Structured Products Offered by Banks

The Financial Services Authority (Otoritas Jasa Keuangan–“OJK”) has issued Regulation No. 7/POJK.03/2016 (“OJKRegulation”)on Prudential Principles for Structured Products Offered by Conventional Banks.Prior to the issuance of this latest OJK Regulation, this matter was regulated by Bank Indonesia Regulation No. 11/26/PBI/2009 on Prudentially Principles for Structured Products Offered by Commercial Banks (“BI Regulation”).In essence, the OJK Regulation aims to mitigate any risks resulting from the development and sale of the complex financial products known as Structured Products. This has been achieved through the formulation of various licensing procedures, risk-mitigation measures, reporting obligations, customer classifications, and marketing guidelines for Structured Products.The Regulation is of relevance to banks and their customers.Structured ProductsThe OJK Regulation defines “Structured Products” as combinations of derivative and non-derivative financial instruments, or combinations of two or more derivative financial instruments. [1] Structured Products are characterized by values or cash flows which are linked to interest rates, exchange rates, commodity prices and/or equity prices, optionality (e.g. caps features, floors, collars, set up/step down, call/put), leverage, barriers (knock in/knock out), and/or binary or digital ranges. [2] LicensingIt should be noted that banks may only engage in structured-product activities (encompassing aspects of planning, development, issuance, marketing, offerings, sales, operations and halting operations) after first obtaining a principal license and an effective statement on issuing structured products from the OJK. [3] In order to obtain a principal license, a bank must submit an application to the OJK, along with the following supporting documents: