Indonesia to allow derivatives-based protected funds again

Since 2008, the launch of equity-linked protected funds using derivatives and funds using constant-proportion portfolio insurance (CPPI) strategies has been halted in Indonesia.

But the capital markets regulator, Bapepam, indicated in recent weeks that it is ready to start approving such products again, says Tino Moorrees, president director at BNP Paribas Investment Partners (BNPP IP) Indonesia.

However, it needs to go further in allowing other types of investment products, he suggests, including those with offshore exposure. Other asset managers agree.

 “In terms of open-market policy, there are no restrictions on foreign investments for debt and equity instruments and this is favourable for the existing market,” says Moorrees.

“However, Indonesia still needs to work on establishing wider variants of securities instruments, such as asset-backed securities, Islamic securities, commodity trading, etcetera, which have huge potential for the country.”

He adds that an integrated trading system with other Southeast Asian markets could help Indonesia to push further coordination and open its market up at a faster rate, following its Asean capital markets peers.

BNPP IP has been in regular contact with Bapepam to seek a solution for re-introducing derivatives-based protected funds to Indonesian investors, says Moorrees, and has convinced the regulator to allow them again. “We will be the first fund manager to launch such a fund again," he adds.

“We believe this is a major breakthrough and that the market for such products will continue to open up gradually,” he adds, noting that BNPP IP was the first fund manager in Indonesia to have launched equity-linked protected funds using derivatives and funds using CPPI strategies.

The asset manager is also lobbying Bapepam to allow fund managers to have more exposure to foreign assets. Regulations currently allow 15% per fund to be invested overseas, and there doesn’t appear to be any indication that the limit will be raised any time soon.

“As a result, a gap exists between the investors’ need for diversification and the available investment alternatives in Indonesia,” says Moorrees. “There are demands for products in foreign currency, as well as for products with offshore markets exposure; demands that are not currently being met by product providers.

“We see this area as an opportunity requiring further exploration,” he adds, “and we intend to work with regulators to fill this gap for investors.”

That said, as reported recently by AsianInvestor, Bapepam is finalising rules to allow onshore asset managers to invest in offshore funds – currently they are limited to foreign securities. 

Meanwhile, Indonesia’s Association of Mutual Funds submitted proposals to the House of Representatives in August that fund managers be permitted to trade commodity futures, and is awaiting a response.

At present, asset managers can’t invest directly in commodity, currency or interest-rate products, which means they can’t create funds based on any of these asset classes. Bapepam takes the view that these asset classes come under the remit of Bank Indonesia, the central bank, so does not give approval for such funds.

Bapepam did not respond to requests for comment by press time.