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Indonesian Regulator Eases Hedging Requirement for Banks

The Financial Services Authority (FSA) revised down the national bank loans growth to only 4 percent in this year, far from the initial estimate of 11 percent compared to 2019 - Photo by TheInsiderStories

JAKARTA (TheInsiderStories) – Indonesia’s Financial Services Authority (FSA) has revised a set of regulations on prudential measures for commercial lenders when selling structured products, a move that expected will help make currency hedging cheaper for bank customers.

Through a regulation that has been effective since April 22, the FSA has removed 10 per cent cash collateral requirements for banks selling structured products  a market-linked investment, that may link a financial product with a basket of among other, securities, indices, commodities, debt issuance or foreign currencies, and derivatives .

FSA Chairman Wimboh Santoso said the authority expects this move could help make hedging cheapers for bank customers.

He said collateral cost requirement has caused the premium cost on structured products sold in Indonesia expensive due to the high volatility of the exchange rate.

This also made domestic structured products hedging transaction less competitive if compared to Singapore, who does not require collateral cash as underlying in hedging transaction.

The FSA assumed this condition has shifted customers’s preference to conduct transaction overseas, including in Singapore. The estimation of structured product hedging transaction reach US$8 billion a year for one bank with potential margin $800 million in a year, according to FSA.

“With this policy, we expected foreign investors who have portfolio in rupiah currency no longer bear high cost in hedging transaction, this also an incentive in order we can attract more foreign investment,” said Santoso on Thursday (26/4).

This policy encourages domestic hedging transactions that culminate in Indonesia’s financial market deepening plans and extend protection to investors in the stock market against any decline of the Rupiah.

Since hedging transaction regulation issued in 2014, around 10 banks have improved their hedging products to include more types of derivative they previously did not sell, including forex call spread options, interest rate swap and cross currency swap.

The dollar has rallied through much of the past week as concerns over the US-China trade dispute receded, allowing the US currency to take advantage of a surge in Treasury yields led by the 10-year paper going over 3 per cent for the first time in four years.

Based on central bank’s data, the volume of forex transactions per day continues to increase to US$5.9 billion per day in 2018 from US$3 billion in 2013.

If many customers hedge their transactions, banks will have more head room to manage their future forex liquidity.

Email: elisa.valenta@theinsiderstories.com