Amendment to Financial Services Authority Regulation Number 7/POJK.03/2016 on Prudential Principles in Conducting Structured Product Activities for Commercial Banks

COPY
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 6 /POJK.03/2018
CONCERNING
AMENDMENT TO FINANCIAL SERVICES AUTHORITY REGULATION NUMBER 7/POJK.03/2016 CONCERNING PRUDENTIAL PRINCIPLES IN CONDUCTING STRUCTURED PRODUCT ACTIVITIES FOR COMMERCIAL BANKS BY THE GRACE OF GOD THE ALMIGHTY THE COMMISSIONERS OF THE FINANCIAL SERVICES AUTHORITY, Considering: a. that in order to encourage financial market deepening and create a banking system capable of developing and competing nationally and internationally, it is necessary to improve regulations regarding prudential principles in conducting structured product activities for commercial banks; b. that based on the considerations referred to in letter a, it is necessary to establish a Financial Services Authority Regulation concerning Amendment to Financial Services Authority Regulation Number 7/POJK.03/2016 concerning Prudential Principles in Conducting Structured Product Activities for Commercial Banks; Recalling: 1. Law Number 7 of 1992 concerning Banking (State Gazette of the Republic of Indonesia Year 1992 Number 31, Supplement to the State Gazette of the Republic of Indonesia Number 3472) as amended by Law Number 10 of 1998 concerning Amendment to Law Number 7 of 1992 concerning Banking (State Gazette of the Republic of Indonesia Year 1998 Number 182, Supplement to the State Gazette of the Republic of Indonesia Number 3790);
2. Law Number 21 of 2011 concerning the Financial Services Authority (State Gazette of the Republic of Indonesia Year 2011 Number 111, Supplement to the State Gazette of the Republic of Indonesia Number 5253);
DECIDING:
Establishing: FINANCIAL SERVICES AUTHORITY REGULATION CONCERNING AMENDMENT TO FINANCIAL SERVICES AUTHORITY REGULATION NUMBER 7/POJK.03/2016 CONCERNING PRUDENTIAL PRINCIPLES IN CONDUCTING STRUCTURED PRODUCT ACTIVITIES FOR COMMERCIAL BANKS.

Article I
Several provisions in Financial Services Authority Regulation Number 7/POJK.03/2016 concerning Prudential Principles in Conducting Structured Product Activities for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016 Number 19, Supplement to the State Gazette of the Republic of Indonesia Number 5843) are amended as follows:

1. Provisions of Article 1 number 5 letter c and number 6 letter c are deleted, so that Article 1 reads as follows:

Article 1
In this Financial Services Authority Regulation, the following terms are defined:

1. Bank means a commercial bank as referred to in Law Number 7 of 1992 concerning Banking as amended by Law Number 10 of 1998, including branches of banks located abroad, which conduct conventional business activities.

2. Structured Product means a Bank product that is a combination of 2 (two) or more financial instruments consisting of non-derivative financial instruments with derivatives or derivatives with derivatives, and has at least the following characteristics:
   a. the value or cash flows arising from the product are linked to one or a combination of underlying variables such as interest rates, exchange rates, commodities, and/or equities; and b. the pattern of change in the value or cash flows of the product is irregular compared to the pattern of change of the underlying variables as referred to in letter a, resulting in changes in value or cash flows not reflecting the entire linear change pattern of the underlying variables (asymmetric payoff), which is characterized by the presence of:

1. optionality, such as caps, floors, collars, step up/step down, call/put features;
2. leverage;
3. barriers, such as knock in/knock out;
   and/or
4. binary or digital ranges.
   The definition of derivatives in this regulation includes embedded derivatives.

3. Customer means:
   a. individuals or entities that use or receive Bank facilities in the form of products and/or services; b. individuals or entities that will use or be given facilities by the Bank in the form of products and/or services.

4. Structured Product Activity means activities and/or processes conducted in connection with the planning, development, issuance, marketing, offering, sale, operational execution, and/or cessation of activities related to Structured Products.

5. Board of Directors:
   a. for Banks in the form of a Limited Liability Company, means the board of directors as referred to in Law Number 40 of 2007 concerning Limited Liability Companies; b. for Banks in the form of legal entities:

1. Regional Public Enterprises or Regional State-Owned Enterprises means the board of directors as referred to in Law Number 23 of 2014 concerning Regional Government as last amended by Law Number 9 of 2015;
2. Regional Enterprises means the board of directors for Banks that have not yet changed their form into Regional Public Enterprises or Regional State-Owned Enterprises in accordance with Law Number 23 of 2014 concerning Regional Government as last amended by Law Number 9 of 2015;
   c. Deleted.
   d. for Banks with the status of branches of banks located abroad means the branch head and officials one level below the branch head.

