
rate (6m USD LIBOR) is nondeliverable and called is called
NDS.
There is a basis between NDS and onshore MIFOR
which is largely determined by the difference in NDF
forward points and onshore deliverable FX forward
points.
The natural payers of NDS swaps are Foreign
Institutional Investors (FII), which hedge currency risks
on their bond holdings, as well as funds which lend to
onshore corporates and hedge their currency risks.
INBMK swaps
Indian government bond benchmark (INBMK) swaps are
contracts with 1y G-sec yields as the floating leg. These
swaps are the least liquid among OIS, MIFOR and INBMK
swaps. Typical participants would be corporates hedging
their local currency bond issues and interbank/investor
hedging of government bond portfolios.
The fixing for INBMK swaps is interpolated from polled
fixings for 1y and 2y benchmark bonds. (BBT ticker for
fixing: CTINR1Y Govt)
Interest rate futures (IRFs)
IRF for 10y G-secs and 91d t-bills are traded on the
National Stock Exchange, but are extremely illiquid due to
lack of investor interest.
MIFOR versus NDS spreads
3
4
5
6
7
8
9
10
5y MIFOR 5y NDS

Lower NDS gives yield enhancing opportunities for FII
0
2
4
6
8
10
12
Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11
%
1y AAA corp yields 12m T-bill yields
1y MIFOR

INBMK, OIS and G-sec yields
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11
% 5y OIS 5y INMBK 5y G-sec

27 December 2011 45
Bond markets

Outstanding government bonds

0.0
0.5
1.0
1.5
2.0
2.5
3.0
2011 2014 2017 2020 2023 2026 2032 2036
INR trn
G-secs Non-SLR government bonds T-bills CMB


Government bonds: holding pattern as of June 2011

Commercial
Banks
37.6%
Non bank
PDs
0.1%
Bank-
primary
dealers
10.0%
Corporates
1.9%
Co-op
banks
3.3%
FIIs
0.9%
Provident
funds
7.0%
RBI
12.9%
Financial
institutions
0.3%
Mutual
funds
0.4%
Others
3.2%
Insurance
cos
22.5%


Banks excess SLR depends on credit growth

20%
22%
24%
26%
28%
30%
32%
Mar-08 Mar-09 Mar-10 Mar-11
10
15
20
25
30
35
SLR requirement as % of NDTL
Banks holdings of SLR securities as % of NDTL
Credit growth (%, inverted, RHS)
Overview
Government bonds outstanding total INR33trn, representing
more than 75% of Indias total bond market. There are two
categories centre and SDL; both qualify for SLR needs. The
quasi-government and corporate bond markets are small.
The bulk of corporate bonds have an AA rating or above. The
market for sub AA ratings is not that liquid.
Short selling of bonds is permitted for 15 days (changed
from 5 days) among commercial banks and primary
dealers (PDs). As of July 2011, there are 21 PDs in India.
Participants are allowed to deliver a shorted security by
borrowing from the repo market.
Bond categories
Government bonds/bills: These are instruments issued by
the central government for deficit financing (T-bills, cash
management bills and longer-dated bonds). T-bills are
discount instruments with maturities of 91d, 182d and
364d. Longer-dated bonds are called G-secs or dated
securities and can extend up to 30 years. These are
generally fixed rate, semi annual coupon bonds. However,
the government has also issued inflation-linked bonds (in
1997), floating rate bonds (first issued in September 1995)
and bonds with call/put options (first issued in July 2002).
The last three categories of bonds are very rarely issued and
outstanding amounts are minimal. The RBI issues CMBs on
behalf of the government, typically whenever the
government exceeds its WMA borrowing limits. These are
discount bills, similar to T-bills and are eligible for SLR
purposes. However, these are typically less than 91d
issuances.
State development loans (SDLs): These are long-dated
securities issued by the state governments to finance their
budget deficits. These are semi-annual coupon bonds,
typically with a maturity of 10 years. SDLs qualify as
eligible SLR securities as well as eligible collateral for
market repos and LAF purposes.
Non-SLR government bonds: Issued by the government
to compensate (in lieu of cash subsidies) oil marketing and
fertiliser companies, and Unit Trust of India special
bonds. These are usually long-dated securities carrying a
coupon with a spread of about 20-25bp over the yield of
comparable government bonds. Beneficiary companies
may divest these securities in the secondary market to
banks, insurance companies/primary dealers, etc, to raise
cash. These are not eligible SLR securities, but are eligible
as market repo collateral.

Source: SEBI, Barclays Capital

27 December 2011 46
MSS bonds: Issued by the government under the Market
Stabilisation Scheme to sterilise FX intervention. Note that
the securities issued under this scheme are the same as
those issued for normal market borrowings and the
interest costs are borne by the government, even though
the proceeds cannot be used for funding budget deficits.
Quasi-government bonds: Issued by stated-owned
enterprises as a part of their debt financing.
Corporate debt: Includes private corporate bonds,
certificates of deposit (CDs) and commercial paper (CP).
Corporates, PDs and permitted financial institutions can
issue unsecured CP for maturities between 7 days and 1
year. Banks can issue CDs for maturities from 7 days to 1
year while eligible financial institutions can issue for
maturities from 1 to 3 years.
Market participants
Banks: Banks are a captive source of demand for
government bonds as they need to hold G-secs as a part
of their SLR requirement. Currently, the SLR requirement is
24% of their NDTL (proxy for deposit base) and banks
typically hold 3-4% of excess SLR as a buffer. This buffer
varies with credit growth and the economic cycle and had
been in the range of 2%-17% in the past 10 years.
Currently, their deposit base is ~INR 60trn, which has been
growing at 15-20% per year. This means banks will likely
absorb ~2trn of bonds each year. Banks typically hold 5-
10y bonds to match their liabilities.
Insurance companies and provident funds: Insurance
companies and pension funds are typical investors in long
end (>10y) paper and are major buyers of SDL and
corporate debt. Life Insurance Corporation (LIC) is by far
the largest insurance provider in the market (with ~77% of
market share in FY10-11). Regulations stipulate that
traditional life insurance companies should invest a
minimum of 50% of their controlled funds in G-secs.
However, this regulation is not applicable to unit-linked
insurance plans (ULIPS).
Others: RBI purchases bonds via OMO activities on an ad
hoc basis to inject liquidity. Securities companies, mutual
funds, primary dealers and corporates are other major
holders of government debt. Foreigners are not major
players given the limits on foreign investment.
Foreign institutional investors access to the domestic bond
markets is subject to limits determined by the Securities and
Exchange Board of India (SEBI). Whenever the investing
limits are changed, FIIs need to bid for them via auctions.
G-sec holding pattern (%, time series)
Banks + PDs
Insurance, PF and mutual funds
RBI
Others
0
10
20
30
40
50
60
70
80
90
100
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11
Banks + PDs
Insurance, PF and mutual funds
RBI
Others
0
10
20
30
40
50
60
70
80
90
100
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11

Corporate bond market size (USD bn)
0
20
40
60
80
100
120
140
160
180
Jun-10 Sep-10 Dec-10 Mar-11
Fixed rate Floating rate Structured notes Others

Secondary market trading in government bonds
-600
-400
-200
0
200
400
600
Apr-11 Jun-11 Aug-11 Oct-11 Dec-11
INR bn
Foreign bank Public bank
Private bank Mutual funds
Primary Dealers Others


27 December 2011 47
Current limits for FIIs are USD15bn in government bonds
and USD45bn for corporate bonds. Within the USD15bn
government bond limits, USD5bn have a tenor restriction
of greater than 5y maturity.
Once allocated, FIIs need to utilise their limits within 45 days
for government bonds and 90 days for corporate bonds. FIIs
can sell these bonds at anytime, but need to re-utilise their
freed-up limits within five working days or they lapse.
FIIs can hedge FX risks on their bond investments for
100% of the principle amount, but for maturities equal to
or less than that of the investment. However, if FIIs cancel
their hedge at any given point in time, current regulations
do not allow them to re-book the hedge. This was
amended in December 2011, before which FIIs were
allowed to re-book 10% of the notional amounts.
Auction procedure
Amounts and frequency: T-bills are auctioned every
Wednesday. 91d bills are auctioned every week. 182d and
364d bills are auctioned on alternate weeks. An indicative
calendar is issued at the start of the quarter. For G-secs, an
indicative calendar is issued twice a year (end-March and
end-September) with indicative tenors and amounts.
Actual bonds and amounts are normally announced on
Mondays with auctions on Fridays.
Auction mechanism: New issues are sold via yield-based
auctions while re-issues are sold via price-based auctions
using a uniform or multiple price method. Recent auctions
have been uniform price-based. 5% of the auction amount
of each issue is reserved for non-competitive bids, and is
allocated at the weighted average price. T-bills are
auctioned via the multiple price method and are generally
not re-issued. Approximately 15% (above the intended
auction amount) is allotted to non-competitive bidders.
Investors holding a current account with the RBI can
submit bids for the primary auction through the NDS-
auction screen. Primary dealers need to underwrite 50% of
the auction (divided equally among all PDs) under the
minimum underwriting commitment (MUC), even though
it is not mandatory that all their bids be successful. If the
RBI thinks bids are too far away from market levels, it may
chose to devolve bonds on PDs to the extent they
underwrote the issue. The remaining portion of the
notified amount is open to competitive underwriting
through an auction process. Institutions including primary
dealers, banks, insurance and provident funds having a
securities account (SGL account) with the RBI are eligible
for participating in the primary auction.
Current FII limits
Type of instrument
Cap
(USD bn)
1 Government debt without tenor restrictions 10
2 Government debt greater than 5y maturity 5
3 Corporate debt without tenor restrictions (including
debt oriented mutual funds)
20
4 Corporate debt long term infrastructure 25
4(a) QFI investment in debt (Including investment in IDF) 3
4(b) Corporate debt long term infra - One year lock in with
one year residual maturity by FIIs
5
4(c) Corporate debt long term infra - three year lock in with
three year residual maturity by FIIs (including
investment in IDF)
17

Previous FII limit auction cut-offs for government bond quota
Type of
limits and
date of
auction
Auctioned
amount
(INR bn)
Highest
bid (bp)
Lowest
allocated
bid (bp)
Total bid
amount
(INR bn)
Total bids'
range (bp)
12-Aug-10 6 80 75 31 0.001 - 80
30-Nov-11 253.28 135.01 115 395.6 0.0001-135.0
05-Aug-11 66 120** 17 127 1 - 120
15-Mar-11 75 5.5 4.0 96.9 2.5 - 5.5
02-Dec-10 220 25 10 227 10 - 25
Government debt limits (no restriction)
Government debt limits (long term)
**2nd highest alloted bid was 21bp

Previous FII limit auction cut-offs for corporate bond quota
Type of
limits and
date of
auction
Auctioned
amount
(INR bn)
Highest
bid (bp)
Lowest
allocated
bid (bp)
Total bid
amount
(INR bn)
Total bids'
range (bp)
15-Mar-11 27 140 105 94 0.4 - 140
02-Dec-10 66 42 35 67.5 35 - 42
12-Aug-10 150 5.5 0.11 161.5 0.11 - 5.5
30-Nov-11 261 125 67 340.06 1-125
07-Oct-11 224 13 8.01 347 0.0001 - 13
02-Dec-10 201 0.60 0.01 201 0.01 - 0.6
Corporate debt limits (long term infrastructure)
Corporate debt limits (unrestricted)


27 December 2011 48
Settlement: Primary market settlements are done on T+1
for bonds and T+2 for T-bills and bonds are credited to the
respective securities account (SGL account). In the
secondary market, G-secs are settled through the
members securities/current accounts maintained with the
RBI. The CCIL acts as a central clearing agent by becoming
a central counterparty to every trade through the process
of novation. CCIL also guarantees the settlement of trades
and it maintains an inventory of bonds for this purpose. All
outright secondary market transactions are settled on a
T+1 basis. However, repo transactions can be settled either
on T+0 or T+1 basis as per requirements.
Shut period: During the shut period, no settlement or
delivery of the relevant security is allowed. The main
purpose of this rule is to facilitate coupon and redemption
proceeds and to avoid any change in ownership during
this process. Currently, the shut period for government
securities held in SGL accounts is one day. For example,
the coupon payment dates for the security 6.49% CG 2015
are 8 June and 8 December of every year. The shut period
will fall on 7 June and 7 December for this security. Given
that G-sec settlement is T+1, this bond cannot be traded
on 6 June and 6 December.
Taxation
All interest income is subject to a 20% withholding tax,
unless specific tax treaties prescribe otherwise. A short-
term (1y or less) capital gains tax of 30% and a long-term
capital gains tax of 10% are imposed. A surcharge of 2.5%
on the tax, and an education cess of 3% (on tax +
surcharge) is also payable.
Regulatory authorities
Regulation of the debt market is shared by the RBI and the
securities and exchange board of India (SEBI).

FII holdings of government + corporate debt
0
10
20
30
40
50
60
70
2006 2007 2008 2009 2010 2011
USD bn FII holdings of outstanding government +
corporate debt
Total government + Corporate FII limits
Note: Typically most of the government bond limits are full.
Source: SEBI, Bloomberg, Barclays Capital


27 December 2011 49

Fiscal deficit has been increasing recently

-1
0
1
2
3
4
5
2001 2003 2005 2007 2009 2011
INR trn
Fiscal deficit Revenue deficit
Primary deficit


Ways and Means Advances from the RBI

0
100
200
300
400
500
600
1997 1999 2001 2003 2005 2007 2009 2011
INR bn
Governments' WMA borrowing from the RBI


India sovereign credit rating history

Moody's S&P Fitch
Baa3 (Jan 2004) BBB-u (Feb 2011) BBB- (Aug 2006)
Ba1 (Feb 2003) BBB- (Jan 2007) BB+ (Jan 2004)
Ba2 (Jul 1999) BB+ (Feb 2005) BB (Nov 2001)
BB (Oct 1998) BB+ (Mar 2000)
BB+ (Dec 1992)
Foreign currency long term debt
Fiscal policy
Fiscal policy is guided by the Fiscal Responsibility and
Budget Management Act (FRBMA), enacted in 2003. The
goal was to reduce the fiscal deficit to 3% of GDP by 2008
which could not be achieved due to the heavy fiscal
spending after the global financial crisis. Fiscal policy is
under considerable pressure arising from a combination of
factors including civil service salary hikes, farm loan
waivers, and fertiliser and petroleum subsides. The RBI is
also a banker to the government and carries out the debt
issuance for fiscal deficit financing. To that extent, the
mandate of the RBI is also deemed to include managing
government borrowing. Also, the governments cash
balances are maintained with the RBI.
The government funds the bulk of its fiscal deficit by
issuing bonds and T-bills, but it also has other means,
such as a small savings schemes and short-term
advances from the central bank. External debt of the
government is minimal.
Small savings schemes: Small savings comprise savings
and time deposits with post offices, savings certificates
like national savings annuity certificates and national
development bonds.
Ways and Means Advances: The government can borrow
from the RBI to finance its short-term funding needs under
the Ways and Means Advances programme. The RBI
decides on the limits each year typically the 1H limits are
higher than 2H limits. The government has to pay interest
(repo rate) to the RBI for WMA borrowing and the repo
rate +100bp for any overdraft incurred via the WMA
scheme. When the government utilises 75% of the WMA
limit, the RBI may trigger fresh issuance of market loans
depending on market conditions. Also, overdrafts are not
allowed beyond 10 consecutive days.
Cash Management Bills (CMBs): The RBI issues CMBs on
behalf of the government, typically when the government
exceeds its WMA borrowing limits. These are discount
bills, similar to T-bills and are eligible for SLR purposes.
However, these are typically less than 91d issuances.
Credit rating
Indias long-term foreign currency rating is Baa3 (Stable) by
Moodys, BBB-u (Stable) by S&P and BBB- (Stable) by Fitch.
Indias long-term local currency debt rating is Baa3 by
Moodys, BBB-u by S&P and BBB- by Fitch.


27 December 2011 50
Corporate bond market in India an overview
Overview: The Indian corporate bond market, while growing, is still small in comparison with the government bond
market. The size of the corporate bond market including CDs and CP is around INR8.9trn, compared with INR25trn in
outstanding longer-dated central government bonds.
The main issuers in the corporate bond market are banks, non-bank financial companies (NBFC), corporates and public
sector undertaking companies (PSUs). Insurance companies and provident funds are the biggest buyers of long-dated
corporate bonds, while mutual funds and foreign banks are the main investors in short-dated paper. Foreign institutional
investors (FIIs) are also eligible to invest in corporate bonds, subject to limits. Corporate bond repos are allowed, with a
25% haircut. However, selling of corporate bonds borrowed through repos is not permitted. Shut periods for corporate
bonds (ie, settlement on bonds is not allowed on days close to the coupon date) vary from 1-day to 1-month, depending
on the issue.
The FII corporate quota is USD45bn. Of this amount, USD20bn is subject to no restrictions in terms of either issuer or
tenor. The remaining USD25bn of the quota has to be invested in bonds issued by infrastructure entities and is divided into
three categories: 1) USD3bn can be used by offshore retail investors to buy local debt mutual fund schemes. This is not
available to registered FIIs. 2) USD5bn can be used by FIIs to buy infrastructure bonds with a residual maturity of more
than 1 year and an initial maturity of at least five years. However, there is a lock-in period of one year for this quota. 3) The
remaining USD17bn can be used to buy infrastructure bonds with a residual maturity of more than three years (initial
maturity of more than 5 years). There is a lock-in period of three years.
For the purpose of FII investment, SEBI adopts the same definition as the RBI for external commercial borrowing (ECB)
regulations. RBIs definition of the infrastructure sector is: 1) power; 2) telecommunications; 3) railways; 4) roads including
bridges; 5) ports; 6) industrial parks; and 7) urban infrastructure (water supply, sanitation and sewage projects). As of
August 2011, SEBI also allowed NBFCs categorised as infrastructure finance companies (IFCs) by the RBI to be eligible for
the purpose of FII investment in the long-term corporate debt infrastructure category. However, FIIs are not allowed to
invest in the CD market
The spread between AAA corporates and 10y G-sec has been in a 45-200bp range for the past five years (except
immediately after start of the global financial crisis in September 2008), with an average spread of 130bp. This spread is
highly correlated to global risk appetite.
Spread between AAA corporates and 10y G-secs steady
within a narrow range

and is highly correlated to global risk appetite

1.32
0
2
4
6
8
10
12
14
2005 2006 2007 2008 2010 2011
10y G-sec yields
10y AAA yields
10y AAA ~10y G-sec spread
Average spread since 2005

0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2005 2006 2007 2008 2010 2011
%
0
10
20
30
40
50
60
70
80
90
10y AAA ~10y G-sec spread VIX Index (RHS)



27 December 2011 51
BONDS
Tenor /
maturity Coupon
Day
count
Issuance
calendar
Auction
Avg. trade
size
Bid-offer
Treasury bills Govt. of India Fiscal deficit
financing
3m, 6m
and 1y
Zero
coupon
Act/365 Every
Wednesd
ay
Multiple
price
T+2 INR30bn/
day
INR250mn 2-3bp T+1 INR2.2trn ITB Govt
Government
bonds
Govt. of India Fiscal deficit
financing
5y to 30y Semi-
annual
30/360 Every
Friday
Uniform
Price
T+1 INR100bn/
day
INR100mn 0.5-2bp T+1 INR25trn IGB Govt
Cash
management bills
Govt. of India Short term fiscal
cash management
28d-90d Zero
coupon
Act/365 Ad hoc Multiple
price
T+1 5-7bp T+1 ICMB Govt
MSS bonds Govt of India Sterilising FX
intervention
<2y Semi-
annual
30/360 Ad hoc Multiple
price
T+1 2-5bp T+1
Quasi sovereign
bonds
Stated owned
cos.
Debt financing <10y Annual 30/360 Ad hoc Uniform
price
T+0 or T+2 INR2bn INR50mn 5bp T+0 to T+2 INR2.1trn
CDs/CPs Banks/
corporates
Short term debt
financing
<1y Zero
coupon
Act/365 Ad hoc Bilateral
issuance
T+0 to T+2 INR1bn/
day
INR250mn 2-5bp T+1 ~INR5.5trn
Corporate bonds
(excl CDs/CPs)
Private sector Debt capital 1y-10y Annual Act/365 Ad hoc Bilateral
issuance
T+0 to T+2 INR1bn/
day
INR250mn 2-5bp T+1 ~INR3.4trn
SDL State
Governments
State deficit
financing
10y Semi-
annual
30/ 360 Ad hoc Multiple
price
T+1 INR2-5bn INR50mn Illiquid T+1 INR6.3trn
Instrument
Floating
leg
Bloomberg
ticker
Day
count
Reset
frequency
Fixed leg
day count
Fix pay
frequency
Liquid
tenors Effective
Daily trading
volume
Bid/offer
spread
Bloomberg
ticker (5y)
Onshore OIS O/N MIBOR NSERO Act/365 O/N Act/365 s.a for >1y, at
maturity for <=1y
1y,-5y T+1 INR2.5bn 3-4bp IRSWNO5
Offshore OIS O/N MIBOR NSERO Act/365 O/N Act/365 s.a for >1y, at
maturity for <=1y
1y-5y T+1 INR2.5bn 3-4bp IRSWNI5
Onshore CCS 6m FX implied MIFORIM6 Act/365 Semi-annual Act/365 Semi annual 1y, 3y, 5y T+1 INR250mn 15-20bp IRSWM5
Offshore CCS 6m US LIBOR US0006M Act/360 Semi-annual Act/365 Semi annual 1y, 3y, 5y T+1 INR250mn 15-20bp IRSWN5
Onshore Govt linked swap
(INBMK)
1y INBMK
yield
CTINR Govt Act/365 Annual Act/365 Annual 10y T+1 Illiquid 30bp IRSWBM5
Curncy

27 December 2011 52
INR nominal and real effective exchange rates
70
75
80
85
90
95
100
105
110
2008 2009 2010 2011
INR NEER
INR REER


USD/INR spot and NDFs
36
40
44
48
52
56
60
2008 2009 2010 2011 2012
USD/INR USD/INR NDFs


Reserve Bank of India FX reserves (USD bn)
225
250
275
300
325
2008 2009 2010 2011

FX Strategist: Olivier Desbarres +65 6308 2073 olivier.desbarres@barcap.com; Nick Verdi +65 6308 3093 nick.verdi@barcap.com
The key objective of the Reserve Bank of India (RBI) is to
ensure orderly market conditions to facilitate smooth
settlement of current and capital account transactions.
India allows full convertibility in the current account but
only partial convertibility in the capital account. Since 1993,
the Indian rupee (INR) has traded under a managed floating
regime without a fixed or pre-announced target or band.
Foreign Institutional Investor (FII) flows and corporate
activity (oil, defence) are typically the key short-term INR
drivers. More fundamentally, the current account deficit,
global commodity prices (eg, crude oil), inflation and GDP
growth matter significantly for the INR.
The RBI has no specific day-to-day INR target. Intervention
typically depends on the volume of FII and corporate
inflows, and is undertaken to curb excessive volatility. The
balance of payments, INR nominal and real effective
exchange rates (NEER and REER), and source of change in
RBI FX reserves are a useful medium-term guide for the
RBI to determine INR fair value.
RBI FX reserves amounted to around USD270bn at end-
November 2011, or four times short-term external debt,
but they have risen only modestly since 2009. Reserve
deployment is guided by criteria of safety, liquidity and
return, in that order. The recent bias has been for the RBI
to acquire gold as part of its FX reserves.
Foreign exchange markets
The RBI regulates the exchange controls and the banking
system, and the Securities and Exchange Board of India
(SEBI) regulates the capital markets. There are about 30
market makers participating in the INR spot and forward
markets. The FII scheme allows foreign investors to
participate in the Indian equity and fixed income markets.
FII registration is done by filling in Form A and after
paying a fee of USD5,000 in compliance with the SEBI FII
regulations (1995). The FII should apply on behalf of the
sub-account (foreign investor on whose behalf the FII
invests in India) for the sub-account registration.
The onshore FX forward market is available only for
hedging commercial transactions (ie, trade and
investment). All other FX forward transactions with
nonresidents both investors and corporates are dealt
with through nondeliverable forwards and interest rate

27 December 2011 53
swaps. Authorised Dealer (AD) category banks can
engage in FX forwards, and banks and primary dealers can
offer IRS.
Corporates
Exposure for multinationals in India
Foreign direct investment: Can be hedged by overseas
parent entity.
Intercompany loans: Can be hedged by Indian subsidiary.
Trade and operations-related flows: Can be hedged by
Indian subsidiary.
Equity and dividend repatriation: Can be hedged by
overseas parent entity.
Foreign direct investment: A parent entity can hedge its
investments in its Indian entities, which fall under FDI
regulations.
External commercial borrowing (ECB): An Indian entity
can hedge loans from the parent entity. This falls under
ECB guidelines.
Trade receivables and payables: An Indian entity can put
on hedges and needs to undertake Know Your Client
verification and provide proof of actual underlying exposure.
exposure on this dividend on behalf of foreign investors.
Companies can remit dividends to nonresident
shareholders after all applicable taxes are paid.
Interest: Local entity is permitted to remit interest (on
parent entity loan/bond) to its overseas parent entity.
original loan agreement. Tax clearance documentation
Recent change in regulations
On 21 July 2011, the RBI issued a fresh directive allowing
nonresident entities outside India to access the onshore
market to hedge their currency risk from trade exposure
with Authorised Dealer Category-1 banks in India.
The advantage to multinational corporates is that, by
virtue of INR billing, it allows the transfer of currency risk
from the Indian subsidiaries to the centralised treasuries.
There is also a cost saving for importers of Indian goods/
services. Due to the significant interest rate differential
between most of the G7 currencies and INR, importers of
Indian goods and services can utilise the high forward
premium for significant cost benefits (achieved by billing
in INR and hedging the payables via a sell USD/buy INR
forward contract).
On 15 December 2011, the RBI introduced a number of
measures for the onshore market, effective immediately,
to curb currency speculation: 1) corporates and foreign
financial institutions which have booked an onshore
forward contract cannot cancel and rebook the contract,
although FIIs can roll over the contract on or before
maturity; 2) the limit for importers hedging an underlying
currency exposure using forwards (under the past
performance facility) was cut to 25% from 75% of the
eligible limit (the average of the previous three financial
years export/import turnover or the previous years actual
import/export turnover, whichever is higher). Importers
which have already exceeded the revised limit cannot
access the facility. All forward contracts booked under this
facility by exporters or importers are fully deliverable; and
3) dealers Net Overnight Open Position Limit (NOOPL)
was reduced and intraday position cannot exceed existing
NOOPL approved by the RBI (typically less than
USD 100mn).
Taxation
Service tax of 12.36% is payable on FX purchase and sale
transactions at the time of settlement. The tax rate is
applied on fees charged for FX trading. If no specific fee is
charged, the tax liability is computed at 0.25% of the FX
settlement value. The current industry practice is to
charge INR100 in service fees for any FX sale or purchase
with an Indian counterparty. Service tax is applicable on
such fees.


27 December 2011 54
FX reference guide
Overview
INR has traded in a managed floating exchange rate regime since 1 March 1993.
Security
Liquidity
(daily volume)
Bid/Offer
spread
Tenor/
Maturity
Local open/
Reuters
FX spot Liquid; USD4-
5bn
1 pip Spot 0900 - 1700 T+2 INR= Should be executed and settled
onshore. Well developed and liquid.
USD10bn
2 pips Up to 1y 0900 - 1700 T+2 INRF= Beyond 1y quoted as currency swap.
Allowed only for covering genuine FX
exposure. Documentary proof
required.
FX options
onshore
Liquid up to 5y;
USD150mn
0.5 vol Up to 5y 24 hours a day T+2 Only vanilla calls, puts and
combinations are allowed. Barrier
options are not allowed. Corporates
cannot net receive premium.
NDFs Liquid up to 1y;
USD2-3bn
3 pips Up to 5y 24 hours a day T+2 INRNDFOR=
PNDF
Given restrictions on foreign
participation in onshore FX forward
market, synthetic forward transactions
up to 5y can be structured offshore.
Participants include corporates (to
hedge FX exposure) and investors.
NDF
options
USD300mn 0.4 vol Up to 3y 24 hours a day T+2 INRNDFOR=
PNDF
Exotics available.
Description
Corporates Mainly exporters and importers hedging commercial FX risks. Corporates raise funds through ECB (external
commercial borrowings) and FCCB (foreign currency convertible bonds).
Banks Banks usually engage in currency swaps to hedge USD liabilities or reduce costs.
Foreign institutional investors FIIs invest in both the primary and secondary equity and debt markets.
Multinationals FX hedging.
Reserve Bank of India The RBI passively invests in the countrys foreign reserves in addition to FX intervention to contain FX market
volatility.


27 December 2011 55
Indonesia
Policy objectives
Bank Indonesia (BI): BI follows an inflation-targeting
framework, under which it has a single overarching
objective: to establish and maintain IDR stability.
IDR stability has two aspects: 1) stable prices of goods and
services (ie, inflation measured in IDR terms); and
2) exchange rate stability against foreign currencies,
primarily the USD.
BIs 2012 inflation target is 4.5% +/- 1%.
BI estimates that for each 1% change in USD/IDR, the
headline inflation rate is affected by 7-10bp.
Frequency and members
Frequency: BI holds a policy meeting once a month,
typically in the second week, following the release of
inflation data in the first week. A schedule is announced
before the start of the year.
Board: BI is managed by the board of governors. The
board is led by the governor, who is assisted by a senior
deputy governor and at least four but not more than seven
deputy governors. The board tries to reach a consensus,
but when it fails to do so, the governor exercises his
authority to decide for the board.
Appointment: Board members, including the governor, are
proposed and appointed by the president with the
approval of the House of Representatives.
Term: Board members are appointed for a term of office of
five years and may be reappointed to the same position for
no more than one subsequent term of office.
1

BI rate: The BI rate is the overnight rate which the central
bank sets in determining policy (BBG ticker: IDBIRATE
Index). Prior to November 2005, BI used the 1m SBI rate as
its policy rate.
Monetary operations: BI conducts two kinds of monetary
operations to manage liquidity: 1) standing facilities; and
2) open market operations. Standing facilities are conducted
daily, and OMOs are ad hoc operations. All standing facilities
are overnight, but OMOs affect liquidity over longer tenors.

Objective
BI follows an inflation targeting framework, with a
single overarching objective of maintaining Rupiah
stability
Function Monetary Authority and Financial Regulation
Policy rate O/N rate (BI rate); BBG ticker: IDBIRATE Index
Frequency Monthly, typically second week of the month
Other relevant
rates
O/N liquidity absorption rate (deposit facility) and
liquidity injection rate (lending facility)
Policy tools
Stand by facilities including deposit and lending facility.
Open market operations including reverse repo and
repo, term deposits and FX intervention
Bank Indonesia
Source: Bank Indonesia, Barclays Capital
Headline inflation vs BI policy rate
0
2
4
6
8
10
12
14
16
18
20
Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11
%
BI rate (%) Headline inflation (% y/y)
Money supply versus USD/IDR
0
5
10
15
20
25
30
Nov-05 Jan-07 Mar-08 May-09 Jul-10 Sep-11
7000
8000
9000
10000
11000
12000
13000
M1 (% y/y) USD/IDR (RHS, inverted)

1
Note: most acronyms in this section correspond to the Bahasa name, not their English name.

27 December 2011 56

Standing facilities: Conducted on a daily basis to inject or
drain liquidity, these are of two types: the deposit facility
and the lending facility. BI conducts these operations daily
from 16:00 to 18:00 hours JKT time.
Deposit facility: Under the deposit facility (or FASBI),
banks can deposit excess funds with BI on a daily basis
at a fixed rate lower than the policy rate. The spread is
currently 150bp below the policy rate.
Lending facility: The lending facility (or REPOBI)
allows banks to repo their SBIs and government
securities with BI at a fixed rate (currently 100bp above
the policy rate). While BI does not offer collateral on its
deposit facility, it requires collateral from banks
accessing lending facility.
The lending and deposit facilities form a corridor
within which market overnight rates (eg, Jibor) move.
Apart from the policy rate, BI also changes the width of
the deposit-lending facility corridor to signal its policy
stance.
Open market operations (OMOs): BI engages in OMOs
on an ad-hoc basis to absorb or inject liquidity.
Contractionary OMOs consist of: 1) sales of Bank
Indonesia Certificates (SBIs); 2) term deposit auctions; 3)
outright sales of government securities; 4) reverse repos of
government securities; and 5) selling USD/IDR spot and
buying swaps. Expansionary OMOs consist of: 1) repos; 2)
outright purchases of government securities; and 3)
buying USD/IDR spot and selling swaps.
Term deposits: Previously known as fine-tune contraction
(FTK) operations, these are ad-hoc auctions conducted by
BI to absorb liquidity. Tenors vary from 2d to 6m, and BI
does not offer any collateral in return. Banks submit
variable rate tenders, and BI determines the cut-off yield.
Repos and reverse repos: These are collateralised
transactions with tenors typically ranging from 2w to 2m.
Repo operations were known as fine-tune expansion (FTE)
operations. BI conducts repos on an ad hoc basis by
calling for variable-rate tenders from banks.
The incentive for banks to use the various standing
facilities/OMOs depends on: 1) their liquidity situation,
which determines which facility they use (ie, liquidity
injection or liquidity absorption); 2) expected growth in
deposits and credit, which determine the extent to which
funds will be locked up; and 3) the returns available on
various instruments, including bonds.

Summary of standing facilities
Deposit facility Lending facility
Frequency Daily Daily
Tenor Overnight Overnight
Transaction Fixed-rate tender Fixed-rate tender
Settlement T+0 T+0
Interest rate BI rate - 150bp BI rate + 100bp
Bidders Banks, brokers Banks
Source: Bank Indonesia

Summary of OMO expansion facilities
Fine tune expansion FX intervention
Tenor 2w to 2m Swaps up to 12m
Transaction
mechanism
Variable- and fixed-rate
tender bidding
Spot USD buying and selling
swaps
Settlement T+0 T+2
Interest rate Fair market value
Bidders Banks, brokers Banks
OMO expansion facilties
Source: Bank Indonesia

Summary of OMO contraction facilities
Issuance of
SBI/SBIS
Fine tune
contraction
Government
securities
reverse repo
FX
intervention
Tenor 9m and 12m
(previously,
BI also
issued 1m,
3m and 6m)
2d to 6m Up to 12m Swaps up to
12m
Transaction
mechanism
Variable-rate
tender
bidding
Variable-
and/or fixed-
rate tender
bidding
Variable-rate
bidding
Spot USD
selling and
buying swaps
Settlement Up to T+1 T+0 T+1 T+2
Interest rate Fair market
value
Fair market
value
Fair market
value
Bidders Banks and
brokers;
Islamic
banks/
sharia
divisions (for
islamic SBIs)
Banks,
Brokers
Banks,
Brokers
Banks
OMO contraction facilities


27 December 2011 57
Reserve requirements: Currently, BI levies a primary
reserve requirement of 8% on the third-party domestic
liabilities of banks, which is to be held in cash. Of the 8%
primary reserves, 5% are non-interest bearing reserves.
The remaining 3% earn an interest rate of 2.5% per
annum. The primary reserve requirement was last raised
from 5% to 8% in September 2010, effective November
2011. BI also levies an 8% reserve ratio on USD deposits.
BI also levies a 2.5% secondary reserve requirement, which
can be in SBIs or government bonds. This requirement was
introduced in October 2009.
Additionally, BI has a loan/deposit-based reserve
requirement for banks that have an LDR ratio outside the
target range of 78-100%. This was introduced in
September 2010, effective March 2011, and intended to
encourage banks to follow prudent lending practices.
Calculation of applicable LDR-based reserve ratio is
detailed in the table below.

Bank LDR Applicable reserves
LDR < lower limit (78%)
0.1 x (78-LDR) x rupiah
depositor funds
LDR > upper limit (100%) &
CAR < 14%
0.2 x (100-LDR)% x rupiah
depositor funds
LDR > upper limit (100%) &
CAR >= 14%
No LDR based reserve is
applicable
Calculation of LDR based reserves

Emergency funding facilities
To minimise the systemic effect of emergencies, BI offers
the following three funding facilities to banks.
Intraday liquidity facility (FLI): To avoid gridlock in the
payment systems, BI offers intraday liquidity facilities to
banks on a repo basis (SBIs and government bonds are
accepted as collateral). This mechanism is purely to
smooth the operation of the payment system supported
by liquid, high-value collateral.
Short-term funding facility (FPJP): This facility allows
banks with a positive capital adequacy ratio to borrow
emergency funds from BI for a maximum of 90 days. BI
accepts high-quality collateral, including government
bonds and collateralised credit assets of banks.
Emergency funding facility (FPD): This is facility allows
banks that are solvent but facing liquidity problems to
borrow from BI. The FPD differs from the FLI and FPIP in
that its use must be based on a decision by the Financial
System Stability Committee.
Distribution of excess liquidity by instrument (IDR trn)
Excess liquidity as of end November 2011
91.5
22%
4.1
1%
132.4
31%
54.6
13%
138
33%
Standing facilities
Term deposits 1m - 3m
Term deposits >3m
Reverse repo
SBI (9m)

Increased reverse repos by BI compressed spread between
6m term deposit and overnight rates (%)
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Jan-11 Mar-11 May-11 Jul-11 Aug-11 Oct-11
O/N deposit facility 6m term deposit yield

Reserve requirements (%)
0
1
2
3
4
5
6
7
8
9
Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11
Secondary reserve requirement
Primary reserve requirement
Secondary reserve requirement was
introduced in October 2009

27 December 2011 58

Money markets
Overnight interbank money markets are moderately liquid,
with the most important overnight rate being Jibor (Jakarta
interbank offer rate, BBG ticker: JIINON Index). Jibor is a
polled average rate (after the highest and the lowest rates
are eliminated) submitted by the 18 member banks at
11:00am Jakarta. Jibor rates for 1w, 1m, 3m, 6m and 12m
also are quoted, but are illiquid.
SBIs and SPNs are the other two liquid money market
instruments. A government bond repo market exists, but it
is not liquid, except for trading between banks and BI.
Ample domestic liquidity and low NDF-implied IDR yields
have resulted in yields on SBIs and SPNs trading below the
policy rate.
Transmission of the policy rate (BI rate) into overnight
money market rates and commercial bank deposit and
lending rates depends on banking system liquidity.
In times of flush liquidity, deposit rates likely will be lower
than the policy rate, while in times of tight liquidity, they
are likely to be higher. While there is no lower limit for
commercial bank deposit rates, there is an upper limit (eg,
the BI rate plus 50bp for 1m deposits).
Banking system liquidity, in turn, is affected by the pace of
government borrowing and spending, changes in reserve
money and OMOs (including FX intervention). Open
market operations are the most important.
Liquidity will be flush in times of increased capital inflows,
and overnight Jibor could trade below BIs policy rate.
Similarly, BIs unsterilised FX intervention during capital
outflows will result in tight domestic market liquidity, likely
resulting in overnight Jibor trading above BIs policy rate.
BIs attempts to build FX reserves in recent years have
caused the banking system to be surplus cash, as BI has not
sterilised most of the intervention. Historically, it absorbed
part of this surplus cash by issuing SBIs. However, foreign
investors bought some of these, which meant that BI
needed to issue more SBIs to sterilise those flows. Given this
phenomenon, BI began to drain excess liquidity via non-
tradable instruments and/or instruments accessible to only
domestic participants, such as term deposits. The ample
liquidity has resulted in overnight Jibor trading at the low
end of the BI corridor. Note that capital outflows during the
2008 global financial crisis resulted in overnight Jibor trading
at the top end of the corridor.

Jibor and corridor rates
4
5
6
7
8
9
10
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11
% Deposit facility BI rate
Lending facility O/N Jibor

Overnight money in deposit facility (IDR trn)
0
20
40
60
80
100
120
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11

Spread between Jibor and policy rate vs USD/IDR
R
2
= 0.5723
-200
-150
-100
-50
0
50
100
7500 8500 9500 10500 11500 12500
USD/IDR spot
J
I
B
O
R
~
B
I

r
a
t
e

s
p
r
e
a
d
,

b
p

27 December 2011 59
Increased foreign participation and flush domestic liquidity help front-end bond yields trade
through policy rate
Standing facility policy corridor: Standing facilities provided by BI to inject or absorb liquidity help in limiting volatility in
market overnight rates. By design, the lending facility acts as an upper bound and the deposit facility acts as a lower bound
for overnight money market rates. At any point in time, the spread between overnight rates, the BI policy rate, and the top
and bottom of the corridor depends on interbank liquidity. Apart from the policy rate, BI uses the width of the corridor rate
to influence overnight money market rates and signal its policy stance. Prior to June 2010, the policy rate corridor was
100bp, with both the lending and deposit facilities 50bp from the overnight policy rate. BI widened the corridor in June
2010 by making the corridor rates +/-100bp from the overnight rate. In September 2011, BI widened the lower end of the
corridor to 150bp, making the corridor asymmetric the deposit facility is offered 150bp below the overnight policy rate
and lending facility at 100bp above the policy rate, making the width of policy rate corridor 250bp.
Current ample liquidity in the banking system implies that the operative policy rate is the lower end of the corridor, 150bp
below BIs policy rate. This implies that the opportunity cost for banks is the deposit rate facility rate (FASBI rate), which is
lower than the policy rate. In turn, this implies that banks are inclined to borrow in the interbank overnight cash market
(which will trade close to FASBI rate) and buy money market instruments that trade at higher yields, eg, SPNs and SBIs,
thus lowering whole yield curve. This is the main reason that front-end bond yields in Indonesia are at multi-year lows and
trade through the overnight policy rate.
Foreign investor participation effect on yield curve: The hunt for yield after the global financial crisis has resulted in
increasing offshore investor participation in EM bonds, particularly Indonesian bonds, given their high yields. Offshore
investors can broadly be classified into two types: 1) those who buy short-dated instruments to capture the difference
between onshore money market rates and NDF implied yields. These investors hedge their currency exposure and typically
are banks, hedge funds and other fast money managers. 2) Those who leave their bond investments FX unhedged and
generally buy longer-dated paper. These are typically pension funds, central banks and wealth management institutions.
The recent bullish sentiment on Indonesia, coupled with extremely low global yields, has resulted in NDF-implied IDR yields
that are much lower than the policy rate. In turn, this has resulted in offshore investors buying front-end bonds, resulting in
those yields falling below the policy rate.

Bullish IDR view results in low NDF-implied yields

unrestricted foreign participation helps transmit lower
NDF yields to onshore (% 1y SPN vs NDF implied)
7800
8000
8200
8400
8600
8800
9000
9200
9400
9600
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
IDR curncy
NDF implied yield differential (RHS)

3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
0%
2%
4%
6%
8%
10%
12%
1y SPN yield
NDF implied IDR yields (RHS)



27 December 2011 60

Cross-currency swaps
The USD-IDR cross-currency swap is the most liquid
interest rate derivative in Indonesia. The swap is quoted as
a semiannual fixed rate versus 6m USD Libor. Swaps
quoted against 6m USD Sibor are also available. Offshore
investors do not have access to the onshore CCS swap.
The CCS curve extends up to 10y, with bid offers as wide
as 50-100bp.
The cross-currency swap used by offshore investors is the
nondeliverable swap (NDS). Given the nature of the fixing,
the NDS is highly correlated to spot USD/IDR.
Risk appetite and IDR appreciation expectations affect
NDF-implied IDR yields and result in a basis between
onshore CCS and NDS. NDS often reacts more than
onshore CCS, given the nature of the participants in the
offshore market. Hence, when risk appetite improves, the
offshore-onshore spread tends to go below zero, and
vice versa.
Offshore interbank dealers, hedge funds and real money
investors are the main participants in the NDS market.
Investors in government bonds use NDS to hedge their
interest rate risk.
Interest rate swaps
The Indonesian IRS curve is not liquid. The 3m SBI used to
be the fixing rate, but since the BI stopped issuing 3m SBIs,
the 3m term deposit yield has been used as the floating
leg. Nonresident investors cannot access the onshore
market, and with limited interest from onshore investors,
liquidity is poor. The 1y point is the most liquid, although
the curve extends to 5y, with a bid-offer spread of 50bp.

