Requirements for Commercial Banks to Conduct Foreign Currency Business Activities

To:

1. Board of Directors of Conventional Commercial Banks; and
2. Board of Directors of Islamic Commercial Banks,
   At their respective locations.

COPY

CIRCULAR LETTER OF THE FINANCIAL SERVICES AUTHORITY NUMBER 33/SEOJK.03/2017

CONCERNING

REQUIREMENTS FOR COMMERCIAL BANKS TO CONDUCT BUSINESS ACTIVITIES IN FOREIGN CURRENCY

In connection with the Financial Services Authority Regulation Number 6/POJK.03/2016 concerning Business Activities and Office Networks Based on Bank Core Capital (State Gazette of the Republic of Indonesia Year 2016 Number 18, Supplement to the State Gazette of the Republic of Indonesia Number 5842), the Financial Services Authority Regulation Number 18/POJK.03/2016 concerning Risk Management Implementation for Commercial Banks (State Gazette of the Republic of Indonesia Year 2016 Number 53, Supplement to the State Gazette of the Republic of Indonesia Number 5861), the Financial Services Authority Regulation Number 65/POJK.03/2016 concerning Risk Management Implementation for Islamic Commercial Banks and Islamic Business Units (State Gazette of the Republic of Indonesia Year 2016 Number 298, Supplement to the State Gazette of the Republic of Indonesia Number 5988), and the Financial Services Authority Regulation Number 24/POJK.03/2015 concerning Products and Activities of Islamic Banks and Islamic Business Units (State Gazette of the Republic of Indonesia Year 2015 Number 289, Supplement to the State Gazette of the Republic of Indonesia Number 5771), as well as in connection with the transfer of functions, duties, and authorities for the regulation and supervision of financial services in the banking sector from Bank Indonesia to the Financial Services Authority, it is necessary to regulate the implementation regarding the requirements for commercial banks to conduct business activities in foreign currency in this Financial Services Authority Circular Letter as follows:

I. GENERAL PROVISIONS

1. Business activities that can be conducted by Commercial Banks are grouped based on the Core Capital owned, which is hereinafter referred to as Commercial Banks based on Business Activities (BUKU). The grouping of Commercial Banks based on Business Activities consists of 4 (four) BUKUs, namely BUKU 1, BUKU 2, BUKU 3, and BUKU 4.

2. Business activities in foreign currency can only be conducted by Banks that fall into the BUKU 2, BUKU 3, and BUKU 4 groups. Banks that fall into the BUKU 1 group can only conduct activities as Foreign Currency Dealers (PVA).

3. Banks that fall into the BUKU 2, BUKU 3, and BUKU 4 groups can conduct Business Activities in foreign currency as long as they have obtained approval from the Financial Services Authority.

4. Banks that obtain approval from the Financial Services Authority to conduct Business Activities in foreign currency are also referred to as banks conducting business activities in foreign currency.

5. In order to apply the principle of prudence and supervision aspects regarding Business Activities in foreign currency conducted by Banks, the Financial Services Authority sets requirements for Banks to conduct Business Activities in foreign currency in this Financial Services Authority Circular Letter.

II. BUSINESS ACTIVITIES IN FOREIGN CURRENCY

1. Business Activities in foreign currency comprise all Business Activities of the Bank, including the issuance of products and/or the implementation of activities in foreign currency.

2. The scope of Business Activities in foreign currency refers to the Business Activities that can be conducted for each BUKU as referred to in the Financial Services Authority regulations concerning business activities and office networks based on bank core capital.

3. In the event that a bank that has obtained approval to conduct Business Activities in foreign currency will offer products and/or activities with high Risk and complexity, the Bank must obtain approval from the Financial Services Authority before issuing such products and/or activities. Examples of products and/or activities with high Risk and/or complexity include structured products and foreign currency (offshore) financial products.

III. REQUIREMENTS AND APPROVAL FOR BUSINESS ACTIVITIES IN FOREIGN CURRENCY

A. Requirements for Conducting Business Activities in Foreign Currency

1. Banks applying for permission to conduct Business Activities in foreign currency must meet the following requirements:

a. the Bank's health level with a composite rating of 1 (one) or composite rating 2 (two) for the last 18 (eighteen) months;

b. having Core Capital of at least IDR 1,000,000,000,000.00 (one trillion rupiah); and

c. meeting the Minimum Capital Adequacy Ratio (KPMM) according to the Risk profile for the latest KPMM assessment as referred to in the Financial Services Authority regulations concerning minimum capital adequacy requirements for commercial banks and the Financial Services Authority regulations concerning minimum capital adequacy requirements for Islamic commercial banks, with the requirement that in the event the KPMM according to the Risk profile is less than 10% (ten percent), the KPMM is set at a minimum of 10% (ten percent).

