Indonesian central bank automates FX swap transactions as critical region promotes sustainability in the FX market
The Indonesian Central Bank considers this an effort to maintain stability in the FX market through liquidity management of the rupiah and foreign currencies. We take a look at how advancing market infrastructure in Indonesia is beneficial in such a critical region to brokerages
Indonesia is a very important market which many FX brokerages are now beginning to focus on.
On this basis, the development of market infrastructure in the country is an important factor, and this aspect is rapidly developing.
Bank Indonesia, which is the central bank within the country that issues sovereign currency and is responsible for the structure by which currency is distributed and exchanged, has begun the implementation of automatic auction for FX swap transactions in an attempt to minimize risks.
This practice has been set in place today, and is the second automation of a process relating to FX that has been conducted by the bank, the first being the automation of FX term deposits which commenced in June this year.
The central bank anticipates that the changes will support its efforts in “maintaining stability in the forex market through liquidity management of rupiah and foreign currencies in the market.”
In BI’s most recent swap auction on Nov. 3, it sold 3-month swap contracts worth $25 million.
Indonesia is a vast country in South East Asia with over 255 million inhabitants, all of whom speak the same language and with a remarkably low median age of 28 years. During the earlier part of the last decade, a number of brokerages from overseas began to focus on Indonesia as a region of rapid potential growth, with several brokerages from Russia paving the way toward developing the retail FX industry in Indonesia via representative offices and introducing broker networks, alongside domestic company Monex Investindo Futures which has over 32% of the local market in terms of retail FX traders.
According to FinanceFeeds research this year, firms wishing to look at entering the potentially lucrative market require an adoption of local modus operandi in order to succeed.
By advancing the procedures and demonstrating modernity, the Central Bank of Indonesia is fostering a future market with less entry restrictions and less need for brokers to conduct manual trade reporting or execution methodologies.
In August this year, ADS Securities Head of Sales APAC & Deputy General Manager Mathieu Ghanem explained to FinanceFeeds “There are 2 distinct markets for an offshore broker like us in Indonesia but actually a lot of restrictions for both liquidity and trading lines provision that makes it difficult for ADS-like brokers to penetrate, those being the institutional and the retail market.”
The institutional market has 2 sub-categories
“The first sub-category is the banking market” said Mr. Ghanem. “This market for an offshore player like us has several restrictions. For example, the onshore Rupiah business can only be traded by onshore banks since the new regulation from the Bank of Indonesia has taken place – local entities can only trade with other onshore entities. Other barriers such as poor internet infrastructure in Indonesia makes it difficult for a E-broker like ADS to distribute non IDR liquidity electronically.”
“The only way for ADS to “tap into” Indonesia would be throughout the offshore NDF market which is mostly traded out of Singapore by a majority of foreign investors only; here both our PoP and NDF offering combine is gaining a lot of traction from hedge funds, family offices and brokers” explained Mr. Ghanem.
“The second sub-category is the brokerage market” he said. “This market has become pretty regulated too and local brokerage houses can only obtain liquidity and trading lines via local and registered market makers. Often, the big players in Indonesia do posses both the brokerage house and the market making entity that are located onshore. To contract and make business with these entities if not located in Indonesia is close to impossible – in addition domestic houses have credit arrangements that no other offshore provider can match.”
Now on the retail market side, which of course do not include any PoP solutions, several offshore brokers have been offering their services since few years now. The most aggressive of these brokers have been black listed by local authorities which had to deal with a lot of abuses” said Mr. Ghanem.
Adam Reynolds, CEO Asia Pacific at Saxo Bank explained today to FinanceFeeds “Saxo Bank Group sees Indonesia as a very strong opportunity over the coming years, and are partnering with local organisations to be able to provide multi-asset trading to Indonesian clients across a huge array of markets and asset classes.”
“Saxo Bank Group has Sinar Mas Group as a strategic investor, and will work with them and their financial arms to access a very broad range of Indonesian clients. We see this sort of partnership as providing the best in breed technology with local knowledge and relationships to ensure we grow critical mass across Indonesia” continued Mr. Reynolds.
Indonesian clients need to be sure they are dealing with licensed legal entities across all the different asset classes for their own protection. Saxo Bank is a licensed European Bank, and Sinar Mas Group is licensed in Indonesia, so together we provide a strong regulatory framework for clients to access both domestic and international markets” Mr Reynolds concluded.
Looking at the quality of the firms which consider Indonesia to be a vital market, and the efforts that they go to in order to align their services with that of the local market, developments such as today’s swap automation will likely be a welcome move in the right direction by many companies.