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.