SINGAPORE BOND MARKET, LOOK NO FURTHER

Waking up to a photo message from one of my good friends captioned “LOL”.

A Dr Chua Wee Meng in the ST forum, I assume because I do not read the papers, is alleging that secondary bond market prices in Singapore are ALL OVER THE PLACE.

For a Singaporean, it is understandably disconcerting because we are used to a structured way of doing things.

Well, get a load of this. It is the same in HK and US too and yet the markets there do not have a big problem with it because there is sufficient depth in them to mostly prevent too much arbitrage.

OTC Bloomberg Definition
A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase “over-the-counter” can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network.

OTC Investopedia Defintion
In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as “unlisted stock”, these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone.

How would you also like to know that the banks and traders themselves have no way of knowing some of the prices too ?

Seriously, would anyone know where the price of Mencast or Hankore is ? Short of colluding to fix a price amongst the 2 banks who would be pricing this bond (because I do not expect the foreign banks to be running after this name), would a trader be able accurately say that is where the market is ?

We have rules for everything in Singapore but it would be unreasonable to put a gun to the head of the banks and force them to make a price for every single bond a customer buys, and price within a tight bid-offer spread like the way the primary dealer banks are obligated to for Singapore Govt bonds. (2Y 5 cts, 5Y 10 cts, 10Y 20cts etc).

I had success in the past with this OTC business because I was able to sniff out the market prices before the other traders did but I will not embark on the topic of market practices. (Ambiguous enough to avoid lawsuits)

Yet, I did not reap many rewards out of it because it was the private banks and retail desks who HEAPED the SPREADS on top of the price I made them, that had the last laugh, and sometimes to my anguish especially when I see a missed deal because they got too greedy.

Retail Clients are classified as such (my personal opinions and not the representative of the market’s).

1. Pro (in the marketplace with access to friends like me on the trading desks)
2. Savvy (access to 3 or more banks)
3. DUMB (not aware of price) and
4. CAPTIVE (no choice but to deal with you).

Where do we look ?

I have been harping about this for a long time to people in places of authority but to no avail. (Perhaps because it originates from emerging market Malaysia ?)

Bank Negara created a BIDS system back in the late 90’s. It has now been replaced by ETP (Electronic Trading Platform) system which is apparently modeled after the Korean Exchange Bond trading system. http://bondinfo.bnm.gov.my/portal/server.pt?open=514&objID=27269&parentname=MyPage&parentid=3&mode=2&in_hi_userid=22874&cached=true

Information is disseminated on bond transactions in the marketplace including OTC deals which is available to the public. http://www.bursamalaysia.com/market/securities/bonds/prices/
[I am not entirely sure it will work if it is a sale between 2 customers and transacted within 1 bank within 1 custodian, which implies there is a possibility that some trades that will slip past the net.]

Why Are We Reticent About Transparency ?

My opinions (so don’t sue me because I could be wrong)

• Embarassing volumes – Singapore corporate bonds DO NOT HAVE AN ACTIVE SECONDARY MARKET BETWEEN BANKS (banks hardly transact with each other). What if the customers find out that the bond has not traded in months ??
• It would be even worse for our global standing and reputation as a bond market if that information is public.
• All banks are not born equal ! – some banks have bigger books and some don’t which is a function of their internal credit limits and trading book sizes. Thus there is no incentive for the largest bank to sit around and be charitable to the smaller banks when they have the clear upper hand.
• Which means that we have a patron system – all prices ultimately come from a handful of banks.

I am definitely not saying that Malaysia has a superior bond market than ours and I know because I have traded MYR bonds in the past and it is errr, a different ballpark that I would probably not enter on a personal capacity because when it dries, it freezes over.

I hope this will not be taken as a critique but a suggestion for LIGHT READING. I am not championing any cause here and I may remove this post soon especially if people find it as offensive as my masterpiece of a post last year on our Disney-like government bond market which I was compelled to remove because we presumed Google Ads found it unacceptable. I may republish it again on popular request since we do not have their sponsorship anyway.