POJK on Prudential Principles in Implementing Structured Product Activities for General Banks

FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 7 /POJK.03/2016
CONCERNING
PRUDENTIAL PRINCIPLES IN IMPLEMENTING
STRUCTURED PRODUCT ACTIVITIES FOR GENERAL BANKS BY THE GRACE OF THE ALMIGHTY GOD THE BOARD OF COMMISSIONERS OF THE FINANCIAL SERVICES AUTHORITY, Considering:
a. that innovation of financial instruments has developed rapidly; b. that the development of such innovation has facilitated the growth of various forms and structures of financial instruments, including those with high complexity, particularly financial instruments in the form of structured products;
c. that the high complexity of financial instruments can result in increased risks faced by banks;
d. that the increase in such risks requires adequate adjustments to the prudential principles and risk management applied; e. that the high complexity of financial instruments must also be balanced with an increase in the quality of information transparency to customers; f. that information transparency to customers is one of the important factors to maintain public confidence in the banking system; g. that banks have an important role concerning the improvement of information transparency quality and maintaining public confidence; h. that in relation to the considerations as referred to in letters a, b, c, d, e, f, and g, it is deemed necessary to establish a Financial Services Authority Regulation concerning Prudential Principles in Implementing Structured Product Activities for General 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 (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 PRUDENTIAL PRINCIPLES IN IMPLEMENTING STRUCTURED PRODUCT ACTIVITIES FOR GENERAL BANKS.

CHAPTER I
GENERAL PROVISIONS
Article 1
In this Financial Services Authority Regulation, the following meanings are meant:

1. Bank is a general 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 is 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 changes in the value or cash flows of the product is irregular compared to the pattern of changes in the underlying variables as referred to in letter a, resulting in changes in value or cash flows not reflecting the entire change pattern of the underlying variables linearly (asymmetric payoff), which is characterized by the existence 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 is:
   a. an individual or entity that uses or receives Bank facilities in the form of products and/or services; b. an individual or entity that will use or be given facilities by the Bank in the form of products and/or services.
4. Structured Product Activity is activities and/or processes conducted in connection with the planning, development, issuance, marketing, offering, sales, 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 (Perseroan Terbatas) is 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 (Perusahaan Umum Daerah) or Regional State-Owned Enterprises (Perusahaan Perseroan Daerah) is 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 is the Board of Directors for Banks that have not yet changed their form to Regional Public Enterprises or Regional State-Owned Enterprises according to Law Number 23 of 2014 concerning Regional Government as last amended by Law Number 9 of 2015;
   c. for Banks in the form of a Cooperative legal entity is the Management Board as referred to in Law Number 25 of 1992 concerning Cooperatives;
   d. for Banks with the status of branches of banks located abroad is 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 (Perseroan Terbatas) is 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 (Perusahaan Umum Daerah) is 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 (Perusahaan Perseroan Daerah) is the 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 is the Supervisors in Banks that have not yet changed their form to Regional Public Enterprises or Regional State-Owned Enterprises according to Law Number 23 of 2014 concerning Regional Government as last amended by Law Number 9 of 2015;
   c. for Banks in the form of a Cooperative legal entity is the Supervisors as referred to in Law Number 25 of 1992 concerning Cooperatives;
   d. for Banks with the status of branches of banks located abroad is the party appointed to carry out supervisory functions.

Article 2
Banks may only conduct Structured Product Activities after obtaining:
a. principle approval to conduct Structured Product Activities; and b. an effectiveness statement for the issuance of each type of Structured Product, from the Financial Services Authority.

Article 3
The implementation of Structured Product Activities as referred to in Article 2 must be guided by the provisions set forth in this Financial Services Authority Regulation.

Article 4
(1) Banks conducting business in foreign currency may only conduct Structured Product transactions linked to underlying variables consisting of exchange rates and/or interest rates. (2) Banks not conducting business in foreign currency may only conduct Structured Product transactions linked to underlying variables consisting of interest rates.

Article 5
(1) Banks must include plans for Structured Product Activities in the Bank's business plan.
(2) The Structured Product Activity plans as referred to in paragraph (1) include:
a. an explanation of the grouping of Structured Products; b. an explanation of the Customer groups targeted by Structured Products; and
c. an estimate of the volume of Structured Product issuance.

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 cash collateral of at least 10% (ten percent) of the notional value of the transaction at the time of the transaction. (2) Further implementation regarding cash collateral of at least 10% (ten percent) of the notional value as referred to in paragraph (1) must be stipulated in an agreement between the Bank and the Customer. (3) The provisions regarding the obligation to provide cash collateral of at least 10% (ten percent) as referred to in paragraph (1) are exempted for Customers consisting of:
a. banks; b. the Government of the Republic of Indonesia;
c. Bank Indonesia or central banks of other countries; and
d. banks or multilateral development institutions.

Article 7
Banks are prohibited from using the words “deposit”, “deposito”, “protected”, “current account”, “savings”, and/or other words that may give Customers the perception that the Bank provides full principal protection for Structured Products, in cases where Structured Products issued by the Bank are not accompanied by full protection of the principal in the original currency at maturity.

