Charles E. Merrill Professor of Finance and Economics
In most countries around the world, the financing of corporations with debt takes the form of bank loans, both short term and long term. While bank finance has the benefit of monitoring by a qualified financial intermediary, it suffers from the disadvantage of concentration of risks – credit, market, liquidity and operational – in the banking system. Corporate bonds issued in public markets have the advantage of diffused ownership and improved allocation of risk. Unfortunately, however, corporate bond markets are generally far less developed than markets for equity, foreign exchange and the major commodities, in terms of transparency, liquidity and ease of trading. These issues are accentuated by the over-the-counter architecture that is typical of corporate bond markets, in which trading takes place in a bilateral setting between two counterparties, rather than a central market place, which adds to transaction costs, due to search, asymmetric information and inventory costs. These factors cause investors to demand an additional premium for trading in corporate bonds, which, in turn, leads to an increase in the cost of debt capital for corporations.
Historically, the United States has had the most diverse and liquid corporate bond markets, although even these markets are fairly illiquid compared with equity markets. Even in the United States, the average corporate bond trades a few times each year, while the average stock trades every few minutes if not seconds. More recently, this market went through a serious transformation, especially in the past decade or so. Starting in 2002, the self-regulatory securities industry body, known as Financial Industry Regulatory Authority (FINRA), required all broker-dealers to disclose all transactions, within 15 minutes, to a central database known as the Trade Reporting and Compliance Engine (TRACE). This data-base, covering virtually all transactions, was fully operational by 2004, and, since then, has vastly improved transparency, and hence, market efficiency.
The global financial crisis of 2008 and the subsequent regulatory developments around the world including the Dodd-Frank Act in the United States, the European Market Infrastructure Regulation (EMIR), and the Basle III banking regulations have changed the financial environment around the world. These major changes have had a major impact on corporate bond markets.
What lessons do these market realities hold for the development of corporate bond markets in Asia, particularly among the emerging economies? Can some of the innovations in market architecture and regulation be replicated in Asia? What are the potential challenges in implementing these innovations in Asian countries? What are the tools available to regulators to improve the efficiency of corporate bond markets? Can the development of corporate bond markets in Asia reduce the concentration of risks in the banking system and improve asset quality? This executive talk provided some thoughts on these issues, based on recent academic research on corporate bond markets, which are relevant to investors, corporations and regulators.
About the Speaker
Professor Marti G. Subrahmanyam is the Charles E. Merrill Professor of Finance and Economics in the Stern School of Business at New York University and a frequent guest of CAMRI at NUS Business School. He holds a degree in Mechanical Engineering from the Indian Institute of Technology, Madras, a post-graduate diploma in Business Administration from the Indian Institute of Management, Ahmedabad and a doctorate in Finance and Economics from the Massachusetts Institute of Technology.
Professor Subrahmanyam has served as a consultant for several corporations, industrial groups and financial institutions in the U.S., Europe, Asia and Latin America. He also sits on the boards of several companies including the ICICI Bank, Infosys Technologies, Metahelix Life Sciences, Nomura Asset Management, and the board of advisers of Apollo Management L.P. He serves as an advisor to various international and government organisations, including the Securities and Exchange Board of India (SEBI). He has taught extensively on executive programs in more than twenty countries around the world.
He has published numerous articles and books in the area of corporate finance, capital markets and international finance. He has been a visiting professor at leading academic institutions in Australia, England, France, Universita Guido Carli LUISS, Rome, Italy, Singapore and Churchill College, Cambridge University.
Professor Subrahmanyam currently serves or has served as an Associate Editor of the European Financial Management, Journal of Banking and Finance, Journal of Business and Accounting, Journal of Finance, Management Science, Journal of Derivatives, Journal of International Finance and Accounting, and Japan and the World Economy. He is the Editor of an academic journal specializing in derivative securities and markets entitled Review of Derivatives Research. His research interests include valuation of corporate securities, options and futures markets, equilibrium models of asset pricing, market microstructure and the term structure of interest rates. He has published several papers in these areas in many of the leading international journals in economics and finance, including Econometrica, The Quarterly Journal of Economics, Journal of Finance, Journal of Financial Economics and The Review of Financial Studies. His recent books include Recent Advances in Corporate Finance (Irwin, 1985) and Financial Options: From Theory to Practice (Dow Jones-Irwin, 1992). He is currently working on a new book, Interest Rate Derivative Products.
Professor Subrahmanyam has won several teaching awards including, most recently, New York University's Distinguished Teaching Medal in 2003.
Opening Address by Professor Joseph Cherian, Director, CAMRI
Talk by Professor Marti G. Subrahmanyam
Question and Answer Session
Closing Remarks by Mr Bill Kelly, CEO, The Chartered Alternative Investment Analyst (CAIA) Association