Herwidayatmo Chairman Indonesian Capital Market Supervisory Agency http:bapepam.go.id

1. SECURITIES MARKET REFORM: The Indonesia Experience Herwidayatmo Chairman Indonesian Capital Market Supervisory Agency http:www.bapepam.go.id 25 August 2003

2. AGENDA • Do we need a reform …? • Fundamental problems encountered … • How to deal with … • The new regulatory regime in the Indonesian financial services industry …

3. 1987 to 1992 Reforms • Allowing foreign investors to own 49% maximum of listed shares, removing fluctuation trading limit, and introducing Parallel Bourse to allow medium-scale companies (Dec. 87) • Moving towards a disclosured-based regime with the establishment of SSX in 1989 and privatization of the JSX in 1992 • Market infrastructure was simultaneously modernized

4. As a result …

5. The Effectiveness of Capital Market Law in January 1996 brought significant changes in the Indonesian securities industry • BAPEPAM becomes more independent in regulating and supervising the market • BAPEPAM has more enforcement powers • More stringent sanctions for serious violations such as market manipulation and insider trading • Open-end Investment Fund is introduced and allow to operate • The Exchange, Clearing Guarantee Corporation, and Central Securities Depository has stronger legal grounds as the SROs

6. But the growth of the issuers remained slow as 1997 monetary crisis gave its disastrous impacts to the market and to the Indonesian economy as a whole …

7. The JSX Market Capitalization (in Rp Trillion)

8. The JSX Market Capitalization (in billion US Dollar)

9. Average Daily Trading Value 1996 – 2002 (in Rp. billion)

10. Average Daily Trading Value 1996 – 2002 (in USD million)

11. Extreme Low Liquidity Volume 1999 2000 2001 The JSX 178,5 billion 134,5 billion 148,4 billion The SSX 7,03 billion 6,57 billion 8,72 billion Exchange Members 184 192 189 Average Rp.1,01 b/year Rp.0,7 b/year Rp.0,8 b/year Average transaction value of exchange members was below Rp. 1 billion (USD 111.7 billion) annually for each member, or below Rp. 90 million (USD 10,141 million) monthly

12. Securities Companies with Losses (in percentage, out of total numbers of securities companies) 1999 – 2001

13. Transaction-related Income of Stock Exchanges 1999 – 2001 (in percentage)

14. Where we are … The JSX Market Cap accounted only 0,13% of the Global Market Cap The JSX trading value accounted only 0,04% of the global trading value Source: 2002 Annual Repot of the World Federation Exchanges

15. Numbers of Investors Total Population Domestic Investors + 3,5 m + 1 m Singapore + 7,3 m + 1,3 m Switzerland + 18 m + 3 m Malaysia + 220 m + 70,000 Indonesia

16. Low competitiveness of the Indonesian securities industry JSX Market Cap only 0,13% of total global market cap JSX Trading Value only 0,04% of total global trading value (in USD) Slow growth of the number of issuers Sluggish growth of the investors The Need to Reform the Industry

17. Fundamental Problems • Big opportunities, but small “efforts”, lowering its competitiveness: • market cap • trading value • number of investors • Weak supervision lowering confidence in the market • Capital market instrument is limited We do need the 3rd Reform

18. REVITALIZING the Securities Firms and the Exchanges Task Force on Exchange Demutualization Task Force on Securities Firms Enhancement 2 Main Recommendations • Improving securities firms soundness through newly entry requirements, for exchange members in particular • Improving the Indonesian SROs capacities by means of exchange demutualization

19. Enhancing supervision and boosting up enforcement activities carried out by BAPEPAM Task Force on BAPEPAM Organizational Structure Restructuring • The new structure of BAPEPAM will have more focus on market supervision and enforcement: • Enhance supervision to issuers, market intermediaries and mutual fund industry • A new unit to establish more effective enforcement cordination with other enforcement agencies offshore and onshore • Certain bureaus will have “market intelligence” back up • Research and a newly Product Development Unit will be more proactive to give a birth to newly instruments in the market

20. JSX Market Cap 2001 – August 15, 2003(in Rp. Trillion)

21. JSX Composite Price Index (CPI)2001 – August 15, 2003

22. The Growth of NAV of Mutual Funds (in Rp. Trillion)2001 – August 15, 2003

23. INVESTMENT PRODUCTS In the market About to launch Stocks Corporate Bonds Government Bonds Rights Warrants Mutual Funds Index Futures LQ45 Asset-Backed Securities Indonesian Depository Receipts Single Stock Options

24. BAPEPAM FULLY SUPPORTS THE IMPLEMENTATION OF ANTI-MONEY LAUNDERING REGIME • The Enactment of Law Number 15 Year 2002 concerning Anti-Money Laundering • To support the Implementation of AML Law, Bapepam revised Rule Number V.D.10 on Know Your Client Principles that became effective on 15 July 2003 • A month before its effectiveness, BAPEPAM did sudden inspection to all securities companies offices to see the compliance level of each sec. Company to the new rule • The result was positive, most sec. companies (almost 80%) were ready to implement the rule • Bapepam and Indonesian Center for Financial Transaction Analysis and Examination (the Indonesian FIU) will sign MOU this year

25. MOVING TOWARDS A SINGLE SUPERVISORY AGENCY Rapid change in the world’s financial market industry characterized by growing convergence of financial services and blurring distinctions between financial services sectors

26. The Existing Regulatory Structures Bank Indonesia Ministry of Finance Directorate General of Financial Institution Capital Market Supervisory Agency Banks Insurance Stock Exchanges Pension Funds Issuers / Public Companies Finance Securities Firms Venture Capital Investment Funds Others Financial Services Others Capital Market Supporting Institutions

27. Consistency between the FSA Law and Financial Services Sector Laws & Regulation Banking Insurance Business Pension Funds Securities Markets Law 23/1999 Law 2/1992 Law 11/1992 Law 8/1995 Law 7/1992 as amended by Law 10/1998 Gov’t Regulation Gov’t Regulation Gov’t Regulation Ministerial Decrees Ministerial Decrees Ministerial Decrees Gov’t Regulation Implementing Regulation Implementing Regulation Implementing Regulation Implementing Regulation Plus regulation for finance companies and venture capital – and other relevant laws in specific cases such as Bankruptcy Law and the Company Law

28. SHORT-TERM OBJECTIVE Accelerating the process of restoring international confidence in Indonesia’s financial system LONG-TERM OBJECTIVE Fostering the development of financial services sector in Indonesia that is efficient, safe, stable and fair, thereby contributing to the welfare of the people of Indonesia by supporting the economic growth and stability of the Indonesian economy

29. CAPITAL MARKET BLUE PRINT 2000 – 2004 VISION To develop a strong and globally competitive market to support the Indonesian economy MISSION • Enhancing commitment to develop a more robust capital market; • Providing more access to medium-sized enteprizes and credit union (cooperatives) to use capital market as their alternative source of financing; • Supporting regional/local government to raise fund through the capital market; • Strengthening domestic-based investors and encouraging them to participate actively in the capital market; • Improving the quality of market infrastructure that meet international standards and to cope with global challenges

30. Thank You Herwidayatmo email: herwid@bapepam.go.id Bapepam Homepage: http://www.bapepam.go.id