CHAPTER II
RISK MANAGEMENT

Article 8
(1) Banks must apply effective risk management in conducting Structured Product Activities.
(2) The application of risk management as referred to in paragraph (1) must at least cover:
a. active supervision by the Board of Directors and Board of Commissioners; b. adequacy of policies and procedures;
c. adequacy of risk identification, measurement, monitoring, and control processes as well as risk management information systems; and
d. internal control systems.

First Section
Active Supervision by the Board of Directors and Board of Commissioners

Article 9
Active supervision by the Board of Directors must at least cover:
a. establishing the Bank's plan for Structured Product Activities; b. establishing the Bank's policies and procedures for Structured Product Activities; and
c. monitoring and evaluating Structured Product Activities.

Article 10
Active supervision by the Board of Commissioners must at least cover:
a. the Board of Commissioners' approval of the Bank's plan for Structured Product Activities; and b. evaluation of the implementation of the Bank's plan regarding Structured Product Activities.

Second Section
Adequacy of Policies and Procedures

Article 11
(1) Banks must have and implement comprehensive and effective policies and procedures for Structured Product Activities.
(2) The policies and procedures as referred to in paragraph (1) must at least cover:
a. Structured Product risk level assessment policies; b. Customer risk profile assessment policies;
c. Structured Product risk level assessment policies regarding the suitability of Structured Product risk levels with Customer risk profiles;
d. human resource policies for Structured Product Activities; e. employee incentive structure policies for Structured Product Activities; f. procedures for conducting Structured Product Activities covering:

1. Structured Product development covering:
   a) feasibility studies; b) product feature development; c) risk analysis; d) legal aspect analysis; e) valuation methods; f) recording methods; and g) testing methods;
2. Structured Product marketing and offering; and
3. Structured Product transaction execution covering:
   a) transaction initiation; b) transaction execution; c) transaction settlement; and d) early termination of Structured Product transactions before maturity; g. dispute resolution procedures for Structured Product Activities; and h. procedures for identifying, measuring, monitoring, controlling risks, and information systems for Structured Product Activities.

Article 12
In determining Customer risk profiles as referred to in Article 11 paragraph (2) letter b, Banks must conduct assessments of at least:
a. Customer objectives; b. Customer financial profiles, including:

1. business characteristics;
2. source of funds and characteristics of the sources of funds owned;
3. assets or wealth owned;
4. capital owned; and
5. Customer financial commitments or obligations to the Bank and/or to parties other than the Bank;
   c. Customer understanding and experience in conducting Structured Product Activities, including:
6. Customer knowledge regarding Structured Products;
7. types of Structured Products previously or currently used by Customers;
8. characteristics of Structured Products previously or currently used by Customers as referred to in item 2;
9. volume of Structured Products previously or currently used by Customers as referred to in item 2;
10. frequency of Structured Product usage by Customers; and
11. duration of Structured Products previously or currently used by Customers as referred to in item 2.

Third Section
Risk Identification, Measurement, Monitoring, Control, and Risk Management Information Systems

Article 13
(1) Banks must conduct processes for identifying, measuring, monitoring, and controlling risks for Structured Product Activities.
(2) The implementation of risk identification, measurement, monitoring, and control processes as referred to in paragraph (1) must be supported by timely, informative, and accurate management information systems.

Fourth Section
Internal Control Systems

Article 14
(1) Banks must have effective internal control systems.
(2) The implementation of effective internal control systems as referred to in paragraph (1) is evidenced by:
a. the existence of authority and responsibility limits for work units regarding Structured Product Activities; and b. audits conducted by internal audit work units.

CHAPTER III
CUSTOMER CLASSIFICATION

Article 15
(1) In conducting Structured Product Activities, Banks must determine Customer classifications.
(2) Customer classifications as referred to in paragraph (1) consist of:
a. Professional Customers; b. Eligible Customers; and
c. Retail Customers.
(3) Customers are classified as Professional Customers as referred to in paragraph (2) letter a if Customers have understanding of the characteristics, features, and risks of Structured Products, consisting of:
a. companies operating in the financial sector, consisting of:

1. banks;
2. securities companies;
3. financing companies; or
4. commodity futures traders,
   as long as they do not contradict regulations in the fields of banking, capital markets, financing institutions, and commodity futures trading; b. companies other than those referred to in letter a that meet the requirements:
5. having capital greater than Rp20,000,000,000.00 (twenty billion rupiah) or its equivalent in foreign currency; and
6. having conducted business activities for at least 36 (thirty-six) consecutive months;
   c. the Government of the Republic of Indonesia or governments of other countries;
   d. Bank Indonesia or central banks of other countries; and e. banks or multilateral development institutions.
   (4) Customers are classified as Eligible Customers as referred to in paragraph (2) letter b if Customers have understanding of the characteristics, features, and risks of Structured Products, consisting of:
   a. companies operating in the financial sector consisting of:
7. pension funds; or
8. insurance companies,
   as long as they do not contradict regulations in the fields of pension funds and insurance business; b. companies other than those referred to in letter a that meet the requirements:
9. having capital of at least Rp5,000,000,000.00 (five billion rupiah) or its equivalent in foreign currency; and
10. having conducted business activities for at least 12 (twelve) consecutive months; and
    c. individual Customers who have asset portfolios consisting of cash, current accounts, savings, and/or deposits of at least Rp5,000,000,000.00 (five billion rupiah) or its equivalent in foreign currency.
    (5) Customers are classified as Retail Customers as referred to in paragraph (2) letter c if Customers do not meet the criteria for Professional Customers and Eligible Customers.

