Education Corner

Background
The Thai bond market has grown rapidly in recent years after the 1997's economic crisis. To help support cash-strapped financial institutions, in June1998 the government issued government bonds for the first time in the decade. The total amount of government bonds issued under this program was THB 500 billion and this has opened a new era for the Thai bond market. The government continued to issue bonds since then with the primary objective to finance budget deficit resulted from the crisis. The substantial amount of new government bonds coupled with successively downtrend of interest rates have contributed to the robust of the bond market as evidenced by a significant increase in both market size and trading volume. The outstanding value of total bond market increased from THB 547 billion in 1996 to THB 10.86 trillion at the end of 2016. Trading volume in the secondary market jumped from a daily average of only THB 0.82bln in 1996 to THB 92blnat the end of 2016.
Regulatory Environment
The Bank of Thailand (BoT) supervises the operation of banking and finance businesses while the Securities and Exchange Commission (SEC) supervises the primary and secondary market for securities business. The issuance and offering of securities are governed by the Securities and Exchange Act 1992 (B.E. 2535). In November 1994, 'the Bond Dealers Club' was set up to be the secondary market for debt securities. The BDC was upgraded to "The Thai Bond Dealing Centre (Thai BDC)' in April 1998 after it was granted the 'Bond Exchange' license from the SEC. The Thai BDC goals are to provide an environment for fair and secure trading, to monitor trade and to disseminate information on the secondary bond market. The Thai BDC also functions as a self-regulatory organization (SRO) and has implemented a number of standards and conventions for bond trading.
Types of Securities
Bonds issued in Thailand can be divided into two major components: government and corporate debt securities. The market is dominated by Government debt securities, which currently account for approximately 74% of total market outstanding.
1. Government debt securities consist of four major types;
1.1 Treasury Bills (T-Bills) are short-term debt instruments with maturity less than 1 year. The bills are sold on a discount basis.
1.2 Government bonds are medium to long-term debt instruments issued by the Ministry of Finance. They consist of three types; Investment bonds (IB), Loan bonds (LB) and Saving bonds (SB). While IB has not been issued since 1991 and there are only few issues remaining, LB captures the majority of the market as they are issued for financing budget deficit. SB is issued to provide households with alternative source of saving.
1.3 Bank of Thailand (BoT) bonds are tools for Bank of Thailand to manage liquidity. There are two types; Central Bank Bill (CB) which are short-term debt instrument and BOT Bond (BOT) which are long-term debt instruments
1.4 State Owned Enterprise (SOE) bonds are medium to long-term debt instruments issued by State Owned Enterprises. This can be categorized into 2 types; guaranteed and non-guaranteed by the Ministry of Finance (MoF) of which the guaranteed bonds account for 72% of total. However, there are restrictions on the government to provide debt guarantee for not exceeding 10 % of total budget expenditure. Only MoF-guaranteed bonds are eligible for liquidity reserve requirement, as same as government bonds.
2. Corporate debt securities
The corporate sector began to issue bonds in 1992 after the enactment of the SEC Act that has eased criteria for the issuance of corporate bonds. Structures of bonds include Straight, Floating Rate Notes (FRN), Amortizing and Convertible. The bonds with more varying features are increasingly issued in recent years.
Issuing Process
Government bonds and T-Bills are issued through auction process, which is organized by the central bank on a weekly basis. Term and size of the auctions will be announced prior to the auction date. Auctions are held on a competitive price auction (American auction) basis. In June 2002, there is a launch of Non-competitive Bid (NCB) availalble for small investors to submit bid in the range of 4-40 million.
For State Owned Enterprise (SOE) bonds, the issuance and auctions are managed by the Public Debt Management Office (PDMO). The auctions are made through Dutch auction where the entire issues are awarded to bidders (underwriters) who offer the lowest cost of funding.
For corporate bonds, issuance is subject to the SEC’s approval. Approval is granted on ‘issuer’ basis,enabling issuers to offer bonds several times in 1 year. Credit ratings are required for all bond offerings with the exception applied to those offered to no more than 10 investors, or in the amount not exceeding 100 million or to creditors for debt restructuring.
