Indonesia faced major currency upheaval last year, testing the capacity of its banks to support their customers’ trading activity with sufficient hedging.
CIMB Niaga delivered a 250% increase in foreign exchange-related derivatives revenues year-on-year, responding to customer needs in terms of product support and technical innovation. The bank was among the first to respond to changing customer interest amid the currency upheaval that revived interest for forex-linked structured products and growth of new structured products.
Capital outflows from emerging markets, triggered in part by volatility in capital markets and the reduction in global trade, were a major concern. Rising US yields last year triggered a rise in bond yields and a slump in the currency across emerging markets, which in turn increased financing costs. That along with the growth of trade protectionism, hurt Indonesian exporters who increasingly turned to hedging to mitigate the impact.
The strengthening US currency also impacted dollar-priced commodities. When the rupiah depreciated for more than two months starting from September last year and the nation’s current account deficit narrowed relative to the end of 2017, the central bank deepened access to hedging products. These products were meant to provide users with the flexibility to protect against exchange rate risk exposure.
“Bank Indonesia increased the benchmark rate by 175 basis points and the currency weakened from 13,500 to 15,000,” says Ferdinand Wawolumaya, head of trading and structuring at CIMB Niaga. “This is a difficult risk-off scenario for a region that has a current account deficit.”
During this period, customers needed to increasingly hedge their exposure to protect themselves from currency moves. CIMB Niaga spotted the diverse client portfolio build-up that included large corporates and an increasing set of small and medium-sized enterprises (SMEs) and offered customised products. The latter had previously hedged over shorter tenors than larger firms.
Previous CIMB initiatives in structured products had already proven positive for customers by affording protection under the conditions of 2018, and this reputation gave clients comfort, he says.
“We introduced call-spread option in 2017 and this was very helpful for clients, as during the weakening of dollar-rupiah in 2018, most of the clients were already covered,” says Wawolumaya.
What also proved valuable was Bank Indonesia’s flexibility to support structured products, such as the domestic non-deliverable forward (DNDF).
After the introduction of the DNDF, the rupiah strengthened from its weakest point to become stronger by the end of the year, so the Bank of Indonesia was quite successful in managing rupiah volatility by introducing this product
Ferdinand Wawolumaya, CIMB Niaga
The DNDF essentially functions as an NDF but its settlement is in rupiah, by netting the difference of the rupiah amount between the DNDF rate and the fixing rate of the Jakarta Interbank Spot Dollar Rate (JISDOR). This overcame some barriers in the market for settlement in non-rupiah and created a new hedging derivatives product that could be used by corporates. CIMB Niaga was fast off the blocks with $74.5 million of DNDF deals and proved useful amid the currency moves.
“After the introduction of the DNDF, the rupiah strengthened from its weakest point to become stronger by the end of the year, so the Bank of Indonesia was quite successful in managing rupiah volatility by introducing this product,” Wawolumaya explains. “We set this product up within one month and, after we had begun trading it, we were able to sell it to our corporate clients, where normally the DNDF is only transacted between banks.”
As one of the few banks trading the product, its key competitive edge was to support understanding of the product among its client base so they could use it effectively.
“Education was really important; this is not a prefunded derivative, customers will not settle their forward using JISDOR fixing, so they need to know sometimes there will be slippage to the execution price,” Wawolumaya says.
The bank’s efforts in the forex structured product space delivered for clients and for itself, despite the fact that such products are typically more popular for shorter tenor during periods of volatility. Revenue for structured investment tools increased by 58% year-on-year.
“Last year, we had an increase of interest in FX-linked structured products. We are seeing more transactions despite it being introduced several years ago,” Wawolumaya observes. “Customers are more educated and can get the maximum payout when FX is trading above a certain level, or below a certain level.”
To assert its ability to build and distribute products to clients, the bank is investing heavily in technology to support a more digital architecture. As a result, customers can be better supported though improved transparency and efficiency, allowing clear understanding of and access to the investment tools available to them at the right time.
“In the old days, automation was done on the front office to the back office and risk management was automated, but price distribution and settlement was semi-manual,” says Wawolumaya.
“Now the bank is investing more in automation, so we are building a platform that can allow a customer to register and open a securities account online, so they don’t have to go the branch and can buy and sell bonds online. Using the same platform, we distribute prices to our branches so the relationship manager can easily service clients with trades automatically going into our system.”