2. Branch offices of banks domiciled outside the country can conduct Business Activities in foreign currency as long as they have met the Core Capital requirements as referred to in item 1.b, which come from business funds that have been allocated as Capital Equivalency Maintained Assets (CEMA) as referred to in the Financial Services Authority regulations concerning minimum capital adequacy requirements for commercial banks.

3. Islamic Business Units (UUS) can apply for permission to conduct Business Activities in foreign currency as long as the Conventional Commercial Bank (BUK) that is the parent has obtained approval to conduct Business Activities in foreign currency.

B. Submission of Applications for Conducting Business Activities in Foreign Currency

1. Banks that will conduct Business Activities in foreign currency must include the aforementioned plan in the Bank Business Plan (RBB) for the same year as the year of the application submission.

2. The Foreign Currency Business Activity Plan contained in the RBB must at least contain:

a. the objectives and benefits of Foreign Currency Business Activities for the Bank, which among others include:

1. results of a brief assessment of market opportunities for Foreign Currency Business Activities and potential demand for products and/or activities in foreign currency that support the business development of the Bank's customers; and

2. the Bank's strategy in developing Foreign Currency Business Activities to support the Bank's overall business;

b. the scope of Foreign Currency Business Activities, including the issuance of products and/or the implementation of new activities to be conducted by the Bank; and

c. a brief explanation regarding the organizational structure, human resources, and information systems that will be prepared in the framework of implementing Foreign Currency Business Activities.

3. Banks that meet the requirements as referred to in item A.1 and item B.1 can submit an application to conduct Business Activities in foreign currency to the Financial Services Authority accompanied by:

a. supporting documents related to the Bank's preparation in the framework of implementing Foreign Currency Business Activities, at least including:

1. feasibility study of Foreign Currency Business Activities, such as economic potential, market opportunities (fund mobilization and fund disbursement), the level of competition among banks, and balance sheet growth projections related to products and/or activities in foreign currency for 12 (twelve) months;

2. readiness to implement risk management for Foreign Currency Business Activities with reference to the Financial Services Authority regulations concerning risk management implementation for commercial banks or the Financial Services Authority regulations concerning risk management implementation for Islamic commercial banks and Islamic business units;

3. implementation procedures (standard operating procedure);

4. readiness of organizational structure, human resources, and information systems used;

5. plan for implementing the Anti-Money Laundering and Counter-Terrorism Financing (APU PPT) program; and

6. readiness of correspondence relationships with banks outside the country; and

b. a list of the Bank's branch offices that will conduct Business Activities in foreign currency.

4. The submission of applications for conducting Business Activities in foreign currency for UUS as referred to in item A.3 is conducted with reference to the provisions of legislation concerning Islamic business units.

5. The Financial Services Authority provides approval or rejection of the Bank's application to conduct Business Activities in foreign currency within a maximum of 60 (sixty) days after all requirements are met and the application documents are received completely by the Financial Services Authority.

6. In the event that additional documents and/or explanations are still needed regarding the evaluation conducted by the Financial Services Authority in the process of providing approval, the 60 (sixty) day time limit is calculated from the time the Bank completes the documents and/or provides the explanations requested by the Financial Services Authority.

7. Banks that have obtained approval to conduct Business Activities in foreign currency must implement Foreign Currency Business Activities within a maximum of 6 (six) months from the date the approval is granted. If within the 6 (six) month period from the date the Financial Services Authority grants approval, the Bank does not implement Foreign Currency Business Activities, the Financial Services Authority's approval becomes invalid.

8. In the event that the Financial Services Authority's approval has become invalid as referred to in item 7, but the Bank still intends to conduct Business Activities in foreign currency, the Bank must resubmit the application for approval to conduct Business Activities in foreign currency to the Financial Services Authority.

IV. REDUCTION OF CORE CAPITAL AND REVOCATION OF FINANCIAL SERVICES AUTHORITY APPROVAL FOR BUSINESS ACTIVITIES IN FOREIGN CURRENCY

A. Reduction of Bank Core Capital

1. Banks that experience a reduction in Core Capital so that they no longer meet the Core Capital requirements for conducting Business Activities in foreign currency as referred to in item III.A.1.b for 3 (three) consecutive months, must submit an action plan in order to:

a. meet the Core Capital requirements; or

b. adjust Foreign Currency Business Activities.

2. The action plan as referred to in item 1 must be submitted to the Financial Services Authority no later than in the fourth month since the reduction in Core Capital occurred.

Example:
Bank "X" conducts business activities in foreign currency. As of August 2017, the core capital of Bank "X" was IDR 1,050,000,000,000.00 (one trillion fifty billion rupiah). As of September, October, and November 2017, the core capital of Bank "X" decreased to the following:

Month | Core Capital
September | IDR 980,000,000,000.00
October | IDR 995,000,000,000.00
November | IDR 960,000,000,000.00

Thus, Bank "X"'s action plan must be received by the Financial Services Authority no later than the end of December 2017.

