Financial Services Authority Regulation Number 32/POJK.04/2020 Concerning Equity Derivative Contracts

FINANCIAL SERVICES AUTHORITY
REPUBLIC OF INDONESIA
COPY
FINANCIAL SERVICES AUTHORITY REGULATION
REPUBLIC OF INDONESIA
NUMBER 32 /POJK.04/2020
CONCERNING
EQUITY DERIVATIVE CONTRACTS
BY THE GRACE OF GOD THE ALMIGHTY,
THE COMMISSIONERS OF THE FINANCIAL SERVICES AUTHORITY,

Considering:
a. that in order to develop the capital market through the provision of investment products in the form of equity derivative contracts, it is necessary to expand trading facilities and enhance supervision over the trading of equity derivative contracts; b. that in order to provide a legal basis for the development, trading, and supervision of equity derivative contracts as investment products and hedging instruments, it is necessary to replace regulations regarding futures contracts and options on equities or equity indices;
c. that based on the considerations as referred to in letters a and b, it is necessary to establish a Financial Services Authority Regulation concerning Equity Derivative Contracts;

Recalling:

1. Law Number 8 of 1995 concerning the Capital Market (State Gazette of the Republic of Indonesia Year 1995 Number 64, Supplement to the State Gazette of the Republic of Indonesia Number 3608);

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:
To establish:
FINANCIAL SERVICES AUTHORITY REGULATION CONCERNING EQUITY DERIVATIVE CONTRACTS.

CHAPTER I
GENERAL PROVISIONS

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

1. Equity means securities, namely debt instruments, commercial paper, shares, bonds, debt certificates, Units of Collective Investment Contracts, futures contracts on Equities, and any derivatives of Equity.

2. Party means an individual, company, joint venture, association, or organized group.

3. Equity Derivative Contract means a contract that grants or creates rights and/or obligations for the Parties to buy or sell a certain amount of underlying assets at a specific price and time.

4. Stock Exchange means a Party that organizes and provides systems and/or facilities to match buy and sell offers of other Parties' Equities with the aim of trading Equities among them.

5. Alternative Market Organizer, hereinafter abbreviated as PPA, is a Party that organizes and provides or uses electronic systems to match Equity transactions on debt-type Equities and/or sukuk among service users continuously outside the Stock Exchange.

6. Stock Exchange Member means a securities broker who has obtained a business license from the Financial Services Authority and has the right to use the Stock Exchange's systems and/or facilities in accordance with Stock Exchange regulations.

7. Exchange Transaction means a contract made by a Stock Exchange Member in accordance with the requirements determined by the Stock Exchange regarding the sale and purchase of Equities, lending and borrowing of Equities, or other contracts concerning Equities or Equity prices.

8. Clearing and Guaranteeing Institution means a Party that organizes clearing and guaranteeing services for the settlement of Exchange Transactions.

9. Custody and Settlement Institution means a Party that organizes central custody activities for custodian banks, securities companies, and other parties.

10. Clearing Member means a Stock Exchange Member or another Party that meets the requirements to obtain clearing and guaranteeing settlement services for Exchange Transactions based on the regulations of the Clearing and Guaranteeing Institution.

11. Collateral means funds, Equities, and/or other financial instruments owned by the Clearing Member as security that can be used by the Clearing and Guaranteeing Institution to settle Exchange Transactions and/or to settle the Clearing Member's obligations to the Clearing and Guaranteeing Institution.

12. Underlying means Equities, equity indices, a collection of Equities, or an index of a collection of Equities that form the basis of the Equity Derivative Contract transaction.

13. Open Position means an Equity Derivative Contract position, whether buy or sell, that has not yet been settled.

14. Contract Liquidation is the closing of a Clearing Member's Open Position by the Clearing and Guaranteeing Institution.

15. Netting Transaction is a transaction conducted by a Clearing Member to settle an Equity Derivative Contract with opposite positions, whether buy or sell, on the same Equity Derivative Contract.

