Partner

KPEI Securities Borrowing & Lending

8 th Asia-Pacific Central Securities Depository Group Cross Training Seminar June 27 th – 28 th, 2006, Bangkok Antonius H. Azwar

Objectives

    

Role of KPEI KPEI SBL Tax Implication Statistics Issues

8 th ACG Cross Training Seminar June 27 th – 28 th, 2006, Bangkok

The Functional Relationship & The Role of KPEI EXCHANGES KPEI/CCP

Performs Securities Transactions • Performs Clearing and Guarantee of securities transaction settlement: As Central Counterparty • Central SBL Service • Managing the Guarantee Fund Performs Central Custodian & Depository KSEI/CD

KPEI SBL

Purposes

 To avoid settlement failure  To cover or to settle a short trading position/margin trading (Strategic Trading)  Clearing Member financing of stock exchange trade settlement for its Client (Securities Financing)

Market Players

 KPEI as Intermediary/Principal and Guarantor  Lenders: Institutional or individual investors through Clearing Member and Custodian Bank .

 Borrowers: All investors participating through Clearing Member only .

KPEI SLB Scheme

------ Scope of KPEI SLB Agreement ---- Client Borrower CM Lender CM/CB Client KPEI Borrower CM Lender CM/CB Client Borrower CM Client Client Client

Why KPEI ?

Borrower NOVATIE Borrower KPEI KPEI WHY WHY?

   Orderly function Guaranteed intermediation Management service:  System support  Collateral management  Default Handling  Entitlement processing  Fee management Lender Lender

Parameter

Collateral Type of Collateral NRC (Non Reimbursement Compensation) Max Loan Period Min Loan Period Recall Period Borrowing Fee rate Lending Revenue rate Borrowing Instruction Fees Min Borrowing fee Parameter 125 % Cash, Stocks, Bank Guarantee, Deposit, Bonds 125 % 90 days (Exchange Day) 1 day (Exchange Day) 4 days (Exchange Day) 15% p.a

12% p.a

IDR 20.000

Borrowing fee x 1 day

Tax Implication

Approved by tax authority Jan ‘06

Fee

Borrower Borrowing Fee = X% No income tax KPEI Fee = Y Lender Lender Fee = Z Borrowing Fee = X% No income tax Lending revenue = X% - Z Income tax KPEI SBL System Investor “No levy of Income Tax as intended under Chapter 23 is imposed upon remuneration for Securities Lending and Borrowing receivables paid by the Borrower to KPEI, part of which is intended for pass-through to the Lender”. “Upon remuneration for lending and borrowing service paid to the ultimate lender client investor by a Stock Exchange Member and/or a Custodian Bank acting as mediator of Lender, which is deemed to be the equivalent of lease, and other income originating from sources pertaining to the utilization of wealth, Income Tax Deduction as intended under Chapter 23 of 15% (fifteen percent) against the projected net income of 40% of bruto income is imposed or as intended under Chapter 26 Income Tax a tariff of 20% is imposed or deducted in accordance with provisions under the Multiple Taxation Avoidance Agreement”.

Manufactured Dividend

Issuer via Payment Agent Cash Dividen= X%, (income tax) Borrower Cash Dividen= X% No Income tax KPEI Cash Dividen = X% KPEI SLB System Lender Cash Dividen= X% No Income tax Investor Cash Dividen = X% No Income tax No levy of Income Tax as intended under Chapter 23 is imposed upon Dividend Replacement paid by the Borrower, whether originating from the Issuer or its own account, to KPEI for further pass-through to the Lender.

NRC (Non Reimbursement Compensation) Borrower Fail to reimburse Penalty = NRC No Income tax KPEI KPEI SLB System Pass-through NRC Final Income tax = 0,1% NRC value Lender NRC No income tax NRC Exchange trade Investor “KPEI, in its capacity as organizer of the stock exchange, is obligated to deduct Income Tax that is final in the amount of 0.1% (zero point one percent) against the value of Non Reimbursement Compensation paid to the Lender due to the inability of the Borrower to make reimbursement for borrowed Securities. This is due to the consideration that a default in a Securities Lending and Borrowing Transaction is deemed to be the equivalent of a Shares Buying Transaction”.

S t a t i s t i c

KPEI SLB Transaction 2004-2006 V olume Unit 95,000,000 90,000,000 85,000,000 80,000,000 75,000,000 70,000,000 65,000,000 60,000,000 55,000,000 50,000,000 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 1st Q2nd Q3rd Q 1st Q2nd Q3rd Q Jan Feb Mar Apr May V alue ID R 350,000,000,000 325,000,000,000 300,000,000,000 275,000,000,000 250,000,000,000 225,000,000,000 200,000,000,000 175,000,000,000 150,000,000,000 125,000,000,000 100,000,000,000 75,000,000,000 50,000,000,000 25,000,000,000 0

2004 2005 2006

Volume value Updated to June 22th, 2006 06’ Total Loan value: Daily average: Total Volume: Rp. 988,190,617,500 . Rp. 5,551,632,682. 330, 555,500 unit shares

S t a t i s t i c

El i g i bl e S tock and M embers hi p M e m b e r s 10 0 9 5 9 0 8 5 8 0 75 70 6 5 6 0 55 50 4 5 4 0 3 5 3 0 2 5 2 0 15 10 5 0 2001-03 2004 2005 2006 Sto c k s 10 0 9 5 9 0 8 5 8 0 75 70 6 5 6 0 55 50 4 5 4 0 3 5 3 0 2 5 2 0 15 10 5 0 Eligible Stocks Eligible Stocks Active Eligible Stock Member Stock : 84 : 70 Members Members Active Members : 83 (Brokers + Custodian Bank) : 39

On Progress Agenda

 Improve regulated short selling • Improve the regulation of short selling • Lift ban on regulation of selected shares for regulated short selling • Coordinate with SX and Bapepam (SEC) for surveillance and enforcement of regulated short selling transaction  Implementation new module: • Substitution Loan, Automatic SBL, Automatic Roll over • Develop different market for SLB (Fixed Term)  Sustainability & stability of supply and demand (Visit directly to member/”marketing program”)  Develop comprehensive KPEI SBL Website for information and order facility  Market education

Current Issues & Obstacles

 Insufficient pool of

Lendable Stocks

 Membership only consists of brokers (Securities company)  Bapepam/SEC has recently permitted Custodian Bank only as a Lender Pension and Mutual Funds lending prohibition  Grey area of Short Selling Regulation  Product knowledge = Additional Education Is Required :  Product it self  Myths & Misconceptions:  SBL Creates Negative Market Conditions  Conflict of Interest for Fund Managers  Stock Lending and Short Selling are Bad for the Market

Thank You

Contact: [email protected]

P: 62-21-52995631