IDR NDS is highly correlated to USD/IDR spot
0
5
10
15
20
25
30
35
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11
7500
8500
9500
10500
11500
12500
13500
2y NDS (%) USD/IDR (RHS)

Offshore-onshore CCS basis depends on risk appetite
-300
-200
-100
0
100
200
300
400
Jan-08 Oct-08 Jul-09 Apr-10 Feb-11 Nov-11
0
10
20
30
40
50
60
70
80
90
Offshore-onshore CCS basis (bp) VIX Index (RHS, %)


27 December 2011 61
Bond markets

Overview
Indonesia issued its first local currency sovereign bonds,
called recap bonds or recaps, to recapitalise its banking
system following the 1997 Asian financial crisis. Trading in
these bonds began in 2000, when banks were permitted to
move these bonds from investment accounts to trading
accounts. The government debt securities law was passed
in September 2002 and authorised the Ministry of Finance
to issue treasury bonds to finance the fiscal deficit.
Currently, IDR700trn of local-currency government bonds
is outstanding (~10% of GDP). Apart from local-currency
bonds, the USD bond market is also active in Indonesia,
with the Debt Management Office (DMO) issuing both
conventional and Islamic foreign-currency bonds. Short
selling is not allowed, and the repo market is illiquid. The
average duration and coupon of local currency treasury
bonds (excluding recapitalisation bonds) is 12y and
10.03%, respectively.
Bond categories
Recap bonds (recaps): Issued to recapitalise the countrys
banks. These bonds have been issued only once, and for
all practical purposes, they are treated as government
treasury bonds, which are issued to finance fiscal deficit.
Treasury bonds (SUNs): Issued by the DMO to finance the
government deficit are called treasury bonds or SUNs. The
DMO issues both fixed-rate (FRBs) and variable-rate
(VRBs) bonds.
Both treasury bonds and recap bonds are referred to as
recaps or IndoGBs.
Treasury bills (SPNs): The government issued its first
treasury bills in May 2007 with a 12m tenor. Issuance of
3m SPNs began in March 2011, after BI stopped issuing
3m SBIs. While 1y SPNs are issued to finance the fiscal
deficit, 3m SPNs are not part of the governments funding
programme and are issued just to develop the yield curve.
Retail bonds: Target retail investors and are used to
finance the fiscal deficit. Both domestic and foreign retail
investors are eligible to buy in the primary market;
institutional investors can buy and sell in the secondary
market. Coupon payments are monthly (unlike the
semiannual coupons on treasury bonds), and issuance is
via non-competitive bidding. Secondary market liquidity is
much lower than it is for recaps.

Bond market growth
0
20
40
60
80
100
120
140
160
180
Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
15
17
19
21
23
25
27
LCY Govt (USD bn) LCY Corp (USD bn)
FCY Govt (USD bn) FCY Corp (USD bn)
Total (in % GDP, RHS)
Source: AsianBondsOnline website, Barclays Capital

Government bond categories
2.95%
7.51%
0.02%
23.82%
4.44%
61.26%
SPN
Treasury bonds
Sukuks
Dollar bonds
Recap bonds
Retail bonds

Holding pattern of local currency government bonds
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11
%

o
f

o
u
t
s
t
a
n
d
i
n
g
Foreigners
Local banks
Others
BI
Note: Holdings are not adjusted for repo transactions by BI. Source: CEIC,
Barclays Capital

27 December 2011 62
Islamic bonds (sukuks): Have been issued since 2008
after the passage of the Islamic Sharia Debt bill in April
2008 and are used to finance fiscal deficit. The MoF also
issues retail and global sukuks.
Corporate debt: The corporate debt market consists of
bonds and MTNs issued by corporates, including state-
owned enterprises. Most of these bonds are listed on the
Indonesia Stock Exchange (IDX). Tenors for bonds issued
by state-owned companies range from 5y to 8y, and sizes
range from IDR100bn to IDR1trn. Tenors of bonds issued
by domestic private companies range from 3y to 8y, with
5y being the most common maturity. Issue size ranges
from IDR100bn to IDR1trn.
Bank Indonesia certificates (SBIs): Issued by BI as part of
its open market operations. The fact that foreign investors
are allowed to buy these bills resulted in a cycle of hot
money inflows in 2010 and 2011. To curb these flows, BI
stopped issuing 3m and 6m SBIs in H2 10, but it continues
to issue 9m SBIs. Currently, domestic and foreign investors
are subject to a minimum six-month holding period for
SBIs, a measure taken by BI to curtail hot money inflows.
The holding-period restriction curbed inflows from
investors who buy SBIs and hedge the FX risk using NDFs.
However, SPNs do not have holding-period restrictions,
and offshore investors shifted to buying SPNs and shorter-
dated (<5y) government bonds to capture onshore-
offshore yield differentials.
Market participants local-currency bonds
Domestic banks, offshore investors, domestic real money,
BI and securities companies are the major participants in
the Indonesian local-currency government bond market.
Domestic banks: Banks are the largest investor group
(along with foreign investors) in the IDR government
bond market and hold ~35% of the total outstanding
as of November 2011. Banks holdings have declined
over the past few years as recapitalisation bonds rolled
off their books and corporate lending needs increased.
Among banks, state-run ones are the largest investors,
with more than half of banks holdings. Their large
share is a result of their recapitalisation after the 1997
Asian financial crisis.
Bank Indonesia: BI accumulates government bonds in
the secondary market for its repo operations and/or to
support the markets in times of volatility. Buying from BI
increased in H2 11 as it sought to calm market volatility.
Domestic mutual funds: We estimate that mutual
funds invest ~30% of their assets in government
Holding pattern of local currency government bonds (latest)
31%
34%
5%
7%
13%
7%
3%
Foreigners
Local banks
Central bank
Pension funds
Mutual funds
Insurance cos.
Others

Holding pattern of SBIs
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11
Domestic banks Offshore Domestic nonbanks
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11
Domestic banks Offshore Domestic nonbanks

Banks holdings of govt bonds declining as loan growth
remains robust
6%
8%
10%
12%
14%
16%
18%
Aug-07 May-08 Feb-09 Nov-09 Aug-10 May-11
55%
57%
59%
61%
63%
65%
67%
69%
71%
73%
75%
Govt bond holdings as % of
banks' balance sheet
Loans as % of banks' balance
sheet (RHS, inverted)


27 December 2011 63
bonds. This picked up in 2006, after a steep drop
during the 2005 mutual fund redemption crisis.
However, given the low yields on government bond
over the past two years, mutual funds shifted
investments to bank deposits, and their share of total
government bonds outstanding has declined to ~6.5%.
Domestic pension funds and insurers: Pension funds
and insurance companies typically invest 20-25% of
their assets in government bonds. Among pension
funds, publicly managed Taspen and Jamsostek invest
a higher proportion in bonds, while privately managed
funds invest a lower proportion. Given the high-yield
regime in Indonesia, pension funds typically have
return mandates of more than 10% pa (which might
come down in the coming years given a declining
trend in interest rates), and lower bond yields have
driven them to shift to bank deposits, just like mutual
funds. However, in the past year or so, the increase in
assets under management resulted in pension fund
and insurance company holdings of government
bonds holding steady, even though they allocated a
lower proportion of their AUM to bonds.
There are no limits on foreign ownership of government
bonds. Foreign investors are the second-largest holders of
government bonds, with ~30% of total outstanding local
currency bonds. Foreign investors have bought 85% of the
change in net outstanding since January 2010. (BBG ticker
for foreign holdings of LCY govt bonds: IDGBFRGN Index).
Offshore real money investors (mutual funds, pension
funds and insurance companies) tend to concentrate on
long-end, on-the-run issues and typically are FX unhedged;
reserve managers tend to focus on the short end.
Fast money investors (foreign bank trading books, hedge
funds) typically invest in front-end bonds, funding their
positions by NDFs.
Offshore investors can hedge their bond holdings using
onshore FX forwards for a notional equal to or less than
the bond holdings, but for a minimum of 3 months. Bonds
should have a residual maturity of more than three
months when initiating a FX hedge. If the notional of
bonds falls short of outstanding FX forwards (ie, due to
maturity of bonds), investors need to buy additional bonds
to match the FX notional.
Coupon and benchmark impacts: Given the shift in
interest rate regimes, Indonesian bonds have coupons in a
wide range, eg, 8-11% for similar maturities. This means
Monthly net absorption by various participants
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
J
a
n
-
1
1
F
e
b
-
1
1
M
a
r
-
1
1
A
p
r
-
1
1
M
a
y
-
1
1
J
u
n
-
1
1
J
u
l
-
1
1
A
u
g
-
1
1
S
e
p
-
1
1
O
c
t
-
1
1
I
D
R

t
r
n
Monthly net supply
Absorbed by local banks
Absorbed by Central Bank
Foreigner absorption

Mutual fund holdings of bonds have been declining
0%
2%
4%
6%
8%
10%
12%
14%
16%
2004 2005 2006 2007 2008 2009 2010 2011
Mutual funds holdings of government
bonds (% of outstanding)
2005 - Mutual fund
redemption crisis
Bond yields lower than bank
deposit rates reduced attraction of
bonds

Bank deposits have offered more competition to bonds over
the past two years
5
8
11
14
17
20
%
2y bond yields 2y deposit rates
5y bond yields
5
8
11
14
17
20
%
2y bond yields 2y deposit rates
5y bond yields

27 December 2011 64
that hold-to-maturity buyers are likely to be sensitive to
the effect of withholding taxes on coupon income and
prefer lower-coupon bonds. However, investors who do
not have to account for MTM changes in bond prices are
likely to prefer higher-coupon bonds for their increased
accrual income. Similarly, most investors prefer to hold
on-the-run benchmark issues for liquidity reasons, and
these issues are likely to trade at a premium (as much as
20-25bp at times) to issues of similar duration.
Auction procedure
Amounts and frequency: The DMO announces the likely
tenors and dates (but not amounts) of auctions at the
beginning of the year. The amount of each auction is
typically IDR5-7trn, with IDR0.5-1.5trn of SPNs. Tenors
and the total auction size (but not sizes of individual bond
issues) are announced a week before the auction.
However, it is not uncommon for the DMO to issue
significantly above or below the indicated issuance
amount. The DMO typically changes the auction tenors
and size as per end investor demand; consequently, it has
been issuing more longer-dated bonds recently. Typically,
auctions are on Tuesdays and alternate between normal
bonds and Islamic bonds. Conventional bonds are typically
auctioned twice a month. Only primary dealers are eligible
to place competitive bids in the primary auctions and
currently there are 18 primary dealers in Indonesia.
Auction mechanism: Treasury bonds are sold via a Dutch
auction with 5-15% allotted to non-competitive bidders at
the average yield of the competitive auction. Competitive
bids are placed on a yield basis in increments of 3.125bp.
The minimum bid size is IDR1bn, with increments of
IDR100mn. Primary dealers are required to bid successfully
for at least 2% each of the indicated auction target amount.
For new issues, the coupon is market determined (and set
in increments of 0.25%).
Bids need to be submitted by 12:00 JKT time (foreign banks
generally accept bids from clients until 11:00 JKT time) and
results are usually released between 14:00 and 15:00.
Settlement: Settlement for primary auctions is T+2 and is
done on a Delivery versus Payment (DvP) basis.
Settlement of securities is governed by the Capital Market
Law and the regulations of the Capital Market and
Financial Institution Supervisory Board (BAPEPAM-LK).
Local currency government bonds are not euro clearable
(non-IDR bonds are clearable through both Euroclear and
Clearstream) and need to be settled via a local custodian.
BI conducts settlements using the Scripless Securities
Settlement System or BI-SSSS.
Pension fund and insurance company holdings of local
currency government bonds (% of outstanding)
0%
2%
4%
6%
8%
10%
12%
14%
16%
2004 2005 2006 2007 2008 2009 2010 2011
Pension funds
Insurance companies

Foreign holdings of bonds
0
5
10
15
20
25
30
Oct-07 Oct-08 Oct-09 Oct-10 Oct-11
USD bn
10%
15%
20%
25%
30%
35%
40%
Foreign holdings of Indo GBs
% foreign holdings (RHS)

Debt switches conducted to smooth the maturity profile
0
5
10
15
20
25
30
35
40
45
50
2
0
1
1
2
0
1
3
2
0
1
5
2
0
1
7
2
0
1
9
2
0
2
1
2
0
2
3
2
0
2
5
2
0
2
7
2
0
2
9
2
0
3
1
2
0
3
5
2
0
3
7
2
0
4
1
IDR trn
INDORB
INDOGB


27 December 2011 65
Record day: The record day for coupon payments is
coupon day 2 JKT business days. There is no shut period;
ie, bonds can even be settled on the record day the buyer
on the record day will be considered as the owner of the
bonds. The coupon is paid on the coupon payment date or
on the next JKT business day.
Debt switches and buybacks: The DMO conducts ad-hoc
debt switches to smooth the governments maturity
profile. Switches are conducted via competitive, multiple-
price auctions, with the DMO announcing the source and
destination bonds and the yield on the destination bonds.
Note that debt switches are on an equal-face-value basis.
The DMO also conducts buybacks to manage the debt
maturity profile and to contain volatility.
Taxation
Indonesia applies a 20% withholding tax on interest
income and capital gains, although this can be lower
depending on double-taxation treaties. Singapore-
registered entities have zero tax. The withholding tax for
domestic mutual funds is currently 5%, although the
government plans to raise it to 15% in 2014. Onshore
licensed banks (domestic and foreign), pension funds and
charity foundations are not subject to withholding taxes.
Auction procedure summary
INDOGBs SPNs
Issuer DMO
Tenors 5y, 10y, 15y, 20y are
typical tenors
3m and 12m
Frequency
Issuance
calendar
Auction style
Normal
auction size
IDR 5-7 trn IDR 0.5-1.5trn
Eligible
bidders
Typically on Tuesdays, alternating between regular bonds
and sukuks each week
Indicative dates and tenors are announced at the start of
the year. Actual bonds are announced one week in
advance
Dutch auction; 5-15% alloted to non-competitive bidders
at the average yield of competitive auction
Primary dealers via competitive bidding for themselves
and others for both SPNs and INDOGBs
Primary dealers via non competitive bidding for others
except BI and LPS for INDOGBs only
LPS (Deposit insurance corporation): Non competitive
bids for SPNs and INDOGBs
B k I d N b d f SPN l


27 December 2011 66
Fiscal policy and the sovereign credit rating

Fiscal policy
Since the 1998 financial crisis, Indonesia has implemented
a relatively tight fiscal stance, posting primary surpluses of
1-2% of GDP. Indonesias primary surplus has declined
since 2006, but the fiscal deficit has not exceeded 2% of
GDP in the past 10 years. Indonesia has a 3% of GDP cap
on its annual deficit.
Fiscal decentralisation, launched in 1999, continues to be
an important government policy. Regional governments
have taken on greater authority to plan and implement
their own budgets.
Indonesias debt/GDP ratio fell to ~26% in 2010 from ~47%
in 2005, and for 2011, the DMO expects it to be 25% and
forecasts debt servicing costs will be 3.2% of GDP.
Financing: Indonesia largely finances its central
government deficit in three ways: 1) external loans; 2)
foreign currency bonds; and 3) local currency bonds.
Generally, local currency bond issuance accounts for 50-
55% of total central government issuance. As a medium-
term strategy, the DMO is looking to reduce external debt
and is expected to finance a large share of the deficit by
issuing local currency debt and longer tenor bonds.
Credit rating
Indonesias long-term foreign currency debt rating is
Ba1(Stable) by Moodys, BB+ (Pos) by S&P and BBB-
(Stable) by Fitch.
Indonesias long term local currency debt rating is Ba1 at
Moodys, BB+ at S&P and BBB- at Fitch.
Given the recent positive economic developments and
credible government policies, the rating agencies have
Indonesia on CreditWatch Positive. Fitch upgraded its
credit rating for Indonesia to investment grade (BBB-) in
December 2011. If one more rating agency (S&P or
Moodys) upgrades the sovereign to investment grade,
Indonesian government bonds would fulfil the basic
criteria for inclusion in most global IG bond indices, which
would likely result in increased interest among offshore
investors. Note however, that individual IG indices have
additional criteria for registration, investor preference, etc.
which also need to be fulfilled for final inclusion.

Local-currency government bonds outstanding and fiscal
deficit
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2005 2006 2007 2008 2009 2010 2011
(FC)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Debt as % of GDP Budget deficit (% of GDP, RHS)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2005 2006 2007 2008 2009 2010 2011
(FC)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Debt as % of GDP Budget deficit (% of GDP, RHS)
Note:* 2011 is DMO estimate.
Source: Debt Management Office, Barclays Capital
Composition of government debt, USD bn
0
50
100
150
200
250
300
350
400
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
Local currency government securities
FX denominated securities
External loans
Total Central Government debt
Indonesia sovereign credit rating history
Moody's S&P Fitch
Ba1 (Jan 2011) BB+ (Apr 2011) BBB- (Dec 2011)
Ba2 (Sep 2009) BB (Mar 2010) BB+ (Jan 2010)
Ba3 (Oct 2007) BB- (Jul 2006) BB (Feb 2008)
B1 (May 2006) B+ (Dec 2004) BB- (Jan 2005)
B2 (Sep 2003) B (Oct 2003) B+ (Nov 2003)
B3 (Mar 1998) B- (May 2003) B (Aug 2002)
B2 (Jan 1998) CCC+ (Sep 2002) B- (Mar 1998)
Ba1 (Dec 1997) SD (Apr 2002) BB- (Jan 1998)

27 December 2011 67
BONDS
Tenor /
maturity Coupon
Day
count
Issuance
calendar
Auction
Avg.
trade size
Bid-offer
Recaps Indonesia
DMO
Recapitalising
Banks
3y-20y Semi -annual
for fixed rate,
quarterly for
variable rate
Act/Act No longer
issued
N/A N/A IDR2-3trn
/ day
IDR20bn 10-50bp T+2 IDR170trn INDORB Govt
INDOGBs Indonesia
DMO
Debt
financing
1y to 30y Semi-annual Act/Act Typically
twice a
month
Dutch T+2 IDR3-5
trn/day
IDR20bn 10-50bp T+2 IDR440trn INDOGB Govt
SPNs Indonesia
DMO
Debt
financing
(only 1y)
3m and
1y
Discount bills Act/365 Typically
twice a
month
Dutch T+2 <IDR1trn/d
ay
IDR50bn 5-10bp T+2 IDR26trn INDOBL Govt
Retail bonds Indonesia
DMO
Debt
financing
5y-10y Monthly Act/Act Adhoc Non
competitiv
e bidding
T+2 <IDR1trn /
day
IDR20bn 10-50bp T+2 IDR43trn INDORI Govt
Islamic
bonds
Indonesia
DMO
Debt
financing
1y-30y Semi -annual Act/Act Once in 2-3
weeks
Dutch
Auction
T+2 IDR1-
2trn/day
IDR20bn 10-30bps T+2 IDR70trn INDOIS Govt
SBI Bank
Indonesia
Sterilising FX
intervention
9m Discount bills Act/360 Monthly Dutch T+1 IDR50bn 5-10bp T+1 IDR140trn INDOTB Govt
Corporate
bonds
Private
entities
Debt capital Adhoc T+5 IDR20-
50bn/day
< IDR5bn 20-50bp T+3 IDR135trn
Instrument
Floating
leg
Bloomberg
ticker
Day
count
Reset
frequency
Day
count Pay frequency
Liquid
tenors Effective
Daily trading
volume
Bid/offer
spread
Bloomberg
ticker (3y)
Onshore
interest rate
swap
3m term
deposit yields
BITD3M Index Act/360 Quarterly Act/360 Quarterly 1y-3y T+2 Illiquid 30-50bp IHSWO3V3 I
Onshore cross-
currency swap
6m USD Libor USOOO6M
Curncy
Act/360 Semi-annual Act/360 Semi-annual 1y-10y T+2 USD5mn 30-50bp IHUSWO3
Offshore cross-
currency swap
6m USD Libor USOOO6M
Curncy
Act/365 Semi-annual Act/365 Semi-annual 1y-10y T+2 USD20-25mn 25-50bp IHSWN3

27 December 2011 68
IDR nominal and real effective exchange rates
80
90
100
110
120
2008 2009 2010 2011
IDR NEER
IDR REER


IDR spot and NDFs
8000
9000
10000
11000
12000
13000
2008 2009 2010 2011 2012
USD/IDR USD/IDR NDFs


Bank Indonesia FX reserves (USD bn)
40
60
80
100
120
2008 2009 2010 2011

Bank Indonesias (BI) primary objective is to maintain the
stability of the rupiah within the context of its overall
stance on monetary policy.
BI adheres to a free-floating exchange rate system. In
practice, it intervenes in the FX markets to minimise
excessive volatility, rather than peg the IDR to a particular
level. FX reserves stood at USD104.1bn at end-November
2011, up USD14.3bn from end-2010 but down USD13bn
from the peak of USD117.2bn in August 2011. BI probably
wants to build reserves, given that the rating agencies
closely focus on these as a measure of financial strength.
Foreign exchange rate markets
There are no limits on buying or selling spot IDR or on the
repatriation of funds. Access to the onshore FX forward
market is restricted to residents unless there is an underlying
trade or investment activity to hedge. Nonresidents are
allowed to buy onshore FX forwards of a minimum 3m tenor
to hedge the FX risk of their bond holdings. FX forwards
cannot be unwound before maturity, although the
underlying bond holding is fungible by instrument.
Local banks are prohibited from the following transactions
with nonresidents: provision of credit in IDR or foreign
currencies; overdrafts; fund placements in IDR; interoffice
accounts in IDR; purchases in IDR of securities issued by
nonresidents; interoffice transactions in IDR; and equity
participation in IDR. Banks are also restricted from
selling/buying FX derivative transactions against the IDR.
Nonresidents are defined as foreign citizens, foreign
institutions, Indonesian citizens who have permanent
resident status in a foreign country, representatives of
foreign countries and international institutions in Indonesia,
foreign representatives and international organisations, and
overseas offices of banks or other Indonesian institutions.
There are no restrictions on nonresidents maintaining
domestic currency accounts locally. However,
nonresidents are only allowed to maintain foreign-
currency checking and time deposit accounts in Indonesia.
Taxation
There is no specific taxation on FX.


27 December 2011 69
FX reference guide
Overview
There are no limits on buying or selling spot IDR, or on the repatriation of funds, but access to the onshore FX forward market is restricted to
residents unless there is an underlying trade or investment activity to hedge.
Security
Liquidity
(daily volume) Bid/Offer spread
Tenor/
Maturity
Local open/
Reuters
pages Additional information
FX spot USD 500mn 5-20 pips Spot 0800 11:00;
1300 1600
T+2 IDR=
FX forward USD200mn 5-15 pips Liquid up to
1y
0800 11:00;
1300 1600
T+2 EXCOJK Restricted access for
foreign investors
NDF market USD500mn 10-40 pips for less
than 1y
20-50bp for between
1y and 5y
Liquid up to
5y
24 hours a
day
T+2 PNDG
NDF
options
Liquid up to 2y;
USD50mn
1 vol 2y 24 hours a
day
T+2 N/A

Description
Onshore banks and corporates Major participants in FX and fixed income markets
Offshore investors (hedge
funds, trading banks, real
money)
Participants in nondeliverable FX market and domestic bond market and usually deal in total return swap
structures.
Nonresidents are allowed to buy onshore FX forwards of a minimum 3m tenor to hedge the FX risk of their
bond holdings. The FX forward cannot be unwound before maturity, although the underlying bond holding is
fungible by instrument.
Multinationals FX hedging

27 December 2011 70
Malaysia
FI Strategist: Rohit Arora +65 6308 2092; rohit.arora3@barcap.com

Monetary policy
Bank Negara Malaysia (BNM): BNM, Malaysias central
bank, uses an interest rate targeting framework to achieve
desired monetary conditions, designed to maintain stable
prices and support growth. The central bank also has a
role to promote financial stability through macro-
prudential measures such as guidelines on credit card
operations and lending guidelines for the property sector.
Interest rate targeting framework: The monetary policy
framework in Malaysia has adapted to the evolving
economic and financial environment. Since the 1970s, the
BNM has changed its approach several times, moving
from monetary targeting to interest rate targeting (using
the base lending rate), to interest-rate targeting with a
fixed exchange rate to the current framework of interest-
rate targeting with a floating exchange rate. However,
price stability remained a paramount objective under all of
these regimes. The current approach was adopted in April
2004 as a way to enhance the transmission of changes in
the policy rate into market rates.
Overnight policy rate (OPR, BBG Ticker: MAOPRATE
Index): The OPR has a dual role a signalling device to
indicate the monetary policy stance and a target rate
for the BNMs daily money market operations.
OPR as the operating target of OMOs: The BNMs
monetary operations target the overnight interbank
rate, usually by changing liquidity levels to ensure this
rate remains close to the OPR.
Overnight operating corridor: To minimise volatility
in the interbank rate, the BNM targets a +-25bp
corridor around the OPR. To guide the market-
determined overnight Klibor and market interest rates
towards the OPR, the BNM conducts open market
operations to manage the supply and demand for
funding.
Standing facility: A standing facility exists to ensure
that overnight interbank rate fluctuations are within
the corridor by providing a lending facility at the upper
limit (OPR+25bp) and a deposit facility at the lower
limit (OPR-25bp) of the operating band.

Objective
Interest rate targeting to achieve the desired monetary
conditions that both maintain stable prices as well as
supports growth
Key indicators CPI inflation, GDP growth
Policy rate Overnight policy rate (MAOPRATE Index)
Frequency Six times a year
MPC
Eight members (governor - chairman, deputy governors,
members of the governance, audit and risk committees)
Other tools
Daily deposit auctions, repos, BNM bills and Statutory
Reserve Requirement (SRR)
Frequent
publications
Monthly Statistical Bulletin, Quarterly Bulletin, Annual
Financial Stability and Payment Systems Report
Bank Negara Malaysia (BNM)
Source: Bank Negara Malaysia, Barclays Capital
Policy rate and CPI
-4%
-2%
0%
2%
4%
6%
8%
10%
2006 2007 2008 2009 2010 2011
Policy rate (OPR) CPI (y/y)
Managing volatility in overnight rates via a policy corridor, %
1.5
2.0
2.5
3.0
3.5
4.0
2005 2006 2007 2008 2009 2010 2011
Overnight rate to gravitate around the policy
Deposit facility
50bp corridor on
the overnight tenor
Lending facility

27 December 2011 71
Key economic indicators: BNMs approach is to balance
inflation and growth risks, especially with reference to
external conditions (given the economys openness). Its
primary focus is to maintain price stability, with CPI
serving as a key indicator with GDP growth as a secondary
consideration. The BNM does not have a fixed target rate
for the CPI, but it does aim to keep real interest rates
positive. The central bank also monitors the pace of
consumer credit growth and demand for household loans.
BNM and MPC: The BNM is a statutory body wholly
owned by the government of Malaysia and reports to the
Minister of Finance. The degree of coordination with the
government is high, with the governor sitting on an
executive committee and briefing the Prime Minister on a
monthly basis on key economic issues.
Board and MPC: As per the Central Bank of Malaysia
Act of 2009, a board of directors includes the
governor, greater than three deputy governors, and
five to eight directors. While the MPC shall consist of
the governor, deputy governors and three to seven
other members (who shall be appointed by the board
or maybe from the board).
Term: The term for governor is five years, while the
deputy governors and directors shall be appointed for
three years, and eligible for reappointment.
Appointment: The governor is appointed by the king,
while the deputy governors are appointed by the
Minister of Finance. The other MPC members are
appointed by the board and can be members of the
board. The governor and deputy governors are not
permitted to hold political positions.
The current MPC consists of eight members including
the governor. It consists of members from the
governance, audit and risk committees. The organisation
structure of BNM is published in its annual report.
Meeting frequency and decision making: The MPC meets
six times during the year in accordance with the published
schedule. Each MPC meeting comprises two sessions over
two days. In the first session, MPC members are apprised
of the latest economic, monetary and financial
developments and analysis on monetary policy issues. In
the second session, there is deliberation of issues and
decision making by the MPC as well as preparation of the
Monetary Policy Statement (MPS). There is no voting for
rate decisions.
Frequent publications: BNM publishes a monthly
statistical bulletin, a quarterly report on the economic and
financial developments, and an annual report.
Bank Negara Malaysias organisational structure
Board of Directors
Governor
(5y term)
Board Risk
Committee
Board
Governance
Committee
Board Audit
Committee
AG
Special
Advisor
Deputy
Governor
(3y term)
Deputy
Governor
(3y term)
Deputy
Governor
(3y term)
AG AG AG AG AG AG
Board of Directors
Governor
(5y term)
Board Risk
Committee
Board
Governance
Committee
Board Audit
Committee
AG
Special
Advisor
Deputy
Governor
(3y term)
Deputy
Governor
(3y term)
Deputy
Governor
(3y term)
AG AG AG AG AG AG

Note: AG - Assistant Governor. Source: Bank Negara Malaysia
BNMs current monetary policy framework
Instruments
Operating
target
Intermediate
target
Ultimate
objective
Direct
borrowing &
lending
Issuance of
BNM bills and
notes
OMO
SRR
Public sector
deposits
Average
Overnight
Interbank
Rate (AOIR)
OPR is target
of AOIR
No specific
intermediate
target
Achieving
sustainable
growth with
price stability
Instruments
Operating
target
Intermediate
target
Ultimate
objective
Direct
borrowing &
lending
Issuance of
BNM bills and
notes
OMO
SRR
Public sector
deposits
Average
Overnight
Interbank
Rate (AOIR)
OPR is target
of AOIR
No specific
intermediate
target
Achieving
sustainable
growth with
price stability

Source: Bank Negara Malaysia
Timetable of daily monetary operations
BNMs operational
intentions for monetary
policy implementation
Possible second
round of dealing
Standing
facilities
0830 hrs
0930
1015
1045
1400
1530
1630
1700
1730
1800
Forecast liquidity in
the banking sector
for the day
Banks submit their bid/offers through
online tendering system (FAST)
Further revision of liquidity forecast
Final revision of liquidity forecast and
conduct overnight tender
Residual liquidity surplus or shortage position
met by standby lending/borrowing facilities
Disseminate information on liquidity position
and intended money market operations,
including repos via public wire services
BNM revises its liquidity forecast taking into
account completed tender operations
Liquidity position may change due
to exogenous factors such as
government operations and
currency-in-circulation
BNMs operational
intentions for monetary
policy implementation
Possible second
round of dealing
Standing
facilities
0830 hrs
0930
1015
1045
1400
1530
1630
1700
1730
1800
Forecast liquidity in
the banking sector
for the day
Banks submit their bid/offers through
online tendering system (FAST)
Further revision of liquidity forecast
Final revision of liquidity forecast and
conduct overnight tender
Residual liquidity surplus or shortage position
met by standby lending/borrowing facilities
Disseminate information on liquidity position
and intended money market operations,
including repos via public wire services
BNM revises its liquidity forecast taking into
account completed tender operations
Liquidity position may change due
to exogenous factors such as
government operations and
currency-in-circulation

27 December 2011 72
The BNM has several tools for liquidity management. They
include:
I. Daily deposit auctions at different maturities;
II. Daily repo operations;
III. Bank Negara Monetary Notes;
IV. A wadiah
1
interbank acceptance facility, and
V. BNM introduced a commodity murabahah program
(CMP
2
) as an additional Islamic investment tool.
Money market tenders: The central bank calls for a
money market tender in the morning, which usually
involves uncollateralised borrowing with a predetermined
maturity of 1w-3m (most maturities being 1w, 2w, 3w and
1m). In 2010, the BNM also introduced a Range Maturity
Auction that includes some flexibility to determine the
maturity range for uncollateralised borrowing. Direct
money market borrowing formed approximately 34% of
outstanding monetary policy instruments in 2010.
Repo operations: Typically, the central bank conducts
overnight repo operations towards the end of each day.
Eligible collateral includes government/BNM securities
(MGS, GII and all BNM bills), private debt securities (PDS),
negotiable instruments of deposit (NID), bankers
acceptances and other types of financial instruments that
are specified by BNM and are done at the repo rate.
BNM bills: Bank Negara Monetary Notes (BNMN for
conventional and SBNMi for Islamic) are issued to sterilise
the excess liquidity created by capital flows and FX
intervention. These instruments can also be used by
financial institutions to meet legal requirements for their
investment portfolios. For liquidity management, tenors
typically are less than 1y. Normally, BNMNs are auctioned
on Mondays and Wednesdays, and SBNMis are auctioned
only on Wednesdays.
Statutory reserve requirement (SRR): SRR is a monetary
policy tool used by the central bank for liquidity, monetary
and credit control. On a fortnightly basis, banks must
maintain a certain proportion of their eligible liabilities (EL)
in a Statutory Reserve Account (SRA). The proportion is
the SRR rate, which was 4% as of November 2011. BNM
allows a 20% fluctuation in the SRR on a daily basis. No
interest is earned on the SRR balance. The EL base consists
of MYR-denominated deposits and non-deposit liabilities,
net of the banks assets and placements with BNM, and
some deductions defined by BNM. There is a penalty if
banks are not able to comply with required reserves.
Outstanding monetary policy instruments, 2010
Direct
money
market
borrowing,
34%
BNMN, 23%
BNMN-i,
10%
Wadiah
acceptance,
11%
Repo, 5%
Others,
17%
Net foreign assets (NFA) and impact on M3 growth
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
2006 2007 2008 2009 2010 2011
0%
2%
4%
6%
8%
10%
12%
14%
16%
Net claims on Government Claims on private sector
NFA (BNM) NFA (banking system)
Other influences M3 growth (y/y, RHS)
MYR bn
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
2006 2007 2008 2009 2010 2011
0%
2%
4%
6%
8%
10%
12%
14%
16%
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
2006 2007 2008 2009 2010 2011
0%
2%
4%
6%
8%
10%
12%
14%
16%
MYR bn
Source: Bank Negara Malaysia, CEIC
Statutory reserve requirements and bank reserves
0
5
10
15
20
25
30
35
40
45
1999 2001 2003 2005 2007 2009 2011
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Excess reserves (MYR bn)
Required reserves (MYR bn)
Statutory reserve ratio (RHS)
Source: CEIC
1
A cash deposit product used by Islamic banks for liquidity management. CMPs are commodity-based transactions that use crude palm oil-based contracts as the
underlying asset.
2
It refers to a mechanism whereby Islamic banking institutions place their surplus funds with BNM based on the concept of Al-Wadiah

27 December 2011 73

Transmission mechanism of monetary policy
Policy rate pass-through to interest rates: Changes in the
OPR pass-through to the economy through the channel of
a developed banking system. In particular, OPR changes
filter through the economy via: (i) the daily average
overnight interbank rate (AOIR) and Klibor; (ii) fixed
deposit rates offered by commercial banks, and (iii) retail
lending rates, ie, average base lending rates (BLR) of the
commercial banks. Despite the openness of the economy,
the pass-through from the policy rate into Klibor and BLR
has been strong (close to one) since the current interest
rate framework was adopted in 2004.
Interest rate pass-through to the financial system:
Changes in interest rates, and narrow and broad money
supply pass-through to the financial system through the
channels of: (i) retail lending rates (BLR); (ii) bond yields
and the cost of financing for the private sector through
private debt securities (PDS); and (iii) bank loan disbursals
to businesses and households.
Interest rate pass-through to market instruments: The
pass-through from the OPR to money market rates such
as BNM bills or T-bills, Klibor is very strong, with complete
transmission being the norm.
Government and BNM bills: BNM bills are the most
liquid short-dated instrument, mainly used by BNM for
liquidity management. They have also been seen as
attractive by foreign investors seeking FX appreciation.
BNM bill yields usually fully reflect interest rate moves
and generally trade lower than Klibor which has a
counterparty risk. BNM bills can also trade below the
OPR depending on banking system liquidity and future
interest rate change expectations.
Klibor: The 3m Klibor is defined by 12 contributors
(see Interest Rate Derivatives section) and generally
sees a complete pass-through of changes in the OPR.
The 3m KliborOPR spread can be defined as a
function of: a) interest rate change expectations, and
b) liquidity/credit premiums. In the case of a rising rate
environment, the Klibor-OPR spread can be in a range
of 25-40bp, while in an unchanged rate environment,
the spread historically has been 10-15bp. The
overnight rate-OPR spread is an indicator of liquidity,
as overnight rate can be in a +/-25bp range around
OPR, reflecting the daily liquidity position of banks.
Certificates of deposit (CDs and NCDs): In Malaysia,
CDs and NCDs issued by banks or corporates. Interest


Monetary
policy
actions
(OPR)
Interbank rates
(Overnight, 1m interbank rates)
Retail lending: base lending rate
(BLR, ALR)
Fixed deposit rates (3m, 12m FD)
Exchange rate channel

Policy transmission of OPR into interest rates, %
1.5
2.0
2.5
3.0
3.5
4.0
2004 2005 2006 2007 2008 2009 2010 2011
5.0
5.2
5.4
5.6
5.8
6.0
6.2
6.4
6.6
6.8
7.0
OPR AOIR
3m deposit rate Base lending rate (RHS)

Impact of OPR on BNM bills and money market instruments
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2005 2006 2007 2008 2009 2010 2011
%
-50
0
50
100
150
200
250
bp
Policy rate 3m bills
3m Klibor 3y MGS
3s10s MGS (RHS)


27 December 2011 74
rate movements are generally in line with the OPR. One
disadvantage of NCDs is that there is no option for an
early withdrawal. (Bloomberg Ticker: MRCDC Curncy).
Negotiable instruments of deposit (NID): NID is a
negotiable bearer receipt issued by an approved
commercial or investment bank as evidence of a
deposit placed with it for a fixed tenor at a specified
fixed rate of interest. Holdings of NID reduce a bank's
eligible liabilities base, which lowers the amount of
funds required to be placed in its statutory reserved
account. NIDs are tradable in the secondary market
and can be sold to raise cash in times of short-term
liquidity pressures. Rate changes are in line with other
money market rates (ie, OPR and fixed deposit rates).
Hindrances in the pass-through mechanism
Openness of the economy: For open economies like
Malaysia, with further liberalisation underway, the direct
impact of interest rate changes on economy can be
impaired by the high degree of trade openness (trade-to-
GDP of approximately 177% in 2010) and potential for
contagion from problems in global financial markets
(Malaysias correlation to global growth was 68%
approximately in 2010). Given capital mobility and the
importance of both currency and rates for an economy,
the interest rate pass-through effect can be disrupted in
times of high capital inflows/outflows (particularly when
unsterilised). This issue can be controlled if a central bank
offers a return on excess balances, which is not the case
in Malaysia.
Capital inflows and liquidity: Periods of excess liquidity
can interfere with monetary policy transmission as
marginal increases in the policy interest rate tend not to
prompt banks to raise their retail rates. However, the
central bank uses a mixture of daily money market
instruments, bill issuances and SLR changes to prevent
financial imbalances arising due to excessive liquidity, and
to ensure the pass-through process remains effective.
Short term volatility in 3m Klibor has historically been a
reflection of changes in interest rate expectations, while
volatility in very short-end rates such as the overnight
interbank rate (in particular, the overnight rate versus the
OPR) has usually reflected domestic liquidity in the
banking sector. BNM uses M3 (broad money) as a
measure of private sector liquidity (ie, credit available to
the private sector) and M1 (narrow money) as a measure
of liquidity in the banking sector.
Excess liquidity impairs transmission of OPR into Klibor
(Klibor-OPR spread vs excess liquidity)
6%
8%
10%
12%
14%
16%
18%
20%
2004 2005 2006 2007 2008 2009 2010
0
5
10
15
20
25
30
35
40
45
Deposits-loans-reserve requirements (% of balance sheet)
3m Klibor-OPR (bp, inverted, RHS)

Net foreign assets track financial market cycles by 3-6m
-60%
-40%
-20%
0%
20%
40%
60%
Net foreign assets (y/y) SPX index (y/y)
-60%
-40%
-20%
0%
20%
40%
60%
Net foreign assets (y/y) SPX index (y/y)

Average O/N rate vs OPR spread and narrow money growth
-30
-25
-20
-15
-10
-5
0
5
2007 2008 2009 2010 2011
0%
5%
10%
15%
20%
25%
Overnight rate - OPR (bp) M1 growth (y/y, %, RHS)


27 December 2011 75
Interest rate swaps (IRS and NDIRS)
The interest rate swap (IRS) market is widely used for
duration hedging in Malaysia. The floating leg of the fixed-
floating MYR interest rate swap is 3m Klibor (see below).
There is a similar offshore market for IRS, ie,
nondeliverable IRS, which is same as IRS, but with
settlement in USD. (BBG Ticker, 5y NDIRS: MRSWNI5).
Floating leg (3m Klibor): 3m Klibor is the 3m interbank
lending rate and is fixed at 11am every business day. The
number of contributing banks designated by the BNM for
fixing is 12, and the fixing is derived by eliminating the
highest and lowest rates and averaging the remaining 10.
Market participants: Domestic banks and financial
institutions, hedge funds and foreign investors.
quarterly/quarterly basis with an actual/365 day count.
The average trade size for an IRS is around USD10k DV01.
The IRS curve is liquid out to 10 years, but most liquid in
the less than 5y segment. The NDIRS market has similar
conventions as the onshore IRS market, with the same
fixing. Average daily market volume is MYR500mn.
While a basis between onshore and offshore IRS
theoretically has been muted historically, it could exist as
onshore banks cannot quote offshore IRS, which in
practice prevents any such arbitrage activity.
Cross-currency swaps (CCS and NDS)
The cross-currency swap (CCS, onshore) or the
nondeliverable swap (NDS, offshore) are the fixed (MYR)
vs. floating interest rate swaps, with the floating leg being
6m USD Libor.
Market participants: The CCS market is commonly used
for asset-liability mismatches. The major participants are
corporates hedging USD loans on the liability side. On the
asset side, can be foreign entities issuing MYR paper which
tend swap back into their local currency. Exporters are also
natural receivers of NDS.
Conventions: The convention for quoting CCS is fixed
MYR (actual/365) against floating USD (actual/360) on a
quarterly/quarterly basis. The average trade size is USD5k
DV01. The curve is broadly illiquid, with the 1y-5y part
being the more liquid tenors. An NDS is similar to a CCS,
but is settled in USD. Similar to an IRS, there can be a basis
between the CCS and NDS.

