Indonesia to reintroduce stock options trading next year, exchange says

2011-10-14 15:48:56

The Indonesia Stock Exchange plans to reintroduce stock-option trading next year to lure investors as it aims to double market capitalization by 2015, according to a director at the bourse.

Options may begin as soon as the end of June, pending the completion of a new trading system and a revision to rules on derivatives, Friderica Widyasari Dewi, director of business development at PT Bursa Efek Indonesia, which runs the exchange, said in an interview. The bourse introduced options in 2004, then shut them down in 2006 because of weak demand, Widyasari said. Trading was thin partly because the bourse capped profits on options to keep volatility in check, she said.

“We don’t want to make the same mistake again,” Widyasari said in Jakarta on Oct. 12. “We will focus on foreign investors and institutional investors, who have a need for hedging.”

New products may help the bourse, Southeast Asia’a third- largest after Singapore and Malaysia with a market capitalization of $369 billion, attract more investors. Indonesia’s economy is forecast by the government to expand this year at the fastest pace since 1996, boosting demand from companies for funding.

Overseas investors bought a net $1.91 billion of Indonesian equities this year through yesterday, down from $1.96 billion in the same period last year, according to data compiled by Bloomberg.

10,000 Contracts

The Jakarta Composite Index (JCI) dropped 0.8 percent this year through yesterday as a slowdown in the U.S. economy and the sovereign-debt crisis in Europe prompted investors to abandon riskier assets in emerging markets.

Indonesia plans to start options trading with 10,000 contracts, based on four stocks as underlying assets, Widyasari said. The number of shares will eventually be expanded to 20, she said. PT Astra International, the nation’s biggest company by market value, PT Indofood Sukses Makmur and PT Telekomunikasi Indonesia are among stocks that may be chosen, she said.

Option contracts give traders the right to buy or sell a security at a set price at a certain time. Investors may use put options, which offer the right to sell a security, to hedge against a drop in the market.

“Foreign investors will wait and see because these types of developments take time to build confidence up,” said Peter Chiang, director of global equities at Kuala Lumpur-based Hwang- DBS Investment Management Bhd., which manages about $3.2 billion in assets. “But it’s a step in the right direction.”

A new trading system that will combine stocks, derivatives and futures in one platform is expected to be completed by the end of this year, Widyasari said.

Expanding Economy

The bourse is also finalizing revisions to derivatives rules that it will submit to the nation’s capital market supervisory agency, she said. Changes to regulations include the removal of caps on profit and shifting to electronic instead of floor-based trading, she said.

Indonesia’s economy is forecast to expand 6.6 percent this year, Bank Indonesia Governor Darmin Nasution said on Oct. 11. That’s the fastest pace since 1996, according to data from the central statistics office. The central bank reduced its benchmark interest rate this week for the first time in more than two years to spur growth. Domestic consumption accounts for about 56 percent of the Indonesian economy, Southeast Asia’s biggest.

Market Cap

The exchange is aiming to boost Indonesia’s market capitalization to 7,500 trillion rupiah ($845 billion) by 2015, Widyasari said. Futures, options, derivatives and exchange- traded funds are traded in Malaysia and Thailand, while the Philippine Stock Exchange is planning to introduce ETFs and securities lending to lure investors to one of Asia’s smallest share markets, exchange President Hans Sicat said on Oct. 5.

An electronic market-maker system is being developed to ensure liquidity for futures and options trading, Widyasari said. Indonesia’s futures trading, the LQ45 Futures Index, is inactive, and liquidity is low on its two ETFs partly because there’s no market maker, she said.

“There’s a lot of interest from bourse members for stock options,” Widyasari said. “We can increase our credibility by having a liquid derivative market.”