Bank Indonesia Improves Provisions for Hedge Swap Transactions
In order to support Indonesia's sharply depreciated rupiah exchange rate, the central bank of Indonesia (Bank Indonesia or BI) improved provisions for Hedge Swap Transactions through Bank Indonesia Regulation No.15/17/PBI/2013 (which takes effect as of 3 February 2014). Through this arrangement, Indonesian banks can sell their US dollars to BI at the current spot rate and promise to buy the amount at a later date on an agreed rate. This protects banks against fluctuations in the rupiah exchange rate.
Bank Indonesia notes: "A Hedge Swap Transaction with Bank Indonesia is a purchase swap transaction by a bank in a foreign currency against rupiah for hedging between the bank and BI. Providing the hedge swap instruments for domestic market actors is an effort by BI to deepen the domestic foreign exchange market where midterm and long term swap instruments are still limited. It aims to minimize exchange rate risks and increase investment activities in Indonesia.
Some improvements set forth in the regulation are expansion of underlying transaction coverage, extension of transaction tenor, and settlement by netting, pricing, transaction mechanism, and transaction documents. With these improvements, a hedging contract may be made within a period of up to three years through Hedge Swap Transactions with BI with a tenor of three, six, or 12 months. Such transactions may be extended by netting. Through such transactions, a bank may carry on hedging activities on economic activities either on behalf of the customer or on behalf of the bank. By enforcement of this regulation, Regulation of BI No.7/36/PBI/2005 is repealed and the new regulation will be reviewed occasionally and adjusted to developments in the domestic foreign exchange market."
In 2013, the Indonesia rupiah exchange rate fell 26 percent against the US dollar.| Source: Bank Indonesia