Download 슬라이드 1 - Bond Pricing Agency Malaysia Sdn Bhd

Bond Pricing Service:
Overview and Methodology
CONTENTS
I. Introduction to the Mark-to-Market System
II. Benefits of Bond Pricing
III. Pricing Process Overview
1.1 Introduction to the MTM System
Book Value Approach
Mark-To-Market Approach
 Unchanged Value of Assets
 Raise of market transparency,
fairness and efficiency
 Market change is not reflected
 Market change is reflected immediately
 Deterioration of customers’ trust
 Compliance with higher risk management,
compliance, reporting and audit requirements
 Obstruction of market efficiency
The Need for Bond Pricing
 Only a few bonds are traded everyday
While the total number of fixed income securities issued totals over 2,000, on average less than 100 of them
(less than 1 % of the total), are traded daily and the transactions are concentrated on government bonds.
 OTC market
Unlike equities, It is difficult to obtain reliable price for fixed income securities since they are traded on the
OTC market
Increasing sophistication of products
The simple and inconsistent valuation methods as used now will not be sufficient to price and capture the
risk of more complex structures going forward
Therefore, there is a need for consistent and transparent valuation of the remaining 99% of the
bonds to estimate their fair market value.
1.2 The Role of Bond Pricing
The Need
Daily valuation of bond portfolios for NAV calculation and regulatory compliance
Utopia
If all the bonds are traded at least once a day, we can use these prices for valuation, just like equity closing
prices from Bursa Malaysia
Dystopia
There are no official published closing prices for bonds. Less than 1% are traded, where are the prices for
the remaining 99%?
Current method
Quotes from brokers or banks, a few via internally generated models. The issue here is, how good are these
prices? Are they verifiable? How are they derived? Do they meet accounting and risk management
standards?
The Solution
BWM as a professional bond pricing provider evaluates about 1,600 bonds that are untraded on any given
day, based on the market prices of about 50 bonds traded on the same day.
BWM generates its fair price using market price data and other market information via various bond pricing
models for different bonds. Since all PDS are different in their type by interest payment methods, principal
payment methods, credit ratings, and embedded options, BWM needs to employ reliable database and
evaluation methodology. This methodology is transparent and consistent.
2.0 Benefits of Bond Pricing for the Bond Market
Revitalizing the Secondary Market for Bonds
The majority of transactions are concentrated only on selected bonds, since the other
bonds are seldom traded in the market due to the uncertainty of their fair values.
Introducing proper valuation may revitalize the bond market by using the marked-tomarket prices as benchmark by publicly announcing them.
Also, marking-to-market system in bond pricing will promote more active management of
bond portfolios held by financial institutions rather than passive hold-to-maturity
strategies.
Revitalizing the Primary Market for Bonds
Many corporate bonds are seldom traded even if they have credit ratings, making the
market price of the bonds uncertain.
Therefore, from the origination and underwriting perspective, primary level pricing
become very tricky especially for lower credits. Professional pricing on previously
issued corporate bonds can promote new corporate bond issues by functioning as
benchmarks for primary level pricing.
2.0 Benefits of Bond Pricing for the Bond Market
Promoting New Product Development
Once the valuation of more advanced products such as option-embedded bonds,
reverse-FRN, etc, is well established, it will encourage more bond offerings and more
active trading of these products in the secondary market.
The pricing provider may also provide the market with the design and proprietary
pricing models for these structured bonds.
Improving Transparency & Specialization in the Investment Trust Industry
Professional bond pricing will improve the standards of fund operation through
consistent, systematic and transparent evaluation of their fixed income investments.
This will indirectly enhance the standards of bond portfolio management and enable
fairer evaluation of fund performance.
The pricer also plays and important social role by promoting investor awareness of the
products offered by investment trusts.
2.0 Benefits of Bond Pricing for the Bond Market
Improving Soundness of Financial Institutions
Professional fair valuation can also help increase the liquidity of assets and
promote the discovery of fair value. This is in line with IAS 39 and Basle 2
requirements.