Historical IRS and floating leg (in different rate cycles)
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
2005 2006 2007 2008 2009 2010 2011
0
20
40
60
80
100
120
140
2s5s spread (bp, RHS) 3m Klibor
1y IRS 2y IRS
5y IRS
%
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
2005 2006 2007 2008 2009 2010 2011
0
20
40
60
80
100
120
140
1y IRS 2y IRS
5y IRS
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
2005 2006 2007 2008 2009 2010 2011
0
20
40
60
80
100
120
140
1y IRS 2y IRS
5y IRS
%

OPR vs Klibor spread
2.0
2.5
3.0
3.5
4.0
4.5
2005 2006 2007 2008 2009 2010 2011
%
5
10
15
20
25
30
35
40
45
50
bp
3m KLIBOR-OPR (RHS) OPR 3m Klibor
Spread stabilises in
10-15bp range in an
unchanged rate
environment
Rising spread in a
hiking cycle,
implying rate change
expectations

Bond-swap spread highly correlated with movements in IRS
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
2005 2006 2007 2008 2009 2010 2011
%
-100
-50
0
50
100
150 bp
IRS-MGS spread (RHS) 5y MGS 5y IRS
Source: Bloomberg

27 December 2011 76
Cross-currency basis (USD/MYR)
Cross-currency basis swaps are floating (MYR, 3m Klibor)-
floating (USD, 3m USD Libor) interest rate swaps. Like
cross-currency swaps, they are used to hedge cross-
currency asset-liability flows, though from floating to
floating. The major drivers of the cross-currency basis are
USD supply-demand mismatches.
Market participants: 1) Banks borrowing USD with access
to cheap deposit-based funding in the local currency
market that have to finance large USD-denominated
assets. 2) Demand for term USD is from non-US banks to
manage USD assets/liabilities on their own balance sheets
and to facilitate similar hedging actions by their local
corporate counterparts.
Conventions: The basis for a USD cross is usually quoted
as the spread on the non-USD leg. With this convention,
the basis swap spread typically takes a negative sign when
USD funding issues increase a more negative number
implies a relatively greater price for the counterparty
borrowing USD versus MYR. The spread is quoted in bp
and has been negative for the past few years.
Bond swap spread
The bond-IRS spread is driven by the direction of interest
rates, ie, bonds outperform swaps in a rate hiking cycle,
while IRS outperform in a cutting cycle. Domestic financial
institutions are active in the spreads, particularly when IRS
is pricing in cuts and are viewed as cheap source of
funding for long bond positions.
In the recent years, bills vs. NDF yield pick-up investors
have also become an active participant.
Futures
3m Klibor futures: The 3m Klibor future contracts expire
on the March-June-September-December cycle, with
additional contracts to provide serial monthly contracts for
the near three months. The notional contract size is
MYR1mn. Liquidity remains weak in Klibor futures, with
some deviations in the forward 3m IRS (based on Klibor) vs
the far 3m Klibor future contracts. No arbitrage is possible
due to the 800-contract limit on speculator margins in the
futures market.
Bond futures (MGS): 5y bond futures are illiquid, and have
not attracted any real interest since their introduction in
2002. There is a speculator margin limit in the futures
market of 600 contracts.
Matched-maturity FX-hedged bills normally yield 1.0-1.5%
-400
-300
-200
-100
0
100
200
300
2008 2009 2010 2011
3m bill - NDF 6m bill - NDF
3m US T-bill
bp
-400
-300
-200
-100
0
100
200
300
2008 2009 2010 2011
3m bill - NDF 6m bill - NDF
3m US T-bill
bp

How the cross-currency basis works
A
MYR lender-
USD borrower
B
USD lender-
MYR borrower
X MYR
X/Q USD
A
MYR lender-
USD borrower
B
USD lender-
MYR borrower
Klibor + basis
USDLibor
Notional
Coupon
A
MYR lender-
USD borrower
B
USD lender-
MYR borrower
X MYR
X/Q USD
A
MYR lender-
USD borrower
B
USD lender-
MYR borrower
Klibor + basis
USDLibor
Notional
Coupon

Note: Q = Spot USD/MYR; A = Receives the basis, B pays the basis.

USD/MYR cross-currency basis swap (bp)
-300
-250
-200
-150
-100
-50
0
50
2006 2007 2008 2009 2010 2011
5y cross currency basis 1y cross currency basis
Source: Bloomberg


27 December 2011 77
Bond markets
Overview
Malaysia is the fourth largest local currency bond market
in EM Asia. Over the past few years, it has been one of the
most favoured bond markets for: (a) the gradually easing
and liberalising of foreign administration rules; (b) no
restrictions on the repatriation of capital, income and
profits earned from Malaysia; (c) no interest
income/capital gains tax on bonds; and (d) the presence
of an equally deep local currency corporate bond market.
Diversity in local-currency bond markets Malaysia's local
currency bond market offers an extensive array of
instruments, with an active market for both conventional
and Islamic bonds, government and corporate bonds
market, bills and bonds. These emanate from all sectors of
the economy, from quasi-government entities and public
companies, from the financial sector to real estate and
infrastructure. Signs of the markets dynamism include
increasing overall size, active issuance and trading of
government and corporate issues, the introduction of new
instruments and improvements to the regulatory structure.
Developed infrastructure: Domestic and foreign
investors can buy and sell conventional and Islamic debt
instruments through the exchange and OTC markets.
Foreign investors can settle MGS via Euroclear and
Clearstream. Investors with Euroclear accounts can trade
with dealers that also have Euroclear accounts, and the
same holds true for Clearstream. However, access through
a Euroclear-Clearstream bridge is not possible. The bonds
are settled onshore, as all MYR securities need to be
deposited with and transacted through authorised local
depositories.
Short selling and repurchase agreements (repos): Only
covered short selling is allowed for MGS, ie, eligible
securities sold short must be covered on the same
transaction day via a repo (using a tender process) or
securities borrowing from BNM (subject to availability
from BNM or ISCAP Institutional Securities Custodian
Programme). Repo facilities are available for onshore
banks from the central bank, or onshore interbanks.
Recent average repo volume has been approximately
MYR14bn per month, with deals more concentrated
among illiquid bonds and less for benchmarks.
Malaysia bond market overview
15 Commercial bills
21 Corp/Fin foreign securities
335 PDS
2 MITB
2 MTB
6 Government foreign securities
83 BNM bills
136 GII
273 MGS
15 Commercial bills
21 Corp/Fin foreign securities
335 PDS
2 MITB
2 MTB
6 Government foreign securities
83 BNM bills
136 GII
273 MGS
Government
sector*: 58%
Private
sector: 42%
Short-term
bills: 11.7%
Non MYR
securities: 3.1%
Government
sector*: 58%
Private
sector: 42%
Short-term
bills: 11.7%
Non MYR
securities: 3.1%
MYR bn
Note: *includes BNM securities. Source: BNM, Barclays Capital

Local currency vs foreign currency bonds
0
50
100
150
200
250
300
2003 2004 2005 2006 2007 2008 2009 2010 2011
USD bn
Local currency Foreign currency
Source: AsianBondsOnline website

Government vs corporate bonds (local currency)
20
40
60
80
100
120
140
160
180
2004 2005 2006 2007 2008 2009 2010 2011
USD bn
Government Corporate

27 December 2011 78
Low volatility: Since 2000 the 3m Klibor has been in a
range of 180bp, making Malaysian local currency bonds
among the least volatile in EM Asian markets, as measured
by the annualised yield on 10y bond yields since 2006.
Bond categories
Longer maturity government/quasi government bonds
Malaysian Government Securities (MGS): MGS are the
largest class of debt securities in the Malaysian bond
market, with USD87bn outstanding as of October 2011,
and an average maturity of 5.3 years. Proceeds from MGS
(along with GIIs) issues are used to finance government
expenditure. Key features of the MGS market are:
Issuance: The government typically announces the
planned issuance calendar for the next year in
December. Primary market tenors are 3y, 5y, 7y, 10y, 15y
and 20y. Mostly, the bonds are auctioned once or twice a
month (issuance method discussed later in this section).
Liquidity: Generally the 5y, 7y, 10y benchmarks are the
most liquid, while liquidity in other tenors is a function
of recent issuance. Bid-offer spreads for benchmarks are
generally 2-3bp and these bonds trade on an average 4-
7bp richer relative to the curve. The best way to get hold
of longer tenor or illiquid bonds is through the auctions.
Similarly, whenever a liquid bond is re-issued, the bond
tends to cheapen a week ahead of the auction.
Market hours: The market is open 9:00-16:30
Singapore/KL. Lunch is 12:30-13:30, during which only
benchmark bonds can be traded, though liquidty is thin.
Trades are usually settled T+2, and prices are quoted to
two decimal places.
Recent issuance trends: In recent years, the
government has been trying to extend the average
maturity of MGS, with relatively more issuance in longer
tenors. Liquidity is relatively good for on-the-run issues,
while off-the-run issues are mostly illiquid. There is only
one callable MGS outstanding as of October 2011.
Government investment issues (GIIs): These are the
Islamic equivalents of MGS, based on the Islamic concept
of Baial-Inah. There are two types of GIIs non-interest
bearing and profit-based which enable institutions to
meet their liquidity requirements according to Islamic
principles. To position Malaysia as a centre for Islamic
finance, the reliance on GIIs as a source for financing the
budget has been increasing. GIIs as a percentage of gross
primary issuance increased from approximately 20% in
2007 to 40% in 2011. The average maturity is 5.4y, as of
October 2011, with the longest tenor being 10y. The main

Least volatile liquid EM Asia government bond market
0
50
100
150
200
250
300
350
TWD CNY MYR KRW HKD THB INR IDR
0%
2%
4%
6%
8%
10%
12%
14%
16%
10y yield volatility (bp, annualised)
FX volatility (%, annualised, RHS)
Gross issuance: MGS, GII and private placements
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011 2012
Gross MGS Gross GII Gross private placement
Comparison between conventional and Islamic bonds

Features
MGS
(Conventional)
MTB
(Conventional)
GI I
(Islamic)
MITB
(Islamic)
Tenor 3 to 20 years 91, 182 and
365 days
3 to 10 years 273 and
365 days
Issue size
(MYR mn)
500 to 4,500 80 to 110 1,000 to 3,500 100 to 200
Return
payment
(interest/
profit)
Interest payment is semi-
annual. Coupon rate is
market-determined base
on the weighted average
successful bid of the
i ssue. Day count basis is
Actual/Actual.
Bills are issued on
discount basis.
(Zero coupon GII) Bonds
are issued on di scount
basis.
(Profit based GII) Profi t
payment is semi-annual.
Profit rate is market
determined based on the
wei ghted average
successful yield of the
issue. Day count basis is
Actual/Actual.
Bills are issued on
discount basis.
Method of
sale in
primary
market
Offered periodically via
competitive multiple-
price auction to
Principal Dealers on a
yi eld basis for new
i ssues and price basis on
reopened basis, or
i ssued through private
placement to selected
i nstitutions.
By competitive
multiple-price
auction on a yield
basis.
Competitive multiple-
price tenders are
submi ted by Islamic bank
or Principal Dealers wi th
Islamic finance operations
and are on a yield basis.
By competitive
multiple-price
auction on a yi eld
basis.
Redemption Bonds are redeemed at
par upon maturity.
Bills are redeemed
at par upon
maturity.
Bonds are redeemed at
par upon maturity.
Bills are redeemed at
par upon maturity.

27 December 2011 79
buyers of GIIs are banks and dedicated Islamic funds. As
most of these bonds are bought on a hold-to-maturity
basis, there is a liquidity discount of approximately 10-
15bp over an equivalent MGS.
Agency bonds (Khazanah and Cagamas): There are two
common agency bonds in Malaysia Khazanah Nasional
and Cagamas bonds.
Khazanah Nasional Berhad is a government agency
wholly owned by the MoF. It is the investment holding
arm of the government, entrusted to undertake
investments in strategic projects and holds a portfolio
of debt securities and equities. All Khazanah bonds are
government guaranteed. However, the amount
outstanding has declined over the past few years; as of
November 2011 MYR21bn was outstanding.
Cagamas, which is Malaysias national mortgage
corporation, issues residential mortgage-backed
bonds. The proceeds are used to purchase housing
loans previously granted by financial institutions and
the government. Outstanding bonds as of November
2011 totalled MYR27.6bn.
Shorter maturity bills
Bank Negara monetary notes (BNMN/SBNMi): These are
Bank Negara Malaysia bills (conventional and Islamic),
issued by the central bank for the purpose of liquidity
management. The bills are issued twice a week, with
maturities ranging from 3m to 1y (discussed in other
monetary tools). The total amount outstanding as of
November 2011 was MYR83bn.
Malaysia government treasury bills (MTBs/MITBs):
These are short-term securities (conventional and Islamic)
issued by the government to finance short-term funding
requirements. The bills are issued once a week, with
maturities ranging from 3m to 1y. MITBs are less liquid
than BNM bills, and at times trade at a marginal discount
to BNM bills. The total amount of T-bills outstanding as of
November 2011 is MYR2.3bn and MYR2.32bn for MITBs.
Corporate bonds
Private debt securities (PDS): The corporate bond market
is fairly well-developed in comparison with the rest of EM
Asia. Debt markets are a key source of funding for the
corporate sector. Bonds are issued under both conventional
and Islamic principles, with the latter representing the
greater part of the market. The market is supported by two
local rating agencies, MARC (Malaysian Rating Corporation
Bhd) and RAM (Rating Agency Malaysia Bhd). The amount
outstanding as of 2010 was MYR208bn.

MGS and GII current debt outstanding (MYR bn)
0
10
20
30
40
50
60
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
2
0
2
1
2
0
2
2
2
0
2
3
2
0
2
4
2
0
2
5
2
0
2
6
2
0
2
7
2
0
2
8
2
0
2
9
2
0
3
0
2
0
3
1
GII (average maturity: 5.4y)
MGS (average maturity: 5.3y)
Source: Bloomberg
Historical average corporate bonds vs AAA/AA corporates
0
50
100
150
200
250
2005 2006 2007 2008 2009 2010 2011
bp AAA- MGS AA1 - MGS
Source: CEIC
Foreign holdings (% of outstanding) of bills highly correlated
with MYR moves
0%
10%
20%
30%
40%
50%
60%
70%
80%
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11
2.90
3.00
3.10
3.20
3.30
3.40
3.50
3.60
3.70
Foreign holdings of BNM bills
USD/MYR (RHS, inverted)
0%
10%
20%
30%
40%
50%
60%
70%
80%
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11
2.90
3.00
3.10
3.20
3.30
3.40
3.50
3.60
3.70
Foreign holdings of BNM bills
USD/MYR (RHS, inverted)


27 December 2011 80
Commercial bills: These are the short-term promissory
notes issued by corporate entities to finance their short-
term capital requirements. Commercial bills outstanding
as of 2010 amounted to MYR15bn approximately.
Market participants
The main participants in MGS markets are the EPF,
banking institutions, foreign investors, insurance
companies (including the Shariah-compliant insurance i.e.
Takaful Industry) and asset management companies.
Employee Provident Fund (EPF): The EPF is a
Malaysian government agency under the Ministry of
Finance, which handles the compulsory savings and
retirement planning for legally employed workers in
Malaysia. As of June 2011, the EPF owned
approximately 33% of total government securities.
Legally, the EPF is obligated to pay a 2.5% dividend
yield, but it returned an average of 5.38% pa from
2006 to 2010. As of 2Q 2011, the EPFs portfolio
comprised 27.8% in MGS, 32.32% in loans and bonds
(including corporate bonds), 35.5% in equities, 17.7%
in money market instruments and 1.84% in property.
Within the MGS category, the holdings comprised 54%
in 1-5y bonds, 32% in 6-10y and 14% in 11-20y. As of
2010, the size of the EPFs total investment was
MYR440bn.
Banks: Commercial banks remain among the biggest
buyers of government securities. As of September
2011, bonds made up 15% of banks total assets, out
of which government securities represented 2.2%
(MYR1.65trn).
Insurance companies and Takaful industries:
Historically, insurance and Takaful industry assets
have been split approximately 40% in private debt
securities, 20% in MGS and BNM paper, 20% in
equities, 10-15% cash, and 5-10% in foreign assets
and other instruments. As of June 2011, life insurers
owned approximately 8% of outstanding government
securities. They are generally the main holders of
longer-dated government paper and, similar to the
EPF, are also major investors in PDS.
Foreign ownership of government securities has increased
over the past few years, reflecting greater asset allocations
to EM local currency bond markets. Foreign holdings as a
percentage of government debt outstanding have
increased materially since the 2008 financial crisis,
especially for Malaysia as it is part of the WGBI. As of
MGS curve shape vs. 3m Klibor
-20
0
20
40
60
80
100
120
140
160
2005 2006 2007 2008 2009 2010 2011
1.50
2.00
2.50
3.00
3.50
4.00
2s5s (bp)
3m Klibor (%, inverted, RHS)
-20
0
20
40
60
80
100
120
140
160
2005 2006 2007 2008 2009 2010 2011
1.50
2.00
2.50
3.00
3.50
4.00
2s5s (bp)
3m Klibor (%, inverted, RHS)
Ownership of government securities (MGS+GII+bills)
Foreign
holders
24.64%
Public
sector
1.25%
Insurance
companies
5.84%
Financial
institutions
42.98%
Bank
Negara
Malaysia
0.16%
Social
security
institutions
25.13%
Source: Asian bonds online
Historical holding pattern of government securities (MYR bn)
0
50
100
150
200
250
300
350
400
2001 2003 2005 2007 2009 2011
Foreign holders
Financial institutions
Insurance companies
Public sector
Bank Negara Malaysia
Social security institutions


27 December 2011 81
September 2011, foreign holdings of MGS represented
35% of the market and for BNM bills the figure was 56%,
compared with 13% and 5% respectively at end-Q1 09.
Although Malaysia forms only around 5% of most EM
Asian local currency bond indices, fund inflows have been
the strongest in the region (as a percentage of amount
outstanding) reflecting the structural supporting factor of
FX liberalisation.
Auction procedure
Amounts and frequency: Both MGS and GII are issued
according to a monthly issuance calendar decided by the
Ministry of Finance in the second half of December for the
next fiscal year. An average issuance size is MYR3.0-4.5bn,
with 1-2 issues per month. The exact date and size of the
issue is announced a week (ie, five business days) in
advance. The issuance calendar (dates, tenor, re-
open/new) for the next fiscal year is announced in the
second half of December.
Auction procedure: MGS and GII are sold through two
methods: market auctions and private placements. MGS
are sold via an American-style auction. Bidders at the cut-
off yield tend to get only a portion of their bid amount
while the highest bidders get a full allocation at their
individual bid price. BNM usually does not change the
announced issuance size. The tendering process is open to
all principal dealers. In the case of GIIs, all Islamic banks
are allowed to participate in the auction. Principal dealers
are obliged to tender competitively for a minimum of 10%
of the issue amount.
When issued trading: The when issued (WI) trading
commences on the tender-announcement date (a week
ahead of issuance). WI trading is done on a yield basis,
regardless of whether it is a new or reopened issue and it
continues until the tender results are announced. Non-
principal dealers or other inter-bank institutions can also
submit bids via a principal dealer, with a maximum
allotment limit of 30% per bidder.
Execution: The cut-off time for orders to be placed with the
DMO is 11:30am Singapore time. Results usually come out
at 1pm Singapore time. Bids need to be in clips of MYR100k.
Bids are submitted in price terms.
Taxation
There are no foreign investment regulations, no capital
gains tax and no tax on interest income from government
bonds for residents or nonresidents.
MGS represent only 10% of the increase in total EPF
investments (MYR155bn) over the past five years
5.15%
5.80%
4.50%
5.65%
5.80%
31%
32%
36%
27%
36%
0
100
200
300
400
500
2006 2007 2008 2009 2010
MYR bn
0%
5%
10%
15%
20%
25%
30%
35%
40%
MGS Loans and bonds
Equity Money market instruments
Properties Rate of dividend
MGS as a percentage of
total investments
Rate of dividend
5.15%
5.80%
4.50%
5.65%
5.80%
31%
32%
36%
27%
36%
0
100
200
300
400
500
2006 2007 2008 2009 2010
MYR bn
0%
5%
10%
15%
20%
25%
30%
35%
40%
MGS Loans and bonds
Equity Money market instruments
Properties Rate of dividend
MGS as a percentage of
total investments
Rate of dividend
Source: EPF Malaysia
Faster credit growth results in lower bank holdings of bonds
50%
52%
54%
56%
58%
60%
62%
64%
66%
Aug-97 Aug-01 Aug-05 Aug-09
4%
6%
8%
10%
12%
14%
16%
18%
Credit as a % of balance sheet
Bonds (securities) holdings as a % of
balance sheet
50%
52%
54%
56%
58%
60%
62%
64%
66%
Aug-97 Aug-01 Aug-05 Aug-09
4%
6%
8%
10%
12%
14%
16%
18%
Credit as a % of balance sheet
Bonds (securities) holdings as a % of
balance sheet
Source: CEIC
Foreign holdings (% of outstanding) of BNM bills and
conventional government bonds

0%
5%
10%
15%
20%
25%
30%
35%
40%
2007 2008 2009 2010 2011
0%
10%
20%
30%
40%
50%
60%
70%
80%
% of foreign holdings MGS
% of foreign holdings BNM bills (RHS)

27 December 2011 82
Features of Malaysian Government securities
Least volatile EM Asian bond market: 3m Klibor (interbank rate) has been in a narrow range of 180bp since 2000, providing
tight range guidance for front-end bond yields. The MGS market has been one of the least volatile government debt markets
in EM Asia since 2006, as measured by the annualised volatility of 10y bond yields (see chart below).
Fiscal revenue reliance on commodities: Malaysias structural weaknesses include its narrow tax base, extensive consumer
subsidies and over-reliance on oil-linked revenues. The country ran persistent fiscal deficits throughout the 2000s, averaging
just above 5% of GDP during 2000-05. By 2007, the fiscal deficit was below 4%, but with the onset of the 2008 global financial
crisis, the collapse in growth and ensuing fiscal stimulus measures, the deficit moved back up to 7.1% of GDP in 2009 and 5.4%
in 2011, with planned deficit for 2012 announced at 4.7% of GDP.
Foreign holdings: MGS have been part of the WGBI since 2007, and account for 5-10% of most market capital-weighted
EM Indices. Foreign ownership of MGS and BNM bills has increased since 2008, to some extent reflecting expectations of FX
appreciation due to the liberalisation efforts. As of November 2011, the weighted-average maturity of the MGS market was
5.7y, making the average duration of bonds around 5.2y. Foreign investors span a diverse range, including regional central
banks, benchmark investors, macro EM investors and SWFs. Most foreign holdings are in <3y tenors, as can be seen in the
nonresident ownership of 65% of total BNM bills outstanding as of October 2011, compared with 35% for MGS.
MGS market highlights: Generally, the MoF sells benchmark bonds in 3y, 5y, 7y, 10y, 15y and 20y tenors. The liquidity of
current benchmarks depends on the issuance calendar, ie, recently issued or to be issued. Benchmarks usually have a 2-
3bp bid-offer spread. Off-the-run issues are held mostly onshore in ALM/balance sheet books and are generally illiquid in
secondary markets. There are usually one or two MGS auctions each month, which provide a convenient way to buy longer
duration or off-the-run bonds due to the lack of liquidity in the secondary market for these instruments. Similarly, when a
benchmark is about to go off-the-run, the bond is prone to cheapening, although generally cheapening does not occur until
the new benchmark is issued. Historically, this is the period during which investors have switched, ie, selling off-the-run and
buying new benchmark issues at auction.
Anomalies in yield spreads: (a) A BNM bill can at times trade at a premium to a matched maturity MGTB because of secondary
market liquidity. (b) A BNMN could have a yield lower than the OPR, especially when market expectations are for lower rates
and liquidity is ample. (c) In bills vs NDFs, because of the consistent account surplus and MYR appreciation expectations,
historically BNM bills have traded approximately 75-100bp above USD/MYR NDF-implied yields. In bonds, conventional MGS
generally trade at a 10-15bp premium over Islamic bonds-GIIs, also due to a secondary-market liquidity premium.
MGS The least volatile bond market in EM Asia Foreign holdings of MGS have increased sharply since 2008
0
50
100
150
200
250
300
350
TWD CNY MYR KRW HKD THB INR IDR
0%
2%
4%
6%
8%
10%
12%
14%
16%
10y yield volatility (bp, annualised)
FX volatility (%, annualised, RHS)

0%
5%
10%
15%
20%
25%
30%
35%
40%
2007 2008 2009 2010 2011
0%
10%
20%
30%
40%
50%
60%
70%
80%
% of foreign holdings MGS
% of foreign holdings BNM bills (RHS)
Note: Volatility calculations are based on the 10yield and spot FX since 2006.



27 December 2011 83

Policy and overview
Debt-to-GDP cap: There is no formal debt/GDP cap, but
the Ministry of Finance informally considers a public debt-
to-GDP ratio of 55% as prudent.
Revenue reliance on oil-linked products: A structural
weakness of Malaysias finances is its reliance on oil-linked
revenues. This comes in the form of interest and revenue
from investments, including profit dividends from state-
owned oil company, Petronas, petroleum income tax and
related corporate taxes. Moreover, the burden of subsidy
spending adds to the fiscal weakness. Malaysia ran
persistent fiscal deficits throughout the 2000s, averaging
just above 5% of GDP from 2000-05. By 2007, the fiscal
deficit had fallen below 4%. But with the onset of the
financial crisis, the collapse in growth and ensuing fiscal
stimulus measures, the deficit shot back up to 7.1% of GDP
in 2009 and 5.4% in 2011, with planned deficit for 2012
announced at 4.7% of GDP.
Fiscal deficit and securities issuance: The government
issues MGS, T-bills, and GIIs to finance its fiscal deficit.
The reliance on foreign currency debt has reduced as
domestic debt markets have developed. In the past, the
local currency market involved mainly conventional
securities (MGS), but in recent years GIIs have become
more prominent as the government seeks to make the
country a hub for Islamic finance.
Credit ratings
Malaysias long-term foreign currency credit rating is A3
(Stable) by Moodys, and A- (Stable) by both S&P and
Fitch. Malaysias external finances and access to domestic
and international financing are a rating strength,
according to the rating agencies. The public sector holds
at least a third of Malaysias domestic government debt,
which further enhances the stability of government
financing. However, the agencies say fiscal liquidity is a
weakness as assessed by the debt service/revenue ratio
(25% of 2010 revenues, well above the A range median).
The structural weaknesses of a narrow tax base, extensive
consumer subsidies and over-reliance on oil-linked
revenues also remain largely unaddressed. Introducing a
goods and services tax (GST) could widen the revenue
base, but such a change is likely only after the next general
election, which according to media reports is expected in
2012.

High revenue dependence on commodity prices
-8.0%
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
2011 2009 2007 2005 2003 2001
0
20
40
60
80
100
120
Fiscal deficit (% of GDP, RHS) Crude oil (USD/bbl)
Source: Bloomberg, CEIC

Gross issuance: MGS, GII and private placements, MYR bn
0
10
20
30
40
50
60
70
80
90
100
2006 2007 2008 2009 2010 2011 2012
0
10
20
30
40
50
60
70
80
90
100
2006 2007 2008 2009 2010 2011 2012
Source: Bank Negara Malaysia, CEIC

Malaysia sovereign credit rating history
Moody's S&P Fitch
A3 (Dec 2004) A- (Oct 2003) A- (Nov 2004)
Baa1 (Sep 2002) BBB+ (Aug 2002) BBB+ (Aug 2002)
Baa2 (Oct 2000) BBB (Nov 1999) BBB (Dec 1999)
Baa3 (Sep 1998) BBB- (Sep 1998) BBB- (Apr 1999)
Baa2 (Jul 1998) BBB+ (Jul 1998) BB (Sep 1998)
A2 (Dec 1997) A (Dec 1997) BBB- (Aug 1998)
A1 (Mar 1995) A+ (Dec 1994)
Source: Bloomberg


27 December 2011 84
BONDS
Tenor /
maturity Coupon
Day
count
Issuance
calendar
Auction
Avg. trade
size
Bid-offer
Malaysia
Government
Securities (MGS)
Government Fiscal deficit
financing
3y, 5y,
7y, 10y,
15y, 20y
Semi-
annual
Act/Act Once/
twice a
month
Multiple
price
T+1 MYR0.5-
3bn per day
MYR10mn 3-7 cents
(liquid
issues),
15-50 cents
(illiquid ones)
T+2 MYR273bn MGS Govt
Malaysia
Government
Investment
Issues (MGIIs)
financing
3y-10.5y Semi-
annual
Act/Act Once/
twice a
month
Multiple
price
T+1 MYR0.25-
0.5bn per
day
MYR10mn 3-7 cents
(liquid
issues), 10-
25 cents
(illiquid ones)
T+2 MYR133bn MGII Govt
Treasury bills
(MGTBs)
Government Short term
fiscal cash
management
3m-1y Discount Act/365 Multiple
price
T+1 - MYR5mn 2-3bp T+1 MYR2.4bn MGTB Govt
Bank Negara
Monetary Notes
(BNMNs)
Central bank Liquidity
management
3m-3y Discount
for bills/
Semi-
annual
for bonds
Act/365 Twice a
week
Multiple
price
T+1 MYR1-2bn
per day
MYR50mn 2-3bp T+1
for zero
coupon/
T+2
for coupon
bonds
MYR88.8bn BNMN Govt
Private Debt
Securities (PDS)
Corporates Funding 1y-20y Semi-
annual
Act/Act or
Act/365
Ad hoc - T+2 MYR0.5bn
per day
MYR5mn 5-10bp T+2 MYR325bn
Note:* Unless indicated otherwise. Source: Barclays Capital

27 December 2011 85
Instrument
Floating
leg
Bloomberg
ticker
Day
count
Reset
frequency
Day
count Pay frequency
Liquid
tenors Effective
Daily trading
volume
Bid/offer
spread
Bloomberg
ticker (5y)
Onshore IRS 3m Klibor KLIB3M Act/365 Quarterly Act/365 Quarterly 1-10y T+0 MYR0.8bn 3-5bp MRSWQO5
Offshore IRS 3m Klibor KLIB3M Act/365 Quarterly Act/365 Quarterly 1-10y T+0 MYR0.8bn 3-5bp MRSWNI5
Offshore cross-
currency swap
6m USD Libor US0006M Act/360 Semi-annual Act/365 Semi annual 1-5y T+2 N/A 30bp MRSWN5
Swaptions IRS MYR100mn GFIMYRP GIRP Option on ND IRS available
Caps/floors 3M KLIBOR MYR50mn GFIMYRP GIRP ND caps, floors available

27 December 2011 86
MYR nominal and real effective exchange rates
90
95
100
105
110
2008 2009 2010 2011
MYR NEER
MYR REER


USD/MYR spot and NDFs
2.8
3.0
3.2
3.4
3.6
3.8
2008 2009 2010 2011 2012
USD/MYR USD/MYR NDFs


Bank Negara Malaysia FX reserves (USD bn)
80
100
120
140
2008 2009 2010 2011


Bank Negara Malaysias key policy objectives are to ensure
that the MYR reflects the fundamentals of the Malaysian
economy and to ensure external trade activity is facilitated
by adequate FX liquidity.
The MYR is a managed float, and the BNMs objective
remains to ensure orderly market conditions with limited
intervention. BNM has clearly indicated that as long as
currency movements are in line with economic
fundamentals, intervention is unlikely. BNM monitors the
exchange rate against a basket of currencies to ensure
that the MYR is fairly valued. In recent months, BNM has
intervened to smooth volatility rather than to change the
direction of MYR.
Malaysias FX reserves have risen strongly since mid-2010,
thanks to robust levels of FDI, portfolio flows and other,
smaller investment inflows. While balance of payments
data serve as a useful indicator of MYR dynamics, inflows
through direct investment, government securities and the
private sector are a better gauge.
Exchange rate market
Commercial banks and money changers are licensed
under the Exchange Control Act to buy and sell foreign
currency. There are no restrictions on nonresident
holdings of foreign currency locally. On 21 March 2007,
BNM announced a sweeping liberalisation of FX controls
on inward- and outward-bound investment, including the
abolition of the cap on banks net open FX positions at
20% of the capital base, lifting limits on residents foreign
currency accounts and end of limits on MYR overdrafts for
nonresidents.
As of August 2010: 1) residents and nonresidents can
settle trades in goods and services in MYR; 2) residents
can borrow any amount in foreign currency from
nonresident-related companies, which includes the parent
company, as well as subsidiaries/branches and associate
or sister companies; and 3) the limit on residents forward
hedging of current account transactions was scrapped.
Residents may obtain foreign-currency trade-finance
borrowing from nonresidents up to a MYR100mn limit for
corps (on a group basis).
Multilateral development banks (MDBs), multilateral
financial institutions (MFIs) and multinational

27 December 2011 87
corporations (MNCs) that are allowed to issue MYR-
denominated bonds in Malaysia may also enter into
forward foreign exchange contracts with licensed onshore
banks to hedge their foreign exchange and interest rate
risks arising from such issuance.
Nonresident investors are allowed to hedge foreign
exchange and interest rate risks arising from investments
in MYR-denominated bonds issued by MDBs and MNCs
via onshore FX forwards.

FX reference guide
Overview
MYR is a managed float
Security
Liquidity (daily
volume)
Bid/Offer
spread
Tenor/
Maturity
Local open/
Reuters
FX spot Liquid; USD1.3bn 20 pips Spot 09:00 16:30 T+2 AFX
FX forward Liquid up to 6m;
USD500-700mn
10 pips Up to 5y 09:00 16:30 T+2 MYRF Domestic and foreign issuers of MYR-
denominated bonds are allowed to use
onshore forward contracts to manage
their FX and interest rate risks.
NDF market Liquid up to 6m;
USD1bn
20-50 pips Up to 5y 24 hours a day T+2
PNDG

NDF
options
Liquid up to 2y;
USD100mn
0.5 vol Up to 2y 24 hours a day T+2
ABSIRFI
X01

Description
Corporates Export and import companies; generally to hedge currency/interest rate risks.
Foreign financial institutions Participate in MYR bond market, with both short- and long-term objectives.
Multi-nationals Hedging.


27 December 2011 88
Philippines

Policy objectives
Bangko Sentral ng Pilipinas (BSP) primary objective is to
maintain price stability conducive to balanced and
sustainable economic growth. BSP uses inflation targeting
to achieve this objective.
Its inflation target is defined in terms of the average y/y
change in the CPI index over the calendar year. Prior to
(and including 2011), BSP followed a variable annual
inflation target (announced two years in advance, with a
target for each year). For the year 2011, BSP has an
inflation target of 4% +/-1%. Starting in 2012, BSP will
shift to a fixed inflation target for the medium term. BSP
has a fixed inflation target of 4 +/-1% for 2012-14.
To ensure accountability in cases where inflation fails to
meet BSPs target, the BSP governor issues a letter to the
president outlining the reasons the target was missed and
the steps that will be taken to bring inflation in line with
the target.
BSP also aims to promote and preserve monetary stability
and the convertibility of the PHP.
MPC: Frequency of meetings and membership
Board: BSPs board consists of seven members appointed
by the president for six-year term. It makes policy decisions
with the help of an advisory committee. No member of the
board may be re-appointed more than once.
Frequency: Monetary policy meetings are held every six
weeks.
Decision: All decisions of the board require the
concurrence of at least four members.
Overnight reverse repurchase rate (RRP) and overnight
repurchase rate (RP): The reverse repurchase rate is the
rate at which banks can deposit excess cash with the BSP
on an overnight basis, and the repurchase rate is the rate
at which banks can borrow overnight cash from the BSP.
The interest rates for the overnight RRP and RP facilities
signal the monetary policy stance and serve as the BSPs
primary monetary policy instruments. (BBG Tickers:
PPCBOND Index, PPCBBLR Index).

Objective
Price stability conducive to balanced and sustainable
growth; inflation targeting
Function Monetary authority and financial regulator
Policy rate Reverse repo and repo rates
Frequency Once in six weeks
Other relevant
rates
SDA, rediscounting facility, reserve requirements
Policy tools
Open market operations consisting of repo and reverse
repo, sale and purchase of government securities and
FX swaps
Bankgko Sentral ng Pilipinas (BSP)
Source: Bankgko Sentral ng Pilipinas, Barclays Capital

Inflation vs BSP policy rate
0
2
4
6
8
10
12
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11
%
Repo Reverse repo
CPI (y/y) Core CPI (y/y)

Reserve requirements
0
5
10
15
20
25
O
c
t
-
0
2
O
c
t
-
0
3
O
c
t
-
0
4
O
c
t
-
0
5
O
c
t
-
0
6
O
c
t
-
0
7
O
c
t
-
0
8
O
c
t
-
0
9
O
c
t
-
1
0
O
c
t
-
1
1
%
Statutory reserves
Liquidity reserves
Effective required reserves

27 December 2011 89
The BSP uses open market operations (OMOs), fixed-term
deposits, standing facilities and reserve requirements in
order to manage liquidity in the financial system.
Open market operations: BSPs OMOs consist of 1)
repurchase and reverse repurchase transactions; 2) outright
sales and purchases of securities; and 3) FX swaps.
Repurchase (RP) and reverse repurchase (RRP): RP and
RRP transactions have maturities ranging from overnight
to 1m. BSP uses the overnight rate to signal the monetary
policy, as well as influence liquidity. Currently, BSP enters
repo transactions for a minimum of 1d (overnight; RPs and
RRPs) and a maximum of 91d (RPs) and 364d (RRPs). RP
and RRP operations are subject to a 20% withholding tax
and a 4% reserve requirement (less than the 21%
requirement on regular deposits).
Special Deposit Accounts (SDA): BSP accepts fixed-term
deposits by banks, trust entities of banks and non-banks
with quasi banking functions to siphon off excess liquidity.
Currently 2w and 1m SDAs are offered (2m, 3m and 6m
SDAs were discontinued in Q2 08). Currently the 2w SDA
rate is 12.5bp above the overnight RRP rate and the 1m
SDA rate is 18.75bp above the RRP rate. The minimum
SDA deposit is PHP10mn, with additions in increments of
PHP1mn.
Rediscounting facility: A standing credit facility provided
by BSP that allows banks to borrow money from the
central bank using promissory notes and other loans of its
borrowers as collateral. There are two types of
rediscounting facilities, a peso rediscounting facility, and
an exporters dollar and yen rediscount facility (EDYRF). All
banking institutions, including branches of foreign banks,
thrift banks, rural and cooperative banks are eligible to
participate in this facility.
Reserve requirements: BSP levies statutory reserves of
10% and liquidity reserves of 11%. Liquidity reserves must
be in the form of term deposits in the reserve deposit
account (RDA) with BSP. Reserves may be in the form of
vault cash, deposits with BSP and government securities.
Reserve requirements are applied to all banks of the same
category uniformly and without discrimination.
Deposits maintained by banks up to 40% of the statutory
reserve requirement earn interest at 4% pa. Liquidity
reserves earn interest equal to 50bp lower than the rate on
comparable government securities.
Policy tools
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
2003 2004 2005 2006 2007 2008 2009 2010 2011
%
0
10
20
30
40
50
60
70
80
90
100
bp
Reverse Repo 2wk SDA
1m SDA 2w SDA~O/N RRP (RHS)
1m SDA ~O/N RRP (RHS)

Reverse repo and SDA volumes
0
200
400
600
800
1000
1200
1400
1600
1800
2005 2006 2007 2008 2009 2010 2011
PHP bn
Reverse repo SDA

Excess/deficit reserves of Philippine commercial banks
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
2006 2007 2008 2009 2010 2011
PHP mn


27 December 2011 90

Money markets
Interbank call loan rate: The interbank call loan market
permits banks with reserve deficits to borrow overnight
(using collateral) from banks with excess reserves (BBG
Index: PPCALL Index). This is the most liquid money
market rate in Philippines. Its primary purpose is to cover
reserve deficiencies.
Phibor: The Philippine interbank offered rate is the PHP
rate implied by USD/PHP FX forwards. It is an average of
the interest rate offers submitted by 20 participating banks
on a daily basis, between 10:30 and 11:30 Philippine time.
Phibor serves as an indicator of the banking systems level
of liquidity.
Phiref: Philippine interbank reference rate similar to
Phibor, but is derived from transactions (as opposed to
polled rates for Phibor) in USD/PHP forwards in both the
morning and evening sessions.
Transmission of policy rates into interbank rates depends
on banking system liquidity. In times of ample liquidity,
overnight rates tend to trade close to the reverse repo rate,
but when liquidity is tight, overnight rates trade close the
repo rate.
Banking system liquidity, in turn, is affected by deposit and
loan growths, which is influenced by changes in reserve
money and unsterilised FX intervention.
By design (and in theory), the repo rate and the reverse
repo rate act as an upper and lower bound to overnight
market rates. However, in practice a variety of factors
result in market rates moving beyond these bounds.
At times of ample liquidity and/or lower USD/PHP, FX-
money market arbitrage results in domestic rates moving
lower than the policy rate. Also, when the banking system
as a whole is flush with liquidity, counterparty limits (with
other banks and with the central bank) result in banks
investing in money market instruments even at yields that
are lower than the reverse repo rate.
In times of tight liquidity, the lack of acceptable collateral
to borrow from the BSP at the repo rate force overnight
rates to rise above the repo rate.

IBCL, reverse repo and repo rates (%)
0
2
4
6
8
10
12
Jan-06 Mar-07 May-08 Jul-09 Sep-10 Nov-11
Reverse repo Repo IBCL rate

Phibor, reverse repo and repo rates (%)
0
2
4
6
8
10
12
14
16
Jan-06 Mar-07 May-08 Jul-09 Sep-10 Nov-11
Reverse repo Repo 1w Phibor

Ample liquidity due to rapid deposit growth (Jan08-to-date)
-10%
0%
10%
20%
30%
40%
50%
2008 2009 2010 2011
Difference between deposit and loan growths
Loan growth since Jan-08
Deposit growth since Jan-08

27 December 2011 91

The Philippines interest rate derivatives market is not fully
developed and is illiquid bid-offers range from 40bp to
100bp, depending on the tenor. The floating leg is the 3m
Philippines interbank reference rate (3m PHIREF). It is a
quarterly fixing with an act/360 day count for both the
fixed and floating legs. Given the nature of the fixing (ie,
derived from FX forwards), Phiref swaps are highly
correlated to USD/PHP FX.
A nondeliverable version of the swap market also exists
(ND-IRS), but it is equally illiquid.
Cross-currency swaps (CCS)
The PHP-USD onshore cross-currency swap is quoted as a
quarterly fixed rate against the 3m USD Libor. Offshore
investors do not have access to the onshore CCS swap
market, but a nondeliverable swap typically is used by
offshore real money investors to hedge PHP bond
exposure.
The nondeliverable cross-currency swap (NDS swap) is
quoted as a semiannual fixed rate against 6m US Libor as
the floating leg. Also, the floating leg day-count
convention for NDS swaps is Act/360 as opposed to the
Act/365 convention for the onshore cross-currency swap.
Risk appetite and PHP appreciation expectations affect
NDF-implied PHP yields. Offshore interbank dealers, hedge
funds and real money investors are the main participants
in the NDS market.

