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Bank Indonesia sets up forex group to tackle rupiah volatility

Publication Date : 02-04-2014

 

Bank Indonesia (BI) launched on Tuesday the country’s first Foreign Exchange Market Committee (FEMC), the job of which will be to reduce foreign exchange volatility in the onshore market and spur higher use of available instruments.

The committee expects to boost spot transaction volume to around US$4 billion per day within the next few months from between $1.5 billion and $2 billion per day at present, according to committee chairman Panji Irawan, who is the head of treasury at state-owned Bank Mandiri, the nation’s largest lender.

Members of the committee include representatives of BI, the Financial Services Authority (OJK), the Indonesian Bankers Association and Association Cambiste Internationale (ACI) Indonesia, as well as state, private, foreign, joint venture and regional development banks.

Indonesia’s daily foreign exchange (forex) transaction volume was much lower than that of neighboring Malaysia and Singapore. Forex transaction volume averaged $5.01 billion per day in Indonesia during April 2013, 66.8 per cent of which was dominated by spot transactions. That compares with $11.09 billion in Malaysia and $383.07 billion in Singapore.

“The spot transaction is the most commonly used instrument as of now. So we are looking to boost the use of spot first and then other instruments,” Panji said on Tuesday.

A spot transaction is a forex agreement between two parties with a two-day completion time frame, while a forward transaction, which accounted for 27.5 percent of daily forex transactions in April last year, takes more than two days to wrap up.

BI Governor Agus Martowardojo said forex demand had continued to rise in line with domestic economic growth. However, the uses of current instruments were limited and the transaction volume was still low, he added.

He therefore expected the FEMC to “deliberate and solve issues” in terms of forex liquidity.

Benedictus Budisetiawan, Bank Internasional Indonesia (BII) global markets head, lauded the committee’s establishment, saying that it would assist forex commercial banks carry out their transactions.

“Our average spot transaction volume has grown an average of 300 per cent since the middle of 2013. This is similar to what has happened at other banks,” he said without providing details.

Mandiri finance and strategy director Pahala N. Mansury claimed that the lender currently controlled 20 to 30 per cent of the forex market. “We aim to increase the share to 40 per cent this year, supported by higher usage of instruments among our corporate clients,” he said.

According to HSBC global markets head Ali Setiawan, who is also the committee’s deputy head, the FEMC will issue a code of conduct to be used among forex traders in order to avoid rate rigging, similar to that found in Singapore and London.

In mid-2013, the Monetary Authority of Singapore (MAS) found evidence that traders from several banks had colluded to deliberately weaken the rupiah by manipulating their quotes for non-deliverable forwards (NDF) and ordered that the guilty employees be fired. MAS then recommended that banks use the Jakarta Interbank Spot Dollar Rate (JISDOR) set by BI as a benchmark to settle their NDF contracts.

 

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