Article 16
Banks must update Customer classifications as referred to in Article 15 if there are matters that may cause changes to the established classifications of Customers.

CHAPTER IV
PRODUCT INFORMATION TRANSPARENCY

Article 17
(1) Banks must apply information transparency in conducting marketing, offering, and execution of Structured Product transactions.
(2) In applying information transparency as referred to in paragraph (1), Banks must:
a. disclose complete, correct, and non-misleading information to Customers; b. ensure the provision of balanced information between potential benefits that may be obtained and risks that may arise for Customers from Structured Product transactions; and
c. ensure that the information provided does not obscure, reduce, or cover up important matters related to risks that may arise from Structured Product transactions.

Article 18
In disclosing information as referred to in Article 17 paragraph (2), Banks must disclose information regarding Structured Products that at least includes:
a. the name of the Structured Product and the issuer of the Structured Product; b. the characteristics and features of the Structured Product;
c. illustrations of interest, income, or profit margin calculations that Customers may obtain from Structured Products;
d. illustrations of risk and potential losses that Customers may bear from Structured Products; e. costs associated with Structured Products; f. terms and conditions of Structured Products including among others:

1. duration;
2. effective date;
3. transaction settlement;
4. early termination of transactions covering at least:
   a) conditions that may cause early termination; b) procedures for early termination; and c) settlement mechanisms, including calculations and charges for costs and losses; and
5. dispute resolution;
   g. a statement that Structured Products do not contradict regulations and legislation; h. information regarding the clarity of coverage for Structured Product guarantee programs in cases where Structured Products are related to fund-gathering activities; and
   i. other information necessary for Customers to assess and make decisions regarding Structured Products.

Article 19
In cases where Banks use economic variables, such as inflation, interest rates, and/or exchange rates, in providing illustrations regarding information disclosure as referred to in Article 18, Banks must:
a. ensure that illustrations are based on assumptions supported by accountable data; and b. ensure that supporting data as referred to in letter a is presented based on at least 3 (three) consecutive years of historical monthly data.

Article 20
Banks must provide periodic written reports to Customers regarding the development and performance information of Structured Products as well as other material information affecting the performance of Structured Products.

CHAPTER V
MARKETING AND OFFERING OF STRUCTURED PRODUCTS

First Section
Marketing of Structured Products

Article 21
(1) Banks may use marketing media in the marketing of Structured Products.
(2) In marketing Structured Products as referred to in paragraph (1), Banks must ensure that information provided through marketing media meets the principles of information transparency as referred to in Article 17 paragraph (2), Article 18, and Article 19. (3) The presentation of information provided by Banks as referred to in paragraph (2) may be adjusted to the marketing media used without reducing the substance of the information presented. (4) Information provided by Banks as referred to in paragraph (3) must be presented in the Indonesian language.

Second Section
Offering

Article 22
(1) Banks must consider the suitability between Structured Product risk levels (Structured Product risk level assessment) and Customer risk profiles when offering and conducting Structured Product transactions with Customers. (2) Banks are prohibited from offering and conducting Structured Product transactions with Customers classified as Retail Customers as referred to in Article 15 paragraph (5). (3) The prohibition on offering and conducting Structured Product transactions with Customers classified as Retail Customers as referred to in paragraph (2) is exempted for Structured Products issued by Banks accompanied by full protection of the principal in the original currency at maturity. (4) Banks are prohibited from offering and conducting Structured Product transactions with Customers classified as Eligible Customers as referred to in Article 15 paragraph (4) in cases where Structured Products meet at least 1 (one) of the following requirements:
a. may cause potential losses exceeding the principal invested by Customers; and/or b. Structured Products that are combinations of derivatives with derivatives. (5) Banks are prohibited from using other Banks to act as sales agents for Structured Products issued by the Bank.

Article 23
(1) Banks must conduct direct meetings with Customers when offering Structured Products.
(2) Banks must specifically designate employees who may act on behalf of the Bank in conducting and/or communicating with Customers in conducting Structured Product offering activities as referred to in paragraph (1). (3) Employees as referred to in paragraph (2) must meet the requirements:
a. being permanent employees of the Bank; and b. having received adequate training regarding Structured Products.

Article 24
(1) In conducting Structured Product offerings as referred to in Article 23, Banks must ensure that the information provided in the offering meets the principles of information transparency as referred to in Article 17 paragraph (2), Article 18, and Article 19. (2) In conducting Structured Product offerings, Banks must provide Customers with written documents at least including:
a. a prospectus or term sheet; and b. a product highlight sheet, of the Structured Products offered.
(3) The obligation to provide documents in the form of a product highlight sheet as referred to in paragraph (2) letter b is exempted for Customers consisting of Banks. (4) Documents as referred to in paragraph (2) must be presented in the Indonesian language.

(5) The Bank is required to document oral explanations provided by the Bank to Customers in offering Structured Products, along with the responses provided by the Customers.