Philippine IRS vs USD/PHP
2.0
2.5
3.0
3.5
4.0
4.5
5.0
%
41
42
43
44
45
46
47
48
PHP IRS
PHP ND IRS
USD/PHP currency (RHS)

USD-PHP NDS vs USD/PHP
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
%
41
42
43
44
45
46
47
48 PHP NDS
USD/PHP currency (RHS)


27 December 2011 92
Bond markets

Overview
The Philippine debt market stood at USD116bn as of
September 2011. The government remains the largest
issuer, accounting for USD98.5bn, or ~85% of the total
outstanding. Within this, local-currency government debt
accounted for USD65.5bn. The Bureau of the Treasury
(BTr) is responsible for issuing debt on behalf of the
government. Short sales of bonds are not allowed, and the
repo market is illiquid.
Bond categories
Treasury bills: Treasury bills (T-bills) are typically 91d,
182d and 364d and are zero-coupons. Shorter-tenor bills
(eg, 35d, 42d) are called cash management bills.
Treasury bonds (RPGBs): Also called fixed-rate treasury
bonds (FXTBs); typical tenors are 2y, 5y, 7y, 10y, 15y and
25y.
Retail Treasury bonds (RTBs): Accessible to retail
investors in the primary market, these bonds have similar
characteristics as RPGBs, but with a quarterly or
semiannual coupons and smaller denominations. These
instruments carry a term of more than 1y and can be
traded in the secondary market. The government has been
offering multi-currency retail bonds, commonly referred to
as OFW bonds, since April 2010.
Global Peso Notes (GPNs): Global Peso Notes are PHP-
denominated bonds settled in USD. The notional and
coupons are linked to PHP, but settled in USD, thereby
reducing FX transaction costs for offshore investors.
The Bureau of Treasury first issued these notes in
September 2010 (10y) and then again in January 2011
(25y) for USD 1bn and USD1.25bn respectively.
The FX fixing for GPN coupon and redemption payments is
the average of the representative market rate for five
Manila business days for any given rate calculation date.
The representative market rate for any given business
day is the weighted average of all spot FX transactions on
the previous business day. (BBG Ticker: PPCWA Index).
GPNs are not subject to the 20% withholding tax and are
euroclearable, which is a major attraction for offshore
investors.
Domestic banks initially needed to include GPNs in their
net open position (NOP) calculations and report them as a
part of their USD balance sheet. However, the BSP

Local-currency bond market growth
0
10
20
30
40
50
60
70
80
2004 2005 2006 2007 2008 2009 2010 2011
0
5
10
15
20
25
30
35
40
45
Govt (in USD bn) Corp (in USD bn)
Govt (% GDP, RHS) Corp (% GDP, RHS)
Source: ADB, Barclays Capital

Government bonds by instrument (PHP bn; % split)
93; 3%
30; 1%
1172; 33%
2282; 63%
Government bonds
Treasury bill
Government
international bonds
Special series bill

Local-currency government debt maturity profile
0
50
100
150
200
250
300
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
2
0
2
1
2
0
2
2
2
0
2
3
2
0
2
4
2
0
2
5
2
0
2
6
2
0
2
7
2
0
2
8
2
0
3
0
2
0
3
1
2
0
3
2
2
0
3
4
2
0
3
5
2
0
3
6
PHP bn

27 December 2011 93
changed the rules in March 2011 allowing banks to hold
GPNs on their domestic balance sheets. Because this is a
PHP-denominated instrument, holding them on the
domestic balance sheet is beneficial as it does not impact
the banks FX net-open-position limits. While the rule
change provided more incentive for domestic banks to
hold GPNs, not much interest has been seen.
USD bonds (RoP): Philippines also issues USD debt to
diversify its financing sources. Excluding contingent
liabilities, ~43% of government debt (as of Sep 2011) is in
foreign currency.
Corporate bonds: Financial intermediaries and
manufacturers dominate issuance of onshore corporate
bonds. These are usually floating-rate bonds with
quarterly resets, and tenors of 2-7y. The average issue size
is PHP1-3bn. Secondary market trading is illiquid.
Market participants
Banks and trust funds are the investor base for
government bonds, given their excess liquidity and asset-
liability management needs. The insurance sector, which
typically invests 40% of its AUM in government bonds,
and pension funds and social security funds (including the
Government Service Insurance System), are significant
buyers of duration. There are no restrictions on foreign
participation. However, the 20% withholding tax on
interest income has deterred offshore investors. Foreign
investor interest in GPNs has been high, helped by the lack
of with-holding tax and ease of transaction.
Auction mechanism
Treasury bills are issued weekly either through competitive
English auctions or non-competitive bids. Auctions for
new issues/series of RPGBs use a Dutch auction system,
but re-issues use a competitive English auction. RPGB
auctions are typically conducted every other week.
Taxation
Interest on local issues of government securities is subject
to a 20% final withholding tax for residents and foreign
investors. Non resident investors can apply for preferential
tax rates under treaties by filing an application with the
Bureau of Internal Revenue (BIR). However, the
documentation process is onerous and has been a key
deterrent to offshore investors, despite there being no
restrictions on foreign investment. Capital gains tax is the
same for residents and nonresidents and is levied as per
corporate tax rates. However, greater than 5y bonds are
tax exempt.
External government bonds by currency (USD bn)
22.26
83%
2.24
8%
1.92
7%
0.52
2%
EUR
JPY
PHP-GPN
USD
International government bonds maturity profile
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2011 2014 2017 2020 2023 2026 2029 2032 2035
USD bn EUR JPY PHP-GPN USD


27 December 2011 94


Fiscal policy
The Department of Finance (DoF) is responsible for fiscal
policy in the Philippines. The countrys two main financing
sources are market borrowings (both domestic and
external) and official development assistance (ODA). ODA
comes from multilateral and bilateral organisations, such
as the World Bank and the Asian Development Bank, and
is used to fund projects and programmes for social reform
and community-driven development.
As a part of its liability management strategy, the DoF has
two objectives: maximise the utilisation of available official
development assistance (ODA) loans and increase the
share of domestic financing sources to minimise interest
and foreign exchange risks. Excluding contingent liabilities,
~43% of government debt (as of Sep 2011) is foreign
currency.
Debt swaps: The Bureau of Treasury conducts debt swaps
in both local and external bonds on an ad-hoc basis to
reduce refinancing risk, lengthen duration and retire
expensive debt. This provides flexibility for the government
on repayments and, hence, more fiscal manoeuvrability for
spending on long-term projects, such as infrastructure,
social services and public works.
Economic and fiscal reforms have resulted in the debt-to-
GDP ratio declining to 52.4% in 2010 from a high of
74.4% in 2004.
Credit ratings
Philippines long-term foreign-currency debt rating is Ba2
(Stable) at Moodys, BB (Pos) at S&P and BB+ (Stable) at
Fitch.
Philippines long-term local-currency debt rating is Ba2 at
Moodys, BB+ at S&P and BBB- at Fitch.

Foreign vs domestic financing (net outstanding, annual)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2010 2008 2006 2004 2002 2000 1998 1996
PHP trn
0%
10%
20%
30%
40%
50%
60%
70%
Foreign
Domestic
Share of dometic debt as % of outstanding debt
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2010 2008 2006 2004 2002 2000 1998 1996
PHP trn
0%
10%
20%
30%
40%
50%
60%
70%
Foreign
Domestic
Share of domestic debt as % of outstanding debt (RHS)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2010 2008 2006 2004 2002 2000 1998 1996
PHP trn
0%
10%
20%
30%
40%
50%
60%
70%
Foreign
Domestic
Share of dometic debt as % of outstanding debt
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2010 2008 2006 2004 2002 2000 1998 1996
PHP trn
0%
10%
20%
30%
40%
50%
60%
70%
Foreign
Domestic
Share of domestic debt as % of outstanding debt (RHS)

Debt swaps conducted to extend maturity
Average maturity of government debt (no of years)
3
5
7
9
11
13
15
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Total Domestic Foreign
Source: Department of Finance, Philippines

Philippines sovereign credit rating history
Moody's S&P Fitch
Ba2 (Jun 2011) BB (Nov 2010) BB+ (Jun 2011)
Ba3 (Jul 2009) BB- (Jan 2005) BB (Jun 2003)
B1 (Feb 2005) BB (Apr 2003) BB+ (Mar 2001)
Ba2 (Jan 2004) BB+ (Feb 1997) BB+ (Jun 1997)
BB (May 1995)
LT foreign currency ratings

27 December 2011 95
BONDS
Tenor /
Maturity Coupon
Day
count
Issuance
calendar
Auction
Avg.
trade size
Bid-offer
T-Bills Republic of
Philippines
Debt
financing
91d, 182d
and 364d
Zero
coupon
Act/360 Once in two
weeks
English T+2 PHP3-5bn
per day
PHP50m 30-50bp T+1 PHP92bn RPTB Govt
T-Bonds
(RPGBs)
Republic of
Philippines
Debt
financing
2y to 25y Semi
Annual
Act/360 Once in two
weeks
Dutch for
new issues;
English for
re-issue
T+2 PHP10bn
per day
PHP50m 10bp T+1 PHP2.28trn RPGB Govt
GPNs Republic of
Philippines
Debt
financing
Until now
10y,25y
Semi
Annual
30/360 Adhoc Book
building
As per
issuance
document
0.75 to 1
point
T+3 USD2.25bn PHILIP Govt
Dollar
bonds
(RoP)
Republic of
Philippines
Debt
financing
Across curve
up to 25y
Semi
Annual
30/360 Adhoc Book
building
As per
issuance
document
USD90mn
per day
USD3mn 0.25 to 0.5
point
T+3 USD22.5bn PHILIP Govt
Instrument
Floating
leg
Bloomberg
ticker
Day
count
Reset
frequency
Day
count Pay frequency
Liquid
tenors Effective
Daily trading
volume
Bid/offer
spread
Bloomberg
ticker
Onshore
interest rate
swap
3m PHIREF PREF3MO Act/360 Quarterly Act/360 Quarterly 1y-5y T+1 20bp PPSWO5
Onshore cross-
currency swap
6m USD Libor US0006M Act/360 Semi-annual Act/365 Semi annual <1y T, T+1 50bp PPOI1M
Offshore cross-
currency swap
6m USD Libor US0006M Act/360 Semi-annual Act/365 Semi annual 1y-10y T+2 50bp PPSWNI5

27 December 2011 96
PHP nominal and real effective exchange rates
80
85
90
95
100
105
2008 2009 2010 2011
PHP NEER
PHP REER


PHP spot and NDFs
40
42
44
46
48
50
52
2008 2009 2010 2011 2012
USD/PHP USD/PHP NDFs


BSP FX reserves (USD bn)
30
40
50
60
70
2008 2009 2010 2011

The key objective of the Bangko Sentral ng Pilipinas (BSP)
is to reduce FX volatility.
The BSP adheres to a market-oriented foreign exchange
rate policy and ensures orderly conditions in the market. It
tries to smooth currency movements and minimise
excessive rate volatility via direct purchases and sales of
FX. The BSP also intervenes in the forward markets.
However, it does not target any particular exchange rate
level.
FX reserves amounted to USD66.2bn as at end-November
2011, up USD12.8bn from end-2010 level. BSP has been
allowing its forward book to roll off in recent months,
from USD16.6bn at end-April to USD9.3bn at end-
September.
Remittances from overseas Filipino workers are a key
driver of the balance of payments. The trade deficit is
susceptible to movement in commodity prices, especially
oil and rice. Increased macro stability has reduced
resident outflows.
The BSPs Manual of Regulations on Foreign Exchange
Transactions states that the sale of FX may be freely made
between and among Authorised Agent Banks (AABs) and
by entities other than AABs provided that the sale of FX by
nonbank BSP-supervised entities (NBBSEs) and their
subsidiary FX corps is governed by BSP regulations.
Onshore banks maximum open FX position should be the
lower of 20% of their unimpaired capital or USD50mn.
Access to the onshore FX forward market is restricted. As
a result, offshore investors tend to take FX exposure via
NDFs. Liquidity has fallen from USD600bn in 2010 to
USD450bn in 2011.
On 28 October 2011, the BSP announced that it was
increasing the market risk weight (to 15% from 10%) of
NDFs to reduce their use for speculative purposes. The
new weight applies from 1 January 2012.
No specific tax is imposed on FX transactions.


27 December 2011 97
FX reference guide
Overview
The Philippines has a managed-float exchange rate policy.
Security
Liquidity
(daily volume)
Bid/Offer
spread
Tenor/
Maturity
Local open/
closing times Settlement Reuters page Additional information
FX spot USD500-600mn 2-5 pips Spot 09:00 12:00;
14:30 16:00
T+1 PDSPESO
FX forward Liquid; USD100mn 5 pips Up to 1y 09:00 12:00;
14:30 16:00
T+1 PHPF=
FX NDFs Liquid; USD400-
500mn
3-10 pips Up to 5y 24 hours a day T+1
PNDF

Offshore market is limited to NDFs.
FX options Liquid up to 1y,
illiquid 1-3y;
USD100mn
0.75-1.25 vol Up to 3y 24 hours a day T+1
Description
Corporates FX hedging.
Domestic banks Major players in the fixed income market.
Foreign institutional investors Participants in NDF market.


27 December 2011 98
Singapore

Monetary policy
Monetary Authority of Singapore (MAS): The primary
objective of MAS is to promote price stability as a sound
basis for sustainable economic growth. Since 1981,
monetary policy in Singapore has been centred on
management of the exchange rate.
Output gap, core inflation are key targets: MAS uses six-
and 12-month forecasts of the output gap and its core
inflation measure in formulating monetary policy. MAS is
not an inflation targeter, but it has exhibited a comfort
zone for its core inflation measure around the historical
level of 1.7% (see Asia Pacific Central Banks 2012 Guide, 4
Nov 2011).
Exchange rate policy: Since 1981, monetary policy has
been centred on management of the exchange rate.
Why the exchange rate? The choice of the exchange
rate owes simply to Singapores unique economic
characteristics. Its economy is very open to foreign trade
and capital flows with the value of trade in Singapore
close to four times GDP. This makes the exchange rate a
much more important channel for policy transmission
relative to interest rates. (See Singapore: Primer on
exchange rate policy and the SGD NEER, 11 July 2011).
How is it managed? MAS manages the SGD against a
trade-weighted basket of currencies (SGD NEER
1
) of
Singapore's major trading partners, and maintains it
broadly within an undisclosed target band.
Policy decision: The SGD NEER policy band is periodically
reviewed to ensure it remains consistent with the
economys underlying fundamentals.
Intervention: If the SGD NEER moves outside the
band, MAS intervenes to steer it back within the band
The impossible trinity: A country cannot
simultaneously manage its exchange and interest rates
and have an open capital market. In the context of free
capital movement, interest rates in Singapore are
largely determined by foreign interest rates and
investor expectations of future movements in the SGD.

Objective
Promote price stability as a sound basis for sustainable
economic growth. Policy centred on the management of
the exchange rate
Key indicators Output gap and MAS core inflation
Policy target SGDNEER band (Slope, width and the midpoint)
Frequency Twice a year (April, October)
Organisation
structure
Economic policy group presents the findings on growth
and inflation dynamics at the Monetary and Investment
Policy meeting. The key members - the chairman, deputy
chairman, a board member and the MD then make the
decision
Other tools
Money market operations (SGS repos/Reverse repos, FX
swaps/Reverse repos, Clean borrowing/Lending, MAS
bills), Intraday liquidity facility, Standing facility, Statutory
Reserve Requirements
Frequent
publications
Monthly Statistical Bulletin (MSB), bi-annual report on
Macroeconomic Review (along with policy statement),
annual report on Financial Stability Review
Monetary Authority of Singapore (MAS)
Source: MAS, Barclays Capital
CPI and SGD NEER
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
2004 2005 2006 2007 2008 2009 2010 2011
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
SGDNEER (y/y) CPI (y/y, RHS)
The impossible trinity no independent interest rates in an
open economy with exchange rate management
The impossible trinity
A country can only have a
combination of two of the
three conditions
Fixed exchange rate
Free capital flows
Sovereign monetary policy
The impossible trinity
A country can only have a
combination of two of the
three conditions
Fixed exchange rate
Free capital flows
Sovereign monetary policy


1
Discussed in detail in the FX section

27 December 2011 99
Organisation structure and decision rule
Board of directors: According to the MAS Act, the
board shall consist of a chairman; and not less than 4
and not more than 9 other directors, one of whom
shall be the deputy chairman. The current board
consists of the deputy prime minister (who is also the
minister of finance) as the chairman, with other
directors representing different sectors of the economy
and society.
Management team: The board shall be appointed by
the President who shall, on the recommendation of the
cabinet also appoints the deputy chairman. The
President shall appoint one of the directors appointed
to be the managing director.
Decision making: The Monetary and Investment
Policy Meeting (MIPM) deliberates and decides on
issues relating to the formulation and implementation
of monetary policy with the objective of maintaining
price stability for sustainable economic growth. The
economic policy group initiates a full-scale review of
growth and inflation dynamics a month ahead of the
meeting and presents its findings and recommended
policy settings at the MIPM. The MIPM, which makes
the final policy decisions, comprises the chairman,
deputy chairman, chairman of the Audit Committee
and the managing director. There is no voting.
Meeting frequency MAS meets twice a year, in mid April
and mid October, to review the economic situation and its
foreign exchange policy. The exact meeting date (mostly
in the second week) is announced a week in advance.
Frequent reports: Frequent reports published by MAS are
the Monthly Statistical Bulletin, Bi-annual report (along
with the policy statement) on Macroeconomic Review,
and annual report on Financial Stability Review.
Other policy tools
Money market operations and reserve requirements
complement the exchange rate policy. Given that
Singapore's monetary policy is centred on management of
the SGDs trade-weighted exchange rate, money market
operations are directed at ensuring there is sufficient
liquidity in the banking system to meet banks' demand for
reserves and settlement balances. To facilitate the fine
tuning of liquidity in the banking system and individual
bank level, MAS operates the MAS Standing Facility (SF)
and Intra-day Liquidity facility (ILF).
Money market operations (MMO): The conduct of
daily money market operations involves MAS: (a)
MAS policy decision history
Date Policy stance
Apr-04 Gradual, modest appreciation (starting from the mid-point of the
current band)
Oct-04 Gradual, modest appreciation
Apr-05 Gradual, modest appreciation
Oct-07 Gradual, modest appreciation; Slight increase in slope
Apr-08 Recentred slope at prevailing (higher) level of the S$NEER
Oct-08 Neutral Band
Apr-09 Recentred at prevailing (lower) level of S$NEER
Oct-09 Neutral Band
Apr-10 Modest and gradual appreciation; Recentred slope at prevailing
(higher) level of the S$NEER
Oct-10 Slope of the band increased slightly; Band widened slightly
Apr-11 Recentred upwards but below the prevailing level; band left
unchanged due to volatility
Oct-11 Gradual, modest appreciation, with reduced slope
Source: MAS

MAS organisational structure
Risk
Committee
Audit
Committee
Monetary and
Domestic Markets
Management
Reserve
Management
Managing
Directors Office
Monetary policy, Investment & Research /
Development and External
Economic
Policy
Develop-
ment
Markets and
Investment
Board of Directors
Financial supervision
Banking and
Insurance
Capital
Markets
Policy, Risk and
Surveillance
Risk
Committee
Audit
Committee
Monetary and
Domestic Markets
Management
Reserve
Management
Monetary and
Domestic Markets
Management
Reserve
Management
Managing
Directors Office
Economic
Policy
Develop-
ment
Markets and
Investment
Economic
Policy
Develop-
ment
Markets and
Investment
Board of Directors
Banking and
Insurance
Capital
Markets
Policy, Risk and
Surveillance
Banking and
Insurance
Capital
Markets
Policy, Risk and
Surveillance
Source: MAS

MAS open market operations
Purpose Frequency Tenors
Money market operations
FX swaps and reverse
swaps
FX liquidity
management
Daily O/N - 1y
Clean
borrowing/lending
SGD liquidity
management
Daily O/N - 1y
Repo/reverse repos SGD liquidity
management
Daily O/N - 1y
MAS bills SGD liquidity
management
Twice a
week
28d, 56d
Liquidity adjustment facilities
Intraday liquidity
facility
Liquidity for
settlement purposes
Daily Intraday
Standing facility Liquidity position
adjustment
Daily O/N


27 December 2011 100
estimating liquidity in the banking system; (b) carrying
out appropriate transactions in the SGS and money
markets with primary dealers (PDs); and (c) monitoring
money market conditions throughout the day.
The Monetary and Domestic Markets Management
Department (MDD) conducts its main money market
operations every morning between 9.45am and
10.30am, after assessing and estimating the day's key
money market factors. MDD monitors monetary
conditions in the banking system throughout the day
and, if necessary, carries out further money market
operations in the afternoon. The amount of liquidity to
inject or withdraw from the banking system depends
on the net liquidity impact of (a) MDDs foreign
exchange operations, if any, and its maturing money
market operations; (b) changes in banks' liabilities base
and, hence, their minimum cash balance (MCB)
requirements (MCB explained later) ; (c) net changes
in currency demand; (d) net issuance of SGS; (e) net
CPF board's fund transfers; and (f) net government
fund transfers by the Accountant General's
Department.
MAS typically uses the following money market
instruments:
FX swaps or reverse swaps: MAS decides the
tenors and total size of the FX swaps to manage
daily liquidity, and that is conveyed to PDs at
9.45am, following which PDs submit bids to MAS.
Tenors for the swaps are usually up to six months.
Clean borrowing or lending: Just like the FX swaps
MAS decides the amount of clean
borrowing/lending and PDs then submit their bids.
Tenors for clean borrowing can be up to 1y.
Repos/reverse repos: An eligible counterparty can
enter into a repo with MAS using eligible securities
(SGS, MAS bills, SGD debt securities from any AAA
rated PSE, any AAA rated sovereign, AAA rated
sovereign-guaranteed companies, any AAA-rated
supranational, foreign currency securities if
covered by bilateral arrangements with MAS). The
purpose of this instrument is more to help PDs
facilitate market-making activity in government
bonds (SGS). MAS specifies the issues and offering
amounts per issue to PDs every morning, and the
results based on a competitive basis are released at
5.45pm. MAS provides complete details of
transaction rates and procedures (including the
haircuts) on its website.
MAS bills
Issuer Monetary Authority of Singapore
Typical issue maturity
The maturity range is up to 3 months (currently
28d and 56d)
Minimum denomination S$1,000
Structure
MAS bills are zero-coupon, and issued and
traded on a discount basis
Auction format
Uniform pricing successful competitive bids
will be allotted at a uniform yield, which is the
highest accepted yield (also referred to as cut-
off yield) of successful competitive bids
submitted at the auction
Underwriters at auction 13 primary dealers
Frequency of auctions Weekly
Cut-off time
All bids need to be submitted by noon on the
auction day
Tax
There is no capital gains tax. Interest and other
qualifying income derived by non-resident non-
individuals in respect of MAS bills issued on or
before 31 December 2013 is exempted from tax.
While for resident non-individuals, similar to
SGS, interest and other qualifying income
derived by resident non-individuals (excluding
Financial Sector Incentive - Standard Tier
companies) in respect of MAS bills issued on or
before 31 December 2013 is taxed at a
concessionary rate of 10%. Primary Dealers are
exempted from tax
Trading basis Traded on discount
Typical transaction size S$5 million
Clearing system
Transactions are cleared on a DVP basis over
the new MAS Electronic Payment System
(MEPS+) and MAS' SGS Book-entry clearing
system
Trading hours
9:00 a.m. to 11:30 a.m. and
2:00 p.m. to 4:30 p.m.
Overview
Auction characteristics
Trading characteristics
MAS bills vs SITB
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
Apr-11 Jun-11 Aug-11 Oct-11
% 1m MAS bill (at auction) 3m SITB

MAS bills: These were introduced in April 2011.
They have been a very small component of liquidity
management operations so far, with only SGD17bn
outstanding as of November 2011. The maturity of
bills issued in 2011 has been 28d and 56d. The
amount of issuance is decided in consultation with
PDs and announced a day ahead of issue. The bills
are typically issued on Monday and Thursday.
Other liquidity adjustment tools
Intraday liquidity facility (ILF) In September 2003, an
intra-day liquidity facility was introduced to ensure
adequate liquidity for settlement purposes. Intra-day
liquidity to banks is extended via intra-day loans or SGS
repos. The window for the facility is between 9am and
5pm, with a default automated reversal time of 5.30pm.
The amount available for loan depends on the amount in
the participants SGS Account, with a 2% haircut applied.
Standing facility (SF): The standing facility is available to
allow banks to initiate SGD deposit or swap for SGD (using
eligible foreign currencies) or borrow SGD (via repo of
eligible collateral) from MAS on an overnight and interest-
paying basis (at the end of each day, 6.15pm). The interest
rate at which banks may borrow/deposit from the facility
will be the reference rate +/- 50 basis points. The reference
rate is derived as the weighted average of successful bids
for MAS's SGD500m overnight clean borrowing or loans
conducted during MMOs on the same day.
Statutory reserve requirement (MCB): All banks in
Singapore are required to maintain interest free cash
balances with MAS called the minimum cash balance
(MCB), equivalent to 3% of their liabilities base. While a
banks MCB is allowed to fluctuate in a 2-4% range of their
liabilities base on a day-to-day basis, they must ensure
that the average MCB ratio for the two-week maintenance
period is not less than 3%.
Statutory reserve requirement: (MLA): Just like MCB,
banks have to maintain minimum liquid assets (MLA) in
order to mitigate liquidity risks. The MLA requirement
varies from bank to bank (called bank-specific
requirements). The liquid assets comprise: a) excess cash
balances maintained with MAS; b) SGD cash; c) outright
SGS/MAS bills or SGS/MAS bills held under reverse repos;
or d) any SGD denominated AAA rated debt security
issued by a sovereign, supranational, or sovereign-
guaranteed company.
Standing facility, repo rates, O/N average rates
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2005 2006 2007 2008 2009 2010
%
SF deposit rate
SF borrowing rate
Singapore overnight rate average
SGS repo overnight rate
Source: MAS, CEIC

MAS bills swapped into USD have mostly yielded higher than
US T-bills
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Apr-11 Jun-11 Aug-11 Oct-11 Dec-11
% 1m MAS bills - SOR (equivalent USD yield)
1m US T-bill

Banks liquid assets and cash balances with MAS
5
10
15
20
25
30
2000 2002 2004 2006 2008 2010
%
3.0
3.2
3.4
3.6
3.8
4.0
Commercial banks: minimum requirement liquid assets
Commercial banks: liquidity ratios
Banks balances with the Monetary Authority (% of
liabilities, RHS)

Policy transmission

Transmission to interest rates
Role of interest rates in Singapore and FX transmission:
The use of the exchange rate as the key policy tool does
not completely eliminate the role of interest rates. Money
market operations are aimed at ensuring sufficient
liquidity in the banking system to meet banks demand for
reserve and settlement balances. MAS also uses interest
rates to support its foreign exchange intervention, for
instance rates are allowed to fall to dampen SGD strength
in periods of strong capital inflows and vice versa. The
interest rate most immediately influenced by MASs
money market operations is the overnight interbank rate
(Sibor), which feeds through to other interbank rates,
though only for a shorter time (see detailed section on
Interest Rates determination in Singapore). MAS can exert
a limited degree of control over domestic interest rates by
varying the amount of liquidity, particularly when the TWI
is floating within the prescribed policy band (ie, no
intervention/major liquidity injection or withdrawal is
required).
Interest rate parity and domestic interest rates:
Uncovered interest rate parity reveals that domestic rates
in Singapore are largely determined by foreign interest
rates and market expectations of the future value of the
SGD. Domestic interest rates (for instance 3m SITBs) in
Singapore have been lower than equivalent US rates (3m
UST bills), which mainly reflects investor expectations of
SGD appreciation.
Sibor: The question that arises is how is the theoretical
value of Sibor (Singapore interbank offered rate) decided
by exchange rate policy. By definition, Sibor is the rate at
which banks lend to one another in the domestic market.
Due to the presence of open capital markets and a USD
Sibor market, the fair value of SGD funding costs for
Singapore banks should be USD Sibor plus a spread, over
the medium term. The spread being a function of
appreciation expectations of SGD vs USD and
demand/supply in domestic money markets. In the
absence of a policy rate, the variance in Sibor is more of a
function of banks domestic money liquidity, in the near
term. Historically, the spread between USD Sibor and SGD
Sibor has been positive, and in line with expectations for
SGD appreciation (or driven by CPI, and hence policy
expectations).
SOR: 6m SOR represents the implied cost of borrowing
SGD by lending USD for the same tenor. Singapores open
capital account makes 6m SOR a good proxy for onshore

Money market rates in Singapore
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2005 2006 2007 2008 2009 2010
%
Interbank overnight
Interbank 3m
3m commercial bills
3m USD Sibor
Singapore overnight rate average
SF deposit rate
SF borrowing rate
SF borrowing rate
SF deposit rate
Source: MAS
Transmission of FX appreciation expectations have kept SITB
yields lower than UST bills
-1
0
1
2
3
4
5
6
2004 2005 2006 2007 2008 2009 2010 2011
%
-150
-100
-50
0
50
100
bp
SITB - SOR (RHS) 3m SITB
3m US T-bill
Source: Bloomberg
Sibor vs. SOR spread; also correlated with CPI and hence
exchange rate policy expectations
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
2003 2004 2005 2006 2007 2008 2009 2010 2011
%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
6m USDSibor-SOR CPI (y/y)
Source: Bloomberg, CEIC

funding costs, and has been one of the most commonly
used rates for corporate and mortgage loans in Singapore.
See Interest rate determination in Singapore section.
SOR vs. Sibor spreads: Before 2008, the spread between
Sibor and SOR had been close to negligible. However, high
capital outflows during the Global Financial Crisis led to
sharp FX depreciation expectations and, hence, a deviation
from the interest rate parity, leading to Sibor falling below
SOR. Similarly, in 2011 SOR remained below Sibor, which
could be explained by FX appreciation expectations and
capital inflows.
Foreign exchange intervention and interest rates (SOR):
MAS intervenes in the FX markets when the SGD NEER
looks like it will break either end of the band. In particular,
resisting appreciation pressures usually lead to a rise in
foreign reserves and an expansion of the monetary base,
which, unless 100% sterilised, tends to raise inflationary
pressures in the domestic economy and impairs the role of
interest rates. In the case of full sterilisation, FX
intervention puts upward pressure on proxy interest rates,
ie, FX forward implied yields, SOR (discussed more in the
interest rate derivatives section)
Transmission into MAS bills and T-bills: Capital inflows,
exchange rate appreciation expectations and movements
in 6m SOR are transmitted into government bond and bill
yields, although changes in these are less volatile than
those in SOR (or shorter tenor interest rate swaps) given
the balance sheet constraints.
MAS FX intervention process
FX intervention when SGD NEER is at
the top end of the band
Market impact:
1) SGD NEER reverts
from the top end i.e.
USD/SGD higher;
2) 6m FX forward points
move to the right, taking
6m SOR higher
the lower end of the band
Market impact:
1) SGD NEER reverts
from the lower end, ie,
USD/SGD lower;
move to the left, taking
6m SOR lower
1) Unsterilised intervention: FX
forwards unwind
2) Sterilised intervention: MAS sells
spot USD/SGD, and does Buy/Sell
FX swap (ie, buys USD/SGD +
sells USD/SGD forward)
1) Intervention: Buy USD/SGD
2) Sterilisation: Sell/Buy FX swap
(i.e. Sell USD/SGD spot + Buy
USD/SGD forward)
the top end of the band
Market impact:
1) SGD NEER reverts
from the top end i.e.
USD/SGD higher;
move to the right, taking
6m SOR higher
the lower end of the band
Market impact:
1) SGD NEER reverts
from the lower end, ie,
USD/SGD lower;
move to the left, taking
6m SOR lower
1) Unsterilised intervention: FX
forwards unwind
2) Sterilised intervention: MAS sells
spot USD/SGD, and does Buy/Sell
FX swap (ie, buys USD/SGD +
sells USD/SGD forward)
1) Intervention: Buy USD/SGD
2) Sterilisation: Sell/Buy FX swap
(i.e. Sell USD/SGD spot + Buy
USD/SGD forward)

FX swap operations impact on MAS balance sheet
(i) Sale of SGD against USD on value date
(ii) Purchase of SGD against USD on maturity date
Assets Liabilities
Assets Liabilities
Foreign assets
Foreign assets
Banks balance with MAS
(i) Sale of SGD against USD on value date
(ii) Purchase of SGD against USD on maturity date
Assets Liabilities
Assets Liabilities
Foreign assets
Foreign assets

MAS FX reserves and FX forward position
0
50
100
150
200
250
300
2004 2005 2006 2007 2008 2009 2010 2011
FX forwards (>3m)
FX forwards (1m-3m)
FX forwards (up to 1m)
FX reserves
USD bn
0
50
100
150
200
250
300
2004 2005 2006 2007 2008 2009 2010 2011
FX forwards (>3m)
FX forwards (1m-3m)
FX forwards (up to 1m)
FX reserves
USD bn


Interest rate determination in Singapore
Exchange rate management, capital inflows and interest rates: The exchange rate policy imposes a constraint on MASs
ability to influence interest rates. Given open capital inflows, MAS can affect both interest rates and foreign exchange
markets simultaneously only for a very short time. For instance, if MAS raises interest rates by reducing the amount of
liquidity in the interbank market, this will make SGD deposits more attractive, and hence lead to further capital inflows.
Interest rates parity and domestic interest rates: Studies by MAS show that changes in money supply or factors affecting
the demand for money have no effect on domestic interest rates. Only changes in US interest rates or market expectations
of future movements in the exchange rate have a significant impact on the domestic interbank rate. Sibor has typically
been lower than US rates on account of economic fundamentals too, ie, Singapores strong internal and external balances,
as well as a reflection of the US-Singapore inflation gap on average. This mostly explains the historically lower interest
rates (interbank, bonds, swaps) in Singapore, relative to the US.
What is SOR? SOR (Swap Offer Rates) refer to the cost of borrowing SGD synthetically by borrowing USD for the same
tenor and swapping out the USD in return for SGD. As shown below, it is a function of USD interest rates (USD Sibor), spot
exchange rates and forward exchange rates. Singapores open capital account makes SOR a good proxy for onshore
funding costs, and has been one of the most commonly used rates for corporate and mortgage loans in Singapore.
SOR vs Sibor: As per MAS notice 757, banks may lend SGD to nonresident financial institutions for any purpose whether in
Singapore or elsewhere as long as the aggregate SGD credit facilities do not exceed SGD5mn per entity. This policy limits
lending of SGD to nonresident financial institutions for speculation in the SGD currency market. The market impact of this
is that SOR can stay below Sibor as the arbitrage of borrowing at SOR (ie, selling/buying USD/SGD FX swaps) and lending
at Sibor is not possible for nonresidents. Moreover, Sibor in longer tenors is not liquid. Historically, except 2009-2011, SOR
has mostly been higher than Sibor reflecting a risk premium in SGD six-months forward expectations, and at times USD
demand/supply mismatches.
SOR became negative in 2011: SOR has been much more responsive to the expected movements of SGD due to the UIP
condition assumed in pricing framework. Before 2008, the spread between Sibor and SOR had been close to negligible.
However, high capital outflows during the Global Financial Crisis led to sharp FX depreciation expectations and, hence a
deviation from the interest rate parity, leading to Sibor falling below SOR. Similarly, in 2011 SOR remained below Sibor,
which could be explained by appreciation expectations. SOR turned negative in August 2011, on account of strong capital
inflows and FX appreciation expectations post the US rating downgrade. Reduced intervention by MAS (versus market
expectations) and outstanding SOR floorlets on 6m SOR at zero could also have played a role in the sharp moves.
Sibor vs. SOR Singapore vs. US rates
-2
-1
0
1
2
3
4
5
2004 2005 2006 2007 2008 2009 2010 2011
%
-125
-75
-25
25
75
125
bp SOR-Sibor (RHS) 6m SOR
6m Sibor

1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
2004 2005 2006 2007 2008 2009 2010 2011
%
-50
0
50
100
150
200
250
10y UST-10y SIGB (bp, RHS)
10y UST
10y SIGB
10y UST-SIGB spread
has been lower than
the 10y annualised
returns of SGD vs.
USD i.e. 2.69%



The interest rate swap (IRS) market is readily used as a
duration hedging instrument in Singapore. The floating
leg of the fixed-floating SGD Interest Rate Swap is 6m SOR
rather than Sibor. (BBG Ticker, 5y IRS: SDSW5 Curncy).
Floating leg (6m SOR): The floating leg of the IRS is the
6m USD/SGD Swap-Offer Rate (SOR). This refers to the
cost of borrowing SGD synthetically by borrowing USD
for the same tenor and swapping out the USD in return
for SGD. The rate is fixed by the Association of Banks in
Singapore. SOR is calculated as below:
100
365
1
360
* 1 1
|
|
.
|
\
|
|
.
|
\
|
+
|
|
.
|
\
|
+
days
days
USDSIBOR
FXSpot
FXfwd

Main participants: Domestic banks and financial
institutions, hedge funds and foreign investors.
semi-annual basis with an Actual/365 day count. The
average trade size for IRS is around USD10k DV01. The
IRS curve is liquid out to 10y, but most liquid in less than
5y (in particular 5y IRS).
Cross-currency basis (USD/SGD)
A cross-currency basis swap is a floating (SGD, 6m SOR)
floating (USD, 6m USDLibor) interest rate swap. It is used
for hedging cross-currency asset-liability flows, though
from floating to floating. The major drivers of the cross-
currency basis are the supply-demand mismatch of USD.
Participants: The main market participants are: a) banks
borrowing USD with access to cheap deposit-based
funding in the local currency market that have to finance
large USD-based assets; b) non-US banks managing USD
asset/liabilities on their own balance sheets and facilitating
similar hedging actions for their local corporate clients. The
dominance of USD on global corporate balance sheets
reinforces the safe haven status of the US currency.
Conventions: By market convention, the basis for a USD
cross is usually quoted as the spread on the non-USD leg.
Given the convention in terms of the contract described
above, the cross-currency basis swap spread typically
takes a negative sign when USD funding issues increase
a more negative number implies a relatively greater price
for the counterparty borrowing USD versus SGD. The
spread is quoted in bp.

SOR, Sibor and USD Libor
-2
-1
0
1
2
3
4
5
6
2004 2005 2006 2007 2008 2009 2010 2011
%
6m SOR 6m Sibor 6m USD Libor
Source: Bloomberg

USD vs SGD IRS historical spread
1.8
2.3
2.8
3.3
3.8
4.3
4.8
5.3
5.8
6.3
2004 2005 2006 2007 2008 2009 2010 2011
%
-50
0
50
100
150
200
250
300
10y USD-SGD IRS (bp, RHS)
10y USD IRS
10y SGD IRS
10y US-SGD IRS
spread has been
lower than the 10y
annualised returns
of SGD vs. USD i.e.
2.69%
Source: Bloomberg

SGD swap rates have been a low beta of USD swap rates
y = 0.4836x + 0.7967
R
2
= 0.8712
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
0 1 2 3 4 5 6 7 8
5y USD IRS (%)
5
y

S
G
D

I
R
S

(
%
)


Market drivers: Since Singapore is an open economy,
with no capital controls, banks can always convert their
USD funds into SGD and vice versa. So, the front-end
cross-currency basis is mostly driven by domestic banks
funding, while the longer tenor basis is driven by
corporate issuance.
Interest rate options
Singapores interest rate options market is one of the
more liquid markets in the region, with most common
vanilla products being caps, floors and swaptions.
The existence of volatility products is due to yield
enhancement products, ie, investors (institutional, private
banks and retail) looking to sell volatility for higher yields.
The supply of volatility from such products is generally
transferred to dealers and banks, which might warehouse
it or pass it over to hedge funds looking to express
market views via swaptions. However, unlike Koreas
swaption market, the supply of volatility is not high
enough to exert downward pressure on the vega part of
the volatility curve, and hence the yield.
Average daily trading volume for swaptions is USD500mn
and USD120mn for caps/floors.
The historical implied volatility grid has almost always
been steep (ie, gamma normalised vol > vega normalised
volatility), just like the US rates volatility grid. However,
the only exception was August 2011, when front-end
rates turned negative, for the first time, driving the
gamma part to become very illiquid. Even though SOR
might have been driven by a few fundamental factors as
discussed earlier, the outstanding floorlets on 6m SOR at
zero, and range accruals might also have played a role in
precipitating some of this move in SOR, and hence the
moves in implied volatility.
SGD NEER expectations: Implied (Libor-SOR, bp) vs. Realised
(6m forward realised/spot)
-100
-50
0
50
100
150
200
250
300
350
2004 2005 2006 2007 2008 2009 2010 2011
-2
0
2
4
6
8
10
12
14
16
6m Libor-SOR
LN (SGDNEER 6m fwd MID/SGDNEER spot, RHS)

MAS FX forwards book and SOR-Libor spread
0
20
40
60
80
100
120
140
2004 2005 2006 2007 2008 2009 2010 2011
USD bn
0.965
0.970
0.975
0.980
0.985
0.990
0.995
1.000
1.005
3m - 1y
1m - 3m
Up to 1m
Exponential (6m SOR Libor, RHS)
0
20
40
60
80
100
120
140
2004 2005 2006 2007 2008 2009 2010 2011
USD bn
0.965
0.970
0.975
0.980
0.985
0.990
0.995
1.000
1.005
3m - 1y
1m - 3m
Up to 1m
Exponential (6m SOR Libor, RHS)
Source: Bloomberg, MAS, Barclays Capital

Historical front end implied vols in Singapore
20
40
60
80
100
120
140
160
180
2006 2007 2008 2009 2010 2011
a
n
n
u
a
l
i
s
e
d

b
p

v
o
l
1y1y implied vol 3m realised vol
Front end implied
vols surged
sharply
when the 6m SOR
turned negative in
August 2011
Source: Bloomberg


Bond markets

Overview
Singapore has one of the most developed bond markets in
Asia. The market capitalisation was about USD243bn as of
2011, of which 76% was in SGD, and the rest in foreign
currencies (mainly USD, EUR and JPY). The SGD bond
market is represented in the three main global bond
indices: the Citigroup World Government Bond Index
(WGBI), the Barclays Global Aggregate Index and the JP
Morgan World Government Bond Index.
Structure: The SGD bond market comprises Singapore
Government Securities (SGS), quasi-government bonds,
corporate bonds, structured securities and a newly added
segment called MAS bills. The Singapore Government has
a credit rating of AAA from Moodys, S&P and Fitch.
Diverse issuers and investor base: The SGD bond market
is fully accessible by all issuers and investors globally, As a
result, foreign entities account for more than one-third of
the bonds issued in the country. There are no capital
controls, hedging restrictions, or withholding taxes. Credit
quality and FX appreciation expectations support strong
foreign demand for Singapore government securities.
Fiscal surplus and government bonds: Unlike many other
countries, the Singapore Government does not need to
supplement its expenditure through the issue of bonds as
it operates a balanced budget policy and often enjoys
surpluses. This policy allows the government to focus on
the development of Singapores capital markets instead.
Repo market: There are no restrictions on short-selling
The SGS repurchase (repo) market is active only between
MAS and PDs. The MAS Repo Facility was established to
allow PDs to borrow SGS from MAS to make the term
structure liquid.
Bond categories
The Singapore Government does not have any external debt.
Two types of domestic debt securities are issued for reasons
unrelated to its fiscal needs: (1) Singapore Government
Securities (SGS) are issued to develop the domestic debt
market; and (2) Special Singapore Government Securities
(SSGS), which are non-tradable bonds issued specifically to
meet the investment needs of the Central Provident Fund
(CPF) (Singapores national pension fund).
Singapore Government Securities (SGS): SGS are
marketable debt instruments issued primarily for
developing Singapore's debt markets. They comprise

Bond markets overview
MAS bills SGS bills SGS bonds Corporate bonds
Issuer MAS in its
own name
MAS on
behalf of the
Singapore
Government
MAS on
behalf of the
Singapore
Government
Corporations, financial
institutions, statutory
boards and
supranationals
Tenor 28d, 56d 3m and 1y 2y, 5y, 7y,
10y, 15y, and
20y
1y-20y
Interest rate Discount Discount Fixed coupon Fixed or floating
Coupon
payments
N/A N/A Semi-annual Annual, Semi-annual
Day count
convention
Act/365 Act/365 Act/Act Act/Act for Statutory
Boards; Act/365 for
corporations and
financial Institutions
Minimum
denomination
SGD 1000 SGD 1000 SGD 1000 SGD 10,000- 250,000
Amount
outstanding
SGS 17bn SGD 66.6bn SGD 79.4bn SGD 82bn

Size of LCY and FCY bond market in Singapore (govt + corp)
0
50
100
150
200
250
300
1995 1997 1999 2001 2003 2005 2007 2009 2011
USD bn
Corporate (foreign currency)
Corporate (local currency)
Government (local currency)

Domestic financing profile
0
10
20
30
40
50
60
70
80
90
100
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
% Domestic credit Bonds Equity

Treasury bills (T-bills), which are short-term (3m and 1y),
as well as longer-term SGS bonds (from 1y to 30y). The
principal objectives of SGS issuance are to:
Build a liquid SGS market to provide a robust government
yield curve for the pricing of private debt securities;
Foster the growth of an active secondary market, both
for cash transactions and derivatives, to enable
efficient risk management;
Encourage issuers and investors, both domestic and
international, to participate in the Singapore bond
market.
SGS bonds
SGS bonds are issued by the government with maturities
of 2y, 5y, 10y, 15y and 20y via auctions according to a pre-
announced calendar (early November). There will be 30y
issuance as well beginning from 2012. Generally, there is
only one auction per month, with an approximate issuance
size of SGD1.5-2.5bn (generally SGD2-2.5bn for a new
issue and SGD0.5-1.5bn for a reopen), with a slightly
smaller size for very long maturities.
The weighted-average maturity of outstanding SGS bonds
was 5.7 years as of November 2011. SGS bond issuance
has helped to establish benchmark issues across the yield
curve, with a higher concentration in shorter tenors, given
the greater demand from investors in this area.
Due to an active MAS vs. PDs repo market, SGS bonds are
fairly liquid across the curve.
Market demand for Singapores debt securities has been
strong over the past 10 years. Bid-to-cover ratios for SGS
bonds and T-bills auctions averaged 2.01 and 1.96
respectively from 2001 to 2010.
SGS bills
SGS T-bills are issued in maturities of 3m and 1y, based on
a issuance calendar announced for the year. 3m bill
auctions take place every Monday (except on holidays),
while 1y bill auctions happen twice a year, also on a
Monday, which is generally in April and October.
The net issuance of SGS T-bills has been rising every year,
with net issuance for a year mostly driven by bank
demand, which broadly is determined by capital inflows
and liquidity (current outstanding: SGD196bn).
Even though both MAS and T-bills are eligible securities
for reserves purposes there could be a spread at times,
mostly reflecting liquidity reasons.
SGS performance over the past decade (local currency vs. FX
hedged)
75
95
115
135
155
175
195
2000 2002 2004 2006 2008 2010
LCY total return index
Hedged total return index
Unhedged total return index

Singapore Government bonds index performance from 2001-
2011 (iBoxx Index)

