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Foreign Exchange

Dealers vexed over Indonesian currency law

Global dealers operating in Indonesia are expressing growing concern over an impending currency law that requires non-cash OTC financial obligations to be settled in Indonesian rupiah, threatening to undermine trading of non-rupiah-denominated contracts, according to Derivatives Intelligence, a sister publication to EuromoneyFXNews.

The currency law contains a general requirement that the Indonesian rupiah be used to settle all financial obligations and other payment transactions taking place in Indonesia, unless certain limited exemptions apply – though lawyers and market officials say the law appears ambiguous regarding the scope of these exemptions.

The problem lies in the apparent contradiction between two articles of the law regarding the settlement of financial transactions. Article 21 of the currency law stipulates that rupiah must be used for each transaction involving payment and for the settlement of financial obligations conducted in Indonesia; article 23 states the obligation to settle in rupiah might be waived if the relevant parties have agreed, in writing, to make payments or settle a transaction in a foreign currency.

In an attempt to clarify the matter, the Ministry of Finance in Indonesia released a document to explain the law’s application on December 6. The document stated that the law will only apply to certain financial transactions involving cash payments, netting OTC cash-settled derivatives, while excluding letter of credits or electronic payment-settled deals.

The ministry’s booklet acknowledges that parties should have contractual freedom, but at the same time this freedom should not legalise the use of foreign currencies in Indonesia to the extent it results in the rupiah being weakened. According to market officials, this is another aspect of the law that still requires further clarification.

Indonesia’s House of Representatives in June approved the currency law, which seeks to promote the use of the rupiah and ensure the importance of the local currency is not diminished by trading in other currencies.

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