October 2, 2019 / 9:37 AM / 19 days ago

Indonesia c.bank paves way for derivative clearing houses to reduce risks

JAKARTA, Oct 2 (Reuters) - Bank Indonesia has issued new rules which will allow companies and investors to set up clearing houses for interest rate and foreign exchange derivative transactions, to reduce the risk of default and improve market liquidity, officials said on Wednesday.

The move is in response to a G20 resolution to control derivative risks after the 2008 global financial crisis, said Agusman, the executive director of the financial market deepening department at BI.

In recent years, BI has been stepping up efforts to broaden and deepen financial markets in Southeast Asia’s biggest economy, saying it could make the rupiah currency less volatile to global market moves and improve monetary policy transmission.

Under the new rules that are effective June 1, 2020, BI details requirements to set up a central counterparty clearing body (CPP) that will eventually clear most over-the-counter (OTT) derivative transactions with a margin set by the agency and its members, said Agusman, who goes by one name.

Investors looking to set up a clearing house must have a minimum capital of 400 billion rupiah ($28.19 million) and there is a 49% foreign ownership cap, Agusman said, adding that BI also requires investors to submit a three-year business plan.

Agusman said the plan will also reduce liquidity gaps in Indonesia’s banking industry.

“Our main issue all this time is big banks don’t want to transact with smaller banks, so the flow of liquidity becomes irregular and not smooth,” Agusman said, adding that the clearing houses can help manage transaction risks for the bigger banks.

Last year, BI launched ‘Indonia’, a new benchmark for the overnight interbank market, to push for more interest rate swap and overnight index swap transactions.

It has also encouraged more future trading of foreign exchange after last year’s launch of transactions of domestic non-deliverable forwards in rupiah and allowing sales of structured foreign exchange hedging products in 2016. ($1 = 14,187.0000 rupiah) (Reporting by Gayatri Suroyo; Editing by Kim Coghill)

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