16. Exchange Transaction means a contract made by a Stock Exchange Member in accordance with the requirements determined by the Stock Exchange regarding the sale and purchase of Equities, lending and borrowing of Equities, or other contracts concerning Equities or Equity prices.

17. Short Selling Transaction means a transaction selling Equities where the Equities in question are not owned by the seller at the time the transaction is executed.

CHAPTER II
TRADING OF EQUITY DERIVATIVE CONTRACTS

Article 2
Parties that organize trading activities of Equity Derivative Contracts must be Stock Exchanges and/or PPAs that have obtained a business license from the Financial Services Authority.

Article 3
(1) Parties that organize clearing, guaranteeing, and settlement transactions of Equity Derivative Contracts must be Clearing and Guaranteeing Institutions that have obtained a business license from the Financial Services Authority. (2) The guaranteeing of settlement of Equity Derivative Contract transactions at the Stock Exchange is implemented based on Financial Services Authority Regulations regarding the guaranteeing of settlement of Exchange Transactions. (3) The guaranteeing of settlement of Equity Derivative Contract transactions at the PPA can be conducted if there is a Financial Services Authority Regulation regulating the guaranteeing of settlement of PPA Transactions. (4) In the event that there is a Financial Services Authority Regulation regulating the guaranteeing of settlement of PPA Transactions as referred to in paragraph (3), the guaranteeing of settlement of Equity Derivative Contract transactions at the PPA is implemented based on the Financial Services Authority Regulation regarding the guaranteeing of settlement of PPA Transactions. (5) In the event that the settlement of Equity Derivative Contract transactions is executed with the delivery of Equities then:
a. the settlement of Equity Derivative Contract transactions must involve a Custody and Settlement Institution that has obtained a business license from the Financial Services Authority; b. the procedures for settling Equity Derivative Contract transactions are subject to the regulations of the Clearing and Guaranteeing Institution and the Custody and Settlement Institution applicable to the settlement of transactions on Underlying Equities; and
c. the total number of Equities in the traded Equity Derivative Contracts must not exceed the number of Underlying Equities.

CHAPTER III
PROCEDURES FOR APPROVAL OF EQUITY DERIVATIVE CONTRACTS

First Section
Contract Requirements

Article 4
Every Equity Derivative Contract to be traded at a Stock Exchange or PPA must obtain approval from the Financial Services Authority.

Article 5
Every Equity Derivative Contract to be traded at a Stock Exchange or PPA must be supported by:
a. a study on the Equity Derivative Contract and the Underlying of the Equity Derivative Contract; b. the availability of trading, supervision, clearing, and guaranteeing and settlement infrastructure for the Equity Derivative Contract;
c. support from Stock Exchange Members or PPA service users;
d. support from equity valuation institutions in the event that the Underlying of an Equity Derivative Contract consists of debt-type Equities and sukuk; and e. the availability of regulations at the Stock Exchange and PPA regarding the Equity Derivative Contract.

Article 6
In the event that the Underlying of an Equity Derivative Contract consists of debt-type Equities and sukuk, the Stock Exchange and PPA must use the fair market price of the Equity and/or the equity index issued by the equity valuation institution.

Second Section
Procedures for Requesting Approval for Equity Derivative Contracts

Article 7
(1) The request for approval of an Equity Derivative Contract is submitted to the Financial Services Authority jointly by:
a. the Stock Exchange or PPA; and b. the Clearing and Guaranteeing Institution.
(2) In the event that the settlement of Equity Derivative Contract transactions is executed with the delivery of Equities, the request as referred to in paragraph (1) is also submitted jointly with the Custody and Settlement Institution.

