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G8 Action Plan for Developing Local Bond Markets
in Emerging Market Economies and Developing Countries

Potsdam, Germany, May 19, 2007

  • See also G8 Finance Ministers Pre-Summit Statement
  • See also G8 Action Plan for Good Finance Governance in Africa
  • See also Who's Who [pdf]
  • Modern and efficient domestic market structures make important contributions to financial intermediation, finan- cial stability and sustained economic growth. Deep and well functioning local currency bond markets in Emerging Market Economies (EME) as well as in developing countries are key in this respect.

    Sound macroeconomic policies, robust market infrastructure and a strong transparent legal framework are key for a broader participation from long-term domestic and foreign investors and enhance the efficient international diversification of capital. In this respect, EME have undertaken a great deal of reforms to reduce their dependency on external finance. Further reforms are necessary to deepen their domestic bond markets, and given countries' and regions' different stages of development and the different natures of their domestic financial systems, sequencing and prioritization of reforms will be different in each country.

    In consultation with other relevant international institutions and partners from emerging and developing countries, considering the results of the workshop on “Developing Bond Markets in Emerging Market Economies”, held on May 9/10, 2007 in Frankfurt, we identified policy issues that contribute towards further progress aiming at en- hancing long-term growth, financial stability and market efficiency in EME.

    We ask our Deputies and the IMF and World Bank to report before our meeting in October 2007 on how to im- plement this action plan. We ask the IMF and World Bank, in cooperation with other relevant international institutions, to regularly report, on this basis, on the progress of the implementation of this action plan. These reports which we will discuss at our future meetings, when appropriate, should cover the following key policy issues:

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    1. Strengthening market infrastructure and public debt management
    There is a need to enhance the regulatory framework and risk-based prudential regulation, removing non-prudential barriers to entry and investment, nurturing a vibrant credit culture, implementing international standards and practices (including documentation), improving the human capital of both local market participants and regulators and promoting efficient and transparent markets. Clearing and settlement systems using international best practices enhance the integration of international financial markets, improve confidence in the EME markets themselves and reduce risks and transaction costs. We reaffirm the IOSCO (International Organization of Securities Commissions) principles for securities regulation and the CPSS (Committee on Payment and Settlement Systems) / IOSCO recommendations for securities settlement systems.

    IMF and World Bank’s diagnostic work identified common weaknesses in securities settlement systems. We believe that technical assistance (TA), provided bilaterally and multilaterally, should be targeted to meet common weaknesses and we support ongoing efforts in this respect. These weaknesses include: lack of independence of the regulator and of supervision by regulators; lack of enforcement of existing rules due to a shortage of resources and skills in the regulator; weak risk management practices in financial intermediaries and weaknesses in legal frameworks for mutual funds; weaknesses in governance of securities settlement systems.

    The main direction of policy should be towards the creation of a liquid local currency government bonds market for benchmarking purposes.

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    2. Broadening and diversifying the investor base
    Broadening and diversifying the investor base is one of the most important steps towards deepening local bond markets in EME. The development of the domestic investor base is a priority that can be fostered by improving the regulatory environment and lowering barriers for foreign investors. We call upon the IFI to support the expansion of the domestic institutional investor base by helping to design enabling reforms of private pension systems, mu- tual funds and insurance markets.

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    3. Developing of derivative and swap markets
    Derivative and swap markets help to address exchange rate and interest rate risks. While in some EME derivative markets have significantly grown in recent years, in most EME these markets remain underdeveloped, particularly those for interest rate derivatives. The development of those markets needs to be underpinned by an appropriate infrastructure and regulatory framework, consistent with the conditions of the local financial system

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    4. Broadening the database
    Limited aggregated data on EME bond markets, particularly on currency composition and maturity and coverage of corporate bond markets hampers the analysis of the local currency bond markets.

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    5. Promoting regional initiatives
    We noted with great interest that a regional bond market initiative by 10 ASEAN countries and China, Japan and Korea (Asian Bond Markets Initiative) is making progress in areas such as diversification of bond issuers and instruments. This initiative is based on a strong political commitment and appropriate involvement of the Asian Development Bank. Regional bond markets could also provide the critical mass necessary to justify costly invest- ments in infrastructure such as trading platforms, valuation services, clearing, settlement and custody services, and accredited regional rating agencies for the smaller EME.

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    6. Developing bond markets in less developed countries, particular Sub-Saharan African countries
    The specific challenges faced by developing countries, particularly Sub-Saharan African countries in developing local bond markets include the different debt structures and level of market infrastructure. Interested Sub-Saharan African countries are invited to adopt the guidelines and recommendations (best practices) outlined in this action plan. We encourage these countries to continue to implement the necessary macroeconomic and banking system reforms, which are preconditions for the sustainable development of capital markets and highlight the importance of sub-Saharan African countries taking full account of debt sustainability considerations when undertaking any new bond issuance, in particular ensuring consistency with the IMF/World Bank Debt Sustainability Framework.

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    7. Technical assistance
    Various IFI and multilateral and bilateral agencies provide TA to develop local currency bond markets in EME and developing countries. These institutions are invited to improve TA and its coordination to avoid duplication and overlap.

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    Source: German Ministry of Finance

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