3. The action plan in order to meet the Core Capital requirements as referred to in item 1.a must at least explain:

a. the cause of the reduction in Core Capital;

b. efforts to be made regarding the mechanism and stages for meeting Core Capital; and

c. other matters that need to be informed to the Financial Services Authority.

4. The action plan in order to adjust Foreign Currency Business Activities as referred to in item 1.b must at least explain:

a. a list of products and/or activities in foreign currency that must be discontinued, including nominal value (outstanding) and remaining maturity;

b. the plan for the stages of reducing foreign currency exposure and the final completion time of Foreign Currency Business Activities, both in aggregate and for each product and/or activity in foreign currency;

c. a communication or notification plan to customers and/or stakeholders regarding the discontinuation of Foreign Currency Business Activities; and

d. other matters that need to be informed to the Financial Services Authority.

5. The completion of Foreign Currency Business Activities as referred to in item 4.b can be adjusted with the remaining maturity of each product and/or activity in foreign currency with a maximum time limit of 3 (three) years.

Example:
On December 1, 2017, the action plan for the completion of foreign currency business activities at Bank "X" was approved with a completion deadline until November 30, 2020. One of the action plans regarding the completion of foreign currency credit granted to PT "Y" with a maturity date in March 2022 is the target that by early 2020, the credit will be transferred to another Bank.

6. Banks must complete the action plan in order to meet the Core Capital requirements as referred to in item 3 within a maximum of 1 (one) year from the date the action plan is approved by the Financial Services Authority.

7. Banks that have obtained approval for the action plan in order to meet the Core Capital requirements as referred to in item 3 then:

a. Banks can conduct Business Activities in foreign currency, including conducting new transactions with customers, as long as they meet the stages of meeting Core Capital that have been approved by the Financial Services Authority; or

b. Banks are not permitted to conduct new transactions until the Core Capital requirements as referred to in item III.A.1.b are met in the event of a violation of the stages of meeting Core Capital that have been approved by the Financial Services Authority.

8. Banks that cannot meet the action plan in order to meet the Core Capital requirements as referred to in item 3 within 1 (one) year from the date the action plan is approved by the Financial Services Authority must submit an action plan in order to adjust Foreign Currency Business Activities as referred to in item 4.

9. Banks submitting an action plan in order to adjust Foreign Currency Business Activities as referred to in item 4 are not permitted to conduct new transactions in foreign currency.

10. New transactions as referred to in items 7 and 9 include:

a. acceptance of new customers; and/or

b. new contracts for all products and/or activities in foreign currency.

11. Banks as referred to in item 9 can conduct new contracts for fund mobilization as long as it is needed in the framework of completing remaining outstanding (liabilities, commitments, and/or contingencies) in foreign currency while still paying attention to the stages of reducing exposure and the completion time of Foreign Currency Business Activities as referred to in item 4.b and item 5, as well as compliance with other regulations such as regulations concerning net foreign exchange position.

Example:
On January 3, 2017, Bank "A" approved the granting of foreign currency investment credit to PT "B" with a ceiling of USD 150,000 (one hundred fifty thousand US dollars). Because Bank "A" experienced a reduction in core capital for three consecutive months, Bank "A" submitted an action plan in order to adjust Foreign Currency Business Activities which was approved by the Financial Services Authority on October 3, 2017. As of that date, PT "B" had withdrawn from the credit facility amounting to USD 100,000 (one hundred thousand US dollars). Thus, Bank "A" still has a commitment to PT "B" in the form of a remaining foreign currency credit withdrawal allowance of USD 50,000 (fifty thousand US dollars) which the withdrawal plan was submitted by PT "B" on November 18, 2017. Considering the available foreign currency liquidity was only USD 30,000 (thirty thousand US dollars), Bank "A" decided to meet the foreign currency shortage of USD 20,000 (twenty thousand US dollars) using third-party funds in order to meet the commitment to PT "B".

B. Revocation of Approval for Business Activities in Foreign Currency

1. Banks submit a report on the realization of the action plan in order to adjust Foreign Currency Business Activities no later than 7 (seven) days from the end of the action plan period.

2. The Financial Services Authority revokes the approval to conduct Business Activities in foreign currency if the action plan period in order to adjust Foreign Currency Business Activities has ended.