Local
currency
FX
hedged
FX
unhedged
Total returns 56% 73% 108%
Annualised returns 4.15% 5.17% 6.94%
Annualised volatility 3.33% 4.14% 7.05%
Average risk free rate 1.25% 1.98% 3.95%
Sharpe ratio 0.87 0.77 0.42

Net issuance of SGS + T-bills
0
5
10
15
20
25
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
SGD bn
T-bills Bonds
Average annual issuance of SGS in
past 6 years is SGD3.9bn


MAS bills
As discussed earlier in other policy tools, these are
instruments issued by MAS, and do not constitute
securities of the Singapore Government. This is one
instrument used in money market operations by MAS, and
was introduced in April 2011. So far, these have been a
very small component of liquidity management
operations, with a total amount outstanding of only
around SGD17bn, as of November 2011. The maturity of
bills issued in 2011 has been 28 and 56 days. The size of
issuance is decided in consultation with PDs, and
announced a day ahead of issuance. Bills are typically
issued on Monday and Thursday.
Special Singapore Government Securities (SSGS): SSGS are
non-marketable floating rate bonds issued specifically to the
CPF board. Under an arrangements between the Singapore
Government and the CPF board, surplus CPF funds are placed
with the government through SSGS. By issuing SSGS to the
CPF board and investing the proceeds from this borrowing,
the Singapore Government is one of the few countries in the
world that explicitly recognises and fully funds its national
pension obligations.
Market participants
Banks: Banks invest in SGS to meet MASs minimum
statutory liquid assets (SLA) Requirement. Faster deposit
growth means a SLA for banks, which leads to generally
stronger demand for SGS. Demand from banks tends to be
for the shorter maturities up to 3y.
Insurance companies: These are also important
participants in the SGS market, mostly for longer maturities
reflecting the typically long duration of their liabilities.
Singapores insurance industry assets reached more than
SGD130bn as of 2010.
Foreign investors: Nonresidents can freely transact in the
SGS market and remit funds in and out of Singapore.
Moreover, the active trading of SGD asset swaps and a
repo market continues to attract the foreign investors into
the SGS market.
Foreign investors are active in SGS markets for two main
reasons: 1) to position for expected structural appreciation
of the SGD, for which they prefer shorter-dated maturities;
and 2) EM and World Global bonds benchmark investors,
as the SGD bond market is represented in the three main
global bond indices: the Citigroup World Government
Bond Index (WGBI), the Barclays Global Aggregate Index
Maturity wise break-up of gross Issuance (SGS)
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010 2011
0
2
4
6
8
10
years
2y 5y
7y 10y
15y 20y
Avg. maturity (RHS)
Source: MAS

10y UST vs. 10y SIGB (lower yields, but higher total returns)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
2004 2005 2006 2007 2008 2009 2010 2011
%
-50
0
50
100
150
200
250
10y UST-10y SIGB (bp, RHS)
10y UST
10y SIGB
10y UST-SIGB spread
has been lower than
the 10y annualised
returns of SGD vs.
USD i.e. 2.69%
Source: Bloomberg

Singapore bonds auction details

MAS
bills
SGS
bills
SGS
bonds
Corporate
bonds
Auction
method
Uniform pricing
(only
competitive
bidding)
Uniform pricing
(with
competitive
/non-
competitive
bidding)
Uniform pricing
(with
competitive
/non-
competitive
bidding)
Private
placement or
public offering
with appointed
financial
institutions
Auction
frequency
Weekly for 28d
(Thursday) and
56d bills
(Monday)
Weekly for 3m
T-bills, twice a
year for 1y T-
bills
Depends on
Issuance
calendar;
generally once
a month
N/A
Average
issue size
SGD 1-1.6bn SGD 3-4bn SGD 1-2bn SGD 0.1bn
Source: MAS


and the JP Morgan World Government Bond Index. While
data on foreign holdings by maturity is not released, such
holdings are thought to be more in the shorter tenors
(average maturity around 3y).
Auction procedure for bonds
Announcement: MAS publishes the next years issuance
calendar every November. The calendar specifies the issue
date, tenor, type (new/re-open) of each SGS auction, but
not the amount.
Amount and frequency: Generally, MAS issues one bond
per month, and the issuance size is determined by demand
and market conditions. Generally, the auction size is
SGD2.0-2.5bn for new issues and SGD 0.5-1.5bn for re-
openings. The auction details (including amount) are
published on the SGS website five business days before
the auction after which the When Issued trading begins.
Auction bidding procedure: SGS bonds and Treasury bills
are sold using a uniform price auction. For all SGS issues,
competitive and non-competitive bids are allotted at the
same yield, which is the highest accepted yield (or the cut-
off yield) for successful competitive bids submitted at the
auction. At the cut-off yield, allotment of SGS is pro-rated
depending on the total bids submitted at that yield.
Participation: Auctions are open to all bidders, but all bids
must be submitted through a PD. Bids are submitted in
terms of the yield. Non-competitive bids are allotted first,
subject to an overall limit of 40% of the issue on offer.
Allocation of competitive bids for each bill/bond issue is
capped at 30% for each PD, and 15% for each non-PD.
MAS also participates in auctions when necessary to
acquire securities. This is done to facilitate the conduct of
money market operations and maintain the MAS Repo
Facility. As a general rule, MAS will not acquire more than
20% of an issue on offer at primary auctions, and will
notify the amount (along with auction announcement) it
intends to take up at the auction.
Results and settlement: The results of SGS auctions are
announced on the SGS website, including the amount of
SGS allotted to MAS at the auction (settled T+3).
Taxation
There is no interest income or capital gains tax on
government securities or MAS bills for residents and
nonresidents. However, financial institutions (ex PDs) and
corporations are taxed at a rate of 10%.
Regulatory and tax details
MAS bills SGS bills SGS bonds
Corporate
bonds
Restrictions on
foreign
investment
None None None None
Capital gains
tax
None None None None
Custodian
Local investors
MEPS
1
+
Participating
banks
MEPS+
Participating
banks
MEPS+
Participating
banks
Central
Depository
Pte. Ltd.
Foreign
investors
MPES+
Participating
banks
MPES+
Participating
banks
MPES+
Participating
banks
Depository
agent
Interest income and withholding tax
All retail
investors
None None None None
Resident
institutional
investors
10% 10%
10%
2
(if SGS
issued after
28-Feb 1998)
10% (if
qualifying
debt security)
None None None None
Trading Income Tax
Financial
institutions
10% (Primary
Dealers are
exempted)
10% (Primary
Dealers are
exempted)
10% (Primary
Dealers are
exempted)
20% (5% for
FSI-BM
companies)
Note: 1 MEPS+ :MAS Electronic Payment System. 2. PDs are exempted from SGS
bonds tax. Source: MAS



Policy and overview
Borrowing: The Singapore government does not need to
finance expenditure via the issuance of bonds. As
discussed in the bonds section, two types of domestic
debt securities are issued for reasons unrelated to fiscal
needs: (1) SGS to develop the domestic debt market ,and
(2) SSGS to meet the investment needs of the CPF.
Debt to GDP is not an accurate measure for Singapore:
For a country like Singapore which does not borrow to
spend, the use of gross debt figures alone may not provide
an accurate or meaningful representation of the countrys
net liabilities or more importantly, its fiscal strength. For
example, the level of government debt outstanding at
SGD321bn (December 2010) or 106% of GDP appears
large on its own. However, it does not take into account
the ability of the Singapore Government to service the
debt given its strong asset position, economys robust
economic growth and prudent macroeconomic policies.
Debt ceiling: The Government Securities Act and the Local
Treasury Bills Act define the authorised net borrowing
limits for government securities and T-bills at SGD320bn
and SGD60bn, respectively. The debt-ceiling takes into
account the special non-marketable SGS (SSGS), which
are issued specifically for the Central Provident Fund. The
debt ceiling for SGS could be increased to accommodate
growth in CPF balances and to provide room to deepen
the market for tradable government bonds.
Proceeds from the Singapore Governments borrowing are
invested. The governments assets include investments in
the Government of Singapore Investment Corporation and
Temasek Holdings. Investment returns are usually more
than sufficient to cover debt servicing costs.
Credit ratings
Since 2003, Singapore has consistently achieved the top
short-term credit ratings as well as long-term credit
ratings of AAA, with a stable outlook from the three main
credit-rating agencies.
The rating agencies cite Singapores high level of
economic resilience derived from rapid economic growth,
a strong balance sheet, high net investment surplus
position and robust public finances as rating strengths.

Government balance (as % of GDP), 2004-11
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg, CEIC, Barclays Capital

External debt to GDP in Singapore has always been high
because of an open economy with no capital restrictions
50
100
150
200
250
300
2003 2004 2005 2006 2007 2008 2009 2010 2011
Gross public debt % GDP
Gross external debt % GDP
Source: MAS

Singapore sovereign credit rating history
Moody's S&P Fitch
Aaa (Jun 2002) AAAu (Feb 2011) AAA (May 2003)
Aa1 (Jul 1999) AAA (Mar 1995) AA+ (Nov 1998)
LT foreign currency ratings
Source: MAS


BONDS
Tenor /
maturity Coupon
Day
count
Issuance
calendar
Auction
Avg.
trade size
Bid-offer
Singapore
Government
Securities
(SGS)
Government Defining a risk-
free term
structure
2y, 5y,
10y, 15y
and 20y
Semi-
annual
Act/Act Monthly Uniform
pricing
T+3 SGD1-2bn
per day
SGD5mn 3-5bp T+1 SGD79.4bn SIGB Govt
Singapore
Government
T-bills
(SITB)
Government Banks' eligible
securities
requirements
91d, 364d Discount Act/365 Monday Uniform
pricing
T+3 SGD1-2bn
per day
SGD5-
10mn
5bp T+1 SGD62.7bn SITB Govt
MAS bills Central bank Liquidity
management
28d, 56d Discount Act/365 Monday,
Thursday
Uniform
pricing
T+1 - SGD 5mn 5bp T+1 SGD17bn MASPSP
Govt
Corporate
bonds
Corporates Financing 1y-15y Annual/
Semi-
annual
Act/Act
or
Act/365
Ad hoc
- T+3 SGD20-
50mn per
day
SGD1-5mn 10-50
cents
T+3 SGD113bn

Instrument
Floating
leg
Bloomberg
ticker
Day
count
Reset
frequency
Day
count
Pay
frequency
Liquid
tenors Effective
Daily trading
volume
Bid/offer
spread
Bloomberg ticker
(5y)
Interest Rate
Swap
6m SOR SORF6M Act/365 Semi-annual Act/36
5
Semi-annual 1-10y T+2 or T+ 3
(after 11:30am)
SGD 400-
600mn
3bp SDSW5
Cross-currency
Basis Swap
6m SOR (SGD)
vs. 6m USD Libor
SORF6M
US0006M
Act/365 (SGD),
Act/360 (USD)
Semi-annual vs
Semi-annual
1-10y T+2 or T+ 3
(after 11:30am)
SGD 40-80mn 5-6bp SDBS5
Swaptions IRS SGD200mn GFISGDP GIRP Option on ND IRS available
Caps/floors 6M SOR SGD100mn GFISGDP GIRP ND caps, floors available

SGD nominal and real effective exchange rates
95
100
105
110
115
120
2008 2009 2010 2011
SGD NEER
SGD REER


SGD spot and forwards
1.1
1.2
1.3
1.4
1.5
1.6
2008 2009 2010 2011 2012
USD/SGD USD/SGD Forwards


MAS FX reserves (USD bn)
150
175
200
225
250
2008 2009 2010 2011


The main objective of monetary/FX policy in Singapore is
to promote price stability as the basis for economic
growth. For instance, at times of high import prices, full
employment and rising cost pressures, the MAS will
probably allow the SGD NEER to appreciate faster. The
secondary emphasis of the exchange rate as a counter-
cyclical stabilisation tool has increased in recent years, in
the wake of the macroeconomic shocks in 1998, 2001,
2003, 2008 and 2011.
The MAS has managed the SGD against an undisclosed
basket of currencies (Singapores major trading partners)
since 1981. An apt description of the way the MAS
manages the SGD NEER is that it is essentially a flexible
basket, band and crawl (BBC) regime. The NEER is
allowed to fluctuate within a policy band and to crawl
within this band around the central point. The width and
slope of the band are undisclosed. The MAS conducts
monetary policy by changing the slope and width
parameters. The basket is revised less frequently and only
to reflect changes in Singapores trade composition.
When the SGD NEER breaches the policy band on either
side, or when there is undue volatility or speculation in the
SGD, MAS intervenes in the FX market, using spot or
forward FX transactions in SGD against the USD. MAS
may on occasion intervene before the band is breached, or
allow the SGD NEER to breach the band before
intervening. The frequency of these FX intervention
operations is indeterminate, but in principle MAS refrains
from intervention as much as possible and allows market
forces to determine the SGD level. The central bank may
temporarily widen the policy band in times of unusual
volatility in currency markets, such as October 2001,
following the September 2001 attacks, and October 2010,
amid large EUR/USD fluctuations. MAS is widely believed
to intervene after the Asian close during New York hours
when required.
By virtue of its money market operating procedures to
provide sufficient liquidity to meet banks demand for
reserve balances, sterilisation of MASs FX intervention
operations occurs automatically. MAS takes into account
the net liquidity impact of FX intervention operations in
conjunction with the various autonomous and other
money market factors on its money market operations. It
is also intervenes in the forward markets.

At the end of November 2011, foreign exchange reserves
amounted to USD238.3bn, an increase of USD15.6bn
year-to-date. The reserves are invested in a diverse range
of foreign currency assets. In FY 11, MAS recorded a net
loss of SGD10.94bn as the foreign exchange impact of the
stronger SGD exceeded interest and dividend income, and
valuation gains on its foreign assets. For this financial year,
MAS says it will make no contribution to the Consolidated
Fund or any return of profits to the government.
SOR fixings are SGD borrowing rates implied by USD/SGD
FX swap points and USD Libor. 6m SOR rates turned
negative in August. This is possible when investors expect
SGD appreciation to be faster than is priced in by interest
rate markets. The following factors could have led to that
outcome: 1) Investors desire for safety in short-term cash
deposits (AAA rated) amid generally weak and volatile
financial markets; 2) Reduced intervention by MAS in the
FX forward market could have driven forward points lower.
This could reflect MASs desire for negative or zero interest
rates to deter further capital inflows, a strategy used by
other central banks, notably the Swiss National Bank; and
3) Investors selling USD/SGD in the forward space,
expecting potential SGD appreciation to offset the negative
implied.
FX markets are accessible to nonresident market
participants. There is a SGD5mn ceiling on SGD credit
facilities that onshore banks can extend to nonresident
financial institutions. When the proceeds exceed SGD5mn,
banks must ensure that the SGD proceeds are converted
into foreign currencies and that the funds are not used for
speculation. MAS may in some cases wave the SGD5mn
cap. MAS also regulates the financial sector.
Corporates
Repatriation: There are no foreign exchange controls or
restrictions on the repatriation of capital, profits or
dividends, although documents should be readily
available.
Regulations: Singapore eliminated most controls on
foreign exchange transactions in 1978. The only
remaining restriction pertains to nonresidents financing
offshore projects with SGD. Nonresidents must convert
proceeds from onshore financing activities to a foreign
currency if those funds are to be used offshore.
Taxation
No specific tax is imposed on FX transactions.
FX reference guide
Overview
All FX market activity is traded onshore, though there are no restrictions on trading offshore. Outright FX forwards are not subject to any
restrictions. The MAS intervenes in the market to guide the SGD according to its exchange rate policy, which sets an undisclosed SGD NEER
policy band.
Security
Liquidity
(daily volume)
Bid/Offer
spread
Tenor/
Maturity
Local open/
Reuters
FX spot USD3bn 3-5 pips 0900 1200;
1400 1600
T+2 PYSGD
FX
forwards
USD0.75-1.0bn 1-10 pips Up to 1y 0900 1200;
1400 1600
T+2 SGDF=
PYSGD

FX options USD400mn 0.2 vol Liquid to 2y;
thin liquidity
2-5y
24 hours a day T+2 SGDVOL
PYSGD

Description
Foreign Institutional Investors Major participants in the FX market.

Korea

Policy objectives
Inflation targeting (headline CPI current range: 3%,
+/-1%).
Korea switched from targeting money supply to inflation in
1998. The target price index was core inflation during
2001-06, but the BoK switched to headline CPI in 2008 to
better reflect prices paid by consumers. The inflation
target for 2010-12 is 3% with a tolerance range of +/-1%.
Financial stability is another important policy objective,
particularly since the latest amendment to the Act
following the global financial crisis.
MPC frequency of meetings and membership
The MPC meets every month to decide the target rate by a
majority vote, with decisions released immediately on the
BoKs website. The governors comments after the
meeting decision are closely watched by investors.
Minutes of policy meetings are released two months later.
The MPC comprises seven members: 1) the governor, ex-
officio; 2) the senior deputy governor, ex-officio; 3) one
member recommended by the Minister of Strategy and
Finance; 4) one member recommended by the BoK
governor; 5) one member recommended by the chairman
of the Financial Services Commission; 6) one member
recommended by the chairman of the Korea Chamber of
Commerce and Industry; and 7) one member
recommended by the chairman of the Korea Federation of
Banks.
The members are appointed by the president. The term of
each member except the senior deputy governor is four
years. All members serve on a full-time basis and no
member may be discharged from office against his or her
will. The governor serves concurrently as the chairman of
the committee.
Resolutions at a monetary policy committee meeting are
approved by simple majority when there are at least five
members present. The governor has the right of veto (for
more details, see Asia-Pacific Central Banks: 2012 Guide, 4
November 2011).

Objective Price stability and financial stability
Policy rate 7d repo rate
Money target Headline CPI; 2011-12 target: 3% +/-1%
MPC frequency Monthly
Other tools
OMOs, lending and deposit facilities, reserve
requirement
The Bank of Korea (BoK)
Source: Bank of Korea

Inflation target and policy rate (%)
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
CPI Core CPI
Lower bound Midpoint
Upper bound Policy rate
Source: Bank of Korea, Barclays Capital

Overnight call rate (%), policy rate (%) and spread
-0.5
0.5
1.5
2.5
3.5
4.5
5.5
Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11
-40
-20
0
20
40
60
80
Call rate - policy rate spread (bp, RHS)
Policy rate
Overnight call rate


Policy rates
7d repo rate (KORP7D), or base rate, is the target rate in
Korea. This rate applies to transactions between financial
institutions and the BoK through repurchase transactions.
Targeting the 7d repo rate was introduced in 2008, when
it replaced the overnight call rate. The previous framework
targeting the call rate caused the call rate to become
virtually fixed at the target level regardless of conditions in
the money market, so its ability to signal changes in
liquidity weakened significantly. And because the call rate
rarely moved, short-term of funds transactions became
too concentrated in the call market, which hindered the
development of a broader money market. The framework
targeting the 7d repo rate aims to overcome these
shortcomings.
Open market operations
Purpose: Bank of Korea adjusts market liquidity, including
banks reserves, through open market operations (OMOs)
so that the call rate does not deviate too far from the base
rate. There are two types of OMOs: the issuance of MSBs
and the purchase/sale of securities. The purchase/sale of
securities involves both outright transactions and
repurchase transactions.
MSB issuance is used as a structural liquidity adjustment
tool. The impact on liquidity of such issues can be long
lasting given the relatively long maturities of MSBs
compared with repos (see the Bond market section for
detail on MSBs).
The main focus of repurchase transactions is routine
liquidity adjustment. Securities eligible for use in repo
transactions are limited to government bonds,
government-guaranteed bonds and MSBs in consideration
of the credit risk involved and efficiency of OMOs. The
repo term varies from overnight to 91d, with the most
popular tenor being overnight to 14d, as repos are mostly
used to fine tune liquidity. Since March 2008, repurchase
transactions, which had been carried out as and when
necessary, were changed to a regular schedule, with 7d
repos offered once a week on Thursday. When the call rate
fluctuates by a large amount, an exceptional offer of short-
term repos (eg, overnight) may be made. Counterparties
for BoKs open market operations, including
domestic/foreign banks and securities companies, are
designated every August.
Like most countries that run structural current account
surpluses, the key purpose of the BoKs OMOs is to
sterilise increases in the domestic money supply caused by
Instruments of open market operations
Type of operation Eligible securities
Issuance of long-term
MSBs
Outright sales of
securities
Government and public
bonds held by the BoK
Repurchases of MSBs
with long-term
remaining maturities
Outright purchases of
securities
bonds held by counterparts
Reverse repos
bonds held by the BoK
Issuance of short-term
MSBs (with maturity of
14d)
Repos
bonds held by counterparts
Repurchases of MSBs
with short-term
remaining maturities
Long-term
adjustment
Withdrawal
Supply
Short-term
fine-tuning
Withdrawal
Supply

Bank of Korea assets Foreign vs domestic (KRW trn)
-
50
100
150
200
250
300
350
400
450
500
Sep-11 Sep-07 Sep-03 Sep-99 Sep-95 Sep-91
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Domestic assets (RHS)
Foreign assets (RHS)
Foreign assets as % of total

Outstanding repos and MSBs (KRW trn)
-50
0
50
100
150
200
250
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Repo MSBs Reserve requirement

intervention in the FX market. Historically, net issuance of
MSBs and repos tend to increase when strong FX inflows
significantly expand the central banks balance sheet.
OMOs also help to balance system liquidity when there are
shifts in liquidity due to seasonally heavy payment
transfers (eg, tax collections or fiscal spending).
Lending and deposit facilities
The BoK also operates lending and deposit facilities to
control the availability of banking institutions funds. These
consist of Aggregate Credit Ceiling Loans, Liquidity
Adjustment Loans and Deposits, intraday overdrafts and
Special Loans.
The Aggregate Credit Ceiling Loan system was
introduced in 1994. Credit under this system is based on
setting the central banks aggregate extension of loans
across the system and then allocating to individual local
banks. As rates offered by Aggregate Credit Ceiling Loans
are below the market levels and the funds often are lent to
commercial banks for loans to SMEs, the system is not a
pure monetary policy tool. The Bank of Koreas medium-
to long-term goal is to reduce the amount of ceiling loans
and align their interest rates with market rates.
Standing facilities offer temporary liquidity to member
banks as needed to prevent excess volatility in the call rate
and were introduced in March 2008 when the policy rate
shift was switched to the BoK base rate. The interest rate
on Liquidity Adjustment Loans is set at 100bp above the
Bank of Korea base rate (50bp on the final day of the
reserve maintenance period), and the rate on Liquidity
Adjustment Deposits is set at 100bp below the base rate
(50bp on the final day of the reserve maintenance period).
Financial institutions required to hold reserves are eligible
to make use of the standing facilities. The use of Liquidity
Adjustment Loans by financial institutions whose financial
soundness is weak may be restricted. The loans are
secured by eligible collateral KTBs, government-
guaranteed bonds or MSBs. Standing facilities are
overnight maturities, but during periods of extreme
dislocation (eg, natural disasters), the MPC may extend
the maturity to up to 1m and expand the pool of eligible
collateral.
Intraday loans were introduced in September of 2000 to
ease temporary shortages of funds related to delayed
settlements. With the growth of financial markets and
settlement volumes, delayed settlements became more
problematic, as each delay has multiple downstream
effects. Under this system, banks receive necessary funds
for settlement up to twice their average reserve deposit
BoK loans to the financial sector (KRW trn)
-
2
4
6
8
10
12
14
16
Jan-97 Jan-00 Jan-03 Jan-06 Jan-09
Other loans
Aggregate credit ceiling system

Supply of liquidity to counter the 2008 global financial crisis,
and its withdrawal
Type Scale Withdrawal
Bank recapitalisation fund 3.3 (2.0)
(1)
Aggregate credit ceiling loans 3.5 (1.0)
(1)
Bond market stabilisation fund 2.1 (1.3)
(1)
Sub-total 8.9 (4.3)
(1)
Unscheduled ad hoc RP purchases 16.8

Entire amount
withdrawn
Other Korean won liquidity
(2)
2.3 One-off support
Total 28
26.8
Entire amount
withdrawn
Korean
won
liquidity
(KRW trn)
Foreign currency liquidity
(3)
(USD bn)
Support
still provided
Notes: 1) figures in parentheses are end-August 2011 basis; 2) outright
purchases of Treasury bonds, repurchases of MSBs priori to maturity, etc;
3) Foreign-currency swaps, etc.
Source: Bank of Korea

M2 (y/y %) and reserve requirement ratio (%)
0%
10%
20%
30%
40%
50%
60%
Nov-71 Nov-77 Nov-83 Nov-89 Nov-95 Nov-01 Nov-07
M2 Reserve requirement ratio


balance on a real-time basis from the BoK at a zero-
interest charge. Eligible collateral includes government
bonds, MSBs, and government-guaranteed bonds.
Acting as the lender of last resort, the Bank of Korea, can
offer special loans to ensure financial stability after
receiving approval from the Monetary Policy Committee.
In accordance to the 1950 Bank of Korea Act, reserve
requirements were introduced and played important role
in absorbing liquidity since the mid-1980s when the shift
of the current account into surplus led to monetary
expansion through the foreign sector. From the 1990s,
however, with the progress of financial liberalisation and
rapid developments of financial markets, open market
operations emerged as the major monetary policy
instrument and reserve requirement ratios were reduced
significantly.
The current reserve requirement (RR) system requires
commercial banks, specialization banks and Korea
Development Bank to deposit a certain ratio of their
deposit liabilities in their account with the BoK. Banks
liabilities subject to reserve requirements initially consisted
of demand deposits, and time and saving deposits.
Certificates of deposits (CDs) were included when the
ceiling on their issuance was abolished in February 1997.
To encourage banks to hold longer-term liabilities, the BoK
assesses different reserve requirements according to the
duration of the deposits, ranging from 0% for long-term
saving deposits to 7% for demand deposits. Currently, the
banking systems weighted-average RR ratio is about
3.7%. The nominal sum of required reserves was roughly
KRW30trn as of the end of July 2011. Reserves are to be
held primarily as deposits with the BoK but up to 35% of
the reserve may be held as vault cash.
The Bank of Korea is considering broadening the liabilities
subject to reserve requirements to include bank notes to
better control the broad money supply. Given the large
amount of outstanding bank notes (KRW180trn at end-
September 2011, versus KRW29trn of CDs), the impact
would be significant. However, no timetable for including
bank notes has been announced, and the specific types
and tenors of bank notes to be included are still being
debated. Implementation of broader reserve requirements
is likely to be gradual.
Reserve requirement ratio by type of deposit
Types of deposits Ratio**
Domestic currency deposits
Demand deposits 7% (5%)
Time and savings deposits, CDs 2%
Special purpose deposits* 0% (1%)
Foreign currency deposits
Resident deposits 2-7% (2-5%)
Nonresident deposits 1%
Note: *Long-term savings deposits, such as workers savings for housing loans,
long-term savings deposits for housing, workers property formation savings,
etc. **Figures in parentheses represent ratios prior to November 2006.

Money supply breakdown (Lf*)
Demand
deposits
19%
Term and
saving deposit
44%
CDs
2%
Others
12%
Currency in
circulation
2%
Beneficiary
certificates
11%
Repo
1%
Bank note
9%
Demand
deposits
19%
Term and
saving deposit
44%
CDs
2%
Others
12%
Currency in
circulation
2%
Beneficiary
certificates
11%
Repo
1%
Bank note
9%
Demand
deposits
19%
Term and
saving deposit
44%
CDs
2%
Others
12%
Currency in
circulation
2%
Beneficiary
certificates
11%
Repo
1%
Bank note
9%
*Lf refers to the liquidity of financial institutions, a money supply measure that is
broader than M2 but narrower than L

Outstanding CDs, financial debenture as % of banks balance
sheets
-
50
100
150
200
250
300
350
400
2001 2003 2005 2007 2009 2011
KRW trn
0%
2%
4%
6%
8%
10%
12%
14%
16%
Financial debentures
CDs
CD/total of banks' balance sheets (RHS)
Financial debenture/total of banks' balance sheets (RHS)


Money market trends (balance as of end of period, KRW trn)

1990 1998 2000 2005 2006 2007 2008 2009 2010
Call
(1)
3.7 16.0 12.9 34.6 28.6 27.9 22.2 27.6 30.8
MSB 15.2 45.7 66.4 155.2 158.4 150.3 126.9 149.2 163.5
CD 6.8 15.7 14.2 63.9 79.8 112.8 116.6 113.3 44.5
RP 3.4 17.5 26.3 42.9 58.4 68.3 67.3 67.7 69.6
CP 12.7 62.3 44.7 31.8 45.7 78.4 89.6 74.2 73.4
CB 0.3 4.1 11.2 4.0 3.7 4.4 3.5 2.6 1.6

Note: (1) Daily average transactions during the last month in the period.

Outstanding borrowings via the call market (KRW trn)

0
10
20
30
40
50
60
70
80
Dec-02 Dec-04 Dec-06 Dec-08 Dec-10
Rest of world
Securities institutions
Foreign banks
Specialised banks
Domestic banks


Outstanding borrowings via the repo market (KRW trn)
Money markets
The money market in Korea consists of the call market,
which plays an important role in the transmission of BoK
policy, as well as the markets for repos, CDs, commercial
paper (CP), covered bills, currency stabilisation bonds and
FX swaps.
The money market is largely divided into the intercompany
market, comprising financial institutions excess or deficient
short-term funds, and the customer market, where financial
institutions trade short-term funds with customers. The call
and repo markets belong to the former category and are
dominated by financial institutions. The commercial paper
and covered bill markets are customer markets used by
businesses and financial institutions, respectively, to secure
short-term funds. The repo and CD markets combine features
of both the intercompany and the customer markets.
Since the global financial crisis, the government has taken
steps to reorganize the money markets. It aims to put
banks at the centre of the call market and encourage
nonbanks to rely more on the repo and commercial paper
markets, or issuance of short-term corporate paper.
Call market
The call market is the largest and most liquid of all money
markets in Korea. Transactions in the call market have terms
shorter than two weeks and are dominated by overnight
borrowing. The overnight call rate was the main tool used
by the central bank to conduct monetary policy until 2008.
As such, there was no real bid-ask on the rate, and volatility
was virtually non-existent. Given its stability and liquidity,
most short-term funds were drawn to the call market,
resulting in a lack of liquidity in other term transactions.
There are about 200 institutions in the call market, but 50
top players account for about 80% of the total volume.
The main participants are domestic and foreign banks, and
securities and insurance companies, which together
account for 90% of the total volume. Total daily trading
volume ranges from KRW25 to KRW35trn and averaged
KRW30trn in March 2011.
In March 2008, BoK switched its policy rate to the base
rate (7d repo), in part to increase liquidity in the money
market term structure.
Repo market
Repurchase agreements (repos) refer to contracts in which
one party sells securities to or buys securities from another
party and agrees to repurchase the same type of security in

0
20
40
60
80
100
120
140
Nonbank financial institutions
Specialised bank
Domestic bank
BoK


the future. Buying and selling take place simultaneously
through one trading contract. In Korea, eligible repo
securities include government bonds, municipal bonds,
special public bonds, financial debentures, publicly offered
corporate bonds (excluding new corporate bonds on which
the exercise of rights is possible) and guaranteed bonds.
Institutions trading repos include securities companies,
banks, merchant banks (only allowed to conduct repo
sales), securities companies and the national postal service.
The minimum trade size is KRW10,000 (there is no upper
limit), and contract terms range from 1d or longer.
Banks and securities firms are main borrowers via the repo
market. The BoK conducts repo operations as part of its
open market operations, but the instruments are limited to
government securities.
CD market (since1980s)
The main participants in the CD market are banks,
investment funds and securities firms. Investment trusts
and securities companies CMA accounts can only
purchase CDs; banks can buy and sell. In 1984, the
government allowed domestic banks to issue CDs and later
expanded that allowance to specialised banks and foreign
banks. However, from a practical perspective, it is difficult
for foreign banks to issue CDs, because investment trusts
and securities firms can rarely buy CDs from foreign
issuers. The most popular tenors are 3m and 6m, in that
order, with 9m and 1y tenors issued occasionally.
According to the Korea Securities Dealers Association
(KSDA), 91d CD yields are required to be submitted by
securities firms. There are two fixes each day (11:30 and
15:30), with the highest and one lowest yield excluded in
calculating the average. The afternoon fix is used in most
interest rate derivatives in Korea.
CDs are an important source of funding for banks. However,
as with any other wholesale funding source, money can
move into and out of CDs rapidly due to broader liquidity
and market conditions. The rising stock market at the end of
2007 along with concerns about bank weakness led to large
withdrawals from CDs, causing CD rates to rise over 50bp in
about a month. Banks replenished their liquidity at the
beginning of 2008, and CD rates fell 70bp within a couple of
months. A similar sequence of events occurred again during
the latter half of 2008, causing significant volatility in the
interest rate derivatives market and contributing to the
sharp inversion of the IRS curve.
Learning a lesson from the 2008 crisis, the Financial
Supervisory Service (FSS) required banks to reduce their
loan-to-deposit ratios (LDRs) to 100% by 2013 (the
Outstanding CDs by holder
-
20
40
60
80
100
120
140
KRW trn
Individuals
Nonfinancial corporates
Government
Financial auxiliaries
Investment institutions
Banks

CD as % of bank deposit funding vs CD-policy rate spread
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11
-40
-20
0
20
40
60
80
100
120
CD-policy rate spread (RHS, bp)
CD as % of bank deposit funding

Banks loan-to-deposit ratio vs credit growth (%)
60
70
80
90
100
110
120
130
140
150
160
Sep-01 Sep-03 Sep-05 Sep-07 Sep-09
%
-5%
0%
5%
10%
15%
20%
25%
LDR (including CDs)
LDR (excluding CDs)
Loan growth (y/y, RHS)
Source: FSS, Bank of Korea, Barclays Capital


FX swap size and implied yields (%)
<1m USD6.0~7.0bn
1m ~ 3m USD3.0~4.0bn
3m ~ 1y About USD1bn
FX swap deal size
-2
-1
0
1
2
3
4
5
6
Nov-06 Aug-07 May-08 Feb-09 Nov-09 Aug-10 May-11
3m 6m

Money market rates vs policy rate (%)
1.5
2.0
2.5
3.0
3.5
4.0
Dec -08 Jun -09 Nov -09 May -10 Nov -10 May -11 Nov -11
Policy rate
3m CP
3m CD
3m Financial debenture

Deposit rate, loan rate, and 91d CD rate (%)
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Lending rate (new loans)
Deposit rate (new deposits)
91d CD rate
deadline was advanced to 2012 in August 2011 as result
of a further tightening of regulations) from 130% in 2008
and excluded CDs from the calculation. Since then the
issuance of CDs has dropped significantly, resulting in a
narrowing in the CD-policy rate spread and a drop in the
spreads volatility.
FX swaps
The FX swap market enables USD funding to be converted
into KRW (and vice versa) and is used by foreign banks. Daily
volume in the FX swap market is USD10-12bn. Typical
transaction sizes by tenor are shown in the table at the right.
Foreign banks account for 70-80% of the market
compared with 40% about a year ago. This is largely due to
the more lenient cap on FX derivatives for foreign banks.
The FX swap market experienced significant dislocation
during the 2008 global financial crisis, owing to the
shortage of USD funding within the banking system
(particularly among the foreign banks) and the worsened
balance of payments profile. Since then, the government
has tightened the regulations, including putting caps on
banks FX derivative positions (200% of capital for foreign
banks, 40% of capital for domestic banks). In addition,
banks funding positions and the balance of payments
have improved significantly since 2009. The government
measures have reduced volume in the FX swap market,
but the have also reduced excess volatility.
The transmission of changes in the policy rate to the
overnight call rate is almost one-to-one. The spread
between other, longer-tenor money market rates and the
policy rate varies, depending on market expectations of
future policy rates, as well as liquidity conditions.
However, given that the CD rate is the benchmark floating
rate for most tradable instruments, the transmission
between policy rate and CDs is a main focus in trading
Korean rates. As discussed above, in addition to policy rate
expectations, the CD-policy rate spread is also driven by
bank funding conditions. Current tight regulation of loan-
to-deposit ratios, combined with modest loan growth, has
caused a significant narrowing of the spread since 2008.
A goal of policy is to cap the CD-policy rate spread given
the concerns about household debt an estimated 90% of
bank loans are based on the CD rate. Also, banks resist
lowering CD rates as it cut into their profitability. As a
result, CD rates have been static recently and have lagged
behind other money market rates in pricing in market
expectations of future interest rates.



3y KTB futures, cash bond yields and futures-bond spread, %

-
1
2
3
4
5
6
7
8
9
10
%
-20
0
20
40
60
80
100
120
140
160
180
3y futures-cash spread (RHS, bp)
3y KTB futures yield
3y KTB cash yield


Futures contracts
Underlying
asset
MSB 364d
3y KTB,
8% coupon
5y KTB,
8% coupon
10y KTB,
5% coupon
Contract size KRW200mn KRW50mn
Contract
months
The first four
consecutive
months in the
quarterly
cycle
The first three
consecutive
months in the
quarterly
cycle
Trading hours
Tick size 0.01 point,
representing
a value of
KRW20,000
0.02 point,
representing
a value of
KRW10,000
Last tradeday
Final
settlement day
Second
business day
after the last
trading day
Final settl. Cash
Position limit 5,000
contracts
(contract
month in
which the last
trading day
belongs)
Listing date 06-Dec-02 29-Sep-99 22-Aug-03 25-Feb-08
Price quote 100-R (R = annualised yield)
Third Tuesday of the contract month
The day after the last trading day
Cash
It can be adopted when the KRX deems
necessary
KRW100mn
The first two consecutive
months in the quarterly cycle
(Mar, Jun, Sep, Dec)
09:00~15:15 (09:00~11:30 on the last trading day)
0.01 point, representing a
value of KRW10,000

Source: KRX, Barclays Capital
Overview
Korea has the most liquid interest rate derivatives market
in EM Asia, and it offers the widest range of products,
including futures, IRS, CCS and options.
Bond future
Bloomberg ticker: KE1 Comdty, KR1 Comdty; KAAA Comdty
The futures exchange trades contracts on 3y, 5y and 10y
KTBs. The underlying asset for the 3y and 5y contracts is a
bond paying an 8% semiannual coupon. Final settlement
is in cash. The underlying asset for the 10y contract, which
was introduced in February 2008, is a bond with a 5%
coupon. The 10y futures have a smaller minimum size, and
originally required physical delivery at settlement. Final
settlement was changed to cash in September 2010.
The Korea Exchange has the discretion to choose a single
bond or a basket of bonds from the universe of KTBs
paying a semiannual coupon, which ultimately determines
the settlement price. The basket of bonds is set at the
opening of a new futures contract and is fixed until
contract maturity.
The 3y futures contract is the most actively traded.
Futures are widely used in Korea, owing to the laws and
regulations governing the trading of physical KTBs. Taxes
on coupon income, the holding-period tax, and the
inability to fund KTB purchases via repos, mean many
investors turn to the futures market. Because shorting
KTBs is not allowed, futures are the only way to express a
short view.
Short positions in bond futures are offset by long positions
from foreign and domestic accounts. Given that swap
spreads historically were negative in Korea (the only
turned positive in recent years), it is common for investors
to express a view of Treasury-swap spread tightening
through long bond futures and short swap positions. This
is essentially a speculative trade with a view that swap
spreads will be positive, driven by higher interest rates,
improved liquidity and foreign inflows.
IRS
KRW IRS is the most liquid IRS curve in EM Asia, with a
bid-ask spread of 1-2bp. It is a quarterly fixed versus 91d
KRW CD (actual/365) contract. The floating leg is the 91d
CD rate that is fixed by KSDA on a daily basis (see the
Money market section for details). A nondeliverable IRS
version also exists, with very little spread between onshore


3y KTB future, IRS and future IRS spread

-
1
2
3
4
5
6
7
8
9
10
-20
0
20
40
60
80
100
120
140
160
180 3y futures-IRS spread (RHS, bp)
3y KTB futures yield
3y IRS
and offshore, given that onshore investors have access
both curves. Tenors up to 20y are available, but with most
liquid tenors are 10y and under. BBG Ticker: KWSWNI1
(offshore) and KWSWO1.
IRS is used to hedge bonds, CCS positions, bank mortgage
books, structural products and options. Both banks
mortgage book hedging and structural products hedging
tend to place downward pressure on long-end IRS. The
main participants in the IRS market are banks, securities
institutions, hedge funds and asset managers.
Bond-IRS swap spread
Like other markets, the bond-IRS spread in Korea is largely
directional with bonds outperforming in a hiking cycle and
IRS outperforming in an easing cycle. Bonds yielded more
than swaps in Korea prior to mid-2010, a reflection of
weak system liquidity, as seen by the relatively high loan-
to-deposit ratio of Korean banks. The spread has tightened
significantly since 2008 thanks to banks improving
fundamentals.
Securities firms cash management accounts (CMAs) are
active in traders of bond-IRS spreads, particularly when
IRS is pricing in rate cuts and is viewed as cheap source of
funding for long bond positions.
CCS (cross-currency swap) and basis swaps
Cross-currency swaps (onshore) or nondeliverable swaps
(offshore) are the fixed (KRW) leg of interest rate swaps,
with floating leg being 6m USD Libor. The difference
between deliverable and nondeliverable forms is whether
physical currency is exchanged at the beginning and end
of the swap term. KRW CCS is one of the most liquid in
Asia, with bid-offer spread as tight as 5bp. Ticker:
KWSWN3 (offshore) and KWUSWO1 (onshore).
The main participants include exporters, bond issuers and
bond investors. A USD shortage in 2008 caused by banks
foreign borrowing was a significant driver of low FX
forwards points, and it widened the CCS-IRS spread (basis,
BBG ticker KRBS1) to a very negative level. But that risk has
eased as banks reduced their foreign borrowing. Basis also
exists in Korea due to exporters sales of USD/KRW forwards
to hedge future USD revenues. Bond issuers and investors
asset/liability flows are becoming an increasingly important
driver of the CCS and basis markets. For instance, at one
point, Thai bond investors interest in long KTB/MSB ASW,
led to higher CCS rates. Government regulations to curb
kimchi bond issuance (foreign-currency debt sold in
Korea) have had the opposite effect.


Cross-currency swap yield and slope
-4
-2
-
2
4
6
8
10
-20
20
60
100
140
180
220
260
300
Onshore CCS 1s5s slope (RHS, bp)
1y CCS
5y CCS

KTB and MSB ASW spread vs. CDS (bp)
-
100
200
300
400
500
600
700
800
Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11
1y KTB-CCS spread 1y MSB - CCS spread
5y CDS


Options
Korea has the most liquid interest rate options market in
EM Asia. Swaptions, caps and floors are available;
swaption tenors from 1y to 10y are available.
The main driver of the options market in Korea is the
demand from domestic investors for yield-enhancing
structures. Additional yield can be gained over bonds by
selling volatility. This vol is subsequently transferred to
dealer desks. Given the amount of structured note
issuance in Korea, the impact of these inherited long vol
positions can be substantial. Overall, delta hedging of
these products tends to put downward pressure on long-
end rates. The unwinding of steepener hedges on CMS
spreads can accelerate IRS curve inversion, and the
unwinding of power spread hedges can widen the bond-
IRS spread.
Swaption norm vol (bp)
40
60
80
100
120
140
160
Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10
40
45
50
55
60
65
70
75
80
85
90 1y1y 5y5y (RHS)
40
60
80
100
120
140
160
Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10
40
45
50
55
60
65
70
75
80
85
90 1y1y 5y5y (RHS)

Bond market

Outstanding KRW bonds (KRW trn)

0
100
200
300
400
500
600
700
800
900
1985 1990 1995 2000 2005 2010
Corporate bonds
Industrial financial debentures
MSBs
Seoul Metropolitan Subway bonds
National Housing bonds
Grain securities
Treasury bonds
Forex stabilisation fund bonds


Outstanding KRW bonds by type

Seoul Metro
Subway
bonds
0.5%
MSBs
21.1%
Industrial
financial
debentures
3.7%
Corporate
bonds
26.5%
Treasury
bonds
42.1%
National
Housing
bonds
6.2%


Bid-ask spread of Asian government bonds (bp)

1.1
2.2
2.6
3 3.1 3.1
5.1
31.7
0
5
10
15
20
25
30
35
KR CN MY SG PH TH HK ID
Overview
The Korean bond market has grown rapidly in recent
years, with total outstanding issuance reaching USD1.2trn
by the end of September 2011. It is the second-largest
bond market in Asia ex-Japan after China. It also stands
out as having a well-developed corporate bond market.
About 42% is government bonds, including Korean
treasury bonds (KTBs), National Housing bonds (NHBs)
and Monetary Stabilization bonds (MSBs). The remainder
consists of financial debentures and corporate bonds.
The Korean bond market was opened to foreign investors
in December 1997, when they were allowed to invest in all
types of listed bonds. In May 1998, the government
removed the restriction that prevented foreigners from
investing in short-term instruments.
Bonds types
Korean treasury bonds (KTBs)
Treasury bonds are issued with 3y, 5y, 10y and 20y
maturities. In recent years, the government has followed
an annual issuance calendar that is released at the
beginning of the year. To increase liquidity, all bonds are
fungible and a particular issue is kept open and re-
auctioned regularly until the next issue of that security is
opened. For example, since 2006, 3y and 5y bonds have
opened in the market twice a year, the 3y in June and
December, and the 5y in March and September. The 10y
and 20y have new issuance once a year in June and
December, respectively. Inflation-linked bonds were
introduced in March 2007.
The Ministry of Strategy and Finance (MoSF) announces its
targeted annual issuance amount annually and announces
auction dates and sizes for each maturity monthly. Auction
results are also made public. Despite its smaller amount
outstanding, the 3y bond is considered the benchmark, as
there is an active futures market in that tenor.
KTBs are among the most liquid Asian bonds; however,
given their relatively heavy regulation and documentation
requirements, as well as the withholding tax, foreign
investor participation has been below potential. Also, the
inability to short KTBs and structurally tight domestic
liquidity (due to high bank leverage) constrain domestic
investors. As a result, interest in trading Treasury bonds is
below potential, and prior to mid-2010, bonds traded
cheap to IRS most of the time.

