Securities financing transactions (SFTs) serve a pivotal role in providing liquidity and funding for financial market participants. The most common types of SFTs are repurchase agreements and securities lending transactions. To facilitate market participants in conducting the SFTs in the cross-border market, a global standard master agreement was formulated. The International Capital Market Association (ICMA) published the first version of the Global Master Repurchase Agreement ("GMRA") in 1992 and followed by its revised versions in 1995, 2000 and 2011. On the other hand, the International Securities Lending Association (ISLA) introduced the Global Master Securities Lending Agreement ("GMSLA"). In practice, those GMRA and GMSLA are the most widely-used models for the crossborder securities financing transactions. However, this article will only focus on the introduction of the GMRA guidelines in Indonesia.
A repurchase agreement (or commonly known as "Repo") is a contractual arrangement between two contracting parties, in which one party agrees to sell securities to another party at a specified price with a commitment to repurchase the same securities at an agreed future date for another specified price. Nowadays, Repo transaction has become one of the safest funding options in the capital market, and it has been increasingly popular in many countries, including Indonesia. Despite Repo Transaction has recorded increase in value, frequency, and volume of transactions and holds an important role in facilitating the market liquidity, there was an absence of law on guidelines to conduct the Repo Transaction in Indonesia.
In light of the above, on 25 June 2015, the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or "OJK") issued OJK Regulation No. 9/POJK.04/2015 on Guidelines on Repurchase Agreement Transactions for Financial Services Institutions ("OJKR 9/2015"). Pursuant to this new regulation, a Repo transaction is a sale or purchase agreement of securities with a covenant to purchase or resell the securities within a stipulated time and price. In principle, OJKR 9/2015 sets out guidelines for the Indonesian Financial Services Institutions ("FSI") on Repo transaction requirements for scriptless securities regulated and supervised by the OJK (as further elaborated below), and settled through the Central Bank of Indonesia and/or the Indonesian Central Securities Depository (Kustodian Sentral Efek Indonesia or "KSEI").
Below are some highlighted provisions under the OJKR 9/2015:
The scriptless securities regulated and supervised by the OJK consist of corporate bonds, corporate sukuk (Islamic bonds), state commercial paper, shares and derivatives of securities.
Transfer of Ownership
Every Repo transaction must result in a transfer of securities ownership.
Repo Transaction Agreement
Any Repo transaction shall occur through a written agreement. Such Repo transaction agreement shall implement the Indonesian GMRA to be issued by the OJK or other parties recognized by the OJK and shall contain at least the following provisions:
a. The transfer of the securities ownership;
b. The obligation to adjust the securities value to normal market value (mark-to-market);
c. The initial margin and/or haircut in the Repo transaction;
d. The margin maintenance including the substitution of the securities margin;
e. The rights and obligations of the parties regarding the ownership of the securities, including the period of execution and tax obligations;
f. Event of default;
g. Event of default settlement;
h. Stipulation of Indonesian law as the governing law;
i. The position of the FSI (either as the agent or the party);
j. The procedures for the confirmation of the Repo transaction and/or any material amendment related to such Repo Transaction.
Amendment to the Repo Transaction Agreement
The parties can agree to change the terms and conditions under the Repo Transaction Agreement made based on the GMRA, provided that the changes do not violate OJKR 9/2015.
Exclusion of the Indonesian GMRA
FSI conducting Repo transactions with government institutions that implement monetary or financial policy is not required to implement the Indonesian GMRA.
Obligations of the FSI
Any FSI conducting Repo transactions is required to:
a. Maintain bookkeeping and records, as well as having adequate documentation of Repo transactions conducted by the FSI;
b. Ensure accounting treatment in the financial statements of the FSI to be in accordance with financial accounting standards; and
c. Record the identities of the parties in Repo transactions correctly.
All debt securities Repo transactions must be reported to the OJK through the beneficiary of securities transaction report, while all equity securities Repo Transactions must be reported to KPEI and KSEI.
Existing Repo transactions that were entered before the issuance of the OJKR 9/2015 will remain valid and are not required to conform to the provisions under the OJKR 9/2015.
Repo transactions performed based on shariah principles are not required to comply with this OJKR 9/2015.
Whilst the OJKR 9/2015 will come into effect on 1 January 2016, it is hoped that the OJKR 9/2015 will improve the regulation and supervision of transactions in Repo transaction conducted by the OJK. Separately, given that the double taxation issue remains in Repo transaction, the OJK and Directorate General of Tax are currently still formulating the necessary regulation to solve the issue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.