A primer on different securities in use in the Indonesian capital markets

Two types of asset-backed securities (ABS) can be listed on the Indonesia Stock Exchange (IDX): a collective investment contract of asset backed securities (CIC-ABS), and asset-backed securities in the form of participatory certificates (ABS-PC).

Definition 

A CIC-ABS is an agreement between an investment manager and a custodian bank that binds ABS holders by authorising the investment manager to manage the collective investment portfolio and the custodian bank to collective custody services. ABS-PC are asset-backed securities issued by issuers, whose portfolios are pools of receivables that serve as proof of proportional ownership over the pools of receivables collectively owned by a group of ABS-PC holders. Pools of receivables are all financial assets that have been purchased by issuers from originators and sold to ABS-PC holders:

1. through the issuance of ABS-PC; or
2. from the results of ABS-PC issuance.

Issuers are parties who issue ABS-PC for the purpose of secondary mortgage financing.
Secondary mortgage financing is the distribution of medium and/or long-term funds to originators by: 

1. purchasing the originators’ pools of receivables and selling them through issuing ABS-PC; or
2. purchasing the originators’ pools of receivables from the results of ABS-PC issuance Originators are banks or other financial institutions that are entitled to own and sell their financial assets to issuers in the context of ABS-PC issuance.

Background 

ABS-PC helps the banking sector by providing liquidity to finance housing through the capital markets via the securitisation of high-quality banking assets. ABS-PC can also prevent maturity mismatch in banking as funds are made accessible on the capital markets, having both long- and medium-term characteristics. ABS-PC not only helps to enhance property financing liquidity but also to deepen the stock market. The issuance of the ABS-PC would help boost growth in the middle-to-lower income bracket by easing access to liquid funds.

Track Record 

Between 2009 and 2016 there have been seven CIC-ABS and two ABS-PC listed on the bourse. Each of the ABS has a AAA rating.

The first ABS-PC is worth Rp181.6bn ($13.3m), with an interest rate set at 8.6% a year. The second ABS-PC, worth Rp456.5bn ($33.3m), is divided into Rp103.5bn ($7.6m) and Rp353bn ($25.8m), with interest rates set at 8.6% and 9.1% a year, respectively.

Scheme 

The purpose of an ABS-PC scheme is to securitise housing loans to maintain long-term liquidity, so that banks (originators) will no longer have to wait many years for the housing loans to return to their assets. In an ABS-PC payments are derived from and collateralised by a specified pool of underlying assets. By turning a number of housing loans into a financial instrument, the underlying assets can be sold to general investors or securitised, thereby spreading risks of investing among many parties. The difference between CIC-ABS and ABS-PC is that the former include all financial assets that generate cash flow, while the ABS-PC is limited to only mortgages.

Regulation 

ABS-PC is regulated by Financial Services Authority Regulation No.23 of 2014 Concerning Guidelines on Issuing and Reporting Asset-Backed Securities in the Form of Participation Certificates for the Purpose of Secondary Mortgage Financing and Rule Number I-R: Listing of Asset Backed Securities in the Form of Participatory Notes for Secondary Financing for Housing.

ABS In Sharia 

In order to support the national economic stimulus plan, including through the expansions of investment products in the capital market through the issuance of ABS-PC, and in line with the government program for the provision of housing, both OJK and the IDX are expected to issue further regulations relating to the issuance of ABS-PC Sharia.