Republic of Indonesia: Enhancing Financial Sector Governance, Risk Management, and Depth (Financed by the Japan Fund for Poverty Reduction)

Transcription

1 Technical Assistance Report Project Number: Capacity Development Technical Assistance (CDTA) January 2013 Republic of Indonesia: Enhancing Financial Sector Governance, Risk Management, and Depth (Financed by the Japan Fund for Poverty Reduction) The views expressed herein are those of the consultant and do not necessarily represent those of ADB s members, Board of Directors, Management, or staff, and may be preliminary in nature.

2 CURRENCY EQUIVALENTS (as of 19 November 2012) Currency unit rupiah (Rp) Rp1.00 = $ $1.00 = Rp9,617 ABBREVIATIONS ADB Asian Development Bank CMNMP Capital Market and Nonbank Financial Industry Master Plan FMDIP Financial Market Integration and Development Program FPO GDP Fiscal Policy Office gross domestic product GMRA Global Master Repurchase Agreement OJK TA Otoritas Jasa Keuangan (Integrated Financial Services Authority) technical assistance TECHNICAL ASSISTANCE CLASSIFICATION Type Capacity development technical assistance (CDTA) Targeting classification General intervention Sector (subsectors) Finance (finance sector development, money and capital markets, insurance and contractual savings) Themes (subthemes) Economic growth (promoting economic efficiency and enabling business environment), private sector development (policy reforms), governance (economic and financial governance), capacity development (institutional development, organizational development) Location (impact) National (high) Partnership Japan Fund for Poverty Reduction GLOSSARY GMRA The Global Master Repurchase Agreement (GMRA) is the master document for all gross paying securities in the nondollar repo market. It was introduced in November 1992 and has been updated numerous times since then. The GMRA document consists of approximately fifteen pages, together with a number of annexes, containing definitions, representations and default provisions that protect both parties in a repo transaction in the event of default. NOTE In this report, "$" refers to US dollars.

3 Vice-President S. Groff, Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director S. Hattori, Public Management, Financial Sector, and Trade Division, SERD Team leader Team members Peer reviewers S. Schuster, Senior Financial Sector Specialist, SERD F. Barot, Senior Operations Assistant, SERD R. Hattari, Public Management Economist, SERD S. Ismail, Financial Sector Specialist, SERD L. Jovellanos, Senior Economics Officer, SERD M. Parra, Operations Assistant, SERD R. Barreto, Financial Sector Specialist, CWRD S.M. Lee, Capital Markets Specialist, Office of Regional Economic Integration In The preparing views expressed any country herein are program those of the or consultant strategy, and financing do not necessarily any project, represent or by those making of ADB s any designation members, Board of or of Directors, reference Management, to a particular or staff, territory and may or geographic be preliminary area in nature. in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