Article 8
The request for approval of an Equity Derivative Contract as referred to in Article 7 must be accompanied by documents as follows:
a. a study at least covering:

1. the background and objectives of the Equity Derivative Contract;
2. the basis for selecting the Underlying;
3. the specification of the Equity Derivative Contract at least containing:
   a) the type and period of the Equity Derivative Contract; b) the required Collateral; c) the determination of the calculation of the value of the Equity Derivative Contract and the multiplier; and d) the determination of the calculation of the settlement price;
4. the trading, clearing, guaranteeing, settlement, supervision, and risk management systems for the Equity Derivative Contract; and
5. the application of similar products in other countries;
   b. evidence stating the readiness of trading, supervision, clearing, guaranteeing, and settlement infrastructure for the Equity Derivative Contract;
   c. evidence of support from Stock Exchange Members or PPA service users;
   d. evidence of support from equity valuation institutions in the event that the Underlying of an Equity Derivative Contract consists of debt-type Equities and sukuk; and e. regulations regarding the Equity Derivative Contract.

Article 9
(1) The Financial Services Authority provides approval or rejection of the request for approval of an Equity Derivative Contract as referred to in Article 7 within a maximum of 30 (thirty) working days since the request was received complete and correct by the Financial Services Authority. (2) Within the period as referred to in paragraph (1), the Financial Services Authority may request changes to the material and/or request additional information related to the Equity Derivative Contract in question. (3) In the event that changes and/or additional information as referred to in paragraph (2) have been submitted to the Financial Services Authority, the review period for the request for approval of the Equity Derivative Contract as referred to in paragraph (1) is calculated from the date the Financial Services Authority receives the changes or additional information.

CHAPTER IV
REGULATIONS FOR STOCK EXCHANGES, PPAS, AND CLEARING AND GUARANTEEING INSTITUTIONS

Article 10
Stock Exchanges or PPAs that organize trading of Equity Derivative Contracts must regulate at least:
a. requirements for Stock Exchange Members or PPA service users who can conduct Equity Derivative Contract transactions; b. the mechanism for Equity Derivative Contract transactions;
c. general provisions on clearing, guaranteeing, and settlement of Equity Derivative Contracts;
d. supervision over the trading of Equity Derivative Contracts must follow information regarding the Underlying; e. actions taken regarding the trading of Equity Derivative Contracts if the trading of the Underlying is halted; f. actions taken against Open Positions in the event of circumstances that cause the Stock Exchange or PPA and the Clearing and Guaranteeing Institution to be unable to perform their functions properly; g. sanctions imposed on Stock Exchange Members or PPA service users who can conduct Equity Derivative Contract transactions; and h. requirements as liquidity providers for Stock Exchange Members or PPA service users who can conduct Equity Derivative Contract transactions.

Article 11
In the implementation of clearing, guaranteeing, and settlement of Equity Derivative Contract transactions, the Clearing and Guaranteeing Institution must regulate at least:
a. the mechanism for clearing, guaranteeing, and settlement of Equity Derivative Contract transactions; b. the required Collateral and guarantee funds;
c. provisions that every Collateral submitted by a Clearing Member must be held by the Clearing and Guaranteeing Institution;
d. the mechanism for risk calculation and the use of Clearing Member Collateral to conduct Equity Derivative Contract transactions; e. the obligation of the Clearing and Guaranteeing Institution to notify Clearing Members and the Stock Exchange or PPA if there is an Equity Derivative Contract at a Clearing Member whose losses have reached:

1. 50% (fifty percent) of the total amount of Collateral of the Clearing Member held by the Clearing and Guaranteeing Institution; or
2. a certain percentage level based on guarantee risk analysis;
   f. the obligation of the Clearing and Guaranteeing Institution to conduct Liquidation of the Clearing Member's Contract if the Clearing Member incurs losses that have reached:
3. 75% (seventy-five percent) or more of the amount of Collateral held by the Clearing and Guaranteeing Institution; or
4. a certain percentage level based on guarantee risk analysis; and
   g. the obligation of Clearing Members who can conduct Equity Derivative Contract transactions and are unable or considered unable to perform their functions within a certain period to conduct Netting Transactions or transfer all Open Positions to other Clearing Members who can conduct Equity Derivative Contract transactions on the same trading day.