6. Board of Commissioners:
   a. for Banks in the form of a Limited Liability Company, means the board of commissioners as referred to in Law Number 40 of 2007 concerning Limited Liability Companies; b. for Banks in the form of legal entities:

1. Regional Public Enterprises means the supervisory board as referred to in Law Number 23 of 2014 concerning Regional Government as last amended by Law Number 9 of 2015;
2. Regional State-Owned Enterprises means commissioners as referred to in Law Number 23 of 2014 concerning Regional Government as last amended by Law Number 9 of 2015;
3. Regional Enterprises means supervisors at Banks that have not yet changed their form into Regional Public Enterprises or Regional State-Owned Enterprises in accordance with Law Number 23 of 2014 concerning Regional Government as last amended by Law Number 9 of 2015;
   c. Deleted.
   d. for Banks with the status of branches of banks located abroad means parties appointed to carry out supervisory functions.

2. Provisions of paragraph (2) and paragraph (3) of Article 6 are amended and 4 (four) new paragraphs are added, so that Article 6 reads as follows:

Article 6
(1) Banks conducting Structured Product transactions with Customers in the form of a combination of derivatives with derivatives must request Customers to provide collateral in the form of cash with an amount of at least 10% (ten percent) of the notional value of the transaction at the time of the transaction.

(2) Provisions regarding the obligation to provide collateral in the form of cash with an amount of at least 10% (ten percent) as referred to in paragraph (1) are exempted for:
a. specific Customers; or b. specific Structured Product transactions.

(3) Specific Customers as referred to in paragraph (2) letter a include:
a. banks; b. the Government of the Republic of Indonesia;
c. Bank Indonesia or central banks of other countries; and
d. multilateral development banks or multilateral development institutions.

(4) Specific Structured Product transactions as referred to in paragraph (2) letter b include foreign exchange to rupiah Structured Product transactions with Customers in the form of a combination of derivatives with derivatives, provided they meet the following requirements:
a. the transaction is conducted for hedging purposes in accordance with established requirements; and b. the Customer has a treasury line or foreign exchange line facility with the Bank.

(5) The requirements for hedging transactions as referred to in paragraph (4) letter a are as follows:
a. hedging transactions must be supported by underlying transaction documents and/or supporting documents in accordance with regulations governing foreign exchange to rupiah transactions; b. the nominal value of the hedging transaction is at most equal to the nominal value of the underlying transaction stated in the underlying transaction documents; and
c. the tenor of the hedging transaction is at most equal to the tenor of the underlying transaction stated in the underlying transaction documents.

(6) In the event that foreign exchange to rupiah Structured Product transactions as referred to in paragraph (4) do not meet the hedging transaction requirements as referred to in paragraph (5), the Bank must request the Customer to provide collateral in the form of cash with an amount of at least 10% (ten percent) of the notional value of the transaction.

(7) Further implementation regarding collateral in the form of cash with an amount of at least 10% (ten percent) of the notional value of the transaction as referred to in paragraph (1) and paragraph (6) must be stipulated in an agreement between the Bank and the Customer.

3. Provisions of Article 32 are amended so that they read as follows:

Article 32
Banks that do not implement the provisions as referred to in Article 2, Article 3, Article 4, Article 5, Article 6 paragraph (1), Article 6 paragraph (6), Article 6 paragraph (7), Article 7, Article 8, Article 9, Article 10, Article 11, Article 12, Article 13, Article 14, Article 15, Article 16, Article 17, Article 18, Article 19, Article 20, Article 21, Article 21 paragraph (2), Article 21 paragraph (3), Article 21 paragraph (4), Article 22 paragraph (1), Article 22 paragraph (2), Article 22 paragraph (4), Article 22 paragraph (5), Article 23, Article 24 paragraph (1), Article 24 paragraph (2), Article 24 paragraph (4), Article 24 paragraph (5), Article 25 paragraph (1), Article 25 paragraph (2), Article 25 paragraph (3), Article 26 and/or Article 27, shall be subject to administrative sanctions in the form of:
a. written reprimand; b. prohibition on expanding business activities;
c. suspension of certain business activities;
d. prohibition on opening branch networks; e. downgrade of the Bank's health level; and/or f. listing of management and/or shareholders of financial service institutions in the list of persons prohibited from becoming shareholders and management of financial service institutions in accordance with regulations concerning fitness and propriety tests.

