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Print articleIndonesia - Prudential Principles in the Implementation of Structured Products by Commercial Banks
October, 2009 -
Bank Indonesia issued Bank Indonesia Regulation Number 11/26/PBI/2009 dated 1 July 2009 on Prudential Principles in the Implementation of Structured Products Activities for Commercial Banks (“BI Reg.11/26/PBI/2009”). Structured Products of commercial banks are those that result from a combination of 2 (two) or more financial instruments, namely: (i) a non-derivative financial instrument and a derivative financial instrument; or (ii) a derivative and another derivative, and have at least the following characteristics:
a. the value or cash flow resulting from the product is linked to one or a combination of basic variables such as interest rates, exchange rates, commodities and/or equity; and
b. the pattern of change in the value or cash flow of the product is not regular, compared to the pattern of change in the basic variables as referred to in point (a) above, thus resulting in a change in the value or cash flow which does not reflect the pattern of overall change in the basic variables in a linear way (asymmetric payoff), which is characterized by, among other things, the existence of: (i) optionality, such as caps, floors, collars, step up/step down and/or call/put features, (ii) leverage, (iii) barriers, such as knock in/knock out; and/or (iv) binary or digital ranges.
Structured Product Activities include activities and/or processes that are conducted in relation to the planning, development, issuance, marketing, offering, sales, operation, and/or cessation of activities related to Structured Products. Commercial banks may only provide Structured Products after obtaining: (i) In-Principle Approval; and (ii) an Effective Statement from Bank Indonesia. Applications for an Effective Statement for the issuance of the Structured Products may only be submitted to BI once in-principle approval has been obtained.
BI Reg.11/26/PBI/2009 stipulates several obligations of a commercial bank that offers Structured Products, whereby the bank must:
(i) draw up a Business Plan,
(ii) perform risk management in an effective manner,
(iii) determine the classification of customers,
(iv) disclose product information,
(v) offer and manage the Structured Products; and
(vi) deliver a report to Bank Indonesia.
Administrative sanctions will be imposed on any commercial banks which conduct prohibited activities under BI Reg.11/26/PBI/2009. The administrative sanctions include:
(i) written warning;
(ii) the lowering of the Bank’s Health Level;
(iii) prohibition against participating in clearing activities;
(iv) suspension and revocation of approval for certain business activities, both for a specific branch office and for the Bank as a whole;
(v) termination of the Bank’s management and subsequent appointment of a temporary management replacement; and/or
(vi) placing members of the bank’s management, employees or, shareholders on the banking sector blacklist.
Further, banks that fail to report their Structured Product transactions to Bank Indonesia within the specified time limit will be fined. Meanwhile, a Bank that conducts Structured Product activities without prior in-principle approval and an effective statement from Bank Indonesia will have to pay 1% of the value of the transaction up to Rp.27 billion Rupiah.
Bank Indonesia also has the authority to revoke the in-principle approval and/or effective statement held by a commercial bank if the risk management regarding Structured Product activities performed by the Bank is not sufficient; and/or the risks resulting from the Structured Product activities conducted by the Bank could endanger the survival of the business of the Bank.
a. the value or cash flow resulting from the product is linked to one or a combination of basic variables such as interest rates, exchange rates, commodities and/or equity; and
b. the pattern of change in the value or cash flow of the product is not regular, compared to the pattern of change in the basic variables as referred to in point (a) above, thus resulting in a change in the value or cash flow which does not reflect the pattern of overall change in the basic variables in a linear way (asymmetric payoff), which is characterized by, among other things, the existence of: (i) optionality, such as caps, floors, collars, step up/step down and/or call/put features, (ii) leverage, (iii) barriers, such as knock in/knock out; and/or (iv) binary or digital ranges.
Structured Product Activities include activities and/or processes that are conducted in relation to the planning, development, issuance, marketing, offering, sales, operation, and/or cessation of activities related to Structured Products. Commercial banks may only provide Structured Products after obtaining: (i) In-Principle Approval; and (ii) an Effective Statement from Bank Indonesia. Applications for an Effective Statement for the issuance of the Structured Products may only be submitted to BI once in-principle approval has been obtained.
BI Reg.11/26/PBI/2009 stipulates several obligations of a commercial bank that offers Structured Products, whereby the bank must:
(i) draw up a Business Plan,
(ii) perform risk management in an effective manner,
(iii) determine the classification of customers,
(iv) disclose product information,
(v) offer and manage the Structured Products; and
(vi) deliver a report to Bank Indonesia.
Administrative sanctions will be imposed on any commercial banks which conduct prohibited activities under BI Reg.11/26/PBI/2009. The administrative sanctions include:
(i) written warning;
(ii) the lowering of the Bank’s Health Level;
(iii) prohibition against participating in clearing activities;
(iv) suspension and revocation of approval for certain business activities, both for a specific branch office and for the Bank as a whole;
(v) termination of the Bank’s management and subsequent appointment of a temporary management replacement; and/or
(vi) placing members of the bank’s management, employees or, shareholders on the banking sector blacklist.
Further, banks that fail to report their Structured Product transactions to Bank Indonesia within the specified time limit will be fined. Meanwhile, a Bank that conducts Structured Product activities without prior in-principle approval and an effective statement from Bank Indonesia will have to pay 1% of the value of the transaction up to Rp.27 billion Rupiah.
Bank Indonesia also has the authority to revoke the in-principle approval and/or effective statement held by a commercial bank if the risk management regarding Structured Product activities performed by the Bank is not sufficient; and/or the risks resulting from the Structured Product activities conducted by the Bank could endanger the survival of the business of the Bank.
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