For bonds held by these financial institutions, the effectiveness of risk
management will be further enhanced as the valuation process will be
consistent and not arbitrary
3.0 Pricing Process
•BWM provides valuations on a daily basis at INDIVIDUAL bond level
•A comprehensive data collection, validation, pricing and dissemination process is in
place to ensure consistent and market neutral valuations
•The bond pricing process is transparent and uses global standard pricing models
•Full documentation is provided to clients
•We incorporate a market feedback mechanism in the event there are disputes or
queries on the prices
•Interaction with the market via this feedback process is critical
3.1 Pricing Process
Market study
Bond Structure
Number of Issues
Fixed Rate Bond
Key Data Challenges
Term Sheet Vs Actual BIDS Data
Zero Coupon Bond
95% of Data
Term Sheet Vs Actual BIDS Data
Fixed Regular Amortizing Bond
Less than 10
Term Sheet Vs Actual BIDS Data
Irregular Amortizing Bond
Mostly ABS Less than 20 Stocks
Irregular amount may change over time
and not static, Pool Information
Callable Amortizing Bond
Less Than 10 stocks
Term Sheet Vs Actual BIDS Data
Callable Multi Step Amortizing
Less Than 10 stocks
Term Sheet Vs Actual BIDS Data
Multi Step Amortizing Bond
Less Than 10 stocks
Term Sheet Vs Actual BIDS Data
Multi Step Bond
25 Stocks
Term Sheet Vs Actual BIDS Data
Callable Multi Step
Popular Structure Less than 50 Stock
Term Sheet Vs Actual BIDS Data
Floating Rate Note
Less than 10 issues
Index Data/Time Series of Banks BLR Rate
Flipper / (Fixed , Float Structure)
2 Issues Only
Long Term Index of MGS 5Year
Callable/Put table Bond
Less than 15 stocks
Issues on Strike Price determination based
on a formula, Credit Related Trigger
Convertible Bond
4 Only which meets BWM Pricing Criteria of
Convertible to Listed Equity
Stock Price Data/Historical Volatility, Strike
Price Based On Formula
Callable Convertible
5 Stocks Only
Stock Price Data/Historical Volatility, Strike
Price Based On Formula, Credit Event Trigger
Multi- Step Callable Convertible
3 Stock Only
Stock Price Data/Historical Volatility
3.2 Pricing Process
Market study
Key Challenges at Security Master Level:
•Granularity of Data
•Specific Coupon Payment rules inconsistent with basic financial mathematics
•Mudharabah / Murabahah valuation
•Floating Rate Indices
•Option valuations eg. Credit related and equity options
•>4000 ISIN are Islamic PN/SN Structure
•BIDS, FAST, term sheet and market conventions inconsistent
•Poor disclosure of ABS pool information
Key Challenges at Trading Information Level
•Market Churns
•Private Placements (Primary & Secondary Info Issue)
•Initial Issue Yield (for very illiquid bond)
•Manipulation and errors in BIDS data
3.3 Pricing Process
Example
Tekad Mercu Berhad
•Trades in between Govt Guaranteed & AAA
•Market prices up to initial expected maturity ie a simple Fixed Rate Bond with 5.25% Coupon
•In reality Flipper Bermuda Callable Bond with 3 period (Fixed, Float, Float) +
Credit Default Derivative
•Optionality is unpriced
Coupon Rate
TMT 1
TMT 2
6.25% for 15 Y
5.25 % for Year 1 to 5, MGS5Y +120BP for Year 6 to 10
& MGS5Y + 120BP for Year 11 to 15
Call
TMT 2
At Par by Issuer on Year 5 or Year 10
Put
TMT 2
If Rating < AAA on Year 5 or Year 10 Against Telekom
3.2 Pricing Process
Bond Pricing Approach
Adopting the right pricing strategy corresponding to the unique environment of the
Malaysian market is critical
Market
Maturity
Market Maturity
Hybrid
Approach
Risk Neutral
Approach
Liquid Secondary Market
Large Pool of Market Participants
Supply of Secondary Trading Instrument
Structured
Approach
Hybrid
Approach
Informational Maturity
Contents of the Information
Access to the Information
Information Maturity
3.2 Pricing Process
Bond Price = f (Risk Free Interest Rate+ Credit Spread)
1. Derivation of Risk Free Curve
Zero
Coupon
Yield
Bootstrap
Calibration
Observed
Trades
Maturity
2. Derivation of Credit Spread for PDS
Derived via
Structural Model
Merton type model
Jarrow-Turnball type model
Risk Neutral Model
3.3 Pricing Process
Risk Neutral (Reduced Form) Model : Jarrow Type Credit Model
Risk Free Yield
Curve
Calibration
Credit
Spread
Prices
Market Price is
assumed to reflect the
true value of the Bond.
