Deutsche Bank completes first Strip Bond Trade in Taiwan
Cynthia Chan, Deutsche Bank Head of Global Markets, Taiwan, said," This transaction is not only the first in the Taiwan market but also a landmark development for the debt market here."
Loh Boon Chye, Deutsche Bank Head of Global Markets, Asia said, "Deutsche Bank recognized a potential issue in the market that centered on the need for greater liquidity, and identified a viable market solution. We are proud to have worked closely with The Financial Supervisory Commission in developing the product and trading guidelines for Strip Bonds in Taiwan. The FSC has been highly responsive in meeting the challenge of creating this new dynamic in the debt market which will provide significantly greater flexibility and liquidity."
In September 2004, The Financial Supervisory Commission selected Deutsche Bank Taiwan's bond stripping proposal as the most feasible proposal to help to resolve the TWD structured bond liquidity issue. Deutsche Bank then successfully built up a bond stripping platform which is not only in line with current legal frame work but also achieves the objective of protecting the interests of bond fund investors.
The significant task of developing the final strip bond product required Deutsche Bank to work through a wide range of issues over a 5 month period. This included obtaining approvals from the Financial Supervisory Commission, Securities and Futures Bureau, Bureau of Monetary Affairs, Gretai Securities Market, Department of Taxation and Taiwan Securities Central Depository Co., Ltd.
Coordination was required between the Taiwan Central Depository, custodian banks, paying agents, authentication banks and Gretai Securities Market in the procedure of physical bond cancellation, the conversion from physical bond to the scripless booking, and the booking of scripless bond.
A proposed tax scheme on the floating structured bonds was developed and this was approved by the Ministry of Finance on 28th Jan. 2005. A large amount of legal work was also provided and coordinated in the design of extensive documentation.
In bond stripping, the original bond is replaced by two separate bonds one called IO (interest only) portion, where the owner is entitled to receive all the coupon payments, and a second one called PO (principal only), where the owner is entitled to the principal repayment on maturity. The advantage is that the owner of the bond is able to trade coupon payments and principal redemption payments separately. The owner of a structured bond is able to sell the structured interest rate stream ( the IO)- while retaining the credit and the principal redemption payment (the PO). This allows bond funds to manage their USD rates exposure, which is on the coupon payment, without touching their principal investment.
Taiwan's overall debt market has grown significantly in recent years, particularly in the issuance of structured notes which are believed to total approximately NT500 Billion. Some of the structured notes are 'inverse floaters' whose returns rise when interest rates fall. The development of a strip bond market in Taiwan would particularly assist in creating an efficient market as 'inverse floaters' reprice to market in a rising interest rate environment.
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Deutsche Bank ranks among the global leaders in corporate and investment banking, securities, derivatives, transaction banking, asset management, and private wealth management, and has a significant private & business banking franchise in Germany and other selected countries in Continental Europe. In Asia Pacific, Deutsche Bank has over 30 offices in 15 countries with more than 6,000 staff.
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