Derivatives trading regulated

Derivatives trading regulated

JAKARTA (JP): Bank Indonesia (BI), the central bank, issued
new guidelines on derivatives trading by local banks yesterday in
an effort to prevent major losses in the future.

Paul Soetopo Tjokronegoro, a director at Bank Indonesia, said
that under the new guidelines, banks are allowed to conduct
trading on behalf of themselves and their customers.

The derivatives transactions the banks can enter are limited
to those dealing with foreign exchange and interest rates,
excluding those dealing in stocks and futures, Paul said.

He added that banks may enter transactions on stock-related
derivatives products only with the consent of Bank Indonesia.

"Derivatives transactions other than those mentioned above are
outlawed," Paul said when announcing the guidelines.

Paul also used the media briefing to explain that most local
banks do not have enough knowledge or information, let alone
skills, in derivatives trading apart from those based on foreign
exchange and interest rates.

Mukhlis Rasjid, another director at Bank Indonesia, concurred
that stock and futures-related derivatives products carry more
risks.

"You see, interest rates fluctuate in a very small range, but
not stock indexes. They can drop and shoot up in a very short
time," Mukhlis said. "You can see from the Barings case."

Barings Bank, a London-based merchant bank, collapsed after
its Singapore futures division suffered losses of more than $750
million in unauthorized risky Japanese stock futures deals. The
233-year-old bank has since been bought by ING of the
Netherlands.

Paul explained that to reduce future big losses on the part of
local banks, banks are required to provide their own written
guidelines on how to conduct derivatives deals in a prudent
manner.

In conducting derivatives transactions, bank boards of
directors and commissioners should be involved, not merely
notified.

"Bank commissioners are required to actively monitor and
supervise derivatives transactions," Paul added.

A number of critics have called on the government to restrict
local banks from taking part in derivatives trading for
speculation instead of for hedging.

Last year, two publicly-listed Indonesian companies incurred
loses of US$66.6 million from derivatives trading. They are PT
Indah Kiat Pulp & Paper and PT Tjiwi Kimia, both paper makers
under the Sinar Mas Group.

Paul explained that under the new guidelines banks may not
conduct derivatives trading which could incur losses of more than
10 percent of their capital.

When banks enter derivatives deals on behalf of their
customers, they are required to have a margin deposit of at least
10 percent of the total value of the deals.

Paul noted that before sealing derivatives transactions, in
the name of customers, banks are obligated to give a clear
explanation to their customers about the possible risks of the
transactions.

"The explanation should be clearly represented in terms of the
derivatives contracts," Paul said.

Indonesian publicly-listed investment holding firm PT Dharmala
Sakti Sejahtera is currently engaged in a court battle against
Bankers Trust New York Corp. over a US$69-million financial
dispute resulting from their derivatives transactions.

Dharmala said the dispute was caused by differences in
financial calculations, which resulted from unclear information
provided by Bankers Trust.

However, Bankers Trust reportedly said that it had not misled
Dharmala and accused Dharmala of trying to escape the contract.
(rid)