Recovery Value
Recovery Value is
normally extracted
from the disclosure
of Rating Agency.
Apply to Bond
Pricing
3.4 Pricing Process
Structural Model : Merton Type Model
Company Value
Liabilities
Stability
Rating Agency
Disclosure
Statistical
Analysis
Measuring the
Probability of
Default
Measuring the
Recovery Value
Credit
Spread
Apply to
Bond
Pricing
3.5 Pricing Process
Our bond pricing methodology is based on a Hybrid Approach combining the Structural and
Risk Neutral models given the state of the Malaysian bond market
Concurrently, BWM is undertaking a comprehensive on-going effort to improve the quality and
granularity of information (e.g securities master, trading data etc)
3.6 Pricing Process
In simple terms, BWM uses the prices of observed trades in the market to derive the prices of
untraded bonds, taking into account the differences between different issuers and structures.
Therefore, EVERY bond has its own individual spread relative to its credit class
Background Study
Define
Matrix
Segmentation
Classes
Other studies:
Credit scoring of
issuers within
industry
Daily Process
Populate into
segments
Apply filtration and
watch bond rules
Any trading data
RISK NEUTRAL
MODEL
ELEMENT
Build yield
curves
Assign
Individual
Spreads
Derivation of individual
spread for PDS via:
•Application of credit
score
•Structure
•Size
•Observation from past
trades
•Market and macro
Economic factors
STRUCTURAL MODEL
ELEMENT
Price ALL
bonds
Feedback and
Verification with
market
3.7 Pricing Process
Pricing of bonds that are untraded or rarely traded
 Obtain a base spread from the past real transaction data
 Track the change of spread over time
 Estimate the spread of the bond relative to changes in the yield curves and other benchmarks
Y
i
e
l
d
Yield curve(AA)
20bp
Real Transaction
Evaluation Yield
20bp
15bp
15bp
Spread(AA)
Spread of specific bond
Base yield curve
(AAA)
3.8 Pricing Process
Bond types priced by BWM:
Callable Amortizing Bonds with Secondary Notes
Discount Bond
Bullet Bond
Fixed Rate Bond
Amortizing Bond
As of Feb 2006:
Callable Bond
Total stocks in the market:
Convertible Bond
Exchange Bond
Priced by BWM:
Bond with Warrants
Fixed Rate ABS
Not priced by BWM:
Callable ABS
Fixed Rate MBS
Not rated or short term issues eg CP and Bills
Callable MBS
Loan stocks and Notes
Stepping FRB
Floating Rate Note
Floating Amortizing Note
Floating Rate ABS
Floating Rate MBS
Bond with Secondary Notes
Amortizing Bond with Secondary Notes
Callable Amortizing Bond
Stepping Amortizing Bond
Callable Stepping Bond
Callable Stepping Amortizing Bond
Convertible Stepping Bond
Callable Bond with Secondary Notes
Convertible Bond with Secondary Notes
2440
1723
426
291
4.0 Delivery Channels
3 different delivery modes to suit client’s requirements
BONDSTREAM
PRICING
Excel download
TERMINAL
BWM Daily
Valuations
5 pm KL
WEB
csv file download
DOWNLOAD
DIRECT DATA
FEED
File to file transfer direct into
client’s system
THANK YOU
To find out more on what we can do for you, contact our Market Development Team at:
Tel: +603 2711 5122 Fax: +603 2284 1807 Email : [email protected]