Foreign banks develop onshore currency market
Foreign banks develop onshore currency market
SINGAPORE (Dow Jones): The demise of the dollar-rupiah cross
currency swap market offshore has led several major foreign banks
in Jakarta to create an onshore market to trade in dollar-rupiah
cross currency and rupiah interest rate swaps, industry sources
told Dow Jones Newswires.
The offshore dollar-rupiah cross currency swap market perished
as spot rupiah trading ground to a halt after Bank Indonesia
implemented new foreign exchange restrictions in mid-January.
Foreign banks in Jakarta met about a month ago to discuss the
formation of an onshore swap market, which market watchers said
will take off very slowly.
"Near-term growth restraints are significant," said Michael
Proulx, an analyst at Prebon Yamane.
When foreign banks responded to the new curbs on offshore
rupiah trading by setting up a rupiah non-deliverable forward
market, Bank Indonesia didn't show much enthusiasm.
But the central bank is showing signs of being more receptive
to the genesis of a swap market in Jakarta, bankers said.
The central bank has less to worry about in this case, as the
absence of an offshore swap market deprives participants in
Jakarta of arbitraging opportunities, market observers said.
Furthermore, the instrument will likely be used mainly for
hedging and not speculation, dealers said.
"This is one of the products that customers need for hedging.
As long as you use it for that purpose, I don't see why they
wouldn't allow it," said a Jakarta-based dealer at a large
European bank.
"Bank Indonesia would welcome this - it's a risk management
tool, which would help even the local banks to manage their
balance sheets," said another Jakarta-based dealer at a European
bank.
After shutting down their dollar-rupiah cross currency swap
desks in Singapore and Hong Kong, a few of the foreign banks have
already set up new cross currency swap desks in Jakarta to meet
their customers' hedging requirements.
Meanwhile, more banks have ventured into the rupiah interest
rate swap market, offering quotes to their customers since early
March, though no trades have been reported so far, dealers and
brokers said.
"We have banks that are willing to support prices, but
nobody's dealing in them," said Proulx at Prebon Yamane.
"I presume that could be due to the fact that spot rupiah has
been so volatile that swaps have blown through the top," said a
third dealer at a European bank.
Foreign banks will likely dominate trading in the onshore swap
market, experts said. The likelihood of "ring fencing" - which
limits the liability of foreign banks' head offices for
transactions - will likely deter trading between foreign and
local banks.
Several leading foreign banks have moved to insert new clauses
in the standard agreement of the International Swaps and
Derivatives Association detailing the conditions when head office
liability doesn't apply, such as in times of a debt moratorium or
when capital controls are imposed.
"We won't see too many Indonesian banks involved because they
don't have the credit rating to trade with offshore parties,"
said Proulx.