Bank Indonesia Regulates Currency Hedging for Stable Rupiah

Bank Indonesia said it will regulate currency hedging by individuals and companies, including state-owned firms, to help stabilize Asia’s most-volatile currency.

The central bank will require Indonesians and corporations to present documents to show underlying economic activity, such as international trade, foreign debt and investments, to conduct hedging transactions with lenders, it said in a statement posted on its website today. The amount and duration of the hedges will be limited by the underlying activity, it said.

“There was previously no framework to guide currency hedging,” said Tri Sulistianing Astuti, a foreign-exchange dealer at PT Bank Rakyat Indonesia in Jakarta. “With increased awareness, both banks and companies won’t be hesitant to provide and take out hedges, which will reduce rupiah volatility as companies can better organize their dollar demand.”

The rupiah has fallen 16 percent against the greenback this year, the most among 24 emerging-market currencies tracked by Bloomberg, as Indonesia’s record current-account deficit and signs the Federal Reserve was preparing to cut stimulus deterred investors. One-month implied volatility, a measure of expected moves in the exchange rate used to price options more than doubled to 15.73 percent, the highest in Asia.

“This rule was issued as the regulatory framework for economic players in mitigating market risk amid the dynamics of the domestic foreign-currency market,” Bank Indonesia said in the statement.

State-Owned Firms

The State-Owned Enterprises Ministry on Sept. 25 said government-held firms can hedge against currency swings. Any gains or losses made from the hedging transactions will be accounted as company profit or cost, Difi Johansyah, a Bank Indonesia spokesman, said in Jakarta today.

Spot trading now accounts for an average of 73 percent of domestic foreign-exchange transactions and for all activity by state-owned firms, Johansyah said. The monetary authority expects the proportion of swaps and forwards trading to increase following the introduction of the new rules, he said.

Reference Rate

Bank Indonesia set its first spot benchmark for the rupiah in May to develop the onshore currency derivatives market by providing a reliable reference to settle the contracts, Johansyah said May 20. The central bank sets the fixing by compiling realized interbank transactions up to 9:45 a.m. local time and releasing the rate at 10 a.m.

The gauge competes with the daily fixing set by the Association of Banks in Singapore, which is used to settle non-deliverable forwards. The association changed how it sets the benchmark to using realized trades, from compiling submissions from lenders, it said in a June 14 statement. The Monetary Authority of Singapore began a review into potential manipulation of the NDF references in September last year.

The rupiah fell 0.2 percent to 11,533 per dollar as of 4:07 p.m. in Jakarta today, according to prices from local banks. The currency’s offshore one-month non-deliverable forwards declined 0.2 percent to 11,313.

The Association of Banks in Singapore set its rupiah fixing at 11,214 per dollar today, 2.9 percent stronger than Bank Indonesia’s benchmark, which was 11,540 per dollar. The offshore reference was on average 0.6 percent stronger than the onshore rate in September and 1 percent weaker in August. NDF contracts, unlike currency forwards, are settled in dollars. Who pays and how much is determined at the end of the contract in reference to a fixing.

Indonesia posted a current-account deficit of $9.8 billion in the second quarter, or about 4.4 percent of gross domestic product, the biggest in data compiled by Bloomberg going back to 1989. The shortfall may be 3.4 percent of GDP in 2013, Bank Indonesia Governor Agus Martowardojo said yesterday after holding the benchmark interest rate at 7.25 percent.

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