Indonesia Plans Rupiah-Settled Domestic NDFs to Curb Volatility

(Bloomberg) -- Bank Indonesia will allow lenders to offer non-deliverable rupiah forward contracts that will settle in the local currency as the central bank steps up efforts to ease volatility.

About two dozen local and foreign commercial banks will be permitted to quote the new instruments to clients with underlying exposure to rupiah, either in equities, trade and investment, according to Nanang Hendarsah, executive director for monetary management at Bank Indonesia. Called a domestic non-deliverable forward, or DNDF, the contracts have to be settled in rupiah based on Bank Indonesia’s spot dollar rate, known as JISDOR, he said.

The Indonesia Foreign Exchange Market Committee is drafting the framework for the market and it may be operational in the coming weeks, Hendarsah said.

The rupiah’s slump to levels not seen since the Asian financial crisis two decades ago has increased the demand for hedging tools, with investors piling into offshore forward contracts. Investors currently have only offshore non-deliverable forwards to hedge their rupiah risks, which are settled in dollars.

While the rupiah has tumbled about 9 percent against the dollar this year to almost 15,000 on the spot market, the three-month dollar-rupiah non-deliverable forwards have risen 11 percent, reaching a high of 15,700 on Sept. 5.

Other features of the proposed domestic NDFs are:

  • Banks will be prohibited from carrying out domestic NDF transactions against Malaysia’s ringgit and Thailand’s baht
  • Only banks with forex license will be allowed to offer domestic NDF transactions
  • Participants will need to furnish documents to validate their eligibility
  • Banks will be prohibited from extending rupiah and forex loans to DNDF participants

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