Clear targets: A stronger regulatory framework will promote a stable financial system

The country’s regulator for the capital markets, Bapepam, has developed and carried out a series of master plans that will guide and pace the development of the Indonesia Stock Exchange (IDX) and other local financial platforms. The current master plan, which was introduced in October 2010 and addresses 2010-14 period, begins with a reflection on the financial crisis and how it has served as a reminder of the importance of market regulation and supervision. “The first line of defence in preventing instability in the financial system is to have sound regulations and strong law enforcements,’’ according to the executive summary of the master plan. It continues, “Recent events have clearly demonstrated that weaknesses in regulations and supervision of the global financial system fuelled the current crisis. Strengthening the regulatory framework and improving the micro- and macro-prudential regulations are essential in order to promote a financial system that is sound, stable and resilient.’’ CREDIBILITY ISSUES: Although Indonesia’s capital markets have largely shaken off any of the negative impacts of the financial crisis, it is also clear that domestic factors, such as allegations of market manipulation in the case of the 2010 initial public offering of Krakatau Steel, can also have an impact on the credibility of capital markets. Regardless of whether these types of allegations are true or common, they can hurt the long-term aim of a wider, deeper, more mature capital market.

To overcome these issues and meet its targets, Bapepam’s master plan outlines five main objectives: a capital market that is an easily accessible, efficient and competitive source of funds; one that offers a conducive and attractive investment climate as well as reliable risk management; stability, resilience and liquidity; a fair and transparent regulatory framework that guarantees legal certainty; and infrastructure that is credible, reliable and to international standards. The plan was developed in concert with the Asian Development Bank (ADB), which provided technical assistance. The ADB will also provide support in implementing the programme.

MEETING OBJECTIVES: To meet the first target, the plan outlines reduced constraints, with programmes that will simplify the listing process, streamline reporting requirements and make electronic reporting easier. Other strategies include increasing public access to finance and guarantee companies and boosting professionalism among financial-services firms.

To reach the goal of a conducive investment climate with reliable risk management, the plan describes 22 programmes that are divided into six strategies. Highlights include amendments to laws on pension funds to make these schemes more popular, using insurance products to promote financial planning, having microfinance encourage the purchase of insurance policies, facilitating more hedging opportunities, introducing more products for small and medium-sized enterprises, developing sharia-compliant alternatives, establishing an investor protection fund and fostering more trading volume in the secondary market for bonds.

For stability, resilience and liquidity, planned programmes include clarifying corporate governance guidelines, pushing risk management and crisis preparation plans and developing a deeper pool of supervision-related financial professionals. That means support for accountancy and ratings firms, which are crucial to healthy market performance.

Under the category of fairness, transparency, legal certainty and regulations, the first strategy is to improve enforcement. Bapepam plans to seek legal reforms that will give it more authority to investigate problems and access information, as well as to increase penalties for non-compliance. For the fifth and final objective – infrastructure that is credible, reliable and meets international standards – the plan includes improving the trading platform, settlement and clearing systems, and data access.