T

he domestic money market is expected to become more liquid as an increasing number of banks participate in repurchase (repo) transactions under a general agreement designed to help lower borrowing costs in the future.

Four banks within the BUKU IV category, those with core capital above Rp 30 trillion (US$2.26 billion), signed on Thursday a deal under the existing Global Master Repurchase Agreement (GMRA) Indonesia with six foreign banks that are active players in money market and foreign exchange (FX) transactions.

The BUKU IV banks are Bank Mandiri, Bank Central Asia (BCA), Bank Negara Indonesia (BNI) and Bank Rakyat Indonesia (BRI), while the foreign-owned lenders are Bank of Tokyo-Mitsubishi UFJ, DBS Indonesia, Standard Chartered Bank, ANZ Indonesia, JPMorgan Chase and Bank Mizuho Indonesia.

The GMRA Indonesia, launched by the Financial Services Authority (OJK) earlier this year, is aimed at standardizing repurchase, or repo, transaction agreements.

A repo transaction agreement is a securities sale-and-purchase contract with a pledge to repurchase or resell the securities at an agreed time and price.

There were already 65 bank participants prior to Thursday’s signing.
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“This will strengthen market stability because only the repo market is resilient during crises.”

With the new participants involved, Bank Indonesia (BI) expects that banks will be encouraged to conduct transactions with each other, so that the domestic money market, as the source of short-term liquidity, will be deeper and wider, helping banks to manage their liquidity better and, in turn, help lower bank rates in the future.

“The new addition increases the total number of participants in the GMRA Indonesia to 71 banks. This will add to the dynamic of the money market in Indonesia,” Nanang Hendarsah, BI financial deepening program director, said in a press conference.

The GMRA helped increase the average daily volume of transactions in the interbank repo market to Rp 1.8 trillion in the fourth week of June from zero in January, when the agreement was signed.

Nanang said more participants involved in the deal would increase the average volume to Rp 5 trillion per day, so that more banks would be attracted to conduct transactions in the secured market rather than in the non-collateralized interbank money market.

“This will strengthen market stability because only the repo market is resilient during crises,” he said.

Thursday’s agreement is a follow-up to a regulatory umbrella issued recently by BI for the domestic money market — including instruments, players and the benchmark rate — that is expected to provide clear guidance for the banking industry.

With clearer guidance, players will be enticed to enter the domestic money market, which is considered to be underdeveloped or in financial terms “non-liquid”, compared to its peers in the Southeast Asian region.

BI claims that a well-functioning or “liquid” money market will play an important role in the liquidity management of financial market players and open the way for more effective monetary policy transmission.

When monetary policy is effectively transmitted to the financial sector, flows of money and the costs of borrowing in the real sector improve and trigger economic growth.

“With repo transactions, flows of liquidity between banks will become smoother and rates will be lower. It is proven that the [repo] rate is lower than the average interbank rates,” Nanang said.

BI data show that the seven-day, 14-day and 28-day reverse repo rates stood at 5.25 percent, 5.45 percent and 5.70 percent, respectively, as of Aug. 24. Meanwhile, the Jakarta Interbank Offered Rate (JIBOR) stood at 5.42 percent and 6.18 percent for one-week and one-month tenors.

Also on Thursday, Ali Setiawan, managing director and global markets head at HSBC Indonesia, said it would join the GMRA next month. As a foreign bank, HSBC had sufficient liquidity and was eager to be an active player in domestic money market, he said.

He added the bank already participated with an average transaction volume of around Rp 1 trillion to
Rp 1.5 trillion in a previous mini-master repo agreement.

Meanwhile, BRI finance director Haru Koesmahargyo said repo transactions had lower rates and made banks feel more comfortable as the transactions used government bonds (SBNs) as underlying security.

The SBNs have become a major instrument that banks use to manage their liquidity. “BRI’s accumulated transaction volume in reverse repo and repo amounts to around Rp 13 trillion as of now,” he said.