CHAPTER VI
COOLING OFF PERIOD
Article 25
(1) The Bank is required to provide time for Customers to study the offer and documents provided by the Bank to Customers as referred to in Article 24.
(2) The provision of time as referred to in paragraph (1) is carried out by providing a cooling off period between the time the offer is made by the Bank and the time the Customer submits a request to accept or decline to conduct a Structured Product transaction with the Bank. (3) The duration of the cooling off period provided as referred to in paragraph (2) is at least:
a. 3 (three) working days after an individual Customer receives the offer document as referred to in Article 24 paragraph (2); or b. 2 (two) working days after a corporate Customer receives the offer document as referred to in Article 24 paragraph (2). (4) Provisions regarding the cooling off period obligation as referred to in paragraph (3) are exempted for:
a. offers of Structured Products issued by the Bank accompanied by full principal protection in the original currency at maturity; and/or b. offers of Structured Products to Customers who are banks.

CHAPTER VII
CUSTOMER STATEMENT
Article 26
(1) In the event that a Customer submits a request to conduct a Structured Product transaction, the Bank is required to ensure that the Customer has received and understood the information contained in the offer document as referred to in Article 24 paragraph (2). (2) The Customer's understanding as referred to in paragraph (1) must be recorded in a separate written document, presented in the Indonesian language, and signed by the Customer using a wet ink signature. (3) The Bank is required to ensure that the party signing the written document as referred to in paragraph (2) is a party with legal authority.

CHAPTER VIII
STRUCTURED PRODUCT AGREEMENT
Article 27
(1) The agreement between the Bank and the Customer in conducting a Structured Product transaction must be recorded in a written agreement.
(2) In the event that the Bank and Customer agree on the possibility of terminating the Structured Product transaction before maturity (early termination), the early termination clause must be included in the Structured Product agreement. (3) The written agreement as referred to in paragraph (1) must be presented in the Indonesian language and signed by the parties using wet ink signatures. (4) The Bank is required to ensure that the party signing the written agreement as referred to in paragraph (3) is a party with legal authority. (5) Documents as referred to in Article 24 paragraph (2) and Article 26 paragraph (2) are an inseparable part of the written agreement as referred to in paragraph (1).

CHAPTER IX
PROCEDURES FOR SUBMITTING PRINCIPLE APPROVAL AND EFFECTIVE STATEMENT
Article 28
(1) To obtain principle approval as referred to in Article 2 letter a, the Bank is required to submit a request to the Financial Services Authority (OJK). (2) The submission of the principle approval request as referred to in paragraph (1) must be submitted in writing to the Financial Services Authority and accompanied by supporting documents consisting of:
a. policy and procedure documents as referred to in Article 11; and b. human resource requirement documents as referred to in Article 23 paragraph (2) and paragraph (3). (3) Approval or rejection of the principle approval request as referred to in paragraph (1) must be submitted in writing to the Bank at the latest 60 (sixty) working days after the complete principle approval request documents as referred to in paragraph (2) are received by the Financial Services Authority.

Article 29
(1) To obtain an effective statement as referred to in Article 2 letter b, the Bank is required to submit a request to the Financial Services Authority (OJK). (2) The request for an effective statement as referred to in paragraph (1) may only be submitted if the Bank has obtained principle approval from the Financial Services Authority as referred to in Article 2 letter a. (3) The submission of the request for an effective statement as referred to in paragraph (1) must be submitted in writing to the Financial Services Authority and accompanied by supporting documents consisting of:
a. marketing documents as referred to in Article 21, if any; b. offer documents consisting of a prospectus or term sheet and product highlight sheet as referred to in Article 24 paragraph (2);
c. documents related to the results of the review by the relevant work unit as an implementation of the policy and procedures as referred to in Article 11 paragraph (2) letter a, letter b, letter c, and letter f, consisting of:

1. Structured Product risk level assessment;
2. Customer risk profile;
3. Suitability of the Structured Product risk level assessment with the Customer's risk profile; and
4. Implementation of Structured Product Activities;
   d. documents stating that the Bank has obtained approval or permission from the competent authority in the event that one or more of the underlying instruments of the Structured Product are instruments requiring approval or permission from the competent authority. (4) The effective statement as referred to in paragraph (1) must be submitted in writing to the Bank at the latest 60 (sixty) working days after the complete request documents for the effective statement as referred to in paragraph (3) are received by the Financial Services Authority.

Article 30
(1) Provisions regarding the effective statement obligation as referred to in Article 2 letter b and Article 29 are exempted for Structured Products issued by the Bank accompanied by full principal protection in the original currency at maturity. (2) Issuance of Structured Products by the Bank accompanied by full principal protection in the original currency at maturity as referred to in paragraph (1) shall refer to the reporting procedures for new products and activities as regulated in provisions regarding the implementation of risk management for Banks.

CHAPTER X
REPORTS
Article 31
(1) Banks submit reports regarding Structured Product transactions every month online through the Financial Services Authority's reporting system.
(2) In the event that the submission of reports as referred to in paragraph (1) cannot yet be performed, Banks submit routine reports every month online through the Universal Bank Headquarters Report System (LKPBU). (3) The submission of routine reports every month online through the LKPBU system as referred to in paragraph (2) is carried out in accordance with the procedures, formats, and timeframes in the provisions regarding LKPBU.

