Derivatives May Land Banks In Court

The Jakarta Globe, Ardian Wibisono & Teguh Prasetyo, January 27, 2009

Containers loading at Jakarta International Container Terminal at Tanjung Priok port. Exporters and importers may resort to action against banks to prevent further losses from speculative investment products. (Photo: Yudhi Sukma Wijaya, JG)

 

Exporters and importers may resort to legal action against banks to prevent further losses from complicated, speculative investment products such as derivatives. 

Toto Dirgantoro, chairman of the Indonesian Exporters Association, or GPEI, said some members have complained that banks pushed them into signing derivatives contracts without properly explaining the potential risks involved. 

“Some of our members have asked to cancel their contracts, but the banks have refused,” Toto said on Monday. “If these banks continue to refuse to cancel these contracts, we’ll pursue legal action.” 

Derivatives are financial instruments that derive value from one or more underlying assets, including currencies, stocks or commodities. These contracts, which are usually held for hedging or speculative purposes, include futures and options. 

Banks usually offer derivatives to take advantage of exchange-rate fluctuations. In Indonesia, these products have mainly been offered by foreign banks or lenders partly owned by foreign institutions. 

Toto said many of its members were offered derivative contracts when the US dollar was still hovering around Rp 9,200 . A typical derivative scheme from the past year, he said, required a firm to sell a specified amount of US dollars per week for a period of a year to banks at an agreed rate of Rp 9,800 per dollar. 

“Lots of exporters and importers were attracted to derivatives because they thought they would be profitable,” Toto said. “They were unaware of the risks involved if the rupiah fell, and the banks did not offer customers the option to cancel contracts if the rupiah plummeted.” 

Many exporters and importers began to encounter problems when the global financial crisis caused the rupiah and commodity prices to plunge in September. 

The rupiah bottomed out at Rp 12,600 on Nov. 20. At this point, holders of derivative contracts had to buy dollars in the open market at higher rates, and then sell them back to the banks at the agreed rates. 

Many exporters were hammered as weakening exports meant they brought in fewer dollars. Toto said he did not know the extent of these losses. “One company held a contract worth more than $10 million,” he said. 

In December, Bank Indonesia, the central bank, banned banks from signing new derivative contracts to speculate on the movement of the rupiah. Existing contracts were permitted to continue, however. 

Wimboh Santoso, BI’s bureau chief of financial system stabilization, said contracts can be canceled if both parties agree to terminate the transactions. 

BI will mediate in disputes and offers a range of restructuring schemes, including the option of converting customer liabilities into loans that have to be paid back gradually. Toto said companies and banks should ideally pursue other avenues, however. 

“We don’t want these contracts to be converted into loans because we didn’t borrow this money for productive purposes,” Toto said. “We’re proposing that banks cancel these contracts and share the losses 50-50. That’s the only fair way.” 

Last week, BI said that derivative-related losses at banks could significantly erode their 2008 net profits. PT Bank Danamon Tbk recently announced that its 2008 net profit fell by 29 percent to Rp 1.5 trillion , from Rp 2.11 trillion in 2007. The decline was due to a loss of Rp 800 billion on forward foreign-exchange contracts.