CHAPTER V
EQUITY DERIVATIVE CONTRACT TRANSACTIONS BY STOCK EXCHANGE MEMBERS OR PPA SERVICE USERS

Article 12
(1) Stock Exchange Members or PPA service users who conduct Equity Derivative Contract transactions must meet the following provisions:
a. prohibited from providing financing for the settlement of Equity Derivative Contract transactions for clients; b. notify clients if there is a client's Equity Derivative Contract entrusted to a Stock Exchange Member or PPA service user who can conduct Equity Derivative Contract transactions that has incurred losses of at least 50% (fifty percent) of the client's assets entrusted to the Stock Exchange Member or PPA service user who can conduct Equity Derivative Contract transactions;
c. conduct Netting Transactions if the client's Equity Derivative Contract entrusted to a Stock Exchange Member or PPA service user who can conduct Equity Derivative Contract transactions has incurred losses of at least 75% (seventy-five percent) of the client's assets entrusted to the Stock Exchange Member or PPA service user who can conduct Equity Derivative Contract transactions;
d. submit every client order through the trading system provided by the Stock Exchange or PPA; e. provide a special account for Equity Derivative Contract trading; f. conduct education and socialization regarding every Equity Derivative Contract product; and g. obtain a written statement from the client stating that the client has understood every risk they will incur. (2) Stock Exchange Members or PPA service users who conduct Short Selling Transactions on the Underlying of Equity Derivative Contract trading must be Stock Exchange Members or PPA service users who conduct Equity Derivative Contract transactions that act as liquidity providers.

Article 13
The sell offer price entered into the trading system of the Stock Exchange or PPA in conducting Short Selling Transactions as referred to in Article 12 paragraph (2) does not have to be above the last occurring price at the Stock Exchange or PPA.

CHAPTER VI
ANNOUNCEMENTS

Article 14
(1) Stock Exchanges or PPAs that will organize trading of Equity Derivative Contracts must issue written information on the types of Equity Derivative Contracts and announce it at least in Indonesian-language electronic media and the website of the Stock Exchange or PPA at the latest 10 (ten) working days before the Equity Derivative Contract transaction begins. (2) The written information on the types of Equity Derivative Contracts as referred to in paragraph (1) must contain:
a. specifications of the Equity Derivative Contracts to be traded; b. a general description of the Underlying;
c. risks and benefits of Equity Derivative Contracts;
d. transaction mechanisms for investors; and e. Stock Exchange Members or PPA service users who can conduct Equity Derivative Contract transactions.

CHAPTER VII
ONGOING OBLIGATIONS

Article 15
Stock Exchanges or PPAs, Clearing and Guaranteeing Institutions, and Custody and Settlement Institutions, in the event that the settlement of Equity Derivative Contracts is executed with the delivery of Equities, must establish certain parameters and conduct a feasibility study again on every Underlying traded at least once every 12 (twelve) months and report to the Financial Services Authority at the latest 1 (one) month thereafter.

CHAPTER VIII
ADMINISTRATIVE SANCTIONS

Article 16
(1) Every Party that violates the provisions as referred to in Article 2, Article 3 paragraph (1) and paragraph (5) letter a, Article 4, Article 5, Article 6, Article 8, Article 10, Article 11, Article 12, Article 14, and Article 15 shall be subject to administrative sanctions. (2) Sanctions as referred to in paragraph (1) are also imposed on Parties that cause the occurrence of violations as referred to in paragraph (1). (3) Sanctions as referred to in paragraph (1) and paragraph (2) are imposed by the Financial Services Authority. (4) Administrative sanctions as referred to in paragraph (1) consist of:
a. written warning; b. fines, namely the obligation to pay a certain amount of money;
c. restriction of business activities;
d. suspension of business activities; e. revocation of business license; f. cancellation of approval; and/or g. cancellation of registration.
(5) Administrative sanctions as referred to in paragraph (4) letters b, c, d, e, f, or g may be imposed with or without prior imposition of administrative sanctions in the form of a written warning as referred to in paragraph (4) letter a. (6) Administrative sanctions in the form of fines as referred to in paragraph (4) letter b may be imposed separately or together with the imposition of administrative sanctions as referred to in paragraph (4) letters c, d, e, f, or g.

