(Updates with details, comment)
JAKARTA, Feb 6 (Reuters) - Indonesia’s central bank urged local commercial banks on Wednesday to use the onshore market as their benchmark for forward rupiah, reminding them that they were banned from trading in offshore rupiah non-deliverable forwards (NDF).
Bank Indonesia said it was coordinating with peers in Southeast Asia about problems in settling NDF rates, after a source told Reuters that internal reviews by banks in Singapore found evidence traders colluded to manipulate such rates.
“NDF is not allowed because the transaction doesn’t have underlying assets...This letter (to be sent to banks) is to reiterate, reminding the banks to not use NDFs,” said Bank Indonesia spokesman Difi Johansyah.
NDFs are derivatives that let companies and investors hedge or speculate on emerging market currencies when exchange controls make it difficult for foreigners to participate directly in the spot market.
The contracts are settled in dollars, so there is no exchange of the underlying currency, but they can affect spot rates.
The issue comes at a particularly sensitive time for Bank Indonesia which has trying to prop up a weakening spot rupiah market in recent months.
“We endorse banks to use the local forward rate...We want the forward onshore market to be more liquid in the future so that it can be a benchmark,” Johansyah said.
The Singapore bank probes found evidence showing that traders from several banks communicated with each other over electronic messaging about what rates they were going to submit for the local banking association’s fixings for NDFs, aiming to benefit their trading books, the source said.
Bank Indonesia will set guidelines for banks to set exchange rate quotes as a benchmark for the futures market, said deputy central bank governor Halim Alamsyah, in charge of bank regulation and supervision.
“We are in coordination with the Southeast Asia region,” said Alamsyah.
The spot rupiah rate has fallen 0.7 percent so far this year to 9,695 per U.S. dollar, after sliding around six percent last year to be emerging Asia’s worst performer. One month dollar/rupiah NDF rates have been even lower in recent weeks as investors worry about the country’s trade deficits.
With heavy foreign ownership of both the Indonesian bond market and stocks, the central bank is worried about the risk of sharper falls in the rupiah.
“There are indication that some banks in Indonesia are involved in NDFs,” said a Jakarta-based trader. “It should be banks that have lines with offshore banks,” said the trader. (Reporting by Adriana Nina Kusuma and Rieka Rahadiana in Jakarta and Jong Woo Cheon in Singapore; Writing by Neil Chatterjee; Editing by Sanjeev Miglani)