BI REGULATION ON HEDGING TRANSACTIONS
As a reaction to the volatility of Rupiah over the past year, Bank Indonesia has issued a new regulation on hedging transactions. This Bank Indonesia Regulation No. 15/8/PBI/2013 regarding Bank Hedging Transactions, (“PBI No. 15/2013”), enacted in October 2013, is expected to encourage the use of derivatives as a tool to hedge foreign currency exposure and to subsequently reduce foreign currency spot transactions and ease pressure on the Rupiah.
The following are some of provisions of note:
- Indonesian business actors are allowed to hedge their foreign exchange positions by entering into standard plain vanilla option, forward or swap transactions.
- These business actors may enter into a purchase of foreign currency against Rupiah transaction for hedging purposes (“Purchase Hedging Transaction”) only if there is proof of the existence of an economic underlying activity for the transaction, such as debt payment obligation in foreign currency or export import and investment. The nominal amount and the term of the Purchase Hedging Transaction may not exceed the nominal amount and term of the underlying activity.
- The settlement of the hedging transaction must be done through the movement of the principal fund in full. Netting settlement is only allowed in the event of force majeure or rollover of the foreign exchange against rupiah transaction for hedging purposes over several economic activities, which must be supported by documentary evidence. Exemption for the netting settlement will also prevail for business actors that use a bank’s services as meant in Bank Indonesia regulations concerning foreign exchange against rupiah transactions.
The enactment of PBI No. 15/2013 also serves as affirmation to the permission given to State Owned Entities to enter into hedging transactions, as provided under Regulation of the Ministry of State Owned Companies No PER-09/MBU/2013, dated 25 September 2013.
Through this PBI No. 15/2013, it is hoped that the volatility of the Rupiah can be reduced and the role of the domestic foreign exchange market in stabilizing the Rupiah exchange can be increased. (by: Elsie F. Hakim)
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26 Mar 2014
BI REGULATION ON HEDGING TRANSACTIONS
As a reaction to the volatility of Rupiah over the past year, Bank Indonesia has issued a new regulation on hedging transactions. This Bank Indonesia Regulation No. 15/8/PBI/2013 regarding Bank Hedging Transactions, (“PBI No. 15/2013”), enacted in October 2013, is expected to encourage the use of derivatives as a tool to hedge foreign currency exposure and to subsequently reduce foreign currency spot transactions and ease pressure on the Rupiah.
The following are some of provisions of note:
- Indonesian business actors are allowed to hedge their foreign exchange positions by entering into standard plain vanilla option, forward or swap transactions.
- These business actors may enter into a purchase of foreign currency against Rupiah transaction for hedging purposes (“Purchase Hedging Transaction”) only if there is proof of the existence of an economic underlying activity for the transaction, such as debt payment obligation in foreign currency or export import and investment. The nominal amount and the term of the Purchase Hedging Transaction may not exceed the nominal amount and term of the underlying activity.
- The settlement of the hedging transaction must be done through the movement of the principal fund in full. Netting settlement is only allowed in the event of force majeure or rollover of the foreign exchange against rupiah transaction for hedging purposes over several economic activities, which must be supported by documentary evidence. Exemption for the netting settlement will also prevail for business actors that use a bank’s services as meant in Bank Indonesia regulations concerning foreign exchange against rupiah transactions.
The enactment of PBI No. 15/2013 also serves as affirmation to the permission given to State Owned Entities to enter into hedging transactions, as provided under Regulation of the Ministry of State Owned Companies No PER-09/MBU/2013, dated 25 September 2013.
Through this PBI No. 15/2013, it is hoped that the volatility of the Rupiah can be reduced and the role of the domestic foreign exchange market in stabilizing the Rupiah exchange can be increased. (by: Elsie F. Hakim)