Surabaya exchange chief: Fair play, please ... !

The Jakarta Post ,  Jakarta   |  Mon, 02/27/2006 7:09 AM  |  Business

Hendarsyah Tarmizi, The Jakarta Post, Jakarta

Indonesia has become one of the largest bond markets in Asia thanks to the increase in the amount of bonds available following the issuance of government securities in early 2003.

These government bonds, in addition to existing corporate bonds, have become primary investment options not only for the country's pension funds, but also for local and foreign mutual fund managers.

The amount of government tradable bonds reached a total of Rp 400 trillion (about US$42.1 billion) as of the end of 2005, in addition to corporate bonds worth up to Rp 60 trillion. Daily bond transactions are now valued at about Rp 2 trillion.

However, the collapse of the local mutual fund industry in early 2005 put the local bond market in the spotlight.

Many investors who suffered huge losses in the mutual fund collapse put the blame on bond traders. They claimed the collapse was the result of unfair trading practices among dealers, rather than a drop in interest rates.

The massive redemption of mutual funds as a result of the sharp fall in bond prices caused a plunge in the net asset value of the country's mutual funds by about 30 percent to approximately Rp 70 trillion as the end of the first quarter of 2005, from more than Rp 100 trillion in the middle of 2004.

These losses occurred because fund managers were compelled to sell their government bonds at low prices to meet the massive redemption from investors.

Almost all government and corporate bonds issued in the country are listed on the Surabaya Stock Exchange, which has focused on bond trading for the past nine years.

Although the exchange provides a trading platform for both government and corporate bonds, most of the government bonds are traded through interbank dealers under the Association of Interbank Bond Dealers, which includes Indonesian units of major foreign banks and securities companies.

They carry out their activities through an on-line trading system provided by Bloomberg.

Recently, The Jakarta Post interviewed Bastian Purnama, the president director of the Surabaya Stock Exchange (SSE), to get the real picture of the bond market.

""The protection against bond investors is still too weak,"" Bastian said when asked about the concerns raised by fund managers.

Appointed to head the exchange last August, the former senior official of state-owned securities companies Dana Reksa has made improving trading transparency his top priority.

Below are excerpts of the interview.

Question: Why is the bond market still vulnerable to manipulative trading practices?

Answer: If you buy stocks either through the Surabaya Stock Exchange or the Jakarta Stock Exchange, you don't need to worry about price manipulation or other forms of unfair practices, because the exchanges are well equipped to detect questionable transactions.

And if a broker or other trading official is found to have been involved in unfair practices, they will receive a harsh punishment from the exchange operators. As a self-regulatory institutions, the exchanges have the power not only to protect investors from unfair trading practices, but also to deal with members who breach regulations.

The activities of the exchanges are also closely monitored by the Capital Market Supervisory Board (Bapepam). So, there is little chance for manipulation.

However, it is different with the bond market. Bonds are predominantly traded off the market (or through over-the-counter trading), and most of the transactions are conducted bilaterally between dealers by telephone or on an on-line trading system.

These factors have contributed to the slower evolution of transparency in the bond market.

The trading of government bonds has been widely criticized for the lack of transparency and supervision from the authorities. So, I am not surprised that many institutional investors have accused (bond traders) of acting like a cartel; a group of traders who can fix prices for their own benefit.

Who supervises the interbank dealers?

Interbank dealers are officially under the control of Bapepam, the institution which issued their licenses. But as most of the interbank dealers operate on the behalf of banks which are under the supervision of the central bank, the law enforcement from Bapepam is often not effective, as compared to its control over securities companies, investment fund managers or stock exchanges. If these institutions breach regulations, Bapepam can issue a prompt decision and take disciplinary measure against them. But if interbank dealers (breach regulations), Bapepam has trouble because it has to coordinate with other institutions such as Bank Indonesia.

How are bonds traded on the Surabaya Stock Exchange?

Our exchange provides a trading platform which enables our members to carry out transactions off the market or through the system. Like stockbrokers, bond brokers are under our monitoring screen. So, if there is something unusual, we can detect it right away. We have also required all transactions carried out off the market to be reported to the exchange so that other members will have a reliable price reference to help them get a fair value to make bids.

The main concern in the trading of government bonds is the lack of the reliable information to create a price discovery -- the fair value of bonds created through the interaction of sell and buy orders. At present, dealers of government bonds do not have a reliable reference in determining their bids because only a small number of them report their transactions to our exchange. As a result, most of the dealers determine their bids based on their own judgment. The prices investors pay to different dealers for similar amounts of the same bonds may vary because the pricing is fragmented and there is an absence of a single price reference.

What efforts have so far been taken by the SSE to promote trading transparency?

We publish the daily closing prices of both government and corporate bonds, as well as the price indexes and yield curve index of all government bonds listed on the Surabaya exchange.

This data is quite useful not only for dealers but also for investors to find the fair value of their bonds when they want to buy or to sell the securities. These indicators are based on the transaction information submitted to the exchange, but they do not represent the actual market prices, because only 20 percent of the transactions are reported.

Most interbank dealers refuse to report their transactions to the exchange on the grounds of the high fees they are charged. To me, this excuse is not valid because they are only required to pay Rp 37,500 for every billion rupiah of transactions they report. The fee is very low, actually. I think they are reluctant to report their transactions because the lack of price transparency benefits them.

How to solve the problem?

The solution is easy and quite simple. We just need a simple instruction from Bapepam to require all interbank dealers to report their transactions to us.

And if all the transactions are reported, then we will be able to publish more reliable price indicators which are not only beneficial for them, but also for the investing public. Such price indicators are quite important to promote transparency.

Reports should cover both pretrade and post-trade information. Pretrade information relates to the posting of firm bids and offers, in both quote and order-driven markets. This enables market participants and investors to know, with some degree of certainty, whether and at what prices they can trade.

Post-trade information relates to the prices and the volume of all individual transactions actually concluded. It provides information about the most recent trading in the market and will assist dealers in assessing the quality of execution they have obtained for their trades compared with other trades.

Do you have reliable technology to handle the reporting?

We have provided an on-line trading system for more than nine years. At present, our system has the capacity to accommodate up to 300,000 transactions per day. Receiving transactions will certainly not pose any problem. Also, our system has been audited and awarded ISO 9001 certification by German certification agency TUV. Now, it is up to the government to decide, and if we are asked to do the job, we will be more than ready.

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