Bank Indonesia (BI) decided to relaxes the macro-prudential intermediation and loan to value (LTV) ratios to strengthening banking intermediary function -Photo: Special

JAKARTA (TheInsiderStories) – Bank Indonesia (BI) aimed to expand the Domestic Non Deliverable Forward (DNDF) policy to boost foreign exchange (forex) supply and demand in the market. It stated in the new regulation on DNDF transaction.

BI said, with this new policy, the central bank want to make customers and foreign parties have a flexibility in conducting transactions through DNDF. Also, it is expected to provide convenience for market players to hedge the exchange rate risk.

The regulation stated, all DNDF transactions must have an underlying transaction which includes trading of goods and services as well as domestic and foreign investment. However, the underlying does not include securities issued by the BI, placement of funds such as savings, current accounts, deposits and Negotiable Certificate Deposit.

Also, credit facilities have not been withdrawn, documents on the sale of foreign exchange against rupiah originating from the sale of export proceeds, and non-underlying loans also include inter-company loans and money transfer activities by fund transfer companies.

Furthermore, the underlying transaction is excluded for the sale of forex transactions through DNDF by customers or foreign parties with a maximum nominal of US$5 million or its equivalent per transaction for each customer or every foreign party.

Other material stipulated in the regulation is about the transaction termination, that can be carried out without underlying transaction.

The DNDF transaction market so far is quite active. At least 13 banks are active in DNDF interbank market. A number of foreign investors for use the DNDF transactions to hedge their investments in shares while a number of corporations including one state-owned company participate in DNDF transactions for hedging.

DNDF transactions are effective starting Nov. 1 of 2018. The Bank developed the transaction not only to added alternative hedging instruments to mitigate exchange rate risk, but also helped stabilize the Rupiah movement.

Prior to the DNDF, foreign investors who owned Rupiah assets, such as government bonds or shares, in large numbers had many NDF transactions in Singapore, Hong Kong, or London.

However, the overseas NDF market is full of speculators. As a result, the exchange rate of foreign NDF futures transactions can increase and affect prices in the domestic forex market. With the development of the DNDF, BI hopes that this kind of condition can be anticipated.

Written by Staff Editor, Email: theinsiderstories@gmail.com