Bank Indonesia Limits BI-FRN Issuance to 12-Month Tenor

Regulatory Constraints Drive Tenor Decision

Bank Indonesia (BI) has confirmed that it will only issue BI-Floating Rate Notes (BI-FRN) with a 12-month tenor, citing regulatory restrictions imposed by the Financial Sector Development and Strengthening Law (UU P2SK). The law limits the central bank's ability to issue financial instruments with maturities exceeding one year. BI's Head of Financial Market Development Group, Arief Rachman, explained that while the bank would prefer to issue longer-term instruments like other central banks, the current regulatory framework restricts them to a maximum of 12 months.

Promoting Overnight Index Swap Market Development

The issuance of BI-FRN is part of BI's strategy to develop the Overnight Index Swap (OIS) market in Indonesia. Unlike the Bank Indonesia Rupiah Securities (SRBI) which are discount-based, BI-FRN features a floating coupon rate that tracks the INDONIA rate. This characteristic is designed to encourage banks, particularly Primary Dealers (DU), to engage in OIS transactions to hedge against interest rate risks associated with their BI-FRN holdings. When interest rates fall, banks holding BI-FRN can protect their asset values by entering into OIS transactions.

Implications for Market Participants

By limiting BI-FRN issuance to the 12-month tenor, BI is providing market participants with a benchmark for hedging strategies. The 12-month tenor gives banks flexibility in managing their interest rate exposure through OIS transactions with various tenors. Arief Rachman noted that banks can choose to hedge their BI-FRN positions at different intervals (e.g., 1 month, 3 months) as long as the hedging duration does not exceed the underlying instrument's tenor.

Future Prospects and Regulatory Considerations

While the current regulatory framework constrains BI's ability to issue longer-term BI-FRN, the central bank has expressed willingness to consider longer tenors if the regulations permit. This approach aligns with international practices where central banks issue securities with various maturities to support market development and monetary policy implementation.