15 May 2013
REGULATION ON HEDGING TRANSACTIONS IN THE FRAMEWORK OF GOVERNMENT DEBT MANAGEMENT

The Minister of Finance on 4 January 2013 issued Regulation No. 12/PMK.08/2013 regarding Hedging Transactions in Government Debt Management (“Regulation”). The Regulation was issued to implement Article 26 (2) and (4) of Law No. 19/2012 regarding 2013 State Budget (“Budget Law”), which allows the government to hedge its debts against interest and exchange rate fluctuations

The hedging transactions meant in the Regulation are transactions entered into in the framework of the management of (i) government debt portfolio risks; and (ii) rate fluctuation risks in relation to government debts. The Regulation specifically states that the hedging may not be conducted for speculative purposes.

A government hedging transaction may be initiated by the government or by an offer from a counterparty which is made on the basis of the counterparty’s loan to the government (underlying loan.). The counterparty in the transaction could be a foreign exchange bank, a non-bank financial institution and/or an international financial institution, provided that they at least have an “A” credit rating from two international credit rating agencies as well as a good financial track record in transactions with the government.

Before a hedging transaction is implemented, the Minister through the director general must determine the hedging policy. The Regulation stipulates that the policy must state, among others, the purpose of the hedging, the market risk target of the debt portfolio, the hedging instrument to be used, the volatility threshold of the debt repayment, and the validity period of the policy.

Besides stipulating the general rules, the Regulation also stipulates provisions regarding identification the government’s need to conduct hedging, implementation of the hedging and the administration and cost associated with the hedging transaction as well as evaluation of the transaction itself.

The Regulation has been in force since the day of its issue of 4 January 2013. (by: Hamud M. Balfas).