Source: ADB


Issuer Ministry of Strategy and Finance (MoSF)
Tenors 3y, 5y, 10y and 20y fixed-rate, and 10y inflation-linked bonds
Annual issuance plan Released at the beginning of the year
Monthly issuance plan Released on the last Thursday of every month
KTB issuance is as even as possible for market stability
Issuance schedule Monday of each week: 3y, 5y, 10y and 20y in that order
Primary dealer 20 as of December 2010, comprising securities firms and
banks
Auction details The auction is open from 10:40-11:00 Seoul. Orders need to
be with the trading desk by 10:40. Auction results are
released at 11:30. Minimum bid size is KRW10bn, with
additional increments of KRW1bn. Each primary dealer is only
allowed to give five bid levels. Bid yields can only be up to 2
decimal places. MoSF issues bonds at 3bp yield gaps (an
adjustment to the usual Dutch Auction method). All bid yields
below the highest accepted are classified into buckets at 3bp
intervals. In each group, the highest accepted rate is applied.
Usually the MoSF only accepts bids for two buckets. For
example, if the range of bids is 3.10-3.15% and the highest
bid is 3.15%, the MoSF will separate the bids into 3.10-3.12%
and 3.13-3.15% buckets, and bidders get bonds allocated at a
yield of 3.12% and 3.15% according to their bucket
Liquidity enhancement Fungible issue system (bond issued with standard coupon
and maturity)
MoSF conducts regular buybacks to enhance liquidity
MoSF introduced conversion offer in May 2009
Secondary market KRX and OTC account for most of the volume
KTBs market summary
Source: Ministry of Strategy and Finance, Barclays Capital
Issuer Bank of Korea
Tenors 28d, 91d, 182d, 1y and 2y
1y and 2y are fungible
Annual Issuance plan None; depends on FX sterilisation needs
Monthly Issuance plan
1st week Monday (less than 1y); Wednesday (2y)
2nd week Monday (less than 1y, 1y)
3rd week Monday (less than 1y); Wednesday (2y)
4th week Monday (less than 1y, 1y)
Last Friday 1y and 2y (open to MSB primary dealers only)
Issuance method
Dutch Auction, all participants receive at the same yield.
Participants place bid yields they want through MSB primary
dealers; banks and securities firms can apply directly to MSB
MSBs Market Summary
BoK may hold irregular issuance (window sales) on Friday depending on market liquidity
Source: Ministry of Strategy and Finance, Barclays Capital
After a five-year hiatus, the MoSF resumed treasury bill
issuance this year to better manage governments cash
position. The schedule is ad hoc, the tenor is short (28d)
and issuance is limited (KRW3-4trn this year).
Monetary Stabilization Bonds (MSBs)
MSBs, which are issued by the BoK, were a major tool of
monetary policy when the volume of government and
public bonds were insufficient for open market operations.
Currently, the ceiling on MSB issuance is set by the BoKs
Monetary Policy Committee every three months (the ceiling
was changed in November 2007 from less than an amount
equal to 50% of total money supply, to an amount
decided every three months by the MPC in consideration of
market liquidity conditions. MSBs are issued in 11 different
maturities ranging from 14d to 2y. About 80% of
outstanding issuance has an initial 2y maturity.
Koreas typically surplus capital position since the 1980s
means there has been considerable MSB issuance in order
to absorb the expansion of money supplied by foreign trade.
Despite having similar fundamental risks, MSBs tend to
have higher yields than KTBs, mainly due to higher supply.
KTBis (inflation-linked bonds)
The first inflation-linked KTB was issued in March 2007
with a 10y tenor and a semiannual real coupon rate set by
the MoSF. Starting in July 2007, monthly issues used an
auction process that set the real coupon rate. The inflation
index used is the non-seasonally adjusted headline Korean
CPI released at the beginning of every month for the prior
month (KOCPI index).
KTBis are quoted using the standard Canadian model with
no floor on the principal value. Settlement is on the first of
any month and uses CPI with a three-month lag as the
reference rate. For example, bonds settled in September
reference Junes CPI. Accrued interest is paid on the
linearly interpolated CPI between the second and third
month prior.
) (
) 1 (
3 2 3

+ =
m m
m
m
CPI CPI x
D
t
CPI Index

Where:
x m
CPI

is the CPI index x months prior to settlement month
m
m
D
is the number of days in month m
t is the day of the month on which settlement takes place
KTBi breakevens vs actual inflation (%)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11
5y inflation average
CPI
BE: Sep-17 nom vs Mar-17 CPI
BE: Jun-20 nom vs Jun-20 CPI

Subsequent coupon payments are made by multiplying
the fixed (real) coupon by the monthly index ratio, and
likewise for final redemption value.
base
t
CPI
CPI
IndexRatio =

Poor liquidity remains the key drawback of the linker
market. Recent issuance consistently has fallen short of
100%. The government is making efforts to improve linker
liquidity, and since September has introduced primary
dealers to make a market in KTBis. However, more
measures are needed to boost liquidity; for example,
instituting regular buybacks of KTBis.
Financial debentures: Bonds issued by financial
institutions; the main issuers are Korea Development Bank
(KDB) and other Korean policy banks.
Corporate bonds: Bonds issued by private nonfinancial
companies. Only companies listed on the Korean Stock
Exchange or registered with the Korean SEC can make
public offerings.
Participants in the KRW government bond market
Koreas bond market has a diversified group of
participants, including banks, insurers, pension funds,
asset management companies and foreign investors.
Banks: Banks hold 23% of outstanding government
bonds, much less than in China and India. As a result,
Korean bonds are less affected by banks lending
behaviour, and therefore, prices tend to be more
stable. Still, the regulatory requirement for banks to
improve liquidity has led to an increase in government
bond holdings (as a percentage of balance sheets) and
offered support for bonds since 2008.
Insurance companies: Korea has the largest insurance
industry in Asia outside of Japan. Life insurers assets
have more than doubled over past 10 years and
reached KRW470trn at H1 11, of which about
KRW90trn is government bonds. The government
introduced risk based capital ratios (RBC) for insurance
companies early this year, which had led to a
significant increase in demand for government bonds
and duration.
Pension funds: Public pension funds, including the
National Pension Service and the Korea Teachers
Pension, play key role in the Korean bond market. For
example, at end-October 2011, the National Pension
Service had KRW202trn of its total assets of KRW336trn
KRW corporate bonds vs. government bonds, yield (%)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10
3y KTB 3y financial debentures
3y corp (AA-) 3Y Corp (BBB-)
Government bond ownership (KRW trn)
0
50
100
150
200
250
300
350
400
450
Rest of world
Individuals
General government (social security funds)
Other financial intemediaries
Private pension and lifer
Depository Corporation including banks
BoK

Commercial banks holdings of government bonds
0
10
20
30
40
50
60
70
KRW trn
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Commerical banks' holdings of gov't bonds (RHS)
% of gov't holding as central bank's balance sheet


invested in bond market directly, with KRW19trn
invested indirectly via external asset managers. Of its
bond holdings, government bonds count for 49%.
Private Korean pension funds have total assets of
KRW50trn but they have a preference for corporate
bonds, beneficiary notes and financial debentures, and
have minimal holdings of government bonds.
Asset management companies: Investment funds in
Korea include investment trusts, mutual funds, and
trust accounts at commercial banks and securities
companies. The industry comprises about 50 asset
management companies authorized by the Financial
Supervisory Commission (FSC) with combined assets
of KRW2.5trn as of October 2011. Bond funds have at
least 60% of their assets in their respective core
securities. Other fund types include spot, futures and
derivatives investment trusts. There are also funds that
specialise in high-yield bonds, many of which have tax-
exempt features to attractive risk-tolerant investors.
Recently, bond funds have shown a steadier trend due
to demand for bonds to meet increased capital
requirements. Stock funds and money market funds
have shown more cyclical volatility.
Withholding tax: The positive outlook for the KRW and
the strong fiscal consolidation process helped to attract
large inflows to the Korean bond market in 2010. To curb
KRW volatility driven by increased foreign inflows, the
MoSF said it will re-impose the withholding tax on interest
income and capital gains earned by offshore investors on
KTBs and MSBs purchased after 13 November 2010.
Other macro-prudential measures have been
implemented to curb KRW volatility arising from foreign
investment flows. These measures include: 1) tighter limits
on the FX forward positions of domestic banks (40% of
total capital) and foreign banks (200%), and stricter
regulation of banks foreign currency liquidity. 2) Since 1
August 2011, the government has imposed a levy of 0.2%
on banks short-term non-deposit liabilities with a maturity
of less than 1y. Borrowings with a maturity of 1-3y face a
0.1% tax, the rate for borrowings of 3-5y is 0.05% and
borrowings of more than 5y face a 0.02% levy. 3) In
addition, banks and other financial firms were banned from
buying kimchi bonds. Also, the government has decided
to impose a tax on kimchi bonds starting next year.
Foreign investors have been extending duration on the
KRW bond curve, encouraged by the economys improving
fiscal and credit fundamentals. Currently, foreign investors
Life insurers assets by type (KRW trn)
0
50
100
150
200
250
300
350
400
450
500
D
e
c
-
0
2
D
e
c
-
0
3
D
e
c
-
0
4
D
e
c
-
0
5
D
e
c
-
0
6
D
e
c
-
0
7
D
e
c
-
0
8
D
e
c
-
0
9
D
e
c
-
1
0
Others
Equities
Loans
Government bonds
Other FI instruments

Mutual funds assets by type (KRW trn)
0
20
40
60
80
100
120
140
160
180
Oct-11 Oct-08 Oct-05 Oct-02
Equity Bond MMF
Source: Korea Investment Trust Companies Association

Foreign ownership of KRW government bonds
0%
5%
10%
15%
20%
25%
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11
KTB foreign ownership
MSB foreign ownership
Source: FSS, Barclays Capital


hold 17% of outstanding government bonds, with an
increasing tenor focus on the 5-10y sector. The increase in
foreign demand has been driven by the efforts of global
central banks to diversify their reserves.
Bond settlement
Foreign investors need to obtain an approval, (ie,
Investment Registration Certificate), from the Financial
Supervisory Service (FSS) to invest in the bond market. To
invest, IRC holders are required to open an exclusive
KRW/foreign currency cash account with their FX bank.
The omnibus accounts of Euroclear and Clearstream are
no longer available effective 1 January 2011; a local
custodian account is required.
Bonds settle at T or T+1 on the exchange, but settlement
negotiable in the over-the-counter market.
Taxation
Foreign investors are subject to three taxes: a 14%
withholding tax on interest income, 20% capital gains tax
and an additional 10% resident tax. The last of these
effectively raises the withholding tax to 15.4% and the
capital gains tax to 22%. These taxes may only apply to
bonds purchased since 13 November 2010. Interest
income earned by nonresidents on KTBs and MSBs settled
on or before 12 November 2010 remain exempt.
Index
KRW bonds are part of the Barclays Capital Global
Aggregate and Global Treasury Indices, with weights of
0.91% and 1.65%, respectively (for details please see
Barclays Capital Live). Globally, about USD1.5trn of funds
are benchmarked to the Aggregate Index. The Korean
government withdrew its plan to join the Citigroup WGBI
and reintroduced the withholding tax on bonds in 2010.
Also, Korean bonds are not part of JP Morgan GBI-EM. As a
result, Korean bonds tend to be off-benchmark
investments for emerging market investors.
Regulators
Main regulators and clearance institutions in Korea include
BoK, MoSF, FSC/FSS, Korea Exchange, KSDA.
Foreign net monthly purchase by tenor (KRW trn)
-6
-4
-2
0
2
4
6
8
10
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
1-2y 3y 5y 10y and longer
Foreign holding of KRW bonds by country (%)
0
5
10
15
20
25
U
S
L
u
x
e
m
b
o
u
r
g
T
h
a
i
l
a
n
d
C
h
i
n
a
M
a
l
a
y
s
i
a
U
K
S
i
n
g
a
p
o
r
e
S
w
i
t
z
e
r
l
a
n
d
H
o
n
g

K
o
n
g
F
r
a
n
c
e
G
e
r
m
a
n
y
K
a
z
a
k
h
s
t
a
n
N
e
t
h
e
r
l
a
n
d
s
C
a
n
a
d
a
O
t
h
e
r
s
Source: FSS, Barclays Capital
Regulatory environment in Korea
President
Prime Minister
Bank of Korea
Ministry of Strategy
and Finance
Financial Services Commission /
Securities & Futures Commission
Korea Exchange
Korea Securities Depository
Korea Securities Finance Corporation
Securities-related organisations
-Korea listed Companies Association
-KOSDAQ listed Companies
Association
Korea Financial
Investment Association
Korea Financial
Investment Companies
(e.g. Securities
Companies)
All financial institutions
(e.g. Foreign exchange banks)
Financial Supervisory Service
President
Prime Minister
Bank of Korea
Ministry of Strategy
and Finance
Financial Services Commission /
Securities & Futures Commission
Korea Exchange
Korea Securities Depository
Korea Securities Finance Corporation
Securities-related organisations
-Korea listed Companies Association
-KOSDAQ listed Companies
Association
Korea Financial
Investment Association
Korea Financial
Investment Companies
(e.g. Securities
Companies)
All financial institutions
(e.g. Foreign exchange banks)
Financial Supervisory Service



Korea central debt issuance and fiscal trend (KRW trn)
0
10
20
30
40
50
60
70
80
90
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
E
2
0
1
2
E
-4.5
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
-
0.5
1.0
Net issuance Amortisation
Fiscal balance (% of GDP)
Source: MoSF, Barclays Capital

Moody's S&P Fitch
A1 (Apr 2010) A (Jul 2005) A+ (Oct 2005)
A2 (Jul 2007) A- (Jul 2002) A (Jun 2002)
A3 (Mar 2002) BBB+ (Nov 2001) BBB+ (Mar 2000)
Baa2 (Dec 1999) BBB (Nov 1999) BBB (Jun 1999)
Baa3 (Feb 1999) BBB- (Jan 1999) BBB- (Jan 1999)
Ba1 (Apr 1998) BB+ (Feb 1998) BB+ (Feb 1998)
B+ (Dec 1997) B- (Dec 1997)
BBB- (Dec 1997) BBB- (Dec 1997)
A- (Nov 1997) A (Nov 1997)
A+ (Oct 1997) A+ (Nov 1997)
AA- (May 1995) AA- (Jun 1996)
A+ (Oct 1988)
Fiscal policy
With one of the lowest debt/GDP ratios (31% for 2011)
among OECD countries, Korea maintains a prudent fiscal
policy. The fiscal stance turned expansionary in 2009, in
response to the global credit crisis. The fiscal deficit,
excluding social security funds, widened to 4.1% of GDP,
which resulted in a significant increase in that years net
KTB issuance. However, fiscal policy has since returned to
a tight stance. The deficit is expected to be less than the
targeted 2% of GDP in 2011, which would translate into
less-than-planned total bond supply of KRW82.4trn. The
government prioritises fiscal discipline and aims to close
the deficit by 2013. It proposed gross issuance of
KRW80.9trn in 2012. This means supply will fall further.
In November, Fitch upgraded the outlook on Koreas
foreign- currency sovereign rating, citing the nations
strong external liquidity, improved fiscal health and fast
economy recovery.
However, the current government debt/GDP ratio may
understate the total public sector liability, given the
existence of large contingent liabilities, including National
Housing Bonds, foreign exchange stabilisation bonds and
public funds that were raised during 1997-98 Asian
financial crisis.
Credit ratings
Koreas long-term foreign currency sovereign debt rating
is A (Stable) at S&P, A+ (Pos) at Fitch and A1 (Stable) at
Moodys.
Koreas long-term local currency sovereign debt rating is
A+ at S&P, AA at Fitch and A1 at Moodys.

BONDS
Tenor /
maturity Coupon
Day
count
Issuance
calendar
Auction
Avg. trade
size
Bid-offer
Government
bonds (KTBs)
Ministry of
Finance
Finance
fiscal deficit
3y, 5y,
10y, 20y
Semi-annual,
quarterly
Act/act Monday Dutch T+1 KRW10trn
per day
KRW10bn-
100bn
1-5bp T+1 KRW340trn NDFB Govt
MSBs Bank of
Korea
Sterilise FX
intervention
28d, 91d,
182d, 1y
and 2y
Quarterly Act/act Monday
and
Wednesday
Dutch T+1 KRW5trn
per day
KRW10bn-
100bn
1-2bp T+1 KRW170trn KORMSB
Govt
KTBi Ministry of
Finance
Finance
fiscal deficit
10y Semi-annual Act/act Monthly, Non
competitive
for PDs
T+1 KRW20bn
per day
KRW10bn 5-10bp T+1 KRW3.9trn KTBI Govt
Financial
debentures
Financial
institutions
Bank
financing
1-7y Quarterly Act/act Ad hoc - T+1 KRW0.5trn
per day
KRW5-10bn 5-10bp T+0 KRW30trn -
Corporate
bonds
Corporates financing 1-5y Quarterly Act/act Ad hoc - T+1 KRW0.5trn
per day
KRW10bn 5-10bp T+0 KRW210trn -
Instrument
Floating
leg
Bloomberg
ticker
Day
count
Reset
frequency
Day
count
Pay
frequency
Liquid
tenors Effective
Daily trading
volume
Bid/offer
spread
Bloomberg
ticker (5y)
Onshore IRS 91d CD KWCDC Act/365 Quarterly Act/365 Quarterly 1-10y T+1 KRW5trn 1-2bp KWSWO5
Offshore IRS 91d CD KWCDC Act/365 Quarterly Act/365 Quarterly 1-10y T+1 KRW5trn 1- 2bp KWSWNI5
Onshore CCS 6m USD Libor US0006M Act/360 Semi-annual Act/365 Semi-annual 1-5y T+1 USD200-500mn 5bp KWUSWO5
Offshore CCS 6m USD Libor US0006M Act/360 Semi-annual Act/365 Semi-annual 1-5y T+1 USD200-500mn 5bp KWSWN5
Swaptions IRS KRW200bn GFIKRWP GIRP Option on ND IRS available
Caps/floors 91d CD KRW50bn GFIKRWP GIRP ND caps, floors available


KRW nominal and real effective exchange rates
60
70
80
90
100
2008 2009 2010 2011
KRW NEER
KRW REER


USD/KRW spot and NDFs
800
1000
1200
1400
1600
2008 2009 2010 2011 2012
USD/KRW USD/KRW NDFs


Bank of Korea FX reserves (USD bn)
150
200
250
300
350
2008 2009 2010 2011


Koreas exchange rate system has been classified by the
IMF as floating since 2009. As an economy open to
foreign trade and investment, exchange rate changes can
greatly affect inflation and GDP growth. Ministry of
Strategy & Finance (MoSF) Minister Bahk recently said the
wons decline will add to the pressures on import prices.
We believe spot exchange rates are carefully referenced to
the KRW NEER.
The Bank of Korea (BoK) tries to stabilise the FX market in
consultation with the government. Under the Foreign
Exchange Transactions Act (FETA), the MoSF is
responsible for establishing overall foreign exchange
policy. The BoK acts as an agent for the MoSF in
managing the Foreign Exchange Stabilization Fund.
While the BoK allows economic fundamentals and
supply/demand of foreign exchange to freely determine
the exchange rate, it may step in to maintain an orderly
market if it is disrupted by seasonal or irregular factors
(eg, large flows of short-term capital) which cause the
KRW to become excessively volatile.
The MoSF reports excessive volatility in the KRW to
parliament. If necessary, the MoSF engages in verbal
intervention by pledging to take steps to stabilise the foreign
exchange market if it spots herd behaviour in the KRW. One
such warning was made in mid-September 2011, when the
KRW weakened to a 12-month low versus the USD.
BoK intervention, acting at the behest of the MoSF, is not
announced publicly, but is believed to take the form of
closing rate management, ie, occurring at the end of the
day/month/year. BoK intervention tries to manage both
excessive strength and weakness in USD/KRW. The BoK
also intervenes using its forward book.
The BoK holds and manages Korea's official foreign
exchange reserves. Its principal objectives in reserve
management are to safeguard the value of the reserves
and to meet the nation's demand for foreign exchange. At
end-November 2011, foreign exchange reserves stood at
USD300.8bn, up USD13.8bn YTD. This is roughly equal to
twice short-term external debt and is above the pre-
Lehman level of around 1.2 times.
The composition of assets at end-2010 shows that the
share of the investment tranche stood at 82.5%, the share

of assets entrusted to external asset managers at 14.3%
and that of the liquidity tranche at 3.2%. The share of
USD-denominated assets stood at 63.7%, slightly higher
than the share of USD assets in the worlds total foreign
exchange reserves. By asset class, 35.8% of reserves were
government bonds, 21.8% bonds issued by government
agencies and 16.1% asset-backed securities. The balance
was corporate bonds and equities, with shares of 16.5%
and 3.8%, respectively.
All banks licensed by the MoSF to conduct foreign
exchange business (FX bank) can participate in FX
markets unless otherwise legally specified. Certain
safeguards remain, including restrictions on the obligatory
repatriation of overseas claims, external borrowings by
financially unsound corporations and nonresidents short-
term KRW borrowings.
Foreign investors enjoy the same rights as local residents.
They are required to register with the Financial
Supervisory Service (FSS) and appoint a standing proxy, a
custodian bank and an FX bank onshore. Each FX bank
engaged in offshore financial transactions must establish
a set of offshore financial accounts clearly separate from
its domestic accounts. If the transfer of funds between
offshore accounts and domestic accounts exceeds 10% of
the offshore assets average balances, the MoSF has to
grant permission. Supporting documentation (approval of
proper regulatory authority) for the underlying transaction
is to be given to the foreign exchange bank when a
physical delivery is required. The Foreign Exchange
Transactions Act (FETA) and the Foreign Exchange
Transactions Regulations (FETR) apply to FX investors.
The responsibility for administering the Act is shared by
the MoSF, the BoK and the Financial Services Commission.
Nonresidents who intend to sell more than USD20,000 of
foreign exchange should file documentation related to
means of foreign exchange acquisition with a designated
FX bank. In principle, FX banks must report any purchase
of foreign exchange over USD20,000 per case to the
National Tax Administration.
There is no limit on the amount of foreign exchange an FX
bank may sell to a resident.
Since the global financial crisis in 2008, the MoSF and the
BoK have implemented a series of measures to reduce
volatility in capital flows and the exchange rate. These
include capping forward foreign exchange positions of
banks operating onshore to limit speculation in the KRW.
Domestic banks and other financial institutions currency
forwards, cross-currency swaps and NDFs are limited to
40% of their equity capital, and for foreign banks Korean
branches, the limit was set at 200% of equity capital. Local
corporates cannot trade NDF options.
Corporates
Foreign direct investment: The source of funds and the
nature of the transaction should be disclosed. Transactions
may require reporting to the BoK or FSS, which should take
place via a designated main FX bank. Transactions can be
hedged onshore at HQ or by a Korean subsidiary, which
should be guided by the Capital Market Act. If HQ, it
should go through the local Know Your Client, and a
nonresident free KRW account should be opened. If the
investment falls under the Foreign Investment Facilitation
Act, there is no need to open up a nonresident free KRW
account for spot transactions.
External commercial borrowing: See rules governing
Foreign Direct Investment above.
Trade receivables and payables: See rules governing
Foreign Direct Investment above.
Dividends: Remittance of dividends overseas to foreign
investors/nonresident shareholders is permitted. BoK/FSS
reporting required.
Interest: Remittance of interest on foreign company loans
/bonds is permitted. BoK/FSS reporting required.
original loan agreement. BoK/FSS reporting required.
Recent change in regulations
The Financial Investment Services and Capital Markets Act
(FSCMA) was passed in August 2007 and took effect on 4
February 2009. It provides stronger investor protection and
gives Professional Investor status for derivatives trading.
Financial institutions are responsible for educating clients,
who are subject to a suitability check. Clients are labelled
Professional or General investors, with the aim of
reducing legal conflicts and other social costs that may
arise between financial investment providers and investors
in case of incomplete derivatives documentation,
application of Chinese Walls or restrictions on short selling.
Regulation on Risk Management in Foreign Currency
Derivatives Transactions was introduced on 6 January 2010
by the FSS in association with the Korea Federation of

Banks. It aims to enforce counterparty risk management by
FX Banks via hedge ratio limits. For corporates, an FX bank
has to limit that ratio to 100% in executing foreign currency
derivatives transactions. There are also restrictions on FX
hedging by exporters. In addition, when executing a foreign
currency derivatives transaction with a corporate investor,
an FX bank needs to review the corporate investors
outstanding amount of Hedged Assets, as well as the
amount of executed foreign currency derivatives
transactions to ensure that the hedge ratio limit applicable
to that corporate investor is not exceeded.
Taxation
No specific taxes are imposed on FX transactions.
FX reference guide
Overview
One of the largest and most actively traded FX markets in Asia excluding Japan.
Security
Liquidity
(daily volume)
Bid/Offer
spread
Tenor/
Maturity
Local open/
Reuters /
Bloomberg
pages Additional information
FX spot Liquid; USD10-
15bn
0.1-0.5 won Spot 0900 1500 T+2 KRW=,
KFTC01

USD2-5bn
0.2-1.2 won <1y 0900 1500 T+2
KRWF=
PYOK,
KMB18
Similar spread in onshore/offshore.
FX options Thin liquidity N/A N/A 24 hours a day T+2 For onshore corporates to trade with
Korean bank or branch. No secondary
market for onshore of any significance;
therefore, back-to-back risk versus
offshore options (NDFs).
NDF market USD2-3bn 0.3-1.0 won Up to 10y T+2 PNDF,
KFTC01
Onshore/offshore spreads similar.
NDF
options
Highly liquid up to
2y; thin liquidity in
2y to 5y
0.4 vol Up to 5y 24 hours a day T+2 KRWVOL=
Description
Foreign investment funds and hedge funds Major players in the NDF and NDF options market
Corporates FX hedging
BoK/Ministry of Finance FX intervention to smooth volatility
Foreign Direct Investors FX hedging
Multi-nationals FX hedging


Taiwan


Objective
Financial stability; sound banking operations; maintain
a stable currency
Policy rate CBC discount rate
Money target M2; 2.5%-6.5% for 2011, same as 2010
MPC
CBC is an independent entity under the Executive Yuan
(the cabinet)
MPC frequency Quarterly
Other tools
OMOs; reserve requirement; discount lending; re-
deposits and credit controls
Central Bank of Republic of China (Taiwan) (CBC)

Source: CBC

Discount rate, short-term accommodation rates, CPI

-3
-2
-1
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2010 2011
Discount rate
Accommodation with collateral
Accommodation without collateral
CPI y/y

Note: Accommodation refers to the CBCs term for emergency funding
available via the discount window for up to 10 days.
Source: CBC, Barclays Capital

Discount rate, NCD rate, M2 y/y growth (%)

0
1
2
3
4
5
6
7
8
9
2005 2006 2007 2008 2010 2011
Discount rate 91d NCD rate M2 y/y
Policy objectives
Promoting financial stability; ensuring sound banking
operations; maintaining a stable internal and external
value of the currency; fostering economic development
within the scope of the above objectives
MPC meeting frequency and members
The MPC board meets four times a year to decide on
policy rates. It also holds emergency meetings, if
necessary. The CBC generally changes its policy rate in
steps of 12.5bp and passes a part of that into NCD rates.
The governor is the chairman of the board of directors.
The governor is entitled to the position independent of any
changes in presidency or cabinet reshuffles. Currently the
board comprises 15 directors nominated by the cabinet
and appointed by the president. Directors are appointed
for 5-year terms and can be reappointed upon the
expiration of their terms. Two of the directors also serve as
deputy governors. (For more details, see Asia-Pacific
Central Banks: 2012 Guide, 4 November 2011).
To achieve its policy objectives, the CBC uses the broad
monetary aggregate M2 as the intermediate target for
monetary policy. Annual targets for M2 are set in the
December MPC meeting. The CBC primarily uses open
market operations (OMOs) to bring M2 growth into line
with its target range.
Discount window
The discount window program offers last resort liquidity
to banks. In the past few years, banks have seldom
accessed discount lending from the CBC as the banking
system has been flush with liquidity. However, changes in
the discount rate signal the CBCs policy stance, even
though its effect on market interest rates may not be
significant if it is not accompanied by other monetary
policy tools. All banks that hold reserve accounts with the
central bank can access the discount window in the
following ways:
Discounting: A bank may apply for funds via the
discount window by sending eligible bills to the CBC.
Eligible bills include bankers acceptances, trade
acceptances, and promissory notes collateralised against



Treasury bills or government bonds. The rate applied to
these loans is the discount rate (TAREDSC Index).
Short-term accommodations: To make up a reserve
deficiency, a bank may apply for short-term funding
(termed accommodation) by issuing promissory
notes payable to the CBC. The promissory note has to
be secured by adequate collateral, either bills eligible
for discount window funding, or securities as agreed
by the CBC. Banks may also borrow without collateral,
but this will be at a higher interest rate. Such funding is
available for a maximum of 10 days and should not
exceed 10% of the borrowing banks required reserves.
If the amount requested exceeds this percentage, the
interest rate will be 1.2 times the short-term
accommodation rates as posted by the CBC. In
addition, if the bank borrows funds for three 10-day
periods in a row, then the interest rate will be 1.2 times
the posted rate.
Open market operations are the CBCs most important
monetary policy tool. Through such operations, it can
directly influence the amount of reserves and level of
interbank call-loan market interest rates.
Open market operation instruments include government
securities and negotiable certificates of deposit (NCDs)
issued by the CBC. These can be issued or sold either on
an outright basis or under repurchase agreements to mop
up excess liquidity. Conversely, these securities can be
purchased to release funds into the market. (For more
details of NCDs, see the Money market section).
The CBC introduced a designated counterparty system to
strengthen the efficiency of its open market operations.
There are 21 commercial banks and bill finance companies
designated as counterparties for its OMOs.
The CBC can change required reserve ratios and thereby
adjust the ability of the banking system to extend credit or
loans. This policy measure, however, has seldom been used
as a small change in required reserve ratios can have a large
impact on monetary aggregates and market interest rates.
On occasions when required reserve ratios were adjusted,
the CBC also conducted OMOs to lessen the impact.
In addition to adjusting required reserve ratios as one of its
monetary policy measures, the CBC also continuously
reviews the reserve requirement system to ensure it is in
line with the evolving financial environment, regulatory
needs and international practice. Major improvements to
CBC foreign assets, reserve requirements, outstanding NCD
(TWD trn)
-10
-5
0
5
10
15
2011 2009 2007 2005 2003 2001
CBC foreign assets Reserve requirements
NCD issued by CBC

Excess liquidity & outstanding NCDs issued by CBC (TWD bn)
-
20
40
60
80
100
120
140
160
180
2005 2006 2007 2008 2009 2010 2011
-
1000
2000
3000
4000
5000
6000
7000
8000
Excess reserves within financial institutions
CBC issued NCDs (RHS)

Average reserve requirement ratio, required reserves and
excess reserves
-
200
400
600
800
1000
1200
1400
1600
1800
1995 1998 2001 2004 2007 2010
TWD bn
0%
2%
4%
6%
8%
10%
12%
14%
Excess reserves
Required reserves
Average required reserves ratio (RHS)

the system that have either been completed or are
underway include: 1) lower required reserve ratios; 2) the
gap between the required reserve ratios for demand
deposits and time deposits has been narrowed to remove
distortions; and 3) reserve liabilities have been broadened
from deposits to all kinds of bank liabilities.
In December 2010, in an effort to discourage speculative
flows betting on TWD appreciation, the CBC increased the
reserve requirement on passbook deposits held by
foreigners. A ratio of 25% was applied to existing deposits
while a 90% ratio was applicable on any net increase in
such deposits after 30 December 2010, effective from 1
January 2011.
Re-deposits
The CBC can accept or release deposits from banks or the
postal savings system. A large portion of deposits held by
the CBC are from the postal savings system. The postal
savings system, which accepts deposits from the general
public, is prohibited from making loans to individuals and
enterprises. As a result, most of its deposits are placed
with the CBC.
Selective credit management
The CBC has two types of credit management tools:
selective preferential loans and selective credit controls.
Selective preferential loans refer to the provision of credit
to financial institutions directed by the CBC for the
purpose of financing select categories of policy-related
loans. Selective credit controls refer to measures that
restrict or intervene in financial institutions extension of
certain types of credit.

Reserve requirement ratio (%)
Checking accounts 10.75
9.775
25.0 ( 90.0)*
5.5
4
5
0.125
TWD 5
F.C. 0.125
0
15.125
Structured products
F.C. deposits
Other liabilities
General
Trust funds
Passbook
Time
Non-resident investors
Passbook
deposits
Savings
deposits
Other bank
liabilities
Time deposits
Note: Since 1 January 2011, funds in TWD passbook deposit accounts with
custodian banks held by overseas Chinese and foreign nationals outside Taiwan,
foreign institutional investors outside Taiwan, and Mainland Area investors for
securities investment in Taiwan, are subject to a 25% reserve requirement ratio
on amounts below the outstanding balance recorded on 30 December 2010,
and a 90% marginal reserve ratio on the increment exceeding the 30 December
2010 level. Source: CBC

Deposits with all banks by type (September 2011)
Passbook
saving
deposits,
27%
F.C.
demand
deposits,
6%
F.C. time
deposits,
5%
Time saving
deposits,
27%
Government
deposits,
3%
Passbook
deposits,
11%
Checking
accounts,
2%
Time
deposits,
19%
Source: CBC


Discount rate (policy rate), CBC NCD rate, money market
instrument yields (%)

0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11
Discount rate
1-30d CBC NCD
90d Tbill
Secondary market 1-30d bank acceptance
Secondary market 1-30d CP


Taiwan bills market (TWD trn)

Issues YE bal Issues YE bal Issues YE bal Issues YE bal Issues YE bal
2001 9.90 1.49 0.09 0.05 8.93 1.10 0.04 0.01 0.85 0.33
2002 8.38 1.31 0.18 0.18 7.53 0.87 0.04 0.01 0.63 0.25
2003 7.55 1.19 0.06 0.06 6.82 0.81 0.03 0.01 0.64 0.32
2004 6.89 1.32 0.13 0.13 5.64 0.78 0.04 0.01 1.08 0.40
2005 7.12 1.17 0.12 0.05 5.69 0.75 0.03 0.01 1.28 0.37
2006 7.00 1.09 0.05 0.03 5.88 0.72 0.04 0.01 1.04 0.34
2007 6.50 0.93 0.09 0.03 5.58 0.66 0.04 0.01 0.79 0.22
2008 6.95 0.97 0.24 0.11 6.07 0.69 0.03 0.00 0.60 0.17
2009 6.29 1.04 0.44 0.22 5.40 0.65 0.02 0.00 0.44 0.17
2010 7.14 1.17 0.37 0.24 5.90 0.69 0.03 0.01 0.84 0.24
NCDs Total Treasury bills
Commercial
paper
Bankers'
acceptances


Open market operations: NCDs and repos (TWD trn)
Overview
The Taiwan money market consists of the short-term bills
and interbank call-loan markets. The bills market is
dominated by commercial paper and NCDs. The interbank
term lending market is less developed, with most liquidity
concentrated in the overnight and less-than-two-weeks
terms. The FX swap market is an important funding
source, particularly for foreign banks. The CBC passes the
policy rate into the money market rate by adjusting NCD
rates. Treasury bills and bank acceptances are also
components of the money market but with much smaller
market shares.
Bills market
Negotiable certificates of deposit (CDs and NCDs)
CDs (certificates of deposit) and NCDs (negotiable
certificates of deposit) are primarily issued by the CBC as a
monetary policy tool to sterilise currency intervention. In
principle, both CDs and NCDs are allowed, but in practice,
only NCDs are issued. The difference between the two is
that CDs are not allowed to be traded after initial issuance.
The CBC first issued CDs/NCDs in the 1980s. Financial
institutions purchase these securities through auctions.
NCD auctions are held daily for 1m, 3m and 6m tenors and
once a month for 1y tenors. The size of the 1m, 3m and
6m NCD auctions is decided by the CBC on a daily basis,
taking into consideration upcoming maturities, liquidity
conditions and market demand. As demand tends to be
strong in most cases due to structurally flush system
liquidity, allocations are at the CBCs discretion and are
usually tied to the amount of deposits of a bank. The
clearing rates for 1m, 3m and 6m are the NCD rates set by
CBC for the quarter the day after the quarterly policy rate
decision. These rates are key to watch as they usually pass
through quickly into short-end money market rates.
Compared with 1m, 3m, and 6m NCDs, 1y NCDs lock in
liquidity on longer-term basis and are viewed as a strong
policy tool and only used when the CBC decides to sterilise
liquidity aggressively. The CBC announces 1y NCD
issuance size on a monthly basis and lets the market
decide the cut-off yield for the auction. The CBC resumed
1y NCD issuance in April 2010 and has issued TWD100bn
every month since then, draining about TWD2trn from the
system. According to CBC, this is equivalent to hiking the
reserve requirement by 4.5ppts.

-6
-4
-2
-
2
4
6
-0.8
-0.6
-0.4
-0.2
-
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Issued CBC NCDs Repo drain
Maturing CBC NCDs Repo injection
Net OMO drain
-6
-4
-2
-
2
4
6
-0.8
-0.6
-0.4
-0.2
-
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Issued CBC NCDs Repo drain
Maturing CBC NCDs Repo injection
Net OMO drain


Banks, investment trusts, bill finance companies, the
Taiwan post, and other approved financials can participate
in the NCD bidding process by submitting desired sizes
and interest rates. Domestic banks also issue CDs as a
money market instrument to manage their balance sheet
needs. These transactions are typically one-off negotiated
deals. The majority of outstanding NCDs are issued by the
CBC for monetary sterilisation purposes.
Commercial paper (CP)
Commercial paper refers to an unsecured, debt instrument
issued for short term financing needs. Its tenor is less than
one year. In Taiwan, there are two types of CP: CP I
(transactional CP) and CP II (financial purpose CP). CP I
refers to commercial paper based on actual transactions,
while CP II are issued for purely financing needs.
The secondary CP fixing rate is set daily for 10d, 20d, 30d,
60d, 90d, 120d, 150d, 180d, and 360d tenors by most
local banks and bill houses. The fixing is calculated at
11:00am Taipei time, except on local holidays. The mid-
rate is calculated for each contributor. Only prices that
have been updated on the day are included. One-way
quotations are excluded. The top 25% and the bottom
25% are eliminated and the remaining mid-rates are
averaged. Day count convention is Actual/365. The 3m
fixing rate is used as the floating rate index for derivative
instruments such as swaps and swaptions.
Trading of CP is limited to local banks and bill houses.
Foreign banks can participate on being granted a licence,
but they are not generally active as CP is largely related to
credit-limit issues. CP makes up 10% of the fixed income
market in Taiwan.
Treasury bills
There are two types of Treasury bills: TB1 and TB2. TB1 is
issued at par, while TB2 is issued at a discount. Maturities
range from three months to one year.
Treasury bill issuance can be sporadic, ranging from once
or twice a year to every month, depending on the
governments financing needs. Issuance in 2011 was
monthly and despite substantial sizes of TWD20-35bn, but
secondary trading of bills was sluggish due to investor
demand dynamics. As the bills are a money market
instrument, typical domestic investors will buy and hold
them to maturity. The extremely low yields highlight the
level of excess money in the money markets.

Primary and secondary CP yields
0.00
0.50
1.00
1.50
2.00
2.50
3.00
2002 2003 2004 2005 2006 2007 2008 2009 2010
CP 30d (2nd) CP 90d (2nd)
CP 180d (2nd) CP 30d (Primary)
CP 90d (Primary) CP 180d (Primary)

Treasury bill issuance, redemption and outstanding (TWD bn)
-50
-30
-10
10
30
50
70
90
110
2011 2009 2006 2004 2001
%
0
50000
100000
150000
200000
250000
300000
T-bill redemption
T-bill issuance
T-bill outstanding (RHS)

Interbank call loan market transactions by tenor
Rest
0%
Overnight
66%
1 week
32%
2 weeks
2%


Interbank call market volume and balance, monthly (TWD bn)
-
50
100
150
200
250
300
350
400
450
500
2011 2009 2006 2004 2001 1999 1996
0
500
1000
1500
2000
2500
3000
3500
4000
Loan balance
Loan transaction (RHS)
Interbank bank market (Taibor)
The Taiwan Interbank Offered Rate, or Taibor, is the
average interest rate at which uncollateralised term
deposits are offered among financial member institutions
of the Taipei Interbank Money Center. The methodology
for arriving at Taibor fixing is: 1) quoted rates for the day
are gathered at 11:00am Taipei time; 2) rates are arranged
in ascending order; 3) rates in the top and bottom
quartiles are eliminated; 4) rates in the remaining middle
two quartiles are averaged to arrive at Taibor fixing; 5)
Taibor fixing is published at 11:30am Taipei time each
business day.
Terms include overnight, 1w, 2w, 1m, 2m, 3m, 6m, 9m
and 1y. Domestic banks, foreign banks, investment and
trust companies, bill finance companies, the Chunghwa
Post Co, and credit cooperative associations are all active
in the market. The banks, Chunghwa Post, and bill
financing companies the main participants. Local banks
play a dominant role as both borrowers and lenders.
FX call loan and swap market
As part of its management of Taiwans foreign exchange
reserves, the CBC allocated a portion for use as seed
capital to set up the Taipei Foreign Currency Call Loan
Market in August 1989. Through this market, local banks
can borrow foreign currency funds at lower cost than they
would pay in the international money market, and can
lend their excess foreign currency funds for higher returns
than they could obtain from overseas deposits.
In recent years, local life insurance companies have begun
to increase the proportion of foreign currency assets in
their portfolios. As a result, local banks frequently demand
more foreign currency funds to meet the hedging needs of
life insurance companies. The CBC began to swap foreign
currency funds with banks when it experienced temporary
shortages of foreign currency funds.
In 2010, the CBC provided USD20bn, EUR1bn and JPY80bn
in funding for the FX call loan market. It also continued to
carry out FX swap transactions with banks and extended
foreign currency call loans to banks to facilitate corporate
financing. The volume of foreign exchange call loan
transactions totalled USD1,669bn in 2010, while FX/TWD
swap transactions amounted to USD946.9bn.
A significant amount of excess liquidity is parked in the
FX swaps market, which keeps FX swap implied TWD
yields negative.


