Indonesia Regulatory Update – Sharia Futures Commodity Trading.

The Indonesian Commodity Futures Trading Supervisory Body (Badan Pengawas Perdagangan Berjangka Komoditi or “Bappebti”) has introduced a sharia-based physical commodity market in the framework of strengthening the liquidity of commodity futures trading transactions and implementing an organized, sharia-based physical market.

Bappebti Regulation No. 5 of 2024 regarding the Implementation of Physical Commodity Markets Based on Sharia Principles at Futures Exchanges (“Bappebti Reg. 5/2024”) became effective on March 28, 2024. The acting head of Bappebti, Dr. Ir. Kasan, MM, said in a statement that with the issuance of this regulation the implementation of sharia-based physical commodity markets is expected to become easier and more transparent.

With respect to the issuance of Bappebti Reg. 5/2024, it is important to note that all other Bappebti regulations, including Bappebti Regulation No. 2 of 2019 regarding the Implementation of Physical Commodity Markets at Futures Exchanges, as amended by Bappebti Regulation No. 10 of 2019, remain in effect and apply to sharia-based physical commodity markets to the extent not specifically regulated under Bappebti Reg. 5/2024.

Establishing a Sharia Futures Exchange

Under Bappebti Reg. 5/2024, a sharia-based physical commodity market may only be implemented by futures exchanges that have obtained approval from the head of Bappebti as a sharia futures exchange and/or futures clearing agency that has a cooperation with a futures exchange that has been approved as a sharia futures exchange. 

Accordingly, in addition to obtaining a futures exchange business license, newly established futures exchanges that intend to facilitate the trading of sharia commodity futures must obtain the approval of the head of Bappebti to become a sharia futures exchange. 

The requirements to become a sharia futures exchange are:

1. has obtained a business license as a futures exchange; 
2. has a trading, supervision and reporting system for the implementation of sharia physical market trading; 
3. has sharia physical market regulations and rules; 
4. has a Sharia Supervisory Council that is a direct representative of the National Sharia Council (Dewan Syariah National) of the Indonesian Ulema Council (Majelis Ulama Nasional);
5. has a cooperation, agreement, commitment, or other written agreement with prospective members of the futures exchange (whether acting as the seller or buyer of a commodity) for the implementation of sharia physical market trading; 
6. has trading facilities for the implementation of the sharia-based physical market;
7. has an opinion letter from the Sharia Supervisory Council stating that the futures exchange’s trading mechanisms and commodities are in accordance with sharia principles and are permitted to be traded in the sharia physical market; and 
8. has a cooperation with a futures clearing agency. 

The Sharia Supervisory Council functions as a liaison between the sharia futures exchange and the National Sharia Council of the Indonesian Ulema Council in regard to proposals and suggestions for the development of products and services on the sharia futures exchange that require a fatwa from the National Sharia Council of the Indonesian Ulema Council.

Approval as a Shariah Futures Exchange

Existing futures exchanges that obtained a futures exchange business license prior to the enactment of Bappebti Reg. 5/2024 must meet the above requirements within six months as of the effective date of Bappebti Reg. 5/2024 to be deemed a sharia futures exchange. 

According to a statement from Bappebti, upon fulfilment of the requirements under Bappebti Reg. 5/2024, Bappebti will issue an acknowledgment letter confirming the futures exchange’s compliance with the requirements. 

The procedures and guidelines to obtain the approval or acknowledgment from the head of Bappebti to become a sharia futures exchange are:

1. Submission to the head of Bappebti an application and all the required documents in accordance with the Attachment of Bappebti Reg. 5/2024.
2. Bappebti will examine and verify the submitted documents.
3. If necessary, Bappebti may inspect the applicant’s physical facilities and issue an inspection report.
4. Within five business days as of the verification, Bappebti will confirm that the applicant has provided all the required documents or request further information.
5. Within five business days as of Bappebti’s response, the applicant must revise its documents and provide all additional information requested by Bappebti.
6. If the applicant fails to revise its documents and/or provide additional information as requested by Bappebti within five business days, Bappebti will notify the applicant that their application has been rejected.
7. Bappebti will notify the applicant that their application has been approved or rejected within three business days as of the complete submission of all the required documents pursuant to Bappebti Reg. 5/2024.

Commodities That Can Be Traded on Sharia Physical Market

Bappebti Reg. 5/2024 provides that only commodities that have been approved by the head of Bappebti may be traded on a sharia physical market. Obtaining this approval requires:

1. the commodity to have been determined by the head of Bappebti as the subject of a futures contract, sharia derivative contract, and/or other derivative contract;
2. an opinion letter from the Sharia Supervisory Council stating that the commodity is not contrary to sharia principles and can be traded on the sharia physical market;
3. a proposal and contract rules including contract specifications for a sharia physical commodities market. 

The proposal referred to above must contain a description and analysis of the following:

1. Availability of commodities in order to ensure delivery;
2. Commodities of guaranteed standards, types, units and quality;
3. Availability of storage facilities at delivery terminals that are suitable for the types and durability of the relevant commodities;
4. Supportive business environment;
5. Pricing determination procedures; and
6. Procedures for the submission and inspection of commodities.

In addition to the above, the contract rules shall at least encompass:

1. Trading days and hours;
2. Quality;
3. Price quotations;
4. Delivery units;
5. Settlement methods;
6. Delivery locations; and
7. Contract specification.

Sanctions

Bappebti Reg. 5/2024 empowers Bappebti, as the regulatory and supervisory agency for the implementation of sharia-based physical commodity markets on futures exchange, to impose administrative sanctions for incompliance with the provisions of Bappebti Reg. 5/2024. Administrative sanctions may be in the form of (i) written warning, (ii) fine, (ii) suspension of business activities, and (iv) revocation of approval. (26 April 2024)