V. TREATMENT FOR BANKS UNDERGOING MERGER, CONSOLIDATION, CONVERSION, AND SPIN-OFF

1. In the event of a merger or consolidation between 2 (two) or more Banks, the resulting Bank from the merger or consolidation can still conduct Business Activities in foreign currency if:

a. at least 1 (one) Bank that undergoes the merger or consolidation has obtained approval to conduct Business Activities in foreign currency before the merger or consolidation is conducted;

b. the resulting Bank from the merger or consolidation has met the Core Capital requirements as referred to in item III.A.1.b; and

c. the resulting Bank from the merger or consolidation informs the Financial Services Authority and obtains confirmation from the Financial Services Authority regarding the plan to use the approval for conducting Business Activities in foreign currency that has been held by one of the participating banks in the merger or consolidation.

2. In the event of a change in business activities (conversion) of a BUK into an Islamic Commercial Bank (BUS) and the aforementioned BUK has obtained approval to conduct Business Activities in foreign currency before the conversion is conducted, the resulting Bank from the conversion can still conduct Business Activities in foreign currency by informing the Financial Services Authority and obtaining confirmation from the Financial Services Authority.

3. In the event that a UUS undergoes a spin-off from its parent BUK, it is regulated as follows:

a. In the event that a UUS that has obtained approval to conduct Business Activities in foreign currency undergoes a spin-off into a BUS, the resulting BUS from the spin-off can still conduct Business Activities in foreign currency as long as it has met the Core Capital requirements as referred to in item III.A.1.b and has informed the Financial Services Authority and obtained confirmation from the Financial Services Authority.

b. In the event that a UUS that has obtained approval to conduct Business Activities in foreign currency undergoes a spin-off and at the same time merges with a BUS or a BUK that is changing its business activities (conversion) into a BUS, the aforementioned BUS can conduct Business Activities in foreign currency as long as it has met the Core Capital requirements as referred to in item III.A.1.b and has informed the Financial Services Authority and obtained confirmation from the Financial Services Authority.

VI. OTHER PROVISIONS

1. Changes to the list of the Bank's branch offices that will conduct Business Activities in foreign currency must be reported to the Financial Services Authority.

2. Applications for conducting Business Activities in foreign currency as referred to in item III.B.3 and notifications to continue Business Activities in foreign currency as referred to in item V, are submitted to the Financial Services Authority at the following addresses:

a. Conventional Commercial Banks

1. Department of Supervision of the Relevant Bank, for BUKs that have their headquarters or branch offices of banks domiciled outside the country located in the DKI Jakarta Province; or

2. Regional Office of the Financial Services Authority or Local Office of the Financial Services Authority according to the area where the Bank's headquarters is located.

b. Islamic Commercial Banks and Islamic Business Units

1. Department of Islamic Banking for BUSs and UUSs that have their headquarters in the DKI Jakarta Province; or

2. Regional Office or Local Office of the Financial Services Authority for BUSs and UUSs that have their headquarters outside the DKI Jakarta Province.

3. Submission of action plans as referred to in item IV.A.1 and reports on changes to the list of the Bank's branch offices that will conduct Business Activities in foreign currency as referred to in item 1, are submitted to the Financial Services Authority at the following addresses:

a. Conventional Commercial Banks

1. Department of Supervision of the Relevant Bank, for BUKs that have their headquarters or branch offices of banks domiciled outside the country located in the DKI Jakarta Province; or

2. Regional Office of the Financial Services Authority or Local Office of the Financial Services Authority according to the area where the Bank's headquarters is located.

b. Islamic Commercial Banks and Islamic Business Units

1. Department of Islamic Banking for BUSs and UUSs that have their headquarters in the DKI Jakarta Province; or

2. Regional Office or Local Office of the Financial Services Authority for BUSs and UUSs that have their headquarters outside the DKI Jakarta Province.

VII. TRANSITIONAL PROVISIONS

1. In the event that a Bank owned by a Regional Government has already had a license as a bank conducting business activities in foreign currency but has not yet met the minimum core capital fulfillment obligation of IDR 1,000,000,000,000.00 (one trillion rupiah), it is required to submit an action plan to adjust Business Activities or increase Core Capital no later than the end of June 2018 as referred to in the Financial Services Authority Regulation concerning Business Activities and Office Networks Based on Bank Core Capital.

2. Banks as referred to in item 1 that cannot meet the Core Capital requirements or that choose to adjust Business Activities in foreign currency, can conduct activities as a PVA as long as they obtain approval as a PVA from the Financial Services Authority.

VIII. CLOSING

At the time this Financial Services Authority Circular Letter takes effect, Bank Indonesia Circular Letter Number 15/27/DPNP concerning Requirements for Commercial Banks to Conduct Business Activities in Foreign Currency is revoked and declared invalid.

This copy is in accordance with the original

Director of Law 1
Legal Department signed
Yuliana

The provisions in this Financial Services Authority Circular Letter take effect on the date of establishment.

Established in Jakarta on July 7, 2017

EXECUTIVE HEAD OF BANKING SUPERVISOR
FINANCIAL SERVICES AUTHORITY, signed
NELSON TAMPUBOLON