Tuesday, July 11, 2017
Investor Protection in Need of Strengthening as Repurchase-Agreement Transactions Continue to Grow
Prayogo Serevin Wisnumurti, Norman Edwin Elnizar
Investors are becoming increasingly interested in investing in and undertaking transactions through the capital markets and as a result, activity on the Indonesia Stock Exchange (Pasar Saham Indonesia – IDX) is increasing. This expansion can be seen in the yearly growth in the IDX Composite (Indeks Harga Saham Gabungan – IHSG). In recent years, one particular type of IDX product which has grown in popularity is the securities transaction. These transactions hold the promise of securities repurchasing and are commonly known as a repurchase-agreements or repo transactions.
In repo transactions, objects are traded by securities buyers and sellers in the form of equity securities (shares) and debt securities (bonds). Moreover, in any repo transaction, there is a provision that guarantees that any shares or bonds which have been sold will be repurchased by the previous securities owner. Such agreements also contain repurchase-agreement clauses which stipulate that one party will receive the funds while the other will receive a profit.
In Indonesia, repo transactions are a growing trend and three-party repo schemes are currently being offered. Under this type of scheme, the third party becomes responsible for ensuring that the implementation of any repo transaction is in accordance with the relevant agreement. Moreover, repo transactions are not only defined as a debt transactions which utilize securities as collateral (gadai efek), but also as lending-and-borrowing transactions, as well as sale-and-purchase transactions with collateral. As a result, repo transactions result in a number of different types of financial arrangement.
Financial Services Authority (Otoritas Jasa Keuangan – OJK) Regulation No. 9 / POJK.04/2015 (Regulation 9/2015) on Guidelines for Repurchase Agreement Transactions for Financial Services Institutions attempts to unite these various types of repo transactions under a single framework. Under Regulation 9/2015 however, a repo transaction is defined as a sale-and-purchase transaction with a repurchase promise. Hence, any previous definition of a stock repo transaction as a lending-and-borrowing transaction is no longer applicable. Moreover, Regulation 9/2015 clearly states that any repo transaction should result in a change of ownership.
Mr. Fahmy, a legal consultant at Fahmy Hoessein & Partners, has conducted research on repo transactions within the Indonesian capital market and, as a result, believes that Regulation 9/2015 raises a number of legal issues. According to Mr. Fahmy, transactions should be based on the repurchase rights of first owners. However, Regulation 9/2015 allows buyers as new shareholders to sell their shares to parties other than first owners.
“This will ultimately lead to chain repos and increase the risk that sellers [first owners] will not be able to buy back shares which have already been agreed upon," Mr. Fahmy explained while defending his dissertation in front of the Academic Session of the Universities of Indonesia on Thursday 6th July. Backed up by promoter Professor Rosa Agustina, as well as by co-promoters Indra Surya and Miftahul Huda, Mr. Fahmy successfully defended his dissertation, which is titled Legal Protection Against Investors for Repurchase Agreements Involving Stock Transactions within the Indonesian Capital Market.
In Indonesia, there was no legal certainty regarding repo transactions prior to 2016. It was only after the OJK issued Regulation 9/2015 that the status of repo transactions was clarified as sale-and-purchase transactions or as lending-and-borrowing transactions. Under Regulation 9/2015, repo transactions require a change of securities ownership. According to Mr. Fahmy however, this mandatory change of ownership will lead to chain repos, where initial sellers are unable to repurchase their shares.
This risk is also exacerbated by the OJK’s Global Master Repurchase Agreement (GMRA), which is more concerned with settlements in cases involving failure and with compensation being provided in the form of money. Thus, any shares which have been lost will only be paid in cash and therefore there is little certainty that shares will be recovered on the seller’s (first owner’s) side.
Mr. Fahmy acknowledges that both Regulation 9/2015 and the GRMA have ultimately offered legal certainty as regards the various models and mechanisms which should be employed for stock repo transactions. However, Mr. Fahmy also stresses that currently this legal certainty remains less than optimum, as there are still parties (first owners) who are not benefiting from stock repo transactions.
In order to overcome this problem, Mr. Fahmy has proposed setting up a so-called “lock-up” system on stocks of guarantees, as well as the inclusion of clauses within stock repo transactions which prohibit stock buyers from selling guaranteed shares before deals are completed in their entirety. Fahmy believes that this solution is fairest as regards sellers, especially in terms of getting their shares back.
It is now up to regulatory bodies such as the OJK to formulate a legal framework which addresses both the lock-up system and three-party repo transactions. By clarifying the rules in this way, repo transactions should no longer lead to confusion and problems, especially within the dynamic arena of the capital markets, and investor protection should ultimately be strengthened.