The central bank plans to issue regulatory measures that will permit banks in Indonesia to trade non-deliverable forwards in the domestic currency market. (Antara Photo/Sigid Kurniawan)

Indonesia's Plan to Create a Domestic Rupiah NDF Market


SEPTEMBER 28, 2018

Jakarta. The central bank plans to issue regulatory measures that will permit banks in Indonesia to trade non-deliverable forwards in the domestic currency market.

The new measure is aimed at stabilizing the rupiah, whose losses of around 9 percent versus the dollar this year have re-ignited concerns about capital outflows.

What is Bank Indonesia Proposal?

Non-deliverable forwards are offshore dollar-settled currency derivatives used by investors with limited access to onshore markets to hedge their exposure or speculate. By their nature, there is no actual delivery of the underlying currency, and the contracts are merely used to synthetically generate a forward hedge.

Bank Indonesia wants to create a parallel non-deliverable forward market for the rupiah onshore as an alternative hedging instrument for businesses and foreign investors.

What Does Band Indonesia Hope to Achieve?

It wants to bring sizeable speculative activity in the NDF markets onshore and under its immediate purview. The market is often heavily one-sided, volatile and a source of anxiety for investors in the rupiah.

Given the heavy foreign investment in Indonesia's bond markets and companies, NDF volumes are significant so keeping those flows onshore could give the central bank a better grip on rupiah.

That, in turn, could narrow the gap between NDF and onshore rupiah forward rates. Thursday's levels put one-year NDF at 15,830 rupiah per dollar, versus 15,645 onshore and a spot rate of 14,915.

Malaysia introduced similar measures in late 2016 and early 2017 to put a floor under its currency. Malaysia first brought the processes for setting benchmarks for ringgit NDFs onshore and then banned participants in its domestic markets from trading NDFs.

Can Indonesia's Domestic NDF Market Succeed? 

Created in the early 1990s as a way for speculators to beat emerging market capital controls, NDFs were designed to be traded at an arm's length from the regulators in the countries of the underlying currencies.

In this regard, Bank Indonesia's requirement that the domestic NDF transactions be backed by genuine underlying transactions, such as investor exposure to bonds or stocks, could make them less attractive for foreign market participants.

The success of this new market depends on how far the central bank's new fixings and intervention work towards creating a parallel market and whether this is truly non-deliverable and easier than using onshore forwards.

What Kind of Volumes Will Be Traded? 

According to Nanang Hendarsah, head of monetary management at Bank Indonesia, offshore rupiah NDF transactions are estimated at around $500 million to $700 million per day, but those jump to as much as $1.5 billion per day during bouts of volatility in the rupiah.

By comparison, total foreign exchange transactions in the domestic market are around $5 billion per day, but most of these are spot transactions and only around $300 million are in the forward market.

"Hedging needs that are currently done in offshore markets and at expensive rates can now be available onshore and more efficient," said Darmawan Junaidi, director of treasury and international banking at Bank Mandiri, who reckons there is real demand for such domestic NDFs.