BI Regulates the Implementation of Sharia-Hedging Transactions

With the ultimate goal in mind of enhancing sharia-hedging transactions in Indonesia, Bank Indonesia (“BI”) has issued Circular Letter No. 18/11/DEKS on Sharia-Hedging Transactions (“Circular Letter”).
 
This Circular Letter implements BI Regulation No. 18/2/PBI/2016 on Sharia-Hedging Transactions (“BI Regulation”), which requires BI to set out further provisions on two mechanisms used to perform sharia-hedging transactions, namely: 1) Simple sharia-hedging transactions (“Simple Hedging”); and 2) Complex sharia-hedging transactions (“Complex Hedging”).
 
The Circular Letter is of relevance to both conventional and sharia-based banks, as well as to any stakeholders who are looking to become involved in sharia-hedging transactions.
 
Sharia-Hedging Transactions
In short, a hedge transaction is designed to offset any potential losses that may be incurred as a result of foreign currency fluctuations across the financial markets.[1] Sharia-hedging transactions, on the other hand, refer to hedge transactions which are conducted in accordance with sharia principles.[2] Sharia-hedging transaction can be initiated by any of the following parties:[3]