Article 17
In addition to administrative sanctions as referred to in Article 16 paragraph (1), the Financial Services Authority may take specific actions against every Party that violates the provisions of this Financial Services Authority Regulation.

Article 18
The Financial Services Authority may announce the imposition of administrative sanctions as referred to in Article 16 paragraph (1) and specific actions as referred to in Article 17 to the public.

CHAPTER IX
TRANSITIONAL PROVISIONS

Article 19
(1) Stock Exchanges and Clearing and Guaranteeing Institutions must adjust regulations related to Equity Derivative Contracts at the latest 1 (one) year since this Financial Services Authority Regulation takes effect. (2) Stock Exchange and Clearing and Guaranteeing Institution regulations regulating Equity Derivative Contracts prior to the effectiveness of this Financial Services Authority Regulation remain in effect until adjustments as referred to in paragraph (1) are made.

CHAPTER X
CLOSING PROVISIONS

Article 20
At the time this Financial Services Authority Regulation takes effect, the Decision of the Head of the Capital Market Supervisory Board Number Kep-39/PM/2003 dated October 31, 2003 concerning Futures Contracts and Options on Equities or Equity Indices, along with Regulation Number III.E.I which is its attachment, is revoked and declared invalid.

Article 21
This Financial Services Authority Regulation takes effect 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 may know it, order the promulgation of this Financial Services Authority Regulation by placing it in the State Gazette of the Republic of Indonesia.

Established in Jakarta on April 27, 2020
CHAIRMAN OF THE COMMISSIONERS
FINANCIAL SERVICES AUTHORITY
REPUBLIC OF INDONESIA, signed
WIMBOH SANTOSO

Promulgated in Jakarta on May 6, 2020
MINISTER OF LAW AND HUMAN RIGHTS
REPUBLIC OF INDONESIA, signed
YASONNA H. LAOLY

STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2020 NUMBER 129

EXPLANATION
OF
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 32 /POJK.04/2020
CONCERNING
EQUITY DERIVATIVE CONTRACTS

I. GENERAL
Market deepening has become the strategy of the Indonesian capital market in realizing the capital market industry as a driver of a resilient and globally competitive national economy. This is pursued through a market deepening program in building blocks consisting of information technology system infrastructure programs and regulations that encourage an increase in the domestic investor base (demand side) and the provision of various products (supply side). To support the implementation of these programs, the Financial Services Authority is also preparing regulatory, supervisory, and law enforcement tools. This series of programs is expected to work in synergy to realize the capital market industry as a driver of a resilient and globally competitive national economy.

Regarding the type of capital market products, derivatives are one of the investment products used by market players and investors as a means to hedge (hedging) their portfolios. Equity Derivative Contracts existing at the Stock Exchange are currently in the form of Futures Contracts or Options with underlying assets consisting of shares, bonds, and a collection of shares or bonds. Although it is an alternative investment product traded at the Stock Exchange, trading in derivatives has not developed.

Efforts to revitalize and develop Equity derivative products continue to be carried out through the launch of the LQ-45 Equity Index Futures Contract in 2016 and the Indonesia government bond futures single bond price basis in 2017, which were initiated by the debt securities market development team. Although it has not been able to drive the Equity derivative market, development continues, including through the planned preparation of the Indonesia government bond futures basket bond price basis. However, the development of these products is still hindered by Regulation Number III.E.1, attachment of the Decision of the Head of the Capital Market Supervisory Board Number Kep-39/PM/2003 dated October 31, 2003 concerning Futures Contracts and Options on Equities or Equity Indices (Regulation Number III.E.1), which cannot accommodate, especially regarding underlying requirements that do not match the conditions of state debt securities that serve as the underlying product. In addition, Regulation Number III.E.1 only regulates the trading of derivative products traded at the Stock Exchange. Meanwhile, there are Alternative Market Organizers that can also be parties organizing the trading of Equity Derivative Contracts.