CHAPTER XI
SANCTIONS
Article 32
Banks that do not comply with the provisions as referred to in Article 2, Article 3, Article 4, Article 5, Article 6 paragraph (1), Article 6 paragraph (2), 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 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, or Article 27, shall be subject to administrative sanctions consisting of:
a. written reprimand; b. reduction of the Bank's health level;
c. suspension and revocation of approval for certain business activities, either for specific branches or for the Bank as a whole;
d. dismissal of the Bank's management and subsequently appointing and appointing temporary replacements until the General Meeting of Shareholders or General Meeting of Members appoints permanent replacements with the approval of the Financial Services Authority; and/or e. inclusion of shareholders, management, or executive officials in the list of unqualified in the banking sector.

Article 33
Banks that do not comply with the provisions as referred to in Article 30 paragraph (2) shall be subject to sanctions as regulated in the provisions regarding the implementation of risk management for Banks.

Article 34
In addition to the sanctions as referred to in Article 32, Banks that do not comply with the provisions as referred to in Article 2 shall be subject to administrative sanctions in the form of fines of 1% (one percent) of the value of the Structured Product transactions conducted and at most IDR 27,000,000,000.00 (twenty-seven billion rupiah).

Article 35
In addition to violations of this Financial Services Authority Regulation as referred to in Article 32, the Financial Services Authority may revoke principle approval and/or effective statements that have been granted as referred to in Article 28 paragraph (3) and Article 29 paragraph (4), in the event that in the opinion of the Financial Services Authority:
a. the application of risk management principles for Structured Product Activities conducted by the Bank is inadequate; and/or b. the risks arising from Structured Product Activities conducted by the Bank may endanger the Bank's business continuity.

Article 36
The procedures for depositing the imposition of administrative sanctions in the form of fines as referred to in Article 34 shall refer to the Financial Services Authority Regulation regarding the procedures for collecting administrative sanctions in the form of fines in the financial services sector.

CHAPTER XII
OTHER PROVISIONS
Article 37
In addition to referring to the provisions as regulated in this Financial Services Authority Regulation, regulations regarding Structured Product transactions that contain elements of foreign currency transactions against the Rupiah shall also refer to regulations governing foreign currency transactions against the Rupiah.

Article 38
(1) Requests for principle approval as referred to in Article 28 paragraph (2) and requests for effective statements as referred to in Article 29 paragraph (3) must be submitted to:
a. the Relevant Bank Supervision Department or Regional Office I of Greater Jakarta, Banten, Lampung, and Kalimantan, for Banks headquartered or branches of banks located outside the country located in the Greater Jakarta (Jabodetabek) area, and Banten Province; or b. the Regional Office of the Financial Services Authority or the local Office of the Financial Services Authority, for Banks headquartered outside the Greater Jakarta (Jabodetabek) area, and Banten Province. (2) In addition to being submitted to the Bank Supervision Department, Regional Office of the Financial Services Authority, or local Office of the Financial Services Authority as referred to in paragraph (1), requests for effective statements as referred to in Article 29 paragraph (3) shall be copied to the Banking Research and Regulation Department.

CHAPTER XIII
CLOSING PROVISIONS
Article 39
(1) Upon the entry into force of this Financial Services Authority Regulation, Bank Indonesia Regulation Number 11/26/PBI/2009 dated July 1, 2009 regarding Prudential Principles in Implementing Structured Product Activities for Universal Banks (State Gazette of the Republic of Indonesia Year 2009 Number 104, Supplement to the State Gazette of the Republic of Indonesia Number 5030) is revoked and declared invalid. (2) Implementation regulations of Bank Indonesia Regulation Number 11/26/PBI/2009 dated July 1, 2009 regarding Prudential Principles in Implementing Structured Product Activities for Universal Banks remain in force as long as they do not conflict with the provisions in this Financial Services Authority Regulation.

Article 40
This Financial Services Authority Regulation shall come into force upon being enacted.

In order that everyone may know it, ordering the enactment of this Financial Services Authority Regulation by placing it in the State Gazette of the Republic of Indonesia.

Established in Jakarta on January 26, 2016
CHAIRMAN OF THE COMMISSIONERS
FINANCIAL SERVICES AUTHORITY, signed
MULIAMAN D. HADAD

Enacted in Jakarta on January 27, 2016
MINISTER OF LAW AND HUMAN RIGHTS
REPUBLIC OF INDONESIA, signed
YASONNA H. LAOLY

STATE GAZETTE OF THE REPUBLIC OF INDONESIA YEAR 2016 NUMBER 19 A copy in accordance with the original Legal Director 1 Legal Department signed Yuliana

EXPLANATION
OF
FINANCIAL SERVICES AUTHORITY REGULATION
NUMBER 7 /POJK.03/2016
ON
PRUDENTIAL PRINCIPLES IN IMPLEMENTING
STRUCTURED PRODUCT ACTIVITIES FOR UNIVERSAL BANKS

