On November 2018, Bank Indonesia (i.e. the Central Bank of Indonesia – “BI”) has enacted BI Regulation No. 20/13/PBI/2018 concerning IDR Interest Rate Derivative Transaction (“PBI 13/2018”). This PBI is issued as a response to the continuing decrease of IDR’s exchange rate against major FX currencies. It is also designed to provide additional hedging instrument in order to create a liquid and efficient money market that in the end will induce the stability of IDR.

Amongst some several distinct features in this PBI 13/2018, are the provisions concerning (1) Eligible Customer; (2) underlying transaction; and (3) netting settlement. Ad.1. Eligible Customer is defined as (i) non-bank legal entity, having a minimum capital of IDR5bio and has carried out its business activities for 12 consecutive months and (ii) individual, having an asset portfolio in the form of cash, current account (giro), savings, and/or deposits in minimum amount of IDR5bio. Ad.2. A bit different with the existing regulations concerning FX transactions against IDR, this PBI does not require underlying transaction/documents for IDR interest rate derivative transaction due to the consideration that the IDR interest rate derivative transaction’s market in Indonesia is still on its early stage and that the fluctuation of interest rate is considered to be (relatively) more limited compared to FX rate. Instead, it obliges Bank to conduct ‘mandatory analysis’ when entering into IDR interest rate derivative transaction with its customers. Ad.3. Under this PBI, IDR interest rate derivative transaction can be settled by way of netting. Further, when a breach of contract occurs, the settlement can be executed by way of close-out netting (the termination process of all IDR interest rate derivative transaction by computing the net value over the whole rights and obligations to the defaulting parties) as long as such mechanism has been regulated under the contract, but please note that it must be executed before the bankruptcy decision (if any) is rendered by the tribunal.

All in all, the above was one of BI’s ongoing efforts to induce market deepening for domestic derivative market in Indonesia. To shed more light on these ongoing efforts, earlier in September 2018, BI has also enacted BI Regulation concerning Domestic Non-Deliverable Forward Transaction (DNDF), whereby BI finally introduces/allows fixing (which has similar feature with netting) as settlement mechanism. This PBI on DNDF serves as an exemption to the (general) netting restriction under PBI on FX Transaction Against IDR. Going back even further, in 2016, PBI(s) on FX Transaction Against IDR has allowed for FX/ IDR structured product in the form of call spread option (with dynamic hedging mechanism). Again, this PBI(s) serve as an exemption to the previous PBI(s) (in 2014 and 2015) that allow only FX/IDR plain-vanilla derivative products.