Taipei foreign currency call loan market volume and interest
rate
0
500
1000
1500
2000
2500
2006 2007 2008 2009 2010 2011E
TWD bn
0
2
4
6
8
10
12
%
Total volume
USD/TWD overnight rate, highest (RHS)
USD/TWD overnight rate, lowest (RHS)

CBC policy target and policy tool summary
Policy implementation Policy formulation
Operating
instruments
Reserve
requirements
Discount window
lending
Open Market
Operations
Redeposits of
financial
institutions
Selective credit
controls &
accommodations
Moral suasion
Operating
target
Reserve money
Intermediate
targets
M2
M2 + bond funds
Final
goals
Price stability
Financial
soundness
Economic
growth
Policy implementation Policy formulation
Operating
instruments
Reserve
requirements
Discount window
lending
Open Market
Operations
Redeposits of
financial
institutions
Selective credit
controls &
accommodations
Moral suasion
Operating
target
Reserve money
Intermediate
targets
M2
M2 + bond funds
Final
goals
Price stability
Financial
soundness
Economic
growth
Source: CBC

To achieve the goals set by the Central Bank of China Act,
the CBC monitors and formulates monetary policy. The
primary target for the CBC is M2 and it uses reserve money
as its operating target to achieve desired levels of M2.
Instruments used by the CBC to achieve operating targets
include open market operations (OMOs), reserve
requirements, discount lending, re-deposits of financial
institutions and credit controls.
Among these options, primary market NCD issuance as
part of OMOs is the main tool the CBC employs to drain
liquidity generated by a large current account surplus and
capital market inflows. The CBC controls short-term
money market rates by setting a pass-through to 30d, 91d
and 182d NCD fixing rates the day after every MPC
meeting. In 2011, the pass-through for first three meetings
has been +7bp, +8bp and +0bp in response to +12.5bp,
+12.5bp and +0bp changes, respectively, in the policy rate.
The CBC then issues 30d, 91d and 182d NCDs at same
rate on a daily basis until the policy rate is changed again.
Given the high substitution between other money market
instruments and NCDs, NCD rates are passed through
quickly into other money market instruments.
Specifically, local banks that have the most access to NCD
auctions and the commercial paper (CP) market tend to
change the CP fixing by the same amount immediately
after the CBC changes the NCD fixing rate following the
MPC meeting. Given CP fixing is the benchmark floating
leg for interest rate derivatives, the policy rate gets passed
through almost identically to the swap market. The CP and
NCD rate spreads have been maintained at about -10bp
since mid-2009. The negative spread reflects surplus
liquidity conditions in the system.
Despite aggressive CBC sterilisation, system liquidity
remains structurally flush due to the strong current
account surplus, high savings ratio and relatively low
leverage in the banking system. These liquidity
conditions are reflected in the negative TWD implied
yields in the call loan/swap market, as well as relatively
low bill and bond yields.
Factors that affect CBC reserve money (TWD bn)
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
2000
2500
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Foreign assets Claims on financial inst.
Government deposits Redeposits by financial inst.
TB, CDs and SBs issued by CBC Other items

Policy rate (discount rate), NCD rate and pass-through
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11
%
-100
-80
-60
-40
-20
0
20 bp
NCD rate pass through (RHS)
90d NCD
Discount rate

NCD rate, 90d CP fixing, and the spread
0.0
0.2
0.4
0.6
0.8
1.0
Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
-20
-10
0
10
20
30
40
50
60
70
80
90d CP fixing - NCD (bp, RHS)
90d CP fixing
90d NCD



IRS
Bloomberg Ticker: NTSWNI1 (offshore) and NTSWO1
(onshore). The floating rate in Taiwan is the 3m secondary
market CP rate (Bloomberg Ticker: CPTW90DY Index;
Reuters Ticker: TW90DCPE=). Cash flows are exchanged
on a quarterly basis with interest paid on an actual/365
basis. Swap terms are available in 1y, 2y, 3y, 4y, 5y, 7y, and
10y standard terms. In practice, decent liquidity is only
available out to five years.
The swaps market in Taiwan mostly involves prop desks
and hedge funds making use of the inherent leverage in
derivative contracts. The structural need for swaps in
Taiwan can be found primarily in bank hedging activity
and, to a lesser degree, in options hedging, corporate
issuances and insurance company hedging. As bank
holdings of treasury bonds are largely placed in hold-to-
maturity portfolios, pay-fixed activity can be seen as a
means to protect margins and hedge against rises in
interest rates. The use of interest rate swaps by
corporations to swap out issuance occurs as well but is
limited given the size of corporate issuances in Taiwan. For
insurance companies, the lack of liquidity in longer tenors
relative to their size and needs makes using swaps less
than ideal.
Bond-IRS swap spread
The bond-IRS spread is very directional in Taiwan, with
bonds tending to outperform IRS in hiking cycles, and vice
versa. This is particularly true since 2009, as flush liquidity
has led to extraordinarily low volatility in the bond market,
which leaves the IRS-bonds spread largely at the mercy of
the swap leg.
Cross-currency swap and basis swap

T
h
e
T
h
e
h
e
e

cross-currency swap (CCS, onshore) or the
nondeliverable swap (NDS, offshore) are the fixed (TWD)
versus floating (USD) interest rate swaps, with the floating
leg being 6m USD Libor. The difference between
deliverable and nondeliverable forms lies in whether
physical currency is exchanged at the beginning and end
of the swap term. The CCS curve extends from 1 to 10
years with liquidity concentrated in 1-5 years. Ticker:
NTSWN1 (offshore) and NTUSWO1 (onshore).
Comparable with the onshore deliverable ones, the
offshore ND CCS is less liquid in Taiwan.
Foreigners are not allowed to access onshore CCS; hence,
the difference between onshore and offshore is significant.

Onshore and offshore IRS rate and spread
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2006 2007 2008 2009 2010 2011
%
-10
-5
0
5
10
15
20
Offshore - onshore spread (bp, RHS)
5y onshore
5y onshore IRS

BondIRS swap spread
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2006 2007 2008 2009 2010 2011
%
-20
0
20
40
60
80
100
120
Onshore 5y IRS - 5y government bond (bp, RHS)
5y government bond
5y onshore IRS

CCS and basis swap
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
2006 2007 2008 2009 2010 2011
%
-500
-400
-300
-200
-100
0
100
200
300
Offshore -onshore spread (bp, RHS)
Onshore CCS 1y
Offshore NDCCS 1y


The spread is largely driven by FX appreciation
expectations, which tend to be priced more into the
offshore NDS contract.
Options
Taiwan rates vol market has the lowest realised and
implied vol among Asia market.
The main market participants are banks, securities firms,
insurance companies, retail and hedge funds. Insurance
companies and retail investors are the main suppliers in
the vol market, while banks, securities firms and hedge
funds are the main buyers.
Flush liquidity conditions have led to low realised and
implied volatility in the Taiwan interest rates market. The
structured product market has been shrinking since 2008,
which, coupled with low volatility, has resulted in shrinking
market volumes.

Swaption norm vol (bp)
0
10
20
30
40
50
60
70
80
90
Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11
1y1y 5y5y

Outstanding notional value of interest rate options (TWD trn)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2002 2004 2006 2008 2010
Bought options Sold options


Bond markets

Overview
The Taiwan bond market experienced a rapid growth
phase in the early 2000s, but growth slowed after 2005 as
the market entered its mature phase. Government bonds
account for 67% of total outstanding bonds with
corporate bonds and financial debentures the rest. Life
insurance companies, postal savings banks and domestic
banks are dominant players in the market. The
government tightened foreign access to the market in
2010 as part of its efforts to reduce hot money inflows.
Most foreign interest in Taiwanese bonds is concentrated
in the short end, mostly for potential FX gains given the
relatively low yields.
Bond categories
Government securities
Government bonds in Taiwan mainly comprise treasury
bonds (TGB), which make up more than 90% of
outstanding government debt. Bills with maturities of less
than one year currently make up 6% of government debt.
Small municipal and federal project loans have also been
issued on occasion.
Government bonds are typically issued with 5y, 10y, and
20y maturities. 2y and 30y tenors have been issued in the
past but are a small part of overall issuance. At the end of
each year, the minister of finance will announce a bond
auction schedule for the following year specifying the
month and issues to be auctioned. Details are released on
a quarterly basis with auctions typically held once a month
for new or re-opened issues. Issue sizes average TWD30-
50bn with gross annual issuance of about TWD600bn and
net issuance approximately TWD300bn.
Treasury bonds are reasonably liquid as the government
issues regularly and make up over 60% of the bond
market. Liquidity of certain issues or tenors can be limited
due to the holding profile of domestic investors. Three
types of domestic institution hold about 85% of all
outstanding government securities: life insurance
companies, postal savings banks and banks. The insurance
companies and postal banks tend to prefer 20y and 10y
bonds for their hold-to-maturity portfolios. This can limit
liquidity in these areas of the market and lead to short
squeezes and high repo rates. Liquidity is best in 5y.
Government securities are issued through approved
registered financial entities such as banks, bill finance
companies, securities firms, the Chunghwa Post and

Outstanding TWD bills and bonds (TWD trn)
0
1
2
3
4
5
6
7
8
9
1999 2001 2003 2005 2007 2009 2011
T-bills CP
Bankers' Acceptances NCDs
Central government bond Local government bond
Corporate bond Financial debenture
Source: CBC

Trading volume of bonds by category (TWD bn)
Year Total
Outright
transac-
tions
Repo &
r-repo
Govt.
bonds
Corp.
bonds
Bank
deben-
ture
Bene-
ficiary
certs
Foreign
& int's
bonds
2003 203,624 126,571 77,053 200,620 2,163 125 2 713
2004 206,132 123,446 82,687 202,015 2,981 457 42 636
2005 319,737 222,175 97,562 314,099 3,824 1,413 80 320
2006 275,833 169,992 105,841 273,496 1,576 519 134 108
2007 194,005 93,788 100,218 192,242 1,345 171 162 86
2008 135,510 59,749 75,761 133,754 1,385 205 82 83
2009 97,547 39,405 58,143 95,993 1,341 152 0 60
2010 106,318 42,652 63,666 95,211 9,561 1,362 123 60
2011.1 8,842 2,736 6,107 7,577 1,119 127 11 9
2011.2 6,476 2,042 4,434 5,615 770 79 7 5
2011.3 9,633 2,861 6,772 8,217 1,219 176 17 5
2011.4 7,315 1,747 5,568 6,058 1,103 142 9 2
2011.5 8,354 2,306 6,048 7,060 1,111 161 9 13
2011.6 8,504 2,543 5,961 7,147 1,195 141 19 2
2011.7 8,301 2,332 5,969 6,810 1,340 131 11 9
Note: 2011 data is monthly, as indicated. Source: CBC

Issuance of TGB since 2001, by tenor (TWD bn)
0
1000
2000
3000
4000
5000
6000
7000
2001 2003 2005 2007 2009 2011
2y 5y 10y 15y 20y 30y
0
1000
2000
3000
4000
5000
6000
7000
2001 2003 2005 2007 2009 2011
2y 5y 10y 15y 20y 30y
Source: CBC


insurance companies. Issuance occurs through
competitive or non-competitive bid processes wherein the
bids are submitted as yield only. In a competitive bid, the
issue clears at the highest price/lowest yield bid. In a non-
competitive bid situation, the issue clears at the weighted
average of all bids and allocation is granted on a pro-rata
basis. Auction results are announced by the CBC.
Dealers auction securities for the government and are
required to disclose bond holdings from auctions. A
monthly statement of bond holdings in the preceding
month submitted on or before the fifth business day of
each month is required.
Government bonds market participants
The investor landscape in Taiwan is comprised of three
main entities: deposit banks, Chunghwa Post and life
insurance companies. They account for 98% of all assets
owned by financial institutions as well as 94% of all
government securities holdings. In recent years,
Chunghwa Post and lifers have been the main buyers of
government bonds due to significant growth in their
assets under management (AUM) and relatively
conservative investment styles.
The sustained external surplus (fuelled by the strong
current account surplus) and tame credit growth have
contributed to flush system liquidity, which has
contributed to low and steady bond yields in Taiwan.
Life insurance companies: Life insurance companies hold
about three times the amount of government securities
held by banks, even though the former on average are only
one-third the size of the latter. Life insurance companies
are very active in securities investments, which make up
about 35% of their portfolios. Of these investments, over
half are in government securities. Currently, lifers hold
about 50% of total outstanding government bonds.
Postal savings system: The Chunghwa Post is one of the
largest savings institutions in Taiwan, with TWD5trn in
deposits, about 20% of all deposits in the system. It
functions as both Taiwans national postal service and a
savings bank, though it is not allowed to lend like a bank.
Its investment style and balance sheet management can
be characterised as conservative (more details in the table
on the next page). Making returns on its huge amount of
postal savings is challenging, and this has been amplified
in recent years given significant FX inflows into Taiwan. It
has been a major incremental buyer of government bonds,
which now account for 25% of its assets, from 5% at the
beginning of 2000.
Issuer Ministry of Finance, R.O.C.
Tenors
2y, 5y, 10y, 20y, 30y annual coupon fixed rate
bond; but concentrate in 5y, 10y, and 20y
Annual issuance plan Released at end of each year
Monthly issuance plan Released at end of previous quarter
Issuance schedule
Monday of each week; 3y, 5y, 10y and 20y on a
weekly order
Primary dealer
20 PDs as of December 2010 comprised of
securities firms and banks
Issuance method Dutch
Settlement
Most government securities transactions are
settled in book entry form via the CGSS system
operated by CBC. Book-entry government
securities are automatically registered in the
name of the investor. T+2; the settlement takes
place from 12:30 to 14:30 with system stop
receiving transaction messages tat 17:30 and
will return unmatched ones
Repo Repos are used in the money market
Clearing agent bank
Only CGS clearing agent bank is eligible to have
CGSS and CIFS account with CBC. Investors
must hold CGS and cash accounts with an
agent bank prior to trading CGS
Introduction of the DVP Mechanism to ensure
delivery of CGS and the payment are made at
the same time
Launch of the mechanism for bond buybacks
to improve secondary market liquidity
Launch of new services for CGS collateral to
meet the needs for title transfer of collateral in
derivative markets
Secondary market TWSE & OTC
TGB summary
Recent development

Major market participants for government bonds (TWD trn)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
D
e
c
-
0
2
S
e
p
-
0
3
J
u
n
-
0
4
M
a
r
-
0
5
D
e
c
-
0
5
S
e
p
-
0
6
J
u
n
-
0
7
M
a
r
-
0
8
D
e
c
-
0
8
S
e
p
-
0
9
J
u
n
-
1
0
M
a
r
-
1
1
Bill finance company
Life insurance
Foreign banks
Domestic banks
Chunghwa Post Co.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
D
e
c
-
0
2
S
e
p
-
0
3
J
u
n
-
0
4
M
a
r
-
0
5
D
e
c
-
0
5
S
e
p
-
0
6
J
u
n
-
0
7
M
a
r
-
0
8
D
e
c
-
0
8
S
e
p
-
0
9
J
u
n
-
1
0
M
a
r
-
1
1
Bill finance company
Life insurance
Foreign banks
Domestic banks
Chunghwa Post Co.


Banks: Banks in Taiwan hold 66% of all assets in the
financial system, and about 20% of all government
securities. Although these holdings are relatively large in
each respective market, they comprise a much smaller
part of banks overall assets, highlighting the liquidity and
size of the banks relative to the fixed income markets. For
example, government securities are only 3.5% of domestic
banks total assets. Since H2 04, the pace of loan growth in
Taiwan has declined steadily and turned negative in early
2009. With a system loan-to-deposit ratio of 81%,
leverage is low, liquidity flush, and dependence on
wholesale funding minimal. These conditions have
contributed to a steady decline in lending and deposit
rates, and government bond yields. The strong run-up in
the housing market after 2009 did cause a rebound in
bank lending and some upward pressure on bond yields.
However, system liquidity remains flush and is likely to
continue to depress yields for the foreseeable future.
Foreigners can open securities accounts with the Taiwan
Depository and Clearing Corp (TDCC) in the name of a
foreign institutional investor (FINI). A FINI has to be
registered with the Taiwan Stock Exchange (TWSE) and
the CBC. Foreign Individual Investors (FIDIs) need an
investment ID registration with the TWSE.
Approved FINIs and FIDIs are allowed to convert foreign
currency (FCY) into TWD or vice versa for investing in
Taiwan. FINI and FIDIs have no investment ceiling. Pre-
applying for an investment quota from the TWSE is
required via their custodian banks.
For book-entry central government securities (CGS), the
mandated clearing agent bank is required to have a CGS
settlement account with CBC, which is responsible for
operating the CGS settlement system and regulating each
clearing agent bank.
Effective 11 November 2010, the Financial Supervisory
Commission (FSC) stipulated that investment by FIIs in
government bonds and money market instruments,
regardless of the residual tenor should not exceed 30% of
their net remitted-in funds. Prior to this amendment, only
investment in government bonds maturing within one
year was subject to the 30% rule for non-securities
investment while government bonds with a residual tenor
greater than one year were exempted.

Lifer insurance holding of government securities
0.0
0.5
1.0
1.5
2.0
2.5
2011 2009 2006 2003 2001
0%
5%
10%
15%
20%
25%
30%
Government securities (TWD trn)
% of total balance sheet (RHS)
Chunghwa Post holding of government securities
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
2011 2009 2006 2003 2001
0%
5%
10%
15%
20%
25%
30%
Investment rules for Chunghwa Post
1) Investment in bonds, bills and notes other than government bonds,
treasury bills and certificates of deposit by the Central Bank of China may
not exceed 20% of total postal savings.
2) Investment in bonds, bills and notes issued, accepted or guaranteed by an
individual financial institute may not exceed 30% of the net value of the
said financial institute.
3) Investment in bonds issued by an individual company or public enterprise
may not exceed 10% of the actual capitalisation of the said company or
public enterprise.
1) Investment in beneficiary certificates may not exceed 5% of postal
savings.
2) The total amount of investments in an individual fund may not exceed
10% of the total of the beneficiary certificates issued by the said fund.
1) Investment in stocks may not exceed 10% of postal savings.
2) Investment in stocks of an individual company may not exceed 1% of
postal savings and 10% of the actual capitalisation of the said company.
The upper limit for investments in domestic and foreign bonds, bills and notes
are as follows:
The upper limits for investment in domestic and foreign beneficiary
certificates by postal savings held by Chunghwa Post are as follows:
The upper limit for investment in domestic and foreign exchange-listed and
over-the-counter stocks by postal savings held by Chunghwa Post are as
follows:
Source: Chungwa Post, Barclays Capital

Tax
For FINI accounts, there is a 15% withholding tax on
interest payments from fixed income instruments,
including government bonds, corporate bonds, financial
debentures, short-term bills, financial securitisation
products, real estate securitisation products and the
respective repos of the abovementioned securities.
Tax treaty rates apply where relevant. Gains from
structured products are categorised as other income and
are subject to a 15% tax rate on a withholding basis. There
are no capital gains taxes in Taiwan on bonds.
Bond settlement and clearing
Since the CBC launched the Central Government Securities
Settlement System (CGSS) in September 1997,
government bonds have been issued in book-entry form.
In October 2001, Treasury bill settlements were added to
the system, and T-bills have been issued in book-entry
form since then. The CGSS is a real-time gross settlement
system (RTGS) for the issuance, transfer, redemption, and
interest payment on central government securities (CGS)
in the form of accounting entries on computer records.
Ownership of book-entry CGS is recorded in a two-tier
system of accounts. Only clearing banks and central
government agencies are eligible to have book-entry
securities accounts with the Department of the Treasury
of the CBC. Individuals and other entities need to hold
securities accounts with the clearing banks.
The Taiwan Depository and Clearing Corp (TDCC) is the
clearing entity for bonds in Taiwan and uses a book-entry
system. Corporate bonds and money market instruments
in bearer form cannot be held at the Taiwan Securities
Central Depository (TSCD). Instead they are held by
custodian banks that have main custody accounts directly
linked to the TSCD for settlement purposes.
Domestic banks holdings of government securities
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2011 2009 2006 2003 2001
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%

Domestic banks credit growth vs. bond holdings
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2011 2009 2006 2003 2001
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Domestic bank credit growth (y/y, RHS)

Central government securities settlement system
Clearing banks
CBC
(Interbank online center)
CGSS CIFS
Individuals
& Institutions
Securities
Dealers
Securities
Dealers
Securities
Dealers
GreTai Securities Market
(OTC)
Gross settlement Net settlement
Clearing banks
CBC
(Interbank online center)
CGSS CIFS
Individuals
& Institutions
Securities
Dealers
Individuals
& Institutions
Securities
Dealers
Securities
Dealers
Securities
Dealers
(OTC)
Securities
Dealers
Securities
Dealers
(OTC)
Securities
Dealers
Securities
Dealers
(OTC)
Gross settlement Net settlement
Source: CBC



Fiscal policy
Taiwans high credit ratings are a reflection of its strong
external balance sheet. Government foreign borrowing is
minimal, but local currency net borrowing has increased
since 2008. Gross general government debt as a
percentage of GDP has risen from 40% before the global
financial crisis to 47% in 2011. The fiscal deficits of recent
years are a result of infrastructure investments and
reduced fiscal revenue from CBC profits. However, fiscal
flexibility remains, high and with market interest rates
extremely low, near-term financing problems look unlikely.
Over medium term, Taiwan is likely to face fiscal pressure
from unfavourable demographics.
Since 2001, there has been a clear pattern with the
Treasury targeting roughly TWD400-600bn of issuance
per year. The government has run a budget deficit since
2008 to boost growth. Public debt as a percentage of GDP
is around 40%; which remains relatively low but is on a
rising trend as a result of the fiscal stimulus policy.
Investment regulations in Taiwan are the responsibility of
the Ministry of Finance (MoF). The National Treasury
Agency (NTA), under the MoF, is responsible for the
administration of the public treasury. The NTA monitors
the revenues and expenditures of each government
agency and the overall fiscal plan so as to manage public
financing and maintain a balanced budget. The
management of interest payments and maturities of
existing government debt as well as new issuances also
fall under the NTAs jurisdiction. The CBC acts as the fiscal
agent of the NTA and handles the issuance, registration,
redemption, and interest payments on central government
bonds and treasury bills.
Credit ratings
Taiwans long-term foreign currency sovereign debt rating
is AA- (Stable) by S&P, A+ (Stable) by Fitch and Aa3
(Stable) by Moodys.
Taiwans long-term local currency sovereign debt rating is
AA- by S&P, AA- by Fitch and Aa3 by Moodys.

Taiwan fiscal trend and bond issuance (TWD bn)
-
100
200
300
400
500
600
700
2011E 2010 2009 2008 2007 2006 2005 2004
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
%
Amortisation
Net issuance
Fiscal balance as % GDP (RHS)
Source: MoSF, Barclays Capital

Moody's S&P Fitch
Aa3 (Jul 1999) AA-u (Feb 2011) A+ (Dec 2001)
AA- (Dec 2002)
AA (Jul 2001)
AA+ (Dec 1992)

BONDS
Tenor /
maturity Coupon
Day
count
Issuance
calendar
Auction
Avg. trade
size
Bid-offer
Government
bonds
(TGB)
Ministry of
Finance
Fiscal deficit
financing
2y, 5y, 10y,
15y, 20y
and 30y
Annual Act/365 1-2 times
per month
Dutch T+2 TWD100-
200bn per
day
TWD 50mn 1-5bp T+2 TWD4.6trn TGB Govt
Treasury
bills (Tbills)
Ministry of
Finance
Fiscal deficit
financing
91d, 182d,
273d, 364d
Discount Act/365 Monthly Dutch T+2 TWD300-
500bn per
day
TWD 10mn 3-5bp T+2 TWD140bn TGTB Govt
Corporate
bonds (excl
financial
debenture)
Corporates financing 2-15 years Semi-
annual or
annual
Act/365 Ad hoc - T+2 TWD5bn
per day
TWD 10mn 3-5bp T+1 TWD1.3trn -
Instrument
Floating
leg
Bloomberg
ticker
Day
count
Reset
frequency
Day
count Pay frequency
Liquid
tenors Effective
Daily trading
volume
Bid/offer
spread
Bloomberg
ticker (5y)
Onshore IRS 90d secondary
market CP fixing
Reuters
TW90DCPE=
Act/365 Quarterly Act/365 Quarterly 1-10y T+2 TWD1-1.5bn 2-5bp NTSWO5
Offshore IRS 90d secondary
market CP fixing
Reuters
TW90DCPE=
Act/365 Quarterly Act/365 Quarterly 1-10y T+2 TWD1.5-2bn 2-5bp NTSWNI5
Onshore CCS 6m USD Libor US0006M Act/360 Semi-annual Act/365 Semi-annual 1-5y T+2 USD20mn 10-20bp NTUSWO5
Offshore CCS 6m USD Libor US0006M Act/360 Semi-annual Act/365 Semi-annual 1-5y T+2 USD10mn 20-50bp NTSWN5
Swaptions IRS TWD1bn (onshore),
TWD500mn (offshore)
GFITWDP (onshore),
GFITWDXP (offshore)
GIRP Option on ND IRS available
Caps/floors 3M CP fix TWD300mn (onshore) GFITWDP (onshore),
GFITWDXP (offshore)
GIRP ND caps, floors available

TWD nominal and real effective exchange rates
90
95
100
105
110
2008 2009 2010 2011
TWD NEER
TWD REER


TWD spot and NDFs
26
28
30
32
34
36
2008 2009 2010 2011 2012
USD/TWD USD/TWD NDFs


CBC FX reserves (USD bn)
250
300
350
400
450
2008 2009 2010 2011

The goal of the Central Bank of the Republic of China
(CBC) is to achieve dynamic stability in the TWD and to
provide an exchange rate conducive to Taiwans exports,
which are intermediate products and therefore deemed to
be relatively sensitive to currency movements. Currency
appreciation can also curb imported inflation.
The exchange rate regime is a managed float. When the
market is disrupted by seasonal or irregular factors (eg,
large flows of short-term capital), causing the exchange
rate to become excessively volatile, the CBC steps in to
maintain an orderly foreign exchange market.
Apart from currency intervention, the CBC also
implements capital/FX controls. Measures include: 1)
USD-denominated margins for securities borrowed by
foreign investors; 2) 30% remittance cap for foreign
investment in government bonds; 3) 20% combined limit
for NDF and TWD foreign exchange options; 4) special
reserve requirement ratios for TWD demand deposits
placed by foreign investors.
At the end of November 2011, the CBCs foreign exchange
reserves totalled USD388.0bn, an increase of USD6.0bn
year to date. The aims of the CBCs management of foreign
exchange reserves centre on security, liquidity, and
profitability. Within this basic framework, foreign exchange
reserves can also be used to achieve other financial or
economic objectives. Creating depth and liquidity in the
foreign exchange market and developing the domestic
asset management industry are examples.
The CBC is required to deliver a targeted profit to the
Finance Ministry every year.
The TWD is convertible in spot and on current account
transactions, but significant restrictions remain in place
for capital account transactions. The CBC regulates
foreign exchange transactions.
In October 2003, the government abolished the Qualified
Financial Institutional Investor (QFII) system, replacing it
with a Foreign Institutional Investor (FINI) system and a
Foreign Individual Investor (FIDI) system. FINIs are
required to register with both the CBC and the Taiwan
Stock Exchange, while FIDIs are required to register only

with the latter. FINIs have unlimited investment quotas;
FIDIs are subject to a USD5mn ceiling.
There are no restrictions on remittances of interest and
principal if the original loan was approved, but the CBC
monitors whether the cash flows are consistent with the
stated purpose of the application. Transactions must be
approved by the regulatory authority. Total annual
remittances must not exceed USD5mn by a natural
person. Remittance of USD50mn by a juridical person may
proceed through authorised banks without prior approval.
A single remittance by a nonresident that does not exceed
USD100,000 may be accomplished through authorised
banks without prior approval. The CBC has to authorise
remittances exceeding these limits.
In December 1996, the central bank completely opened up
the forward market. FINIs are allowed to engage in FX
forward transactions and are required to conduct actual
delivery when the transactions mature. These are allowed
for hedging purposes only.
There are restrictions on: 1) USD-short positions overnight
for onshore banks; 2) orders being placed in the last 30
minutes of trading (15.30-16.00); and 3) frequent intra-
day trading, particularly when taking significant short spot
positions.
The limit that a bank can take for NDF and option
positions was cut in December 2010 to one-fifth of the
spot limit from one-third previously.
Corporates
Exposure for multinationals in Taiwan
Foreign direct investment (FDI) made by an overseas
parent firm, intercompany loans, trade and operations-
related flows and equity and dividend repatriation can be
hedged by the parent firm or Taiwan-based subsidiaries.
FDI: Investments (and related FX hedges) are subject to
the approval of the Ministry of Economic Affairs
Investment Commission and the CBC.
External commercial borrowing (ECB): A Taiwanese
entity can hedge loans from the parent company, with
necessary documentation provided to the CBC.
Trade receivables and payables: Hedges can be put on
by the Taiwanese entity, which needs to undertake Know
Your Client verification and provide proof of actual
underlying exposure. Rebooking/cancelling of hedges
requires CBC approval.
exposure on this dividend on behalf of foreign investors,
subject to the provision of supporting documents.
Interest: A local entity is permitted to remit interest (on
parent entity loan/bond) to its overseas parent.
original loan agreement. Tax clearance documentation
Taxation
There are no specific taxes on FX transactions.


FX reference guide
Overview
TWD is a managed float currency, and there is significant intervention by the CBC to limit its volatility.
Security
Liquidity
(daily volume)
Bid/Offer
spread
Tenor/
Maturity
Local open/
Reuters
FX spot USD0.8-1.2bn 5 pips Spot 09:00 12:00;
14:00 16:00
T+2 TAIFX1
FX
forwards
USD0.5-1bn 3-20 pips 1w-1y 09:00 12:00;
14:00 16:00
T+2 TAIFX2
NDF market USD1bn 20-50 pips Up to 5y 24 hours a day T+2 PNDF
FX options USD0.2bn 0.3 vol Commonly
1w-1y
24 hours a day T+2 TWDVOL
Description
FINIs/hedge funds, oilers,
shippers, electronics firms
Mainly active in the swaps and FX markets rather than bonds.
Securities companies and
corporates
Securities companies actively trade bonds and swaps, while corporates are active mainly in swaps and FX to
hedge currency and interest rate exposures. CBC closely monitors corporate trading of FX, especially in
USD/TWD.


Thailand
Monetary policy
Price stability: The Bank of Thailands (BoT) main policy
objective is to achieve price stability, which it pursues
through an inflation targeting regime.
Inflation targeting framework: The BoT has conducted
monetary policy under a flexible inflation targeting
framework since May 2000. Like other central banks, the
BoT pays attention both to inflation and to economic
growth and stability, including financial market conditions
and the financial status of households, businesses, and
financial institutions.
Inflation targeting: Core inflation (excluding food and
energy prices) was the BoTs key target variable until
2011. Its aim was to keep core inflation in a range
consistent with both the inflation rate of Thailands
trading partners and the ability of various groups in the
economy to adjust to changing price levels (for 2011,
the range was 0.53%).
Target band revised annually: The target band width
is revised every December as per the BoT Act 2008.
The board, under a cooperative agreement with the
government, determines the targets for monetary
policy for the following year. If inflation breaches the
target, the BoT Monetary Policy Committee (MPC)
must explain why and what policy action it is taking in
response, as well as the period within which it expects
inflation to return to target.
Policy rate: The BoT implements its monetary agenda
by influencing short-term money market rates via the
policy rate, which is currently the 1-day repurchase
rate (Bloomberg Ticker: BTRR1DAY Index). The BoT
uses a variety of monetary policy instruments
(discussed below) to implement the MPC's interest
rate decisions. Prior to January 2007, the 14d
repurchase rate was the monetary policy rate. The BoT
switched to the 1d repo rate due to its higher turnover
volumes, which allows for greater policy effectiveness.
Macro-econometric model approach: The BoT relies
on models to provide forecasts of economic growth and
inflation as well as to assess the impact of various
economic disturbances and effectiveness of macro-
Objective
The main objective of the BoT is to ensure price
stability in the economy. The BoT follows an inflation
targeting framework
Target
Inflation targeting. The 2011 core inflation target was
0.5-3%
Independence
The BoT Act 2008 provides the central bank
operational independence and a key role in setting its
goals. The inflation target is set jointly by the MPC and
the MoF
MPC
7 members (3 officials - 1 Governor, 2 Deputy
Governors and 4 outside experts representing
academia, government and industry)
Policy rate 1d repo rate (BTRR1DAY Index)
OMOs
Bilateral repo, outright buy/sell of Government
securities, issuance of BoT bills/bonds, FX swaps
Decision making
All seven members vote. Based on a
macroeconometric model approach to inflation
targeting
Meeting
frequency
Eight times a year, approximately every six weeks,
though twice there are 8-wk intervals. Generally on a
Wednesday at 14:00hours local time
Frequent reports
Policy minutes two weeks after the policy meeting,
and an inflation report every quarter
Bank of Thailand (BoT)
Source: Bank of Thailand, Barclays Capital

Policy rate, inflation, inflation targets
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
Core inflation
Policy rate
BoT core inflation target


economic policies. The BoTs Macro-econometric Model
(BOTMM) is the main model used by the MPC and it
covers four important areas: real estate, monetary
conditions, and the external and public sectors.
Monetary Policy Committee (MPC): BoT decisions are
independent, though there is a high degree of
coordination between the government, BoT and Ministry
of Finance (MoF).
BoT board: The BoT board consists of the chairman
(appointed by His Majesty the King), the governor as
the deputy-chairman, three deputy governors, the
secretary of the office of the National Economic and
Social Development, the director of the Fiscal Policy
Office and five experts appointed by the Cabinet.
Committee: The MPC consists of 7 members: three
BoT officials (governor and two deputy governors)
and four outside experts. To appoint the governor, the
finance ministry will recommend a candidate from a
list of applicants to the cabinet. External members
represent academia, government and industry, and
are appointed by the board of directors, while the
deputy governors are appointed by the governor.
Independence: The BoT Act 2008 provides the central
bank operational independence and a key role in
setting its goals. The inflation target is set jointly by
the MPC and the MoF each December.
Terms: The members hold office for three-year terms
and can be reappointed, though they are limited to
two consecutive terms. The governor holds office for
five years from the date of appointment and may be
reappointed for one more term.
Decision making: All seven members vote at the
policy meeting, which lasts for half a day, to decide the
policy rate direction. The decision making is based on
a macro-econometric model approach to inflation
targeting, as discussed earlier.
Meeting frequency: The BoT holds monetary policy
meeting eight times a year. The meetings take place
every six weeks (though twice a year there are 8-week
intervals), on Wednesdays at 2pm.
Frequent reports: The BoT publishes meeting
minutes two weeks after a policy meeting, and an
Inflation Report every quarter, to present its latest
economic and inflation forecasts.

Headline inflation and real rates
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
Real rate CPI Policy rate

Bank of Thailand monetary policy committee
BoTs Court of
Directors
Financial
Institutions Policy
Committee
Monetary Policy
Committee
Payments System
Committee
Monetary Policy Committee
Chairman (BoT Governor)
2 Deputy Governors
4 External Members
The MPC sets a target for monetary
policy in conjunction with the
Minister of Finance each year, and
submits that target for Cabinet
approval prior to end-December of
the preceding year
The MPC reports on monetary
policy to the cabinet every six
months
Section 51 of the BoT Act requires
the MPC to act in conjunction with
the government in the case of an
emergency or systemic crisis
BoTs Court of
Directors
Financial
Institutions Policy
Committee
Monetary Policy
Committee
Payments System
Committee
Monetary Policy Committee
Chairman (BoT Governor)
2 Deputy Governors
4 External Members
The MPC sets a target for monetary
policy in conjunction with the
Minister of Finance each year, and
submits that target for Cabinet
approval prior to end-December of
the preceding year
The MPC reports on monetary
policy to the cabinet every six
months
Section 51 of the BoT Act requires
the MPC to act in conjunction with
the government in the case of an
emergency or systemic crisis




Bilateral repo: The BoT uses bilateral and reverse repos to
temporarily add or drain funds available in the banking
system. The first round is at 10am and second (if required)
at 4pm every day. On an MPC day, the BoT may delay the
first round post the rate decision. To enhance the
signalling effect of the policy rate (1d repo rate), a fixed-
rate tender is conducted for the 1d tenor while a variable-
rate tender applies to all other tenors. Eligible securities are
defined as public and central bank debt securities.
Outright purchase/sale of government securities: To
permanently add or drain liquidity available in the banking
system, the BoT buys or sells government securities
outright via primary dealers (PDs). However, this is an ad-
hoc measure, and used infrequently (it was used only five
times in 2010 and six times in 2011). The BoT usually adds
rather than drains reserves through this channel to
accommodate a permanent increase in currency in
circulation to reflect the growing economy. The
procedure: BoT notifies PDs before 10am, who then have
30 minutes to respond with bids/offers, indicating yields
and amounts. Results from this multiple-price auction are
announced by 12:00.
Issuance of BoT bills/bonds: The BoT issues bills
(<12m)/bonds (2y, 3y) to enhance its flexibility and
efficiency in managing the money market. Bills/bonds are
issued through competitive multiple-price auctions, and
generally on Tuesdays. Eligible bidders are commercial
banks, specialised financial institutions, finance and
securities companies, government pension funds,
provident funds, mutual funds, the Social Security Office,
life and non-life insurance companies.
FX swaps: The BoT conducts buy/sell USD/THB FX swaps
with onshore banks to provide short-term baht liquidity,
and sell/buy USD/THB FX swaps with onshore and
offshore banks to absorb short-term baht liquidity. Every
Friday, the BoT releases its net FX forward position, the
Bloomberg ticker for which is THFRSWUS Index.
Other policy tools
Standing facilities: The BoT has an End of Day Liquidity
Adjustment Window to allow financial institutions to
adjust their positions by borrowing/lending. The current
corridor is the policy rate +/-50bp. While there is no
restriction on the amount that an institution can borrow
through this facility, the borrowing amount is implicitly

Summary of monetary policy instruments
Standing
facilities
Bilateral
repo
Outright
purchase/
sale of
securities
Issuance
of BoT
bonds
Buy/Sell
FX swaps
Sell/Buy
FX swaps
EOD
liquidity
adjustment
window
Purpose
Affect
supply of
broad
money
and avoid
volatility in
market
interest
Temporarily
provide/
absorb
liquidity
Permanently
provide/
absorb
liquidity
Liquidity
absorp-
tion
Provide
short/
medium-
term baht
liquidity
Absorb
short/
medium-
term baht
liquidity
To allow
financial
institutions
to adjust
their
positions
Frequency
Averaged
over a 2-
week
period
Daily Irregular Twice a
month
Daily Irregular
(OTC)
Daily
Eligible Securities
Cash,
deposits
at BoT and
secured
public
debt
securities
Secured
public debt
securities
Govt
bonds
US dollar US dollar Liquidity-
providing:
Secured
public debt
securities
Liquidity-
absorbing:
BoT debt
securities
Maturity
N/A 1d, 7d, 14d,
1m
N/A 1-15
days, 1y,
2y, 3y
1d, 7d, 1m,
3m, 6m,
9m, 12m
1d, 7d, 1m,
3m, 6m,
9m, 12m
Overnight
Auction procedures, interest rate basis
N/A Mostly
variable-rate
tenders,
except for 1-
day maturity
that requires
fixed-rate
tenders
Multiple-
priced
auction
Multiple-
priced
auction
(with non-
competiti
ve bid for
maturi-
ties > 1y)
Multiple-
priced
auction. But
can also be
granted on
a case by
case basis if
suitable
Market-
based rates
on a case
by case
basis
Policy rate +
0.5% (fixed
rate
Reserve
require-
ments
OMOs

Total open market operations outstanding (THB bn)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2007 2008 2009 2010 2011
BoT repo operations BoT bills BoT FX fwds
Source: IMF, Barclays Capital

capped by an institution's eligible collateral. Eligible
collateral is the same as for eligible securities used in normal
repos, which consists of government bonds, treasury bills,
FIDF bonds, government-guaranteed state enterprise
bonds, and BoT bonds.
Intra-day liquidity: The overnight lending facility is also
provided as part of the BAHTNET RTGS payment system
to accommodate the "spillover" into overnight liquidity of
the free-of-charge intra-day liquidity. In the event that the
intra-day liquidity is not repaid by the end of the day,
banks are charged the same interest rate as that of the
End-of-Day Lending Facility.
Reserve requirements: Commercial banks must maintain
the average level of required reserves over a fortnight
(starting on a Wednesday). The current reserve
requirements ratio is 6% and reserveable assets consist
of: 1) a minimum 1% in non-remunerated current account
deposits at the BoT; 2) a maximum 2.5% in vault cash;
and 3) the rest in eligible secured public debt securities.
However, Thailand does not actively rely on the reserve
requirement (RR) tool for monetary policy management.
The BoT cites several reasons that make the RR an
ineffective tool, compared with other instruments, for
managing liquidity, controlling credit expansion or curbing
inflation expectations in Thailand:
Under the inflation targeting framework, the RR
measure has limited use as an effective monetary
policy instrument, compared with monetary and credit
targeting frameworks (like India and China).
Excess liquidity in the commercial banking system is
high. With liquid assets in the commercial banking
system roughly 4.4 times (Jan 2011) the size required
by law, required increases in the RR ratio to absorb
this excess liquidity would be very large.
The existing financial landscape whereby financial
institutions are not under the same supervisory
standards as commercial banks can significantly
reduce the effectiveness of the RR measure.
Using the RR tool to influence credit growth is unlikely
to be effective in an environment of high excess
liquidity, as the cost for commercial banks is very low
(the BoT estimates a 1% RR increase raises interest rate
costs for commercial banks by only 0.02%).

Standing facility End of day liquidity adjustment window
(%)
0
1
2
3
4
5
6
2007 2008 2009 2010 2011
Policy rate
BoT's end of day liquidity
adjustment window
(+/- 50bp is the current corridor)
Source: CEIC

Excess liquidity in banking system leads to ineffectiveness
of RR
7%
9%
11%
13%
15%
17%
19%
21%
2001 2003 2005 2007 2009 2011
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Excess liquid assets (% of
commercial banks' balance sheet)
Excess liquid assets/required liquid
assets (RHS)
Source: CEIC


Money markets
Overview: Monetary conditions are affected by the rate
change transmission mechanism, which happens through
several channels: market interest rates, credit, asset prices,
expectations and the exchange rate. Although interest rate
changes for a long time were the major determining factor
of monetary conditions, after the financial crisis of 1997
the pass-through effect from the repo rate to the retail
financial sector diminished. This was due to shrinking
bank loans as a percentage of GDP and changes in banks
asset composition as they reduced lending to the real
estate sector in favour of liquid assets (which has
contributed to ample systemic liquidity).
Money market rates: The repo rate, deposit rate, banks
minimum lending rate and Bibor (interbank rate) all move
in line with the policy rate.
Minimum lending rate (MLR): The MLR is primarily
the floating interest-rate index linked to secured and
unsecured loans. Mortgage loans could be MLR +/-
spread (depending on customer credit worthiness);
clean loans without collateral are generally MLR
+spread. The generally used rate is the average of the
four major banks MLR (Bloomberg: TAVGMLR Index).
The spread between the MLR and policy rate over the
past few years has been in a range of 250450bp (the
widest spread was seen when banks did not cut retail
rates despite the BoT cutting the policy rate in 2009).
Deposit rates: These are set by commercial banks.
Both lending and deposit rates move in line with the
policy rate. The deposit rate generally refers to the
average of the deposit rates of the five largest local
banks (Bloomberg: TAVG3MD5 Index).
Bibor: The Bangkok interbank offer rate. This is
calculated by the BoT at 11.45am Bangkok time. At
least nine banks contribute data; the highest and
lowest quartiles are removed and the remainder
averaged. However, the use of Bibor is relatively rare,
and institutions tend to borrow via the FX swap
market because it is much more liquid.
6m THBFIX. This refers to the cost of borrowing THB
synthetically by borrowing USD for the same tenor and
swapping out the USD in return for THB. This is a more
liquid and commonly used rate by onshore banks due
to the current account surplus, which creates surplus
USD to lend.