I. GENERAL
The increasing integration of the global financial system, accompanied by rapid innovation in financial instruments, has facilitated the growing variety and structure of financial instruments with diverse levels of complexity, ranging from simple to highly complex. Among the financial instruments that have developed quite rapidly are structured financial instruments, more commonly 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 in terms of finance and other fields such as law and taxation. The complexity arising from the structuring of Structured Products will result in increasingly complex risks faced by Banks, thereby requiring adequate adjustments regarding the application of prudential principles and risk management, particularly related to the management and control of risks that may arise from such Structured Products for Banks. From the public's perspective, the complexity arising from Structured Product activities must also be balanced with an increase in the quality of transparency. Thus, the public can make objective assessments regarding the suitability between the risks that may arise and the benefits, as well as the suitability of the structured product with the risk appetite and needs of the public. The improvement of the quality of transparency aims to ensure that public confidence in the financial system, particularly the banking system, remains maintained. As intermediation institutions, Banks play an important role in improving the quality of transparency and maintaining public confidence. The strengthening of the application of prudential principles and risk management, accompanied by public confidence, is expected to maintain the integrity of the banking system in particular and the financial system as a whole.

II. ARTICLE BY ARTICLE
Article 1
Sufficiently clear.

Article 2
Letter a
Principle approval as referred to in this paragraph aims to assess the Bank's readiness to conduct Structured Product Activities comprehensively and is not approval for the issuance of each type of Structured Product. Therefore, the request for approval as referred to in this paragraph is submitted once before the Bank conducts Structured Product Activities.

Letter b
The effective statement provided by the Financial Services Authority is administrative in nature, based on data, information, and documents submitted by the Bank, so it does not constitute a guarantee in any form regarding the suitability, benefits, risks, and losses that may arise among the parties conducting the transaction.

In principle, the parties who need to ensure the suitability, benefits, and risks that may arise from Structured Products are the parties conducting the transaction, namely the Bank and Customers.

Article 3
Sufficiently clear.

Article 4
Sufficiently clear.

Article 5
Paragraph (1)
What is meant by the Bank's business plan is a written document describing the Bank's business activities as regulated in provisions governing Bank business plans.

Paragraph (2)
Letter a
What is meant by grouping consists of:

1. fund collection, if Structured Products are issued in connection with fund collection activities;
2. fund provision, if Structured Products are issued as part of fund provision facilities provided by the Bank to Customers.

Letter b
Sufficiently clear.

Letter c
Sufficiently clear.

Article 6
Paragraph (1)
What is meant by "notional value calculation" is the initial notional value set until maturity. In the event that there is more than 1 (one) notional value set, the largest notional value is used as the basis for measurement to determine the amount of collateral. Collateral provided as referred to in this paragraph is not a substitution for the risk assessment conducted by the Bank on Customers.

Paragraph (2)
Sufficiently clear.

Paragraph (3)
Letter a
What is meant by banks in these regulations are Banks as referred to in Article 1 and banks located outside the country.

Letter b
Sufficiently clear.

Letter c
Sufficiently clear.

Letter d
What is meant by "banks or multilateral development institutions" are bodies established by a group of countries that provide funding 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 (CAF), Caribbean Development Bank (CDB), Central American Bank for Economic Integration (CABEI), East African Development Bank (EADB), West African Development Bank (BOAD), and Black Sea Trade and Development Bank (BSTDB).

Article 7
Regarding the prohibition mentioned, Structured Products issued by Banks and not accompanied by full principal protection in the original currency at maturity are not permitted to be recorded in the "current accounts," "savings accounts," and "time deposits" accounts in Bank reporting.

Article 8
Paragraph (1)
Principles for the application of risk management refer to provisions governing the implementation of risk management for universal banks.

Paragraph (2)
Sufficiently clear.

Article 9
Letter a
The Bank's plan mentioned is recorded in the Bank's business plan.

Letter b
Sufficiently clear.

Letter c
Sufficiently clear.

Article 10
Letter a
Approval of the Bank's plan regarding Structured Product Activities is considered to have been conducted if the Bank's business plan, signed by Commissioners, includes the Bank's plan regarding Structured Product Activities.

Letter b
Evaluations of the implementation of the Bank's plan regarding Structured Product Activities can be recorded in the minutes of the Board of Commissioners meetings or reports on business plan supervision as regulated in provisions regarding Bank business plans.

Article 11
Paragraph (1)
Sufficiently clear.

Paragraph (2)
Letter a
Risk levels are high, medium, and low, the determination of which is left to each Bank.

Letter b
Customer risk profiles include Customer risk appetite consisting of risk averse, risk neutral, and risk taker, the determination of which is left to each Bank.

Letter c
Sufficiently clear.

Letter d
Human resource policy requirements include human resource requirements and qualifications for Structured Product Activities.

Letter e
In establishing incentive structure policies, Banks are required to ensure that the incentive structure developed can create alignment between employee interests, Customer interests, and Bank interests. To achieve this goal, Banks must avoid establishing incentive structure policies based solely on sales volume without accompanying other control mechanisms.

Letter f
Procedures for implementing Structured Product Activities provide a formal framework for implementing Structured Product Activities, including the establishment of activity implementation processes, establishment of authority and responsibility, and inter-unit relationships, from the development stage to commercialization.

Letter g
Sufficiently clear.

Letter h
Sufficiently clear.

