Bapepam tightens rules on shorts and margin trading

Novia D. Rulistia , The Jakarta Post , Jakarta | Wed, 07/02/2008 10:53 AM | Business

The Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK) has issued a new regulation increasing the requirements for short selling and margin trading to reduce snowballing market crashes.

In a margin trade, an investors borrows money from brokers to acquire shares.

In a short sell, an investor sells a share that he does not own in an attempt to profit from the share's decline in value.

Security firms can lend shares belonging to their clients, but failure to return the shares will result in a fine for the investor.

The two transactions are commonly performed in the market, but in the past, heavy risk taking, where investors have borrowed beyond their financial means, has resulted in market slumps, as happened on Jan. 22 this year when the Indonesian Stock Exchange (IDX) index fell 7 percent.

The regulation, issued Monday night, states that security firms must have a minimum Rp 5 billion in working capital and must seek approval from the IDX before conducting a short sell or a margin trade.

Under the new regulation, to receive financing to conduct either of the two mechanisms, a private investor must have a minimum net wealth of Rp 1 billion, earn more than Rp 200 million a year and have a margin trading account in a securities firm.

To perform a margin trade, an investor must shelter a minimum of Rp 200 million as collateral, or 50 percent of the value of the transaction.

In addition, the loan may only amount to a maximum 65 percent of the sheltered collateral. If the investor wishes to borrow more, he must raise the collateral value within three days to match the percentage threshold.

If the collateral amount is not secured, the securities firm or broker must sell the acquired shares to match the 65 percent of collateral requirement.

To perform a short trade, an investor must shelter collateral equivalent to 135 percent of the value of the transaction.

If the collateral is below the required percentage, an investor must fill the gap within three days, or his securities firm or broker must buy up the shorted shares to match the level the ratio to the collateral.

Purbaya Yudhi Sadewa, chief researcher of Danareksa Research Institute, said the regulation would benefit the market because shorting and margin trading further pushed down a falling market.

However, many investors are still in the dark over the new regulation, he said.

Bapepam-LK also on Monday officially issued a regulation stipulating that investors acquiring more-than 50 percent of a listed company must offer to buy the remaining shares. Previously, the threshold stake value was 25 percent.

Also under the regulation, the stakeholder is given a two-year deadline from the time of the takeover in which to sell back the shares to allow the public to retain a 20 percent stake.

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