SINGAPORE Feb 19 Offshore markets in the
Indonesian rupiah are shifting to a new reference rate for
trading the currency, one that will provide investors with a
more credible and reliable hedge for their exposure to the
volatile Southeast Asian economy.
Market regulators in Singapore announced on Tuesday that the
non-deliverable forwards (NDF) market in the Indonesian rupiah
will use a reference rate set by Indonesia's central bank to
settle their expiring contracts, switching from a fixing rate
that is now determined by banks in Singapore.
The Singapore Foreign Exchange Market Committee (SFEMC) has
recommended that banks use the rupiah JISDOR (Jakarta Interbank
Spot Dollar Rate) to settle NDF contracts from the end of March.
The announcement was anticipated by traders and fund
managers who have for a while had to deal with wild swings in
the rupiah offshore market, resulting in major divergences
between onshore and offshore rates and therefore an inability to
effectively hedge their exposure.
"Rupiah NDFs are once again a viable hedging option," said
Siddharth Mathur, head of currency and rates strategy for Asia
at Citi. "Now with the link to onshore restored, NDFs again
become a proper hedge."
Indonesia's high-yielding markets are extremely sought after
by emerging market investors. Most leveraged and real money
investors use the NDF market to hedge exposure to the currency.
The divergences between NDFs and onshore rupiah forwards
began last year when, following a long investigation by
Singapore's central bank into collusion by banks in setting
benchmark rates, Indonesian authorities introduced the JISDOR.
While the NDF market followed a reference, or fixing, set by
the Association of Banks in Singapore (ABS), most traders
onshore followed the JISDOR, a weighted average daily rupiah
reference rate set by Bank Indonesia since May last year.
There was however a consistent variance between the two
rates, since the NDF fixing was often skewed by the massive
hedging flows. Onshore rupiah rates, meanwhile, were driven not
just by portfolio flows but also the country's heavy trade
payments and receipts.
Bank Indonesia last year urged local banks to use an onshore
market-based benchmark to settle forward rupiah contracts. It
bars onshore banks from using the NDF market.
The rupiah fell nearly 21 percent against the U.S. dollar
last year amid capital outflows from emerging economies and on
concerns about the country's current account deficit. It has
shown more resilience so far in 2014, rising 3 percent despite a
fresh bout of emerging market turmoil.
A BETTER REFERENCE
The offshore ABS fix on Wednesday had the
rupiah at 11,790 per dollar, while JISDOR was 11,850 per dollar.
That discrepancy, traders said, was owing to the heavy
one-sided flows in the NDF market, which caused lopsided moves
in the fixing, irrespective of where the currency was traded
Volumes in rupiah NDFs, estimated to be less than a billion
dollars a day, had shrunk in 2013 owing to the wide spread, or
basis in market terms, between the two rates.
"The ability of funds to hedge was impeded by the fixing
mechanism. As NDFs were not anchored, funds potentially faced
mark-to-market swings on their hedge that would not represent
their underlying exposure," said Citi's Mathur.
"The hedge could end up being a completely different
position. Its correlation to the underlying could become
coincidence rather than design."
The ABS explained in its statement that the switch to JISDOR
as the reference rate was in keeping with its policy to using
the most suitable benchmark for settling trades.
BNP Paribas said in a note that several real money investors
had stopped participating in the NDF market as they saw it as
"Their participation should now improve," BNP analysts said.
"Overall, we should see more interest and liquidity in the
market. This would naturally lower the risk premia on Indonesia
assets," they wrote.
That pick up in interest has been evident over the past
week, as rumours swirled in markets of the impending change in
reference rates, with Indonesian bond yields at the longer end
slipping between 50-70 basis points.
Credit default swaps, which are insurance contracts to hedge
credit risk, should also move to price in a lower risk premium
on Indonesian assets as some of the hedging that had been
diverted to the CDS market moves back into NDFs, BNP said.
The spread between the onshore and offshore forward markets
would eventually shrink, traders said, as both markets converged
into the same reference rate.
(Editing by Kim Coghill)