Article 12
Letter a
What is meant by Customer objectives includes:

1. obtaining additional income (yield enhancement) in conducting Structured Product transactions;
2. maintaining the integrity of principal in conducting Structured Product transactions;
3. short-term, medium-term, or long-term objectives; and
4. having liquid investment tools in conducting investments.

Letter b
Number 1
Assessment of business characteristics includes assessment of business activity types, business industries, markets, and market shares held, and business cycles.

Number 2
What is meant by characteristics of source of funds (source of funds) includes the sustainability and time horizon of the funds.

Number 3
The term assets or wealth includes cash, securities, effects, and fixed assets owned.

Number 4
Sufficiently clear.

Number 5
Sufficiently clear.

Letter c
Sufficiently clear.

Article 13
Sufficiently clear.

Article 14
Paragraph (1)
Sufficiently clear.

Paragraph (2)
Letter a
The establishment of authority and responsibility limits for work units related to Structured Product Activities is recorded in policy and procedure guidelines.

Letter b
Sufficiently clear.

Article 15
Paragraph (1)
Sufficiently clear.

Paragraph (2)
Sufficiently clear.

Paragraph (3)
To determine the level of Customer understanding regarding the characteristics, features, and risks of Structured Products, it can be conducted through:
a. interviews, the results of which are recorded in written form; and/or b. questionnaires, the format of which can be determined by each Bank, conducted as part of implementing Customer risk profile assessments as referred to in Article 11.

Letter a
Number 1
Sufficiently clear.

Number 2
What is meant by "securities companies" are securities companies as referred to in Law Number 8 of 1995 regarding Capital Markets.

Number 3
What is meant by "financing companies" are financing companies as referred to in provisions governing financing institutions.

Number 4
What is meant by "futures contract traders" are futures contract traders as referred to in Law Number 32 of 1997 regarding Commodity Futures Trading as amended by Law Number 10 of 2011.

Letter b
Number 1
What is meant by "capital" is equity as referred to in financial accounting standards.

Number 2
Sufficiently clear.

Letter c
Sufficiently clear.

Letter d
Sufficiently clear.

Letter e
What is meant by "banks or multilateral development institutions" are bodies established by a group of countries that provide funding 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 (CAF), Caribbean Development Bank (CDB), Central American Bank for Economic Integration (CABEI), East African Development Bank (EADB), West African Development Bank (BOAD), and Black Sea Trade and Development Bank (BSTDB).

Paragraph (4)
To determine the level of customer understanding regarding the characteristics, features, and risks of Structured Products, this can be done through:
a. interviews, the results of which are documented in writing; and/or b. questionnaires, the format of which may be determined by each Bank, conducted as part of the implementation of the customer risk profile assessment referred to in Article 11.

Letter a
Number 1
The term “pension fund” refers to pension funds as referred to in Law Number 11 of 1992 concerning Pension Funds.

Number 2
The term “insurance company” refers to insurance companies as referred to in Law Number 40 of 2014 concerning Insurance Business.

Letter b
Number 1
The term “capital” refers to equity as referred to in financial accounting standards.

Number 2
Clearly sufficient.

Letter c
Clearly sufficient.

Paragraph (5)
Clearly sufficient.

Article 16
Clearly sufficient.

Article 17
Paragraph (1)
Information transparency aims to enable Customers to obtain adequate information regarding the product before making a decision.

Paragraph (2)
Clearly sufficient.

Article 18
Letter a
Clearly sufficient.

Letter b

1. For Structured Products that are a combination of non-derivative financial instruments and derivatives, the disclosure of information regarding the characteristics and features of the Structured Product includes:
   a) the type of non-derivative instrument; b) the type of derivative; and c) variables such as exchange rates or interest rates, which serve as the basis (underlying variable) for the Structured Product.

2. For Structured Products that are a combination of derivatives and derivatives, the disclosure of information regarding the characteristics and features of the Structured Product includes:
   a) the types of derivatives; and b) variables such as exchange rates or interest rates, which serve as the basis (underlying variable) for the Structured Product.

Letter c
In providing information regarding illustrations of interest, income, or profit margin calculations that can be obtained, the Bank must disclose at least:

1. the method for calculating interest, income, or profit margin;
2. the assumptions used; and
3. illustrations of interest, income, or profit margin calculations for the Structured Product under several scenarios.

Letter d
In providing information regarding illustrations of potential risks and losses that may be borne, the Bank must disclose at least:

1. the risks that may be faced;
2. the method for calculating potential losses;
3. leverage components;
4. the assumptions used; and
5. illustrations of loss calculations under several scenarios, including the scenario of the largest possible loss.

Letter e
Costs inherent to Structured Products include, among others, administrative fees, premiums, commissions, fees, and/or penalties. In providing information regarding inherent costs, the Bank must disclose the method for determining cost calculations.

Letter f
Clearly sufficient.

Letter g
Clearly sufficient.

Letter h
Clearly sufficient.

Letter i
Clearly sufficient.

Article 19
Clearly sufficient.

Article 20
The frequency of periodic written reports submitted by the Bank is adjusted to the type and complexity of the Structured Product offered.

Article 21
Paragraph (1)
The term “marketing media” includes, among others, advertisements, brochures, leaflets, or electronic marketing media.
The term “marketing” refers to a form of communication aimed at conveying information to the public, which is not always followed by offering activities.

