BI's scriptless system to foster domestic bond market

Urip Hudiono, The Jakarta Post, Jakarta

Bank Indonesia (BI)'s new, fully computerized securities settlement system is expected to support and promote the country's domestic bond market.

"The system's ability to promptly and reliably manage large quantities of transactions of government domestic bonds will increase investors' confidence in the bonds, and therefore foster their liquidity and market growth," BI Governor Burhanuddin Abdullah said during the recent launch of the system.

The central bank, according to Law No. 24/2003 on government domestic bonds, is now mandated to administer the trade of the bonds.

Called Bank Indonesia's Scriptless Securities Settlement System (BI-SSSS), the system has been handling bond transactions since February. The government plans to issue a total of Rp 24 trillion worth of domestic bonds this year. The first issue took place in February, worth about Rp 2.52 trillion (US$296.5 million), which was followed by a Rp 2 trillion issue earlier this month.

BI-SSSS is an extension of the central bank's Real Time Gross Settlement (BI-RTGS) system. BI-RTGS has been the country's main electronic interbank cash transfer and clearing system since it was introduced in 2001.

BI-SSSS enables its current members, consisting of 145 banks, 11 sub-registries, nine foreign currency exchange companies and four stock brokers, to settle bond transactions online through locally installed SSSS terminals (ST).

The terminals are connected via dedicated leased lines with BI's Automatic Bidding System central computer (BidCC) and BI's SSSS central computer (SCC). The BidCC administers the bidding on bonds, while the SCC handles the settlement of bond transactions.

The new, paperless system also enables the Ministry of Finance, as the issuer of government domestic bonds, to monitor the bonds' current standing.

Previously, the whole process was done manually, which in practice proved prone to delays and human error, resulting in frequent settlement failures.

At present, the BI-SSSS can only handle bond transactions in rupiah. However, because the system is designed according to global clearing standards set by the Bank for International Settlement (BIS) and the International Organization of Security Commissions (IOSCO), BI will be able to develop it for bond transactions in foreign currencies, in anticipation of a future borderless international bond market.

For reliability, the system implements a delivery-versus- payment (DVP) method, enabling it to verify the identities of both the buyer and the seller, as well as the buyer's available funds. If the buyer does not have enough funds, the transaction is put into a queue until the buyer has adequate funds.

"The DVP method will reduce settlement failures and prevent any monetary disruption," said Burhanuddin.

The system's reliability was demonstrated in an exhibition during its launching, in which giant state Bank Mandiri made an actual transaction with Deutsche Bank AG over a batch of government domestic bonds worth Rp 100 billion.

An information technology officer at a major bank, however, questioned the central bank's preparations for dealing with possible technical malfunctions of the system.

"If there is any technical malfunction, will BI be able to get the system running again in time to prevent any settlement failures?" he asked, adding that he also found some difficulties in integrating the system's software with the software used by his bank.

As a contingency measure, BI has provided back-up facilities for the BI-SSSS, as well as several firewall computer servers for added security. It also provides optional dial-up connections and direct guest terminals in case there is a disturbance in the system's dedicated leased lines.