East Asian central banks outline plans for local-currency bond fund

By Reshmi Basu

New York, April 19 - The Executives' Meeting of East Asia and Pacific Central Banks (EMEAP) said it has completed the initial study for a local currency bond fund, a follow up to the $1 billion Asian Bond Fund launched in 2003 for dollar-denominated debt.

In its initial study, the group has recommended a preliminary framework consisting of two components: a Pan-Asian Index Fund and a Fund of Bond Funds.

The pan-Asian fund will be a single bond-index fund investing in local-currency bonds issued in EMEAP economies.

The fund of funds will have a two-layered structure, with a parent fund investing in a number of country sub-funds comprising local-currency bonds from the respective EMEAP economies.

The central banks intend the bond fund program to strengthen regional financial cooperation in East Asia and promote the development of bond markets in the region.

The second, local-currency phase is aimed at encouraging the development of index bond funds in the regional markets and enhancing regional and domestic bond market infrastructure.

The second phase 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 ABF2 will help to encourage the development of index bond funds in regional markets; it can also be a useful catalyst for the improvement of domestic bond markets and for greater harmonization of bond market infrastructure and legal, regulatory, and tax arrangements across the region," said David Burton, director of the International Monetary Fund's Asia and Pacific Department, in a news release.

In June 2003, the Asian Bond Fund was launched at an initial size of $1 billion. The Fund invested in a basket of dollar-denominated bonds issued by Asian sovereign and quasi-sovereign issuers in EMEAP economies.

The EMEAP Group comprises 11 central banks and monetary authorities in the East Asia and Pacific region, including Australia, China, Hong Kong SAR, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, and Thailand.

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