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5 I. INTRODUCTION 1. To realize a more advanced and prosperous Indonesia, the government targeted an average annual gross domestic product (GDP) growth rate of 6.3% 6.8% and a decline in the poverty rate to below 10% under its National Medium-Term Development Plan for To achieve these goals, the government will need total aggregate investment of Rp12,000 Rp13,000 trillion over this same timeframe. Much of this investment needs to be intermediated through the financial sector. The Capital Market Development Program Cluster and ongoing technical assistance (TA) of the Asian Development Bank (ADB) have provided significant support to develop the nonbank financial sector in Indonesia by strengthening institutions and enhancing the capital markets. 1 ADB s Financial Market Development and Integration Program (FMDIP), and this capacity development TA will build on these achievements to further deepen and diversify the nonbank financial sector to ensure the government can meet its aggregate investment targets. 2 The FMDIP and this TA have been incorporated into the first strategic pillar of ADB s country partnership strategy for , which is inclusive growth, and reflect the government s reliance on the financial sector to support economic growth and development. ADB s continuing assistance in developing the country s nonbank financial sector recognizes the large unfinished reform agenda, the government s strong commitment to reform in this area, and the government s specific request for ADB to remain engaged in the sector throughout the current country partnership strategy period. The impact, outcome, and outputs of the TA reflect the findings of consultations with the government during the processing of the FMDIP, as well as the recommendations of an ADB TA project designed to identify constraints to increasing liquidity in the government bond market. 3 Other facets of the TA have been discussed with and reflect the priorities of the executing agency and the implementing agencies. The design and monitoring framework is in Appendix 1. 4 II. ISSUES 2. ADB support for nonbank financial sector development in Indonesia has produced measurable results. Assistance provided by ADB to strengthen the capacity of Bapepam-LK has improved standards and made supervision of the financial markets more effective. CLSA Asia- Pacific Markets Corporate Governance Watch for 2010 noted that market participants and regulators are genuinely becoming more serious about enforcement. 5 A primary dealer system has been established, benchmark consolidation is continuing, and a reliable risk-free yield curve is emerging. The pension and insurance subsectors exhibit promising trends as insurance premiums relative to GDP now exceed 2.5% and are approaching the level of insurance penetration in Thailand. The corporate bond market, while still very small, is also exhibiting encouraging trends and was one of the fastest-growing markets in Southeast Asia during 2010 and Nevertheless, the local currency markets in government and corporate bonds represent, in the aggregate, less than 15% of GDP. By comparison, the bond markets in Malaysia and Thailand exceed 65% of GDP. 1 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of Indonesia for Subprogram 2 of the Capital Market Development Program Cluster. Manila; ADB Technical Assistance to the Republic of Indonesia for Strengthening Indonesia s Capital Market. Manila. 2 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of Indonesia for the Financial Market Development and Intermediation Program. Manila. 3 ADB Technical Assistance for Improving Liquidity of Bond Markets in ASEAN+3. Manila. 4 The TA first appeared in the business opportunities section of ADB s website on 3 October CLSA Asia Pacific Markets, Corporate Governance Watch. Hong Kong, China.

6 2 3. A number of development constraints have continued to restrain growth in the financial markets. First, the twin silo approach to financial sector supervision exhibits a number of weaknesses. The banking sector is regulated by Bank Indonesia, the country s central bank while the capital markets, insurance, and nonbank financial sectors are regulated by Bapepam- LK. This means that regulation of financial conglomerates is bifurcated and cannot be applied on a consolidated basis. Regulations covering one part of the financial sector often constrain development in the other. Disparate access to resources and the lack of qualified immunity for nonbank regulators has produced an uneven application of supervision which is susceptible to arbitrage. Responsibility for financial sector development is likewise split between the two regulators and the Ministry of Finance s Fiscal Policy Office (FPO). The end results of these issues include a lack of coordinated development, low investor confidence, and limited domestic participation in the capital markets. An increase in foreign capital inflows due to an upgrade in Indonesia s credit rating has made the need to address these problems and modernize the supervision of financial markets even more urgent. 4. Government debt issuance continues and the outstanding debt stock has increased. However, the size of the debt market, relative to GDP, has declined as the pace of issuance has not mirrored the growth in the economy. This situation has been exacerbated by the fact that half of the outstanding government debt stock is thinly traded or not tradable. Market participants currently have no effective hedging mechanisms such as repurchase agreements, for example, and no derivatives. This forces market participants to close positions rapidly in response to nominal events and creates a feedback loop of elevated volatility. The FMDIP establishes a framework to increase the stock of tradable government debt by converting bank recapitalization bonds into government debt. However, more needs to be done to help develop more efficiently functioning primary and secondary government debt markets and to boost the role of the contractual savings subsector as a source of domestic demand for capital markets products. The contractual savings subsector needs to migrate to more advanced portfolio management methodologies but is constrained from doing so by an acute shortage of trained risk management professionals, including actuaries. 5. To address these issues, the government has made it a priority to strengthen the financial sector s infrastructure and assure investors of stability and proper governance. It has begun to harmonize supervision across the financial sector, reduce regulatory arbitrage, and improve the overall competence and integrity of supervision. Under the FMDIP, the government will launch an independent, unified financial sector regulator through the newly authorized Integrated Financial Services Authority (OJK). OJK will start operations on 1 January 2013, and bank supervision to be transferred from Bank Indonesia to OJK by the end of Legally, OJK will be fiscally and operationally independent from government. It will be governed by a board of commissioners that will have full control over the budget, which will be financed by fees and levies currently applied to the financial sector. The FMDIP also includes support for significant revisions to the three primary sector laws governing capital markets, insurance, and pensions. This is intended to provide a legal framework for harmonized supervision, as well as supervisory immunity and the power to resolve problem institutions. 6. While the establishment of OJK represents a landmark in the government s reform efforts, broad-based TA will be necessary to ensure its success. Support will be needed to ensure rapid integration of diverse corporate cultures within the new organization so that it can exercise its regulatory function effectively. The operational and procedural standards OJK adopts will have to reflect international sound practices. In addition, the creation of OJK has triggered FPO s emergence as the Government s designated agency for coordinating financial sector policy. Specifically, the FPO s responsibilities will now expand beyond fiscal matters to