4. Between CHAPTER XII and CHAPTER XIII, 1 (one) chapter is inserted, namely CHAPTER XIIA, so that it reads as follows:

CHAPTER XIIA
TRANSITIONAL PROVISIONS

Article 38A
All Structured Product transaction agreements between Banks and Customers that are ongoing and already existed prior to the implementation of this Financial Services Authority Regulation may be adjusted to this Financial Services Authority Regulation.

Article II
This Financial Services Authority Regulation shall come into force on the date of its promulgation.

This copy is in accordance with the original
Deputy Director of Legal Consultancy and
Harmonization of Banking Regulations 1
Legal Directorate 1
Legal Department signed
Wiwit Puspasari

In order that everyone knows it, it is ordered to promulgate this Financial Services Authority Regulation by placing it in the State Gazette of the Republic of Indonesia.

Established in Jakarta on 19 April 2018
CHAIRMAN OF THE COMMISSIONERS
FINANCIAL SERVICES AUTHORITY, signed
WIMBOH SANTOSO

Promulgated in Jakarta on 22 April 2018
MINISTER OF LAW AND HUMAN RIGHTS
REPUBLIC OF INDONESIA, signed
YASONNA H. LAOLY

STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2018 NUMBER 67

EXPLANATION
OF
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 6 /POJK.03/2018
CONCERNING
AMENDMENT TO FINANCIAL SERVICES AUTHORITY REGULATION NUMBER 7/POJK.03/2016 CONCERNING PRUDENTIAL PRINCIPLES IN CONDUCTING STRUCTURED PRODUCT ACTIVITIES FOR COMMERCIAL BANKS

I. GENERAL
Among financial instruments that have experienced quite rapid development are structured financial instruments, better known as Structured Products. Structured Products are non-conventional financial products structured in such a way based on the needs and objectives of Customers or specific groups of Customers. Thus, in their structuring, expertise is required from parties in various fields, both from a financial aspect and other fields such as law and taxation.

In efforts to further encourage Structured Product transactions in the domestic market and in line with the dynamics of the development of the domestic foreign exchange market, the Financial Services Authority deems it necessary to improve regulations regarding prudential principles in conducting Structured Product activities for commercial banks.

This improvement of regulations is intended to increase the effectiveness of conducting Structured Product transactions in the domestic market while still paying attention to the management and control of risks that may arise from such Structured Products for Banks.

II. ARTICLE BY ARTICLE

Article I
Number 1
Article 1
Clear enough.

Number 2
Article 6
Paragraph (1)
What is meant by "notional value of the transaction at the time of the transaction" is the initial notional value set until maturity. In the event that more than 1 (one) notional value is set, the largest notional value is used as the basis for measurement to determine the amount of collateral. The collateral provided as referred to in this paragraph is not a substitution for the risk assessment conducted by the Bank against the Customer.

Paragraph (2)
Clear enough.

Paragraph (3)
Letter a
What is meant by "bank" is the Bank as referred to in Article 1 and banks located abroad.

Letter b
Clear enough.

Letter c
Clear enough.

Letter d
What is meant by "multilateral development bank or multilateral development institution" is an entity established by a group of countries that provide financing facilities or advising functions for development purposes, such as the World Bank, African Development Bank, Asian Development Bank, European Bank For Reconstruction and Development, Inter-American Development Bank, International Finance Corporation, Islamic Development Bank, Council of Europe Social Development Fund (Council of Europe Resettlement Fund), Corporación Andina de Fomento, Caribbean Development Bank, Central American Bank for Economic Integration, East African Development Bank, West African Development Bank, and Black Sea Trade and Development Bank.

Paragraph (4)
Letter a
What is meant by "transaction conducted for hedging" is a transaction conducted by the Customer to the Bank to mitigate risk or protect the value of an asset, liability, income, and/or expense of the Customer against the risk of future currency value fluctuations. What is meant by "hedging" is a method or technique to reduce risks arising or estimated to arise due to price fluctuations in the financial market as referred to in the provisions of regulations governing hedging transactions to the Bank.

Letter b
What is meant by "treasury line or foreign exchange line facility with the Bank" is a facility provided by the Bank to the Customer to conduct foreign exchange to rupiah transactions including spot transactions and/or foreign exchange derivative transactions to rupiah. Spot transactions include transactions with fund delivery on the same day (today) or with fund delivery 1 (one) working day after the transaction date (tomorrow).

Paragraph (5)
Clear enough.

Paragraph (6)
Clear enough.

Paragraph (7)
Clear enough.

Number 3
Article 32
Clear enough.

Number 4
Article 38A
Clear enough.

Article II
Clear enough.

SUPPLEMENT TO THE STATE GAZETTE OF THE REPUBLIC OF INDONESIA NUMBER 6201