Meanwhile, regarding Equity Derivative Contracts, there have been commitments from G-20 member countries that standardized Equity Derivative Contracts should be traded at Stock Exchanges or electronic trading platforms, cleared through central counterparties, reported through trade repositories, or subject to higher capital requirements if not cleared through central counterparties.

Given the above conditions and in accordance with the direction of Equity derivative product development in order to provide alternative investment products, it is necessary to refine Regulation Number III.E.1.

II. ARTICLE BY ARTICLE

Article 1
Sufficiently clear.

Article 2
"Equity Derivative Contracts" include futures contracts, options, and other contracts determined by the Financial Services Authority.

Article 3
Paragraph (1)
Sufficiently clear.

Paragraph (2)
Sufficiently clear.

Paragraph (3)
Sufficiently clear.

Paragraph (4)
Sufficiently clear.

Paragraph (5)
Letter a
Settlement of Equity Derivative Contract Transactions can be executed through electronic book transfer or physical settlement as regulated in Financial Services Authority Regulations concerning Equity Transactions.

Letter b
Sufficiently clear.

Letter c
Sufficiently clear.

Article 4
Sufficiently clear.

Article 5
Sufficiently clear.

Article 6
Sufficiently clear.

Article 7
Sufficiently clear.

Article 8
Letter a
Number 1
Is clear enough.
Number 2
Is clear enough.
Number 3
Letter a)
Is clear enough.
Letter b)
Is clear enough.
Letter c)
In practice, the referred "multiplier number" is also commonly called the multiplier.
Letter d)
Is clear enough.
Number 4
Is clear enough.
Number 5
Is clear enough.
Letter b
Is clear enough.
Letter c
One of the forms of support evidence from an Exchange Member or PPA service user includes a statement letter stating the commitment of the Exchange Member or PPA service user. Letter d Is clear enough. Letter e At the time of submitting an Equity Derivative Contract, if regulations regarding Equity Derivative Contracts were not yet available, the submission of the Equity Derivative Contract was accompanied by a draft regulation regarding the Equity Derivative Contract.

Article 9
Is clear enough.

Article 10
Letter a
Is clear enough.
Letter b
Is clear enough.
Letter c
Is clear enough.
Letter d
Is clear enough.
Letter e
Is clear enough.
Letter f
Is clear enough.
Letter g
Is clear enough.
Letter h
The term "liquidity provider" refers to an Exchange Member or PPA service user who has received approval from the Exchange or PPA to trade Equity Derivative Contracts, and has the obligation to offer sell and buy requests for Equity Derivative Contracts every trading day of the Equity Derivative Contracts to support the creation of trading liquidity for those Equity Derivative Contracts.

Article 11
Is clear enough.

Article 12
Is clear enough.

Article 13
Is clear enough.

Article 14
Paragraph (1)
Is clear enough.
Paragraph (2)
Letter a
Is clear enough.
Letter b
The general description of the Underlying in the Exchange's announcement regarding Equity Derivative Contracts includes information such as price, volatility level, and the basis for determining the selection of the Underlying. Letter c Is clear enough. Letter d The transaction mechanism for investors in the Exchange or PPA's announcement regarding Equity Derivative Contracts includes, among others, how to transact, trading procedures, up to the settlement of the Equity Derivative Contract. Letter e Is clear enough.

Article 15
Is clear enough.

Article 16
Is clear enough.

Article 17
The term "specific actions" includes, among others, actions by the Financial Services Authority ordering an Exchange Member or PPA service user to improve standard operating procedures.

Article 18
Is clear enough.

Article 19
Is clear enough.

Article 20
Is clear enough.

Article 21
Is clear enough.

ADDITION TO THE STATE GAZETTE OF THE REPUBLIC OF INDONESIA NUMBER 6513