The Indonesia Stock Exchange (IDX) will on May 1 start imposing stricter regulations on margin trading and short selling, despite opposition from industry players.

IDX director M.S. Sembiring said Tuesday his office remained on track to apply the new regulations, which would limit shares that can be put into transaction for margin trading and short-selling activities into the trading system on May 1.

“We will stick to the plan, as there is no announcement yet from Bapepam [the Capital Market and Financial Institution Supervisory Agency] to delay the regulations,” he said.

Under the new policy, for example, shares used in margin trading and short selling must have a minimum daily trading value of Rp 1 billion (US$88,000), and Rp 5 billion for newly listed shares.

With the requirement, it is estimated only shares of 19 companies can be used for margin trading, from 33 companies previously.

As for short selling, only shares of 16 companies are eligible from 22 companies previously, according to analysts.

The IDX has decided to implement such a regulation in an effort to reduce market risks resulting from the two speculative trading activities. The transactions are commonly and widely used in the market.

However, the IDX and the Bapepam have only temporarily frozen the short-selling transactions widely blamed for exacerbating the October stock market rout. Margin trading transactions are still allowed.

Margin trading is a transaction in which investors borrow money pledged with securities collateral from brokers to buy other securities. In Indonesia, the broker will get handsome proceeds from interest rates paid by the borrowers. But once the securities value plunges, the investors will be in greater losses than any others.

Short selling, however, is a way of trading where investors can sell shares they do not own, so that they can buy the shares again at cheaper prices and make a profit. Short selling is often used to create panic in the hope of repurchasing securities later at a lower price.

According to the IDX and Bapepam, margin trading and short selling are extremely risky methods, especially when investors borrow too much money and use it merely for speculations.

As fluctuations in the stock market ease up, Bapepam and the IDX have planned to allow short-selling activities in the market in May, but under the stringent policy.

Securities houses, however, have responded negatively to the policy, as most of them are not ready yet for the new system.

Indonesian Securities Companies Association (APEI) chairwoman Lily Widjaya said the securities houses needed more time to adjust to the new policy.

“Our system is not ready yet,” claimed Lily, who is also president director of Merrill Lynch Indonesia.

She added the association also questioned the criteria set out by the regulator in relation with shares that could be used in margin trading and short selling.

Securities houses are also concerned about sharp falls in profit, because they have been actively involved in margin trading and short selling. For margin trading alone, brokers get hefty gains by slapping high interest rates of between 16 percent and 25 percent for the money borrowed by their investors.

Sembiring said the IDX had received a letter of complaint from the association, which sought a delay in the implementation of the new policy.

There are 120 securities houses in Indonesia, but only 116 are active, according to Bapepam.

Daily trading at the bourse tops an average of Rp 750 billion, down from the Rp 1 trillion before October last year.

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