Trading of bonds
The majority of secondary market trading takes place as an Over-the-Counter (“OTC”) market. Dealers (financial institutions holding debt securities license granted by the SEC) are required to report all bond transactions to ThaiBMA. We monitor, compile, and disseminate prices to the public on a “nearly” real-time basis. Prices disseminated by ThaiBMA are used as market reference for Mark-to-Market (MTM). Bonds are traded on price or yield quotations with up to 6 decimal points. Prices are usually quoted by 'clean' basis as a percentage to par value with 6 decimal points. Market convention for price/yield formula is actual/365 basis.
Investors in bond market are mainly institutions including banks, mutual funds, provident funds, government pension fund and insurance companies. Government bonds are the most actively traded securities, accounting for approximately 80-90 % of total trade. Benchmark issues are government bonds with maturity closes to 5, 10, 15, 20, 30 and 50 years.
Clearing and Settlement
BoT is responsible for the settlement of government securities, as it is a depository and a registrar for government debt securities. Most of government bonds are issued in bearer form and settled by physical delivery at BoT. Corporate bonds are cleared and settled at the Thailand and Securities Depository Co. Ltd (TSD). Most of them are issued in the form of scripless and transferred on a book-entry basis. Convention on settlement date is T+2 but can be varied upon counterparty agreement. The BoT is currently working on the project to improve efficiency of the settlement system for government securities in order to facilitate Delivery versus payment (DVP) on a real-time basis.
Taxation
Three types of income are subject to taxation; interest, discount (a spread between par and offering price) and capital gain. The tax rates vary across types of investors and types of income. Non-resident institutional investors are subject to 15% withholding tax on interest, discount and capital gain. The rates may be reduced to 10 % for double tax treaty countries. For individual investors, interest income is subject to 15 % withholding tax. The first individual buyer who buys discount bonds is also 15 % taxed as discount is treated as interest income. Capital gain tax for zero coupon debt instruments is exempt for individual investors while there is 15 % tax on coupon bonds.
Other Market Developments
Primary Dealers
Primary Dealers are financial institutions appointed by the BoT to be the BoT's counterparties in open market operations. They are responsible to be market makers for government securities, to participate in the government securities auctions. In addition, primary dealers are also obliged to submit reference yields on government securities to ThaiBMA at the end of each day.
List of Primary Dealers (announced on 18 September 2014)
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1Bangkok Bank PLC.
2Krungthai Bank PLC.
3Kasikorn Bank PLC.
4JPMorgan Chase Bank
5Citibank, N.A.
6CIMB Thai Bank PLC.
7Deutche Bank AG Bangkok Branch
8TMB Bank PLC.
9Siam Commercial Bank PLC.
10 BNP Paribas, Bangkok Branch
11Standard Chartered Bank (Thai) PLC.
12KGI Securities (Thailand) Limited
13Bank Of Amerca, National Association
14The Hongkong and Shanghai Banking Corporation Ltd.
Bond Trader Registration
To promote the level of professionalism and to ensure the fair and orderly manner of the bond market, the SEC issued regulation requiring all bond traders to register with ThaiBMA effective from 18 August 2000. In order to register, traders have to satisfy the set criteria and pass the registered trader examination administered by ThaiBMA. ThaiBMA will be responsible for ensuring that trading practice of registered traders follows the established Ethics and Code and Conduct for the bond market.
ThaiBMA Government Bond Yield Curve and Bond Indices
The Government Bond Yield Curve is developed by using bidding yields quoted daily by 14 primary dealers at minimum value of THB 20 million. Additionally, ThaiBMA publishes reference yields of state owned enterprise (SOE) bonds, FIDF bonds and treasury bills. The yield curve information is disseminated to the public on a daily basis since 1999.In addition to the yield curve, ThaiBMA has also developed Bond index to be a tool to track market performance and serve as a better benchmark
  • Government Bond Index
  • T-Bill Index
  • Short-term Government Bond Index
  • SOE Bond Index
  • ThaiBMA Investment Grade Corporate Bond Index
  • Commercial Paper Index
  • Composite Bond Index
  • Zero Rate Return Index
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