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)