The Financial Services Authority (“OJK”) has issued a regulation that provides a detailed framework for the establishment of a dedicated Securities Finance Agency (Lembaga Pendanaan Efek / “SFA”) so as to boost transaction volume and liquidity in the Indonesian stock market by, in particular, encouraging margin trading and short selling.
Upon establishment, the SFA will provide securities financing to brokerage firms, which are currently handicapped by limited internal resources and a lack of access to funding from banks and other sources. Accordingly, the SFA is expected to provide an alternative source of financing to brokerage firms to fund margin-trading and short-selling, as well as other types of securities transactions.
The new regulation (OJK Regulation No. 25/POJK.04/2018 / “Reg. 25”) entered into effect on 5 December 2018.
B. Reg. 25: Key Provisions
The SFA, which must be a limited liability company and be licensed by the OJK, is expected to provide facilities to brokerage firms in the form of cash and/or securities for the settlement of margin-trading and short-selling transactions. Upon securing approval from the OJK, financing may also be provided for other types of securities transactions, such as public offerings on the primary market, repurchase agreements (repo), and securities lending activities.
The SFA must be majority owned, either directly or indirectly, by the Indonesian Stock Exchange (IDX). Other shareholders may consist of:
- the Indonesian Central Clearing Agency (KPEI);
- the Indonesian Central Securities Depository (KSEI); and
- other legal entities approved by the OJK.
The SFA must have a minimum paid-up capital of IDR 250 billion (USD 17.6 million). However, the shareholders may be required by the OJK to contribute additional capital, having regard to business and operational exigencies.
Only Indonesian citizens may serve as directors and commissioners of the SFA. In addition, directors must be resident in Indonesia. Both directors and commissioners are required to undergo fit-and-proper tests conducted by the OJK prior to their appointments.
The SFA may raise capital by means of:
- borrowing from a financial-services institution;
- issuance of bonds or sukuk
- subordinated loans from shareholders
- capital increase, including by way of a public offering; and/or
- securities lending
Reg. 25 also contains detailed provisions governing the SFA’s internal organizational structure, internal control system, operational and risk management, annual operations and budget planning, reporting, and sanctions.