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2nd Updates on DNDF Transaction

By : Arie Armand, Agung Santoso

23-Jun-2020

On 19th March 2020, Bank Indonesia (i.e. the Central Bank of Indonesia – “BI”) has enacted Bank Indonesia Regulation Nr. 22/2/PBI/2020 (the “2nd Amendment”) concerning Second Amendment to Bank Indonesia Regulation Nr. 20/10/PBI/2018 concerning Domestic Non-Deliverable Forward Transaction (the “PBI on DNDF”) (collectively, the “2nd Amended PBI on DNDF”) which comes into effect at the same date as the enactment.

The (only) new feature installed in this 2nd Amendment is the insertion of IDR bank account ownership by Foreign Party as one of the eligible underlying transactions for DNDF.

This amendment is introduced to allow foreign investors who own IDR and are willing to invest in IDR denominated investment products (and therefore to have currency exposure in IDR) – but still in a wait and see position considering the market volatility due to this Covid-19 pandemic – to be able to hedge their ownership of IDR while waiting for the market to become stable and then to reinvest their IDR.

In order to give an overall yet brief summary on “DNDF transaction” in Indonesia, we have re-highlighted below some key points on the implementation of DNDF in Indonesia based on the 2nd Amended PBI on DNDF:

 

I. Netting Requirement

1. General

Pursuant to (i) Bank Indonesia Regulation Nr. 18/18/PBI/2016 concerning FX Transaction against IDR between Bank and Domestic Parties, and (ii) Bank Indonesia Regulation Nr. 18/19/PBI/2016 concerning FX Transaction against IDR between Bank and Foreign Parties (including its subsequent amendments collectively “PBI on FX Transaction Against IDR”) - all FX transactions against IDR (including forward) between Bank and foreign parties or domestic parties - must be settled by way of transfer of the principal amount in full (full movement of fund). 2nd Amended PBI on DNDF provides exemption to this requirement by allowing netting settlement in DNDF transaction. DNDF is defined as standard (plain vanilla) derivative FX transaction against IDR in the form of forward with a fixing mechanism feature, which is executed in domestic market.

A Bank (defined as Indonesian banks, including branch of foreign bank in Indonesia) can enter into DNDF transaction(s):

  1. For its own interest; and/or
  2. For the interest of its Customer and/or Foreign Party
  3. Both as defined in PBI on FX Transaction Against IDR):
    • Bank with Customer;
    • Bank with Foreign Party; and
    • Bank with Bank.

DNDF transaction(s) as per point (a) and (b) (i) - (ii) abovecan only be conducted for hedging purpose which issupported with underlying transaction. No underlying transaction is required for DNDF transaction between Banks.

2. Settlement Mechanism (Fixing)

Fixing is defined as settlement mechanism without any transfer of principal amount by way of calculating the difference between forward transaction rate and the reference rate at certain future date that has been agreed in the contract (fixing date). Based on the above, this fixing mechanism has similar feature with netting mechanism which is originally restricted for any FX transaction against IDR. On the fixing date, DNDF transaction must be settled by fixing mechanism based on (i) Jakarta Interbank Spot Dollar Rate (JISDOR) (for USD against IDR transaction) OR (ii) BI’s middle rate (kurs tengah BI) (for non-USD FX against IDR transaction). The DNDF transaction must be settled in IDR, and the DNDF cannot be rolled-over and early terminated (while unwind* mechanism is allowed without Underlying Document). *) Unwind is defined as a process to reverse a transaction by entering into an opposite transaction.

 

II. Underlying Transaction Requirement

Any DNDF transaction must be supported by document(s) of the underlying transaction (“Underlying Document”) unless exempted as provided in paragraphs III and IV below. 2nd Amended PBI on DNDF further specifies what can be considered as eligible underlying transaction for DNDF, namely:

  1. Domestic and international trade of goods and services;
  2. Investment in the form of direct investment, portfolio investment, loans, capital, and other onshore and offshore investment (including tax amnesty);
  3. Providing credit or bank financing in FX for trade and investment activities, which only applies for transaction between Bank and Customer; and/or
  4. Ownership of IDR bank account by Foreign Party*.

*) Means all IDR denominated cash account owned by Foreign Party with Indonesian Bank, among others in the form of saving account, giro account and/or deposit account for investment purpose, to collect return on investment and/or other purposes.

However, the following items cannot be considered as underlying transaction for the purpose of DNDF transaction:

  1. commercial paper issued by BI
  2. placement of fund;
  3. credit facility or bank financing that has not been withdrawn;
  4. sale of FX against Rupiah transaction document;
  5. the fund remitting activities conducted by fund remittance company;
  6. intercompany loan; and
  7. FX trading business activity.

For purchase of FX against IDR through DNDF transaction, the abovementioned underlying transactions must be evidenced by a final form of the Underlying Document; while for sale of FX against IDR through DNDF transaction, the abovementioned underlying transactions can be evidenced by either a final or estimated form of the Underlying Document.

Details on what types of document(s) can serve as Underlying Document are stipulated in PBI on FX Transaction Against IDR and its implementing regulation(s).

Further, Underlying Document can be used for more than 1 (one) DNDF transactions provided that the amount and term of the DNDF shall not exceed the amount and term of the corresponding Underlying Document, but the Underlying Document can only be used at the same time in 1 (one) Bank within Indonesia banking system.

 

III. Threshold

There is no requirement to have Underlying Document for sale of FX against IDR through DNDF transaction with value not exceeding USD5,000,000 (or its equivalent) / per transaction / per Customer or per Foreign Party.

Note: There is no threshold provision for the purchase of FX against IDR through DNDF transaction. Therefore, such DNDF transaction (in any amount) must comply with the Underlying Document requirement.

 

IV. Inter-Bank Transaction

Underlying Document is not required for an inter-Bank DNDF transaction. Bank is also allowed to conduct cover-hedging transaction with foreign bank (where the foregoing can be supported by the existing Underlying Document between Bank and its Customer and/or Foreign Party). V. Transfer of IDR Similar with PBI on FX Transaction Against IDR, this 2nd Amended PBI on DNDF also restricts any transfer of IDR to offshore account, including funds resulted from the settlement of DNDF transaction(s).

 

V. Transfer of IDR

Similar with PBI on FX Transaction Against IDR, this 2nd Amended PBI on DNDF also restricts any transfer of IDR to offshore account; including funds resulted from the settlement of DNDF transaction(s).

 

 


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