Policy rate transmission to money markets (%)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2007 2008 2009 2010 2011
Policy rate 1d repo rate
1m SOR (THBFIX) 3m T-bill rate
1m BIBOR
Source: Bloomberg

Structural shift from banking system to capital markets for
financing
0%
20%
40%
60%
80%
100%
120%
140%
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
% of GDP
Bank loans
SET market cap
Bond market (at par)
Source: Thailand Public Debt Management Office

Transmission mechanism from BoT policy rates to markets
BoT 1d repo rate
(policy rate)
Open market
operations
(repo, BoT bills,
FX swaps)
Standing
facility
Market rates
Deposit
rates
BIBOR
THBFIX
(SOR)
Banking system
liquidity
BoT bills,
T bills
Credit risks,
interest rate
change
expectations
Banking system
liquidity, interest
rate change
expectations
USD, THB liquidity,
capital inflows,
exporters/importers
hedging, BoT FX
intervention
BoT 1d repo rate
(policy rate)
Open market
operations
(repo, BoT bills,
FX swaps)
Standing
facility
Market rates
Deposit
rates
BIBOR
THBFIX
(SOR)
Banking system
liquidity
BoT bills,
T bills
Credit risks,
interest rate
change
expectations
Banking system
liquidity, interest
rate change
expectations
USD, THB liquidity,
capital inflows,
exporters/importers
hedging, BoT FX
intervention


Transmission mechanisms
The BoT sets the overnight repo rate, and guides overnight
market rates through daily bilateral repo operations. This
rate is transmitted into interbank rates, deposit rates, BoT
bill rates, and thus the economy.
Transmission to repo rates: Repos undertaken by the BoT
are variable rate tenders in 7d, 14d and 1m tenors. Trends
in 7d, 14d, 1m repo rates ahead of a policy meeting tend
to reflect market expectations of interest rate changes
from the meeting (naturally in a cutting cycle), and less
the liquidity positions of banks, as the 1d repo (policy rate)
is a fixed rate tender. Since the interest rate market is
linked to SOR, repo rate levels can be seen as a better
market reflection of rate change expectations.
Transmission to Bibor: Overnight Bibor has been equal to
the policy rate as 1d repo tender by BoT is a fixed rate
repo. The only exception might be on the policy meeting
day, as Bibor is fixed before the policy rate decision on the
same day. Bibor is not an active market in longer tenors
due to flush liquidity, but Bibor fixings in the shorter tenors
(1w, 1m) do reflect banks expectations of rate changes at
policy meetings.
Transmission to T-bill/BoT bill rate: For the past few
years, BoT bill yields (1m, 3m) have mostly been below the
BoT repo rate, including in hiking cycles. This is mostly
due to excess liquidity. The BoT repo rate forms a
hypothetical cap on bill yields in times of ample liquidity,
while the standing facility (ie, 1d repo rate 50bp) forms a
hypothetical floor, in an unchanged interest rate
environment. However, a bill yield may also trade below
that floor in times of strong foreign inflows into the bond
market, or sharp changes in interest rate expectations.
Excess liquidity dampens policy pass-through
Excess liquidity: Post the 1997 crisis, corporate funding
increasingly relied on bonds and stocks, rather than bank
loans. This has led to banks holding more liquid assets on
their balance sheets, in the form of deposits, eligible
securities and cash in hand.
Impaired transmission: The excess liquidity ie, higher-
than-desired level of low-risk instruments like money
market and bond investments interferes with monetary
policy transmission because the marginal increase in the
policy interest rate does not give banks an incentive to
raise their retail rates. This impairs the transmission from
the policy rate to deposit and bank lending rates, as
observed during 2004-05.
7d, 14d repo rates reflect interest rate expectations
-50
-40
-30
-20
-10
0
10
20
2008 2009 2010 2011
bp
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
%
7d repo spread over policy rate (bp)
14d repo spread over policy rate (bp)
Policy rate (%, RHS)
7d, 14d repos reflecting rate
cut expectations ahead of the
policy rate decision

Due to ample systemic liquidity T-bill yields have mostly been
lower than the repo rate
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
2004 2005 2006 2007 2008 2009 2010 2011
3m T-bill - 1d repo rate spread (bp)

Excess liquidity and impaired transmission through the
banking sector
5%
7%
9%
11%
13%
15%
17%
19%
2001 2003 2005 2007 2009 2011
200
250
300
350
400
450
500
550
600
650
Excess liquid assets (% of banks' balance sheet)
MLR - repo rate (spread, bp, RHS)


Interest rate swap (IRS)
In Thailand, the dynamics of the IRS are slightly unusual.
The onshore IRS market adopts the onshore FX forward-
implied yield (THBFIX) as the floating rate index. This is
due to the lack of a well developed money market.
Corporates are the main hedgers in the swap market,
though hedge funds are also active participants. An
onshore and offshore IRS market is liquid up to 10y.
Floating rate: The THBFIX curve is derived from USD
SIBOR and USD/THB spot and forward rates. The THBFIX
represents the implied cost of borrowing THB by lending
USD for the same tenor. Reuters calculates the fixing and
eliminates the upper and lower quartiles of contributing
prices for the average calculation. SOR is calculated as:
100
365
1
360
* 1 1
|
|
.
|
\
|
|
.
|
\
|
+
|
|
.
|
\
|
+
days
days
USDSIBOR
FXSpot
FXfwd
Due to the nature of the fixing, in terms of risk exposure,
the interest rate swap is equivalent to a cross-currency
swap. However, there could be a spread in times of
illiquidity or supply/demand mismatches.
Currently, there is no basis between the IRS and NDIRS.
But it could exist during the times of illiquidity or
supply/demand mismatches when onshore dealers
cannot quote an NDIRS.
Cross-currency swaps (CCS)
There is an onshore and offshore CCS market, but both are
generally illiquid. There has been a negative cross-
currency basis at times (ie, CCS lower than IRS). The
onshore/offshore curves could be different because of FX
restrictions on foreigners (discussed more in FX section).
The basis between the two exists because the linkage
between onshore and offshore capital markets is tightly
regulated and asset/liability mismatches create such an
anomaly. Onshore investors have only a limited ability to
asset-swap USD paper into THB on a case-by-case basis,
while foreign entities are prohibited from issuing bonds in
the onshore market. CCS, NDS are normally quoted from
1y-5y.
Futures
Bond futures: 5y ThaiGB bond futures were launched in
October 2010. These are based on a basket of eligible
bonds ie, a designated basket of ThaiGBs with a

IRS vs. floating leg (%)
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2007 2008 2009 2010 2011
THBFIX
1y IRS
5y IRS

Bonds vs. IRS spread
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
2007 2008 2009 2010 2011
%
-140
-120
-100
-80
-60
-40
-20
0
20
40
60
bp
5y bond-swap spread (RHS) 5y IRS 5y ThaiGB

Summary of Bibor methodology
Subject Description
1. Current number of rate
contributors
17 banks
2. Quote time 10.45-11.00 AM (Bangkok time)
3. Tenors Overnight,1w, 1m, 2m, 3m, 6m, 9m and 12m
4. Distribution time 11.15 AM onwards (the rates are specified as
of 11.00 AM)
5. Settlement date T+2 for all maturities except overnight
6. Day count convention Actual/365
7. Calculation method Eliminate the top and bottom quartiles of the
quoted rates and arithmetically average the
remaining rates
8. Calculation result BIBOR rates with 5 decimals (rounding up the
sixth decimal place when it is 5 or more)


minimum issuance size of THB5bn and a 4-6y term to
maturity on the first calendar day of the contract month.
The settlement is calculated from the average yield quoted
by primary dealers. The contract size is THB1mn, with a
speculative position limit of 10,000 contracts (or
THB10bn) on one side of the market in any contract
month or all contract months combined. This newly
introduced futures market still has much lower trading
volumes (close to nil) compared with the bond market.
Bloomberg: TOBA Comdty.
6m THB fix futures have a contract size of THB10mn with
the two nearest quarter months being the contract
months. The markets existence makes short-term IRS and
6m FX forward risk management slightly easier; however,
there is a speculative position limit (the maximum
position, either net long or net short) of 2,000 contracts
(or THB20bn) on one side of the market in any contract
month (or all contract months combined), which makes
the market rather illiquid. The trading volumes of this
instrument have also been very low (close to nil).
Bloomberg: TXBA Comdty.
3m Bibor futures have a contract size of THB10mn with
the two nearest quarter months being the contract
months. The markets existence makes it easier for banks
to hedge short-term rates; however, there is a speculative
position limit (the maximum position, either net long or
net short) of 2,000 contracts (or THB20bn) on one side of
the market in any contract month (or all contract months
combined), which makes the market rather illiquid. The
trading volumes of this instrument have also been very
low (close to nil). Bloomberg: TORA Comdty.
Policy rate and IRS fixing
6m THB fix: In the absence of developed money markets,
less reliance on Bibor, and Thailand being an exporting
economy, the focus is more on FX forwards. Hence, even
IRS is priced on the 6m THB fix. The THB 6m IRS fix is the
implied cost of borrowing THB by lending USD for the
same tenor, and (according to the theory of interest rate
parity) is driven by the policy rate over the longer term.
However, movements over a 1-3m horizon, just like any
other FX forward market in EM Asia, are more a function
of the supply/demand of USD.
Factors affecting the 6m THB fixing
Exporters and importers: An exporter (with future
cash flows in foreign currency) would be a natural
receiver of the fix, while an importer would be a
natural payer. With Thailand running a current

T-bills vs. NDF implied yield spreads
-200
-150
-100
-50
0
50
100
150
2007 2008 2009 2010 2011
bp
3m bill vs NDF 6m bill vs NDF
Source: Bloomberg

Cross-currency basis
-250
-200
-150
-100
-50
0
50
2007 2008 2009 2010 2011
bp
Source: Bloomberg

Factors affecting THB fix
UPWARD IMPACT DOWNWARD IMPACT
Importers Exporters
BOT forward book expansion BoT forward book unwinding
Flush USD liquidity Tight USD liquidity
Risk sentiment - THB
depreciation expectations
Risk sentiment - THB
appreciation expectations


account surplus, one would expect the net receive
interest to be greater (and more so if importers
hedge less than exporters owing to the long-term
trend of THB appreciation).
BoT FX swap operations and FX market
intervention: The BoT is naturally a payer of the
fix, as a part of its liquidity sterilisation process
following intervention in the FX spot market (when
FX appreciation is sharp). The size of the BoTs FX
forward book expands when the THB is
appreciating sharply and it unwinds during periods
of depreciation. Bloomberg Ticker for net forward
positions: THFRSWUS Index.
Global risk sentiment and USD/THB liquidity:
Market sentiment and expectations for USD/THB
to move higher/lower in the next six months could
also cause the fix to deviate from the implied
interest rate parity level.
Domestic liquidity: Surplus THB liquidity (or
injections via OMOs) in the system and less
interbank demand for THB (than USD) at times can
have an impact of lowering the fix, though this
impacts mostly the shorter tenors.
Cross-border asset managers hedging needs:
Asset managers investing in offshore assets tend
to hedge FX risk by selling FX forwards. This trend
was particularly evident in 2009-2010 when asset
managers investing in Korean bonds were major
receivers of swaps, which drove the fix much lower
than the policy rate for a sustained period.
Others: Other factors such as regulations related to
foreign participation in the FX market or
exporter/importer hedges can create volatility in the
FIX at times, or even sharp moves in 6m USD Sibor.
Policy rate and 6m THB fix
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2006 2007 2008 2009 2010 2011
%
-150
-100
-50
0
50
100
150
bp
6m FIX vs policy rate (RHS)
1d repo rate
THBFIX


Bond markets

Overview
The Thailand bond market has grown rapidly since the
1997 economic crisis. To support cash-strapped financial
institutions, in June 1998 the government issued bonds for
the first time. It has continued to issue bonds since then,
initially with the primary objective of financing the budget
deficit that resulted from the crisis. The substantial
amount of new government bonds, coupled with the
downtrend in interest rates, has helped in the
development of a well-functioning bond market, as shown
by the significant increase in both the market size and
trading volumes over the past decade. The market is now
close to USD220bn in size and is dominated by
government debt securities, which account for
approximately 85% of total debt market outstanding.
Bond categories
Government/central bank bonds: Debt securities of the
government sector in the Thai capital market consist of
four major types: loan bonds (LBs), savings bonds, T-bills
and promissory notes (PNs). Apart from government
bonds, there are also BoT bills/bonds, SoE bonds
(including some with government guarantees), special
financial institution such as National Housing Bonds (all
with government guarantees), and Financial Institution
Development bonds Issued by the BoTs FIDF committee
(including some with government guarantees).
Government bonds (ThaiGBs): Issued by the Ministry of
Finance to fund budget needs, these are also called loan
bonds (LBs). The BoT acts as arranger of the auctions for
these bonds.
These are the most liquid bonds in the market and
form the yield curve. Generally, bonds are auctioned
every second week (Wednesday), based on an
issuance calendar announced ahead of the quarter.
The average auction size is in a range of THB520bn.
Liquid benchmarks are 5y, 7y, 10y, 15y, while longer
tenor benchmarks, 20y, 30y and 50y, are not very liquid
in the secondary market. The MoF also issues floating
rate notes (FRN) and inflation (CPI) linked bonds.
Outstanding ThaiGBs totalled USD73.7bn as of Oct
2011, with a weighted average maturity of 7.4 years.
The naming convention of LBs is LB, followed by the
year, then month, and A, B (for first one expiring in the
month or the second one). For instance LB176A refers
to a June 2017 issue.

Transformation of the financial system since 1997 (% of GDP)
128%
91%
24%
82%
12%
63%
0%
20%
40%
60%
80%
100%
120%
140%
1997 2011
Bank loans SET market cap Bond markets (at par)
Source: Public Debt Management Office

Bonds outstanding (THB bn, %)
T-bills, 0,
0%
Corporate
bonds,
1320, 16%
Government
external
bonds, 13,
0%
Government
savings
bonds, 495,
6%
Government
loan bonds
(Domestic),
2190, 27%
BoT bills
and bonds,
2856, 35%
SoE bonds,
1072, 13%
Special
financial
institutions
bonds, 155,
2%
FIDF, 48,
1%
Local currency vs. foreign currency bond markets
0
50
100
150
200
250
2004 2005 2006 2007 2008 2009 2010 2011
U
S
D

b
n
20
25
30
35
40
45
50
55
60
65
70
Other corporates (foreign currency)
Banks and financial institutions (foreign currency)
Government (foreign currency)
Corporate (local currency)
Government (local currency)
Total debt (% of GDP, RHS)

T-bills: Government bills issued by the MoF for short-term
cash management. Typically, these are 28d, 91d and 182d
bills, and are sold on Mondays via an American-style
auction. The auction schedule is usually announced at the
end of each month. As of November 2011, there were no
T-bills outstanding.
BoT bills/bonds: The BoT issues bills and bonds as part of
its open market operations to absorb short- and medium-
term baht liquidity. The tenors of the bills issued range
from 14d to 3y. Typically, the most commonly issued
tenors are 1y, 2y and 3y. Only 3y bonds have coupons,
while the rest are sold at a discount. There is also a BoT 3y
FRN, linked to 6m Bibor. BoT bond auctions generally take
place on a Tuesday, and issuance sizes are THB1070bn.
The auction schedule is usually announced at the end of
each month. Liquidity is good for BoT bills and bonds
(which generally trade at a slight premium to T-bills of the
same maturity), but for FRNs it is poor.
Savings bonds (SBs): These are the short-to-medium-term
instruments issued by the MoF, with the primary objective
of offering retail investors an alternative to bank deposits.
SBs generally target households (ie, retail investors) and
are not usually available to financial institutions.
State-owned enterprise (SOE) bonds: Issued by
corporates for long-term infrastructure projects. They can
be categorised into two types: guaranteed by the MoF and
non-guaranteed, with the former accounting for
approximately 50% of the total. However, government
debt guarantees may not exceed 10% of total budget
expenditure. Only MoF-guaranteed bonds are eligible for
liquidity reserve requirements, the same as government
bonds.
Inflation-linked bonds: (ILB): The first ILB was issued in
July 2011 with a 10y tenor and a semi-annual real rate
coupon. The inflation index used is the headline consumer
price index, calculated and published by the Ministry of
Commerce (THCPIYOY index). In essence, the structure of
ILBs is the same as Treasury Inflation Protected Securities
(TIPS) issued by the US Treasury.
Linkers are quoted using a standard Canadian model
with no floor on the principal value. Settlements are set
on the first of any month and use CPI with a three-
month lag as the reference rate. For example,
September settling bonds would refer Junes CPI.
Accrued interest is paid on the linearly interpolated CPI
between the 2nd and 3rd month-back-CPI.
Thai Government bonds
Abbreviation Terminology
ThaiGB or LB
These are the most active Thai Government
bonds, and also form a yield curve out to 50y.
They are also known as loan bonds, and form the
biggest composition of the budget financing
Savings bonds
These are bonds issued mostly for households as
an investment. Households own c.17-20% of
government debt. These bonds are issued by both
the BoT and government
BoT bonds
The BoT issues longer-term bonds for its
financing, along with other policy tools and BoT
bills. Commonly issued tenors are 1y, 2y and 3y
FIDF
Post the Asian Financial Crisis in 1997, the BoT
setup the Financial Institutions Development Fund
(FIDF), which issues FIDF bonds. These are
guaranteed by the BoT
Promissory notes
The government also issues promissory notes, for
both financing the budget as well as liabilities
restructuring. These are generally short-dated
notes
SoE bonds
State-owned-bonds are issued by corporates.
Approximately 50% of these bonds are currently
guaranteed by the government
FRN Floating rate notes
ILB Inflation-linked bonds
Source: PDMO, AsianBondsOnline website, Barclays Capital

Government bonds outstanding
0
100
200
300
400
500
600
2011 2016 2022 2027 2032 2037 2042 2047 2052 2057
THB bn
ThaiGBs Savings bonds International bonds


) (
) 1 (
3 2 3

+ =
m m
m
m
CPI CPI
D
t
CPI Index

Where:
x m
CPI

is the CPI index x months back of
settlement month m;
m
D
is the number of days in
month m; t is the day of the month on which
settlement takes place
Subsequent coupon payments are made by
multiplying the fixed (real) coupon by the monthly
index ratio, and likewise for final redemption value.
IssueDate
t
CPI
CPI
IndexRatio =

The current amount outstanding of the linker
(ILB217A July, 2021 expiry) is only THB40bn, with
poor secondary market liquidity, due to very limited
available free floating market capitalisation. Given the
poor liquidity, the best opportunity to buy these bonds
is at re-openings of the bond. The PDMO plans to
issue THB60bn of these bonds in FY 2012.
Since the issuance of linkers, breakevens have been
driven by nominal bond yields, as secondary market
liquidity for linkers post issuance remains poor.
Corporate bonds: The corporate bond market is much
smaller than the government market, with few issuers and
little diversity in debt offerings. This reflects, in part, the
limited corporate need for long-term financing, the ready
availability of alternative financing from commercial banks
at competitive rates, and regulatory policies that
emphasise investor protection by imposing substantial
limitations on the ability of institutional investors to
purchase anything but investment grade debt, which
effectively precludes issuance of below investment grade
debt. All public issuance to more than 10 investors must
obtain a rating from an SEC-approved credit rating
agency. Debt issuance of less than THB100bn or that
issued to creditors for debt restructuring purposes is
exempt from obtaining a rating. Bond structures include
straight, FRN, amortising and convertible securitised,
structured notes and credit-linked.
Shorter maturity corporate instruments: In addition to
corporate bonds, there are some shorter-dated corporate
instruments, including short-term debentures, promissory
notes, bills of exchange and negotiable certificates of
deposit (NCDs).

Historical breakdown by tenor, Thai GB benchmark issuance
0
50
100
150
200
250
300
350
400
450
500
2008 2009 2010 2011 2012
5y 7y 10y 15y 20y 30y 50y Non-benchmarks
0
50
100
150
200
250
300
350
400
450
500
2008 2009 2010 2011 2012
5y 7y 10y 15y 20y 30y 50y Non-benchmarks
Breakeven levels mostly driven by nominal yields due to
illiquidity in Linkers (%)
3.20
3.30
3.40
3.50
3.60
3.70
3.80
3.90
4.00
4.10
Jul-11 Aug-11 Sep-11 Oct-11 Nov-11
2.20
2.30
2.40
2.50
2.60
2.70
2.80
2.90
3.00
Nominal yield B/E (RHS)
Source: ThaiBMA website, Barclays Capital
Government bond holding patterns
Central bank,
10%
Other
depository
corps, 16%
Financial
corporations,
32%
Central
government,
15%
Households
and NPISH,
16%
Nonresidents,
11%
Note: NPISH Nonprofit Institutions Saving Household Sector (NPISH).
Source: CEIC


Market participants
The biggest holders of Thai government bonds (ThaiGBs)
are financial corporations (32%); central banks and other
depository institutions (26%; ie, commercial banks,
government savings banks, Industrial Finance Corporation
of Thailand, Government Housing Bank, Exim Bank of
Thailand); central government entities (15%); household
sector (16%)and foreign investors (11%).
Commercial banks: Commercial banks are one of the
largest investor groups in the Thai government bond
market. PDs are required to participate in auctions, and in
the secondary market they have to quote two-way pricing
for benchmark bonds.
Asset management companies and mutual funds: Such
funds invest in various types of asset, depending on fund
mandates and asset mix. Given the nature of such funds
they tend to invest in shorter-tenor (<3y) bonds, with a
high concentration in less than 1y maturity. A main reason
for investment in shorter maturities is that major investors
in mutual funds tend to be retail investors, who enjoy a
capital gains tax exemption from such investments.
Provident funds: Provident funds have longer-term
liabilities as per the model of pension schemes. They
mostly invest in longer-dated bonds.
Government Pension Fund (GPF): As of September 2011,
the GPF managed approximately THB500bn of assets. The
benchmark for the GPF is Thai Bonds Market Association
Index, while for shorter-dated investments it benchmarks
against the 6m deposit rates. The GPF invests
approximately 75-80% of its assets in fixed income
instruments, with approximately 75% in THB-
denominated fixed income. The GPF also invests in longer-
tenor maturities, including 20y-50y bonds (both in
primary as well as secondary market).
Social Security Office (SSO): As of 2009, the SSO
managed around THB703bn. The SSO invests c.50% of its
assets in government bonds. Unlike the GPF and insurance
companies, it generally invests in shorter-dated bonds
with maturities of less than 5y.
Insurance companies: Insurance firms generally invest in
fixed income assets, and mostly invest in longer-dated
securities to match their liabilities. Given the poor
illiquidity of longer-dated bonds, these funds mostly
participate in the auctions, and can also hold until
maturity, ie, no mark-to-market risks.

Government bond holding breakdown
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Central bank Other depository corps
Financial corporations Central government
Households and NPISH Nonresidents
Source: CEIC
Securities investment as a part of banks balance sheets (vs.
net credit)
62%
63%
64%
65%
66%
67%
68%
69%
70%
71%
2004 2005 2006 2007 2008 2009 2010 2011
12%
13%
14%
15%
16%
17%
18%
Net credit (% of total assets, LHS)
Securities investment (% of total assets)
Source: CEIC
Auction details
ThaiGBs BoT Bills
Issuer Central Government Central Bank
Tenors
Benchmarks are 5y, 7y,
10y, 15y, 20y, 30y, 50y
14days, 1m, 3m, 6m, 12m, 2y, 3y
Frequency Bi-weekly (Wednesday) Weekly (Tuesday)
Issuance
calendar
Quarterly issuance
calendar announced by
the PDMO
Auction style
UST style competitive
price
UST style competitive price
Normal
auction size
THB 5-20bn
THB 10-40bn for 1m-1y bills and
THB 40-80bn for 2 weeks
Eligible
bidders
Primary Dealers
Commercial banks, specialised
financial institutions, finance and
securities companies, government
pension funds, provident funds,
mutual funds, the Social Security
Office, life and non-life insurance
companies
Source: Bank of Thailand, AsianBondsOnline website, Barclays Capital

Retail investors (households): Households have owned
around 17-20% of the government bonds over the past
two years. Due to high savings rates, ample liquidity, and
low bank deposit rates, government bonds (particularly
savings bonds) have been considered as a safe investment
by households.
Foreign investors: Nonresidents tend to invest across
the curve.
While financial corporations, other depository institutions
and the central government have always been the biggest
holders, foreign participation in this asset class has
increased over the past couple of years. Foreign holdings
in ThaiGBs (ie, the actively traded set of government
bonds) amounted to 11% of the total as at October 2011.
As interest in Asian local currency government bonds and
FX increases among global EM investors and regional
reserve managers, foreign participation in the markets for
ThaiGBs and BoT bills/bonds is likely to increase.
Auction procedure
ThaiGBs: Thai government bonds are issued on
Wednesdays based on a quarterly issuance calendar (and
amounts) announced by Thailands Public Debt
Management Office. Issuance size varies from THB5-20bn,
depending on maturity/coupon type. Auctions are held on
a competitive price basis (UST-style auction).
BoT-bills: The Bank of Thailand issues 2w, 1m, 3m, 6m, 1y
bills weekly on Tuesdays, and bonds bi-weekly also on
Tuesdays. The sale of bills is also via a UST-style
competitive price auction, and the amounts sold vary from
THB10-60bn for 1m-1y bills, and THB40-80bn for two
weeks.
The cut-off time for orders to the PDMO or BoT is
10.30am Singapore time. Results are posted 30min2hrs
after the cut-off time. Bids need to be a minimum of
THB100m for each particular bond. Subsequent bids need
to be in increments of THB1m. Bid yields must be no
longer than three decimal points. Each bank is only
allowed to submit three bids for every bond. ThaiGB and
BoT bonds are auctioned as an American auction. Bidders
at the cut-off yield usually only get a proportion of their
bid amount while the highest bidders get the full amount
at their specific bid price.

Taxation
Interest income: There is no withholding tax on interest
income from Thailand government bonds for foreign
investors.
Capital gains: The capital gains tax is 15%, unless
exempted. As per Stock Exchange of Thailand regulations,
institutional investors from 28 countries are exempt from
capital gains taxes. These countries include Canada,
France, Germany, Hong Kong, Italy, Singapore, Switzerland
and the UK. Institutional investors from the US are taxed at
15% on capital gains. However, if the US investor is a US
bank operating out of the US, the gains would qualify as
business profits and would be exempt from Thai tax.
Settlement
The BoT is responsible for the settlement of government
bonds and uses a Real-Time Gross Settlement (RTGS)
system that provides DvP (delivery vs. payment) facilities.
Most corporate bonds are settled at the Thailand
Securities Depository (TSD). Settlement convention is T+2
but can vary by bilateral agreement.
Thailand government bonds can be settled via Euroclear.
Foreign investors must have a THB account, similar to a
current account, through which they can buy and sell THB.
There are two types of such accounts: (1) nonresident
baht account (NRBA); and (2) nonresident baht account
for securities (NRBS). The NRBS is used for securities
investments such as bonds, while NRBA is the foreigners
account which is mostly used for trade transactions.



Legal framework
Public Debt Management Act 2005: According to this
act, the MoF shall raise loans for the following purposes:
1) financing the budget in the case of a deficit or where
expenditure exceeds revenue; 2) economic and social
development; 3) restructuring public debt; 4) on-lending
to other government agencies.
Debt/GDP: The level of public debt is close to 45% of
GDP. The PDMO expects the ratio to remain below 45%
for the rest of this decade. The value of the bond market is
equivalent to 63% of GDP, compared with 82% for the
equity markets and 91% for bank loans. The government
considers a 60% debt-to-GDP ratio as a prudent guideline,
though this level is not enshrined in law. Similarly, the
government views an interest payments/budget
expenditure ratio of below 15% (10.5% currently) as
prudent.
Government borrowing ceiling: As per the Debt
Management Act, (1) the aggregate amount of new debt
to fund the budget deficit is not to exceed 20% of the
existing annual budget expenditure, plus 80% of the
budgetary appropriation set for principal repayments. (2)
Loans for economic and social development should be in
foreign currencies, and should not be more than 10% of
the budgetary appropriation. (3) The MoF is to guarantee
loans not exceeding 20% of the existing annual budgetary
appropriation and the additional budgetary appropriation.
Historical debt and bond issuance pattern
Debt composition: The composition of debt funding in
Thailand has changed over the past 15 years from an
overreliance on bank loans in 1997 to a more equal
reliance between bond markets, equity markets and bank
loans. Similarly, bond markets have developed from their
overreliance on foreign currency funding in 1997 to a
greater use of local currency debt. External debt now
represents only 8% of total debt outstanding, while short-
term debt is only 11.4% of total debt outstanding.
Issuance pattern: The PDMO issues bonds according to a
calendar issued just before the beginning of every quarter.
The PDMO also announces the calendar ahead of the
fiscal year (Oct-Sep), providing a guide for the total size
and amounts to be issued for each benchmark. The
PDMOs bond issuance strategy includes benchmark
bonds (5y, 10y, 15y, 20y, 30y), short-term instruments (T-
bills and 2y, 3y), FRBs and savings bonds, and its plans to

Thailand public debt
0.5 Non-guaranteed
30.5
Government
guaranteed
31 FIDF debt
149 Domestic
6 External
155
Special
financial
institutions
guaranteed
debt
422 Domestic
126 External
357 Domestic 548
Non-guaranteed
167 External 524
Government
guaranteed
1072
Non
financial
state
enterprise
debt
6 Others
399 Loan for stimulus package No. 2 2969
Domestic
1132 FIDF's loss compensation 41 External
1432 Deficit financing and debt management
3010
Direct
govern-
ment debt
in THB bn 40% Public debt to GDP
0.5 Non-guaranteed
30.5
Government
guaranteed
31 FIDF debt
149 Domestic
6 External
155
Special
financial
institutions
guaranteed
debt
422 Domestic
126 External
357 Domestic 548
Non-guaranteed
167 External 524
Government
guaranteed
1072
Non
financial
state
enterprise
debt
6 Others
399 Loan for stimulus package No. 2 2969
Domestic
1132 FIDF's loss compensation 41 External
1432 Deficit financing and debt management
3010
Direct
govern-
ment debt
in THB bn 40% Public debt to GDP

Budget deficit trend 2004-2011
-600
-500
-400
-300
-200
-100
0
100
2011 2010 2009 2008 2007 2006 2005 2004
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
Budget deficit (THB bn)
Budget deficit (% of GDP, RHS)

Bond issuances and debt-to-GDP (government + BoT) trends
0
1000
2000
3000
4000
5000
6000
7000
2
0
1
0
2
0
0
9
2
0
0
8
2
0
0
7
2
0
0
6
2
0
0
5
2
0
0
4
2
0
0
3
2
0
0
2
THB bn
0%
10%
20%
30%
40%
50%
60%
70%
BoT and FIDF
State enterprises (non-guaranteed)
State enterprises (guaranteed)
T-bills
Government bonds
Domestic bonds outstanding (% of GDP)
Source: CEIC

deepen the market with continued issuance of inflation-
linked bonds and very long-term bonds (50y).
Credit rating
Thailands long-term foreign currency sovereign debt
rating is BBB+ (Stable) by S&P, BBB (Stable) by Fitch and
Baa1(Stable) by Moodys.
Thailands long-term local currency sovereign debt rating
is Baa1 by Moodys, A- by S&P and A- by Fitch.
Thailand sovereign credit rating history
Moody's S&P Fitch
Baa1 (Nov 2003) BBB+ (Aug 2004) BBB (Apr 2009)
Baa3 (Jun 2000) BBB (Oct 2003) BBB+ (May 2005)
Ba1 (Dec 1997) BBB- (Jan 1998) BBB (Sep 2003)
Baa3 (Dec 1997) BBB (Oct 1997) BBB- (Jun 1999)
Baa2 (Nov 1997) A- (Sep1997) BB+ (May 1998)
Baa1 (Oct 1997) A (Dec 1994)
A3 (Apr 1997) A- (Jun 1989)
A2 (Aug 1989)
LT foreign currency rating
Source: Bloomberg


BONDS
Tenor /
maturity Coupon
Day
count
Issuance
calendar
Auction
Avg.
trade size
Bid-offer
Government
Securities
financing
Up to 50y Semi annual Act/365 Bi-weekly
(Wednesd
ay)
Multiple
price
T+2 THB2-7bn
per day
THB
20-50mn
3-5bp for
liquid
benchmarks,
5-10bp for
illiquid bonds
T+2 THB2.2tn THAIGB
Govt
T-bills Government Short term
fiscal cash
management
1m, 3m,
6m
Zero
coupon
Act/365 Ad hoc Multiple
price
T+2 THB1-3.5bn
per day
1-2bp T+2 0 THAITB
Govt
BoT bills Central
Bank
Sterilisation 14days,
1m, 3m,
6m, 12m,
2y, 3y
Zero
coupon
(Semi
annual for
bonds)
Act/365 Weekly Multiple
price
T+2 THB10-
100bn per
day
THB
50-100mn
1-2bp for bills
3-5bp for
bonds
T+2 THB2.8trn BOTB Govt
Corporate
bonds
Corporates Financing Mainly 3-
5y
Quarterly /
Semi -
annual
Act/365 Ad hoc - T+2 THB300-
400mn per
day
THB
10-40mn
15-20bp T+2 THB1.3trn _
Instrument
Floating
leg
Bloomberg
ticker
Day
count
Reset
frequency
Day
count Pay frequency
Liquid
tenors Effective
Daily trading
volume
Bid /offer
spread
Bloomberg
ticker (5y)
Onshore IRS 6m THB FIX THFX6M
1
Act/365 Semi annual Act/365 Semi annual 1-10y T+2 THB5-10bn 3-5bp TBSWO5
Offshore IRS 6m THB FIX THFX6M Act/365 Semi annual Act/365 Semi annual 1-10y T+2 THB3-4bn 4-6bp TBSWNI5
Cross-currency
Swap
6m USD Libor US0006M Act/365 Semi annual Act/365 Semi annual 1-5y T+2 NA 50-60bp TBUSWO5
(onshore)
TBUSSW5
(offshore)

1
THFX6M is only an approximate ticker for the interest rate swap floating leg. The actual fix is published on Reuters (THBFIX=TH)


THB nominal and real effective exchange rates
95
100
105
110
2008 2009 2010 2011
THB NEER
THB REER


THB spot and forwards
28
29
30
31
32
33
34
35
36
37
2008 2009 2010 2011 2012
USD/THB USD/THB Forwards


BoT FX reserves (USD bn)
80
100
120
140
160
180
200
2008 2009 2010 2011

A key objective of the Bank of Thailand (BoT) is to ensure
low volatility in the spot and forward THB markets.
The exchange rate has been a managed float since 2 July
1997. The central bank intervenes regularly to keep
currency volatility in check (in both spot and NDF
markets). The intervention is done mostly in Asian trading
hours, but the BoT has representative offices in London
and New York to help its intervention needs. Recently the
BoT has reduced its currency intervention and appears
willing to let the THB move in line with its inflation-
targeting framework, economic fundamentals and
regional currencies.
FX reserves have risen almost 55% since end-2008.
Although Thailand has enjoyed a consistent balance-of-
payment surplus in recent years, due to manufacturing
exports, remittances and tourism, a large part of the
reserve accumulation has been driven by intervention in
the spot and forward markets.
THB is a freely floating currency convertible in spot with
domestic and offshore markets. NDFs are not available,
and options market is illiquid for all tenors.
Restrictions apply to FX forward transactions by
nonresidents where there is no underlying trade or
investment activity.
Domestic financial institutions lending to nonresidents
with no underlying trade or investment activity is not
allowed to exceed THB300mn per nonresident entity.
For transactions undertaken with no underlying trade or
investment activity, domestic financial institutions
borrowing from nonresidents cannot exceed THB10mn
per nonresident entity.
The BoT regulates all activities relevant to the foreign
exchange market, and official documentation is required
to trade THB in either the spot or forward markets.
Foreign investors are allowed to participate in the local
securities markets after setting up a local custodian
account. Nonresident investors are required to open a
Nonresident Baht Account (NRBA) and a Nonresident Baht
Account for Securities (NRBS). The outstanding balance in
these accounts must be no more than THB300mn at the

end of each day, and funds in a NRBA are locked in for at
least six months without interest.
Taxation
No specific taxes are imposed on FX transactions.

FX reference guide
Overview
Since July 1997, Thailand has maintained a managed-float exchange rate regime. The BoT intervenes to reduce market volatility, sterilising its
transactions through FX swaps and T-bill and bond issuance.
Security
Liquidity
(daily volume)
Bid/Offer
spread
Tenor/
Maturity
Local open /
closing times Settlement Reuters page Additional information
FX spot USD0.8-0.9bn 1-2 pips Spot 07:30 16:00 T+2 THB=TH
FX
forwards
(onshore)
USD1.2-1.5bn 1-3 pips Up to 1y 07:30 16:00 T+2 THBF=TH Fully convertible FX market
FX
forwards
(offshore)
Illiquid;
Up to 1m: USD200mn
Above 1m:
USD100mn
1-3 pips Up to 1y 07:30 16:00 T+2 PREE

FX options Illiquid for all tenors N/A N/A N/A N/A N/A Order-only basis
Description
Domestic banks Given the relatively low reserve requirement for holding bonds, banks are active investors.
Foreign institutional investors
and hedge funds
This group has a more short-term investment orientation for all instruments FX, FX forwards, bonds and
swaps.

Barclays Capital | The Emerging Markets Weekly

Appendix: Useful links
Common links
Asian Bonds Online www.asianbondsonline.adb.org
ASEAN Social Security Association www.asean-ssa.org
Bank of International Settlements www.bis.org
Barclays Capital Research www.barcaplive.com
China
Peoples Bank of China www.pbc.gov.cn/english/
Ministry of Finance www.mof.gov.cn/
State Administration of Foreign Exchange www.safe.gov.cn/model_safe_en
China Securities Regulatory Committee www.csrc.gov.cn/en/homepage/index_en/jsp
China Banking Regulatory Committee www.cbrc.gov.cn/mod_en00/jsp/en001000.jsp
China Government Securities Depository Trust & Clearing Co www.chinabond.com.cn/cdc/english/index.html
China Foreign Exchange Trade System www.chinamoney.com.cn
Shanghai Stock Exchange www.sse.com.cn
Hong Kong
Hong Kong Monetary Authority www.info.gov.hk/hkma
Securities Exchange www.hkex.com.hk
Hong Kong Institute of Monetary Research www.hkimr.org
Hong Kong Treasury www.fstb.gov.hk
India
Reserve Bank of India www.rbi.org.in
Ministry of Finance www.finmin.nic.in
Securities and Exchange Board of India www.sebi.gov.in
Fixed income Money Market and Derivatives Association of India www.fimmda.org
The Clearing Corporation of India www.ccilindia.com
Bureau of Indian Standards www.bis.org.in
Union Budget and Economic Survey www.indiabudget.nic.in
Indonesia
Bank Indonesia www.bi.go.id/web/en
Ministry of Finance (Indonesian) www.depkeu.go.id
Ministry of Finance (English) www.depkeu.go.id/Eng/?menu=english
Debt Management Office www.dmo.or.id/en
Surabaya Stock Exchange www.bes.co.id
Indonesian government www.indonesia.go.id/en
Statistics Indonesia www.bps.go.id
Korea
Bank of Korea www.bok.or.kr /eng
Ministry of Strategy and Finance http://english.mosf.go.kr/
Financial Supervisory Service http://english.fss.or.kr/
Futures Exchange www.fm.krx.co.kr/English
Futures Association http://english.kofa.or.kr/
Korea Securities Dealer Association www.ksda.or.kr
Korea Securities Finance Corp www.ksfc.co.kr

Appendix: Useful links, contd
Malaysia
Bank Negara Malaysia www.bnm.gov.my
Ministry of Finance www.treasury.gov.my
Bond Infohub www.bondinfo.bnm.gov.my
FAST main page www.fast.bnm.gov.my/fastweb/public/MainPage.do
Malaysia EPF www.kwsp.gov.my
Philippines
Bangko Sentral ng Pilipinas www.bsp.gov.ph
Bureau of the Treasury www.treasury.gov.ph
Department of Finance www.dof.gov.ph
Securities and Exchange Commission www.sec.gov.ph
Singapore
Monetary Authority of Singapore (MAS) www.mas.gov.sg
Ministry of Finance www.mof.gov.sg
Singapore Government Securities (SGS) www.sgs.gov.sg
Singapore Department of Statistics www.singstat.gov.sg
Central Provident Fund (CPF) www.cpf.gov.sg
Taiwan
Central Bank of China www.cbc.gov.tw
Ministry of Finance www.mof.gov.tw
National Treasury Agency www.nta.gov.tw
Securities Bond Trading Exchange www.gretai.org.tw
Thailand
Bank of Thailand www.bot.or.th
Thai Bond Market Association www.thaibma.or.th
Ministry of Finance www2.mof.go.th/
The Thai Bankers Association www.tba.or.th
Public Debt Management Office www.pdmo.go.th/en
Bureau of Trade and Economic Indices www.price.moc.go.th/en
Government Pension Fund (GPF) www.gpf.or.th/eng

KEY ASIA CONTACTS
Jon Scoffin
Head of Research, Asia-Pacific and Head of Credit Research
+65 6308 3217
jon.scoffin@barcap.com

FI Strategy
Rohit Arora
FI Strategist, Emerging Asia
+65 6308 2092
rohit.arora3@barcap.com
Kumar Rachapudi
+65 6308 3383
kumar.rachapudi@barcap.com
Ju Wang
+65 6308 2801
ju.wang@barcap.com

FX Strategy
Olivier Desbarres
Head of FX Strategy, Asia-Pacific
ex-Japan
+65 6308 2073
olivier.desbarres@barcap.com
Hamish Pepper
FX Strategist, Asia-Pacific ex-Japan
+65 6308 2220
hamish.pepper@barcap.com
Nick Verdi
FX Strategist, Asia-Pacific ex-Japan
+65 6308 3093
nick.verdi@barcap.com

Emerging Asia Economics
Rahul Bajoria
Regional Economist India, Malaysia,
Thailand
+65 6308 3511
rahul.bajoria@barcap.com
Jian Chang
Regional Economist China, Hong Kong
+852 2903 2654
jian.chang@barcap.com
Joey Chew
Regional Economist Singapore
+65 6308 3211
joey.chew@barcap.com
Yiping Huang
Chief Economist, Emerging Asia
+852 2903 3291
yiping.huang@barcap.com
Wai Ho Leong
Senior Regional Economist Korea,
Malaysia, Singapore, Taiwan
+65 6308 3292
waiho.leong@barcap.com
Siddhartha Sanyal
Chief Economist, India
+91 22 6719 6177
siddhartha.sanyal@barcap.com
Prakriti Sofat
Regional Economist Indonesia,
Philippines, Sri Lanka, Vietnam
+65 6308 3201
prakriti.sofat@barcap.com
Lingxiu (Steven) Yang
Regional Economist China, Hong Kong
+852 2903 2653
lingxiu.yang@barcap.com

Credit
Krishna Hegde, CFA
Asia Credit Strategist and
Senior Financial Institutions
+65 6308 2979
krishna.hegde@barcap.caaom
Avanti Save
Credit Strategy
+65 6308 3116
avanti.save@barcap.com
Christina Chiow, CFA
Chinese Real Estate
+65 6308 3214
christina.chiow@barcap.com
Lyris Koh
Financial Institutions
+65 6308 3595
lyris.koh@barcap.com
Jit Ming Tan, CFA
N. Asia High Yield Industrials and
Resources
+65 6308 3210
jitming.tan@barcap.com
Timothy Tay, CFA
High Grade Diversified Industrials;
Oil & Gas and Utilities
+65 6308 2192
timothy.tay@barcap.com
Erly Witoyo
S.E. Asia High Yield Industrials
and Resources
+65 6308 3011
erly.witoyo@barcap.com
Nicholas Yap
Associate
+65 6308 3180
nicholas.yap@barcap.com
Rampharaj Yudhanahas
Associate
+65 6308 3804
rampharaj.yudhanahas@barcap.com


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Barclays Capital and its affiliates do not provide tax advice and nothing contained herein should be construed to be tax advice.
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based on your particular circumstances from an independent tax advisor.
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wholly owned subsidiary Barclays Capital Inc., a FINRA and SIPC member."
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of Barclays Capital. 2011 Barclays Capital. All rights reserved.

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EMERGING MARKETS RESEARCH

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