Paragraph (2)
Clearly sufficient.

Paragraph (3)
Clearly sufficient.

Paragraph (4)
Clearly sufficient.

Article 22
Paragraph (1)
The implementation of regulations in this paragraph is part of the implementation of policies as referred to in Article 11.

Paragraph (2)
Clearly sufficient.

Paragraph (3)
Clearly sufficient.

Paragraph (4)
Letter a
The condition where potential losses may exceed the invested principal generally occurs when the Structured Product contains leverage elements.

Letter b
Clearly sufficient.

Paragraph (5)
Included in the definition of acting as a sales agent are:
a. representing the Bank to follow up on Customer requests for Structured Products; and/or b. acting as a referral agent.

Article 23
Paragraph (1)
Clearly sufficient.

Paragraph (2)
Clearly sufficient.

Paragraph (3)
Letter a
Clearly sufficient.

Letter b
The purpose of providing training regarding Structured Products is to ensure that employees have adequate understanding and are able to explain to Customers well regarding the characteristics, features, and risks of the Structured Products offered. Thus, the Bank is responsible for ensuring that the implementation, frequency, and material provided in training can achieve the aforementioned training objectives, among others by considering the complexity of the products offered and employee competence.

Article 24
Paragraph (1)
Clearly sufficient.

Paragraph (2)
Letter a
The term “prospectus or term sheet” refers to an official document that provides all material information required by Customers to evaluate and make decisions regarding the Structured Product offered.

Letter b
The term “product highlight sheet” refers to a document aimed at helping Customers understand the main information regarding the Structured Product contained in the prospectus or term sheet.

The product highlight sheet is presented in a clear, concise format using language easily understood by Customers. Therefore, the product highlight sheet can be compiled in a “question-answer” format and must at least answer questions regarding the Structured Product:

1. the product to be purchased or invested in by the Customer;
2. the benefits of the product to be purchased or invested in by the Customer;
3. the counterparty with the Customer who will purchase or invest;
4. the differences between the product to be purchased or invested in by the Customer and conventional current accounts, deposits, and time deposits;
5. the main risks affecting the product;
6. profits or losses obtained or charged to the Customer, in various scenarios including the worst-case loss;
7. the suitability of the product for:
   a) Customers who do not wish to experience principal loss; b) Customers who may require liquidity in the short term; c) Customers who do not have knowledge or experience in conducting derivative transactions;
8. the costs that the Customer must pay in purchasing the product;
9. the frequency of product evaluation conducted and communicated to the Customer;
10. the procedure for the Customer to exit or stop the transaction and the risks and/or costs that the Customer must be aware of regarding transaction termination;
11. the parties whom the Customer can contact at the Bank to obtain information, and/or
    report problems, complaints, or disputes; and
12. product certainty, including whether it falls within the coverage of the Deposit Insurance Corporation.

The product highlight sheet is presented with a font size of at least 10 (ten) and does not exceed 4 (four) pages.

Paragraph (3)
The term “bank” in this paragraph refers to Banks as referred to in Article 1 and banks located outside the country.

Paragraph (4)
Clearly sufficient.

Paragraph (5)
Documentation conducted by the Bank includes, among others, voice recordings.

Article 25
Paragraph (1)
The provision of time aims to enable Customers to evaluate the suitability of the Structured Product offered by the Bank with the Customer's needs.

Paragraph (2)
The provision of time is given for offers on every type of product.

Paragraph (3)
Letter a
The period of 3 (three) working days is calculated from the date of receipt of the offer document by the Customer, proven by a receipt.

Letter b
The period of 2 (two) working days is calculated from the date of receipt of the offer document by the Customer, proven by a receipt.

Paragraph (4)
Letter a
Clearly sufficient.

Letter b
The term “bank” in this paragraph refers to Banks as referred to in Article 1 and banks located outside the country.

Article 26
Paragraph (1)
Clearly sufficient.

Paragraph (2)
Clearly sufficient.

Paragraph (3)
The term “party having legal authority, among others for individuals” refers to parties legally competent; for legal entities, it refers to officials having authority according to the articles of association or internal regulations of the respective legal entity.

Article 27
Paragraph (1)
Clearly sufficient.

Paragraph (2)
Clearly sufficient.

Paragraph (3)
Clearly sufficient.

Paragraph (4)
The term “party having legal authority, among others for individuals” refers to parties legally competent; for legal entities, it refers to officials having authority according to the articles of association or internal regulations of the respective legal entity.

Paragraph (5)
Clearly sufficient.

Article 28
Clearly sufficient.

Article 29
Clearly sufficient.

Article 30
Clearly sufficient.

Article 31
Clearly sufficient.

Article 32
Clearly sufficient.

Article 33
Clearly sufficient.

Article 34
Clearly sufficient.

Article 35
Clearly sufficient.

Article 36
Clearly sufficient.

Article 37
Clearly sufficient.

Article 38
Clearly sufficient.

Article 39
Clearly sufficient.

Article 40
Clearly sufficient.

SUPPLEMENT TO THE STATE GAZETTE OF THE REPUBLIC OF INDONESIA NUMBER 5843 ---