BI to toughen rules on
derivative products

With banks already exposed to the high risk posed by derivative transactions, the central banks have decided to tighten regulations on derivative and other structured products.

The new regulations will further strengthen a ruling made last month by the bank to ban derivative transactions related to speculation deals. More regulations are expected to follow.

"For products related with structure and derivatives, there will be qualifications and conditions for banks to adhere to if they wish to become eligible to carry engage in these business transactions," BI deputy governor Muliaman D. Hadad said last Friday.

Also, he added, these products would only be sold to consumers with a strong understanding of their purpose.

"We call these clients sophisticated customers," Muliaman said.

The high exposure of Indonesia's banks to derivative transactions has led to increasing concerns over the health of the banking industry as a whole.

Anxiety about potential losses from these transactions was heightened last week when Bank Danamon announced a drop in net profit triggered by funds set aside to cover losses from derivative transactions.

Other banks have also reported a jump in claims involving these transactions.

Bank Mandiri, the largest lender, said by last November claims on derivative deals jumped 124 percent to Rp 572 billion (US$76 million) from the previous year.

Budi Mulya, another BI deputy governor, said 15 banks sold up to $4 billion in derivative transactions before the December ban came into affect in the hope they would mature in the second half of this year.

In total, Budi added, banks operating in Indonesia engaged in a total $66 billion worth of derivative transactions last year, although most were allowable because they acted as protection to the currency against sudden fluctuations, or hedging.

Regarding structured products, Muliaman said a tougher regulation was necessary to assist in part protecting bank customers using these products.

"We have learned from experience that it's better late than never, so we are going to issue the new regulations," Muliaman said.

The central bank has been under scrutiny for failing to protect the retail investors who bought foreign investment products from local banks.

Late last year, dozens of Indonesian investors suffered setbacks after purchasing supposedly bona fide investment products linked to bonds issued by the now-defunct US banking giant Lehman Brothers.

The investors bought the products through Citibank Indonesia.

Muliaman said even for the banks which had gained approved to sell products linked to derivative transactions, they would be required to regularly report their status to BI.

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