Offshore Rupiah Spot Fixing to End as Onshore Rate Converges

The Association of Banks in Singapore will discontinue its rupiah spot fixing used to settle non-deliverable forward contracts as the gap between onshore and offshore exchange rates converges.

Traders should use Bank Indonesia’s Jakarta Interbank Spot Dollar Rate, or Jisdor, to settle transactions starting March 28, when the offshore benchmark will no longer be published, the ABS said in an e-mailed statement yesterday. The fixing set by the Singapore-based association was 11,790 per dollar today, 0.51 percent stronger than the 11,850 Jisdor. The gap was as wide as 4.6 percent on Oct. 22, data compiled by Bloomberg show.

The association scrapped four spot fixings in June, replaced the Malaysian ringgit reference with an onshore rate and changed how it calculated the rupiah’s benchmark by using trades instead of surveys. The Monetary Authority of Singapore announced censures for 20 banks the same month, ordering them to set aside as much as S$12 billion ($9.5 billion) at zero interest, for seeking to rig reference interest rates amid a widening global review of interbank benchmarks.

“The level of the NDF will now be tied to the level of the onshore exchange rate and that’s a positive change,” Rajeev De Mello, who manages $10 billion as Singapore-based head of Asian fixed income at Schroder Investment Management Ltd., said in an interview today. “What’s now very important is that the onshore currency actually trades properly.”

‘Welcome Move’

Bank Indonesia required onshore lenders to use the Jisdor to settle currency derivatives in May, then-spokesman Difi Johansyah said at that time, following Bank Negara Malaysia, which asked local banks to use an onshore benchmark in January 2013. The Indonesian monetary authority calculates the reference by collecting realized trades between banks up to 9:45 a.m. then publishing the rate at 10 a.m. in Jakarta.

“As Jisdor was only launched in May 2013, we took time to observe Jisdor and its acceptance and use as a benchmark in the market,” the association said today in an e-mailed response to questions.

“This is a welcome move,” Bank Indonesia Deputy Governor Perry Warjiyo said today in a text message. “A vote of confidence to the domestic foreign-exchange market.”

The rupiah is the best-performing emerging-market currency this year, gaining 3.2 percent. It strengthened 0.4 percent today to 11,794 per dollar as of 11:58 a.m. in Jakarta, prices from local banks show. One-month non-deliverable forwards rallied 0.7 percent today to 11,771, trading 0.2 percent stronger than the onshore spot rate, according to data compiled by Bloomberg.

Converging Rates

“We expect the gap between the onshore and offshore fixings to continue converging until March 27,” said Irene Cheung, a foreign-exchange strategist in Singapore at Australia & New Zealand Banking Group Ltd.

The adoption of a local rupiah fixing is positive for the currency as it would end onshore-offshore rate divergence that has fueled foreign-exchange volatility in the past, Craig Chan and Prateek Gupta, Singapore-based strategists at Nomura Holdings Inc., wrote in a research note yesterday.

Onshore trading of the rupiah has picked up after the central bank scaled back intervention, Schroder’s De Mello said. Bank Indonesia wasn’t entering the market to support the rupiah, Warjiyo said in November without providing a time-frame.

“Bank Indonesia has announced they are allowing the currency to trade freely,” said De Mello. “There might be some other steps they need to do to promote the liquidity of the onshore currency trading.”

NDF contracts, unlike onshore foreign-exchange forwards, are settled in dollars. Who pays and how much is paid at the end of the contract is determined by reference to a fixing.

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