Indonesia to introduce sovereign bond futures next year

[SINGAPORE] Indonesia plans to introduce sovereign bond futures next year as it seeks to deepen its financial markets and help investors manage the risk of holding Asia's most volatile debt.

The national bourse will list contracts for benchmark local-currency government notes as early as the second quarter, Poltak Hotradero, the head of research and development at the Indonesia Stock Exchange, said in a phone interview from Jakarta on Wednesday (Dec 9).

The introduction of the futures, a type of derivative used to hedge risk or for speculation, is still subject to regulatory approvals, he said.

Foreign funds own 38 per cent of Indonesian domestic sovereign bonds, the highest proportion in Southeast Asia, and the investment flows increase the volatility of the rupiah.

The 10-year yield on the nation's debt has fluctuated from 7 per cent to 9.74 per cent this year, while the rupiah has traded between 12,395 and 14,736 against the US dollar. "Investors are saying we love Indonesian government bonds but we hate the currency," Mr Hotradero said. "They said if you can't help us with the currency, at least help us by providing hedging" on the bonds, he said.

Approval will be needed from the Finance Ministry, the Financial Services Authority and Bank Indonesia, Mr Hotradero said.

Short selling will be allowed, although there will be a limit on the number of contracts that can be traded by a single party, he said in a mobile-phone text message on Thursday.

Short selling refers to the sale of a security that isn't owned by the seller, or that the seller has borrowed.

Futures will make the market more liquid and resilient, give traders greater flexibility, and serve as an indicator for market performance and expectations, said Dini Agmivia Anggraeni, a fixed-income analyst at PT Trimegah Securities in Jakarta. "Futures tend to a be a riskier product, so foreign investors with more risk appetite may jump in first," she said. "Banks and asset managers would also want to join."

BLOOMBERG