Central banks unveil 2nd ABF structure

Central banks unveil 2nd ABF structure

Eileen Ng, Agence France-Presse, Kuala Lumpur

Asian central banks on Thursday unveiled the initial structure of
a planned second Asian Bond Fund (ABF) to invest in debt
securities denominated in local currencies as part of efforts to
boost regional financial cooperation.

They gave no timeframe for when it would be launched.

In a statement released here, the 11-member Executives'
Meeting of East Asia and Pacific Central Banks (EMEAP) Group said
it had completed an initial study on ABF2 which would be designed
to facilitate investment by public and private sector investors.

ABF2 followed the successful launch in June 2003 of the first
US$1 billion ABF which is was now fully invested in U.S. dollar-
denominated regional bonds and marked another important milestone
in regional cooperation, it said.

Under a recommended preliminary framework, it said ABF2 would
consist of two components -- a Pan-Asian Bond Index Fund (PAIF)
and a Fund of Bond Funds (FoBF).

"It is intended that the ABF2 funds will be passively managed
against a set of pre-determined benchmarks, covering local-
currency bonds issued by sovereign and quasi-sovereign issuers in
EMEAP economies," the statement said.

"The EMEAP Group believes that the developmental impact of the
ABF2 will be significant. ABF2 will promote the development of
index bond funds in the regional markets and at the same time,
enhance the domestic as well as regional bond market
infrastructure."

EMEAP groups Australia, China, Hong Kong, Indonesia, Japan,
Korea, Malaysia, New Zealand, the Philippines, Singapore and
Thailand.

It said the PAIF, a single bond index fund investing in local
currency-denominated bonds in EMEAP economies, would act as a
convenient and cost-effective fund for investors seeking a well-
diversified exposure to Asian bond markets.

The FoBF is a two-layered structure, with a parent fund
investing in a number of country sub-funds comprising local
currency-denominated bonds in EMEAP nations, it said.

The FoBF sub-funds are aimed at providing local investors with
low-cost and index-driven investment vehicles and at the same
time giving international investors the flexibility to invest in
the Asian bond markets of their choice.

"In determining the size of ABF2, EMEAP members will be
careful to limit the size of the total investment so that it will
not have any crowding out effect on private sector investors," it
said.

Steps will be taken to improve the market infrastructure by
minimizing the legal, regulatory and tax hurdles in their markets
to facilitate the creation of fixed income products in the
region, the statement said.

The group said it would consult market practitioners on the
structure of the ABF2 and gave no indication on when the fund
would be launched.

The first ABF, designed to defend the region against currency
speculation and capital flight, was invested in high-grade debt
securities and officials have said the second ABF would be
targeted at countries whose ratings were under investment grade,

The Monetary Authority of Singapore said it was pleased with
the progress of ABF2.

"Together with initiatives proposed in other regional fora,
ABF2 will broaden the depth and liquidity of Asia's bond markets,
and provide investors with an additional means to invest in
Asia," it said.

Malaysia's central Bank Negara said ABF2 would be a
"significant initiative" towards promoting the development of
bond markets in the region.