7 3 include high-level coordination of financial sector development and stability. The FPO will also assume a new role as executing agency for ADB loans and TA. This will provide FPO and ADB more flexibility to address a wider range of development constraints, including taxation issues, which had proven challenging under Bapepam-LK. To ensure a smooth transition across all affected agencies, FPO will require a rapid build-up of technical capacity. 6 It will need these skills to maintain the existing momentum of financial sector reform and to exercise its expanded mandate efficiently and effectively. Given the central role ADB has played in promoting these reforms, it is critical that ADB provide TA support to both OJK and the FPO to assure the government of ADB s commitment to the continuing development of the financial sector. 7. Concurrent efforts are also needed to develop the domestic debt markets and to encourage domestic investors to participate in the capital markets. ADB TA must continue support to ongoing reforms under the government s Capital Market and Nonbank Financial Industry Master Plan (CMNMP) for Many of these reforms are currently being supported by ADB and are complex and technically challenging. ADB is currently providing realtime technical advice to senior policy makers through an onsite resident advisor. This assistance has been directly responsible for a number of key reforms completed under the FMDIP and will be continued. Further, specific steps are needed to encourage broader and deeper participation in the government debt market. Basic inventory management tools, including the Global Master Repurchase Agreement (GMRA) and interest rate derivatives, must be provided to support the efforts of primary dealers to make two-way markets. These tools, which will strengthen risk management and reduce volatility, will foster a more active Government debt issuance program. In conjunction with these efforts, the tax code applicable to the financial system as well as specific financial transactions must be modified to provide the proper incentives to support financial sector development. 8. Finally, efforts are needed to raise awareness of the important role played by contractual savings in financial sector development and economic growth. Financial literacy must be improved both within and outside of the government to reduce entrenched resistance to coordinating efforts to develop Indonesia s financial system. In addition, the reforms already implemented under the FMDIP must now be further supported by building technical capacity in the sector. Developing greater actuarial and risk management capacity in the insurance subsector is particularly important, because this will lead to enhanced returns and provide more diverse choices to investors. III. THE TECHNICAL ASSISTANCE 9. The TA will build on key reforms initiated under the FMDIP and will support the government s initial efforts to develop OJK as a world class financial regulator. The TA will also provide long-term support to the continuing implementation of select activities within the CMNMP that aim to deepen the capital market. Finally, the TA will support the government s efforts to increase the demand for domestic capital market instruments. It will do this by reducing resistance to the coordinated development of the traditional capital markets and the contractual savings sector. The TA will also strengthen the nonlife insurance sector s risk management capacity. 6 The transition will directly affect FPO, Bapeman-LK, and OJK due to the establishment of new and revised mandates. However, additional indirect effects will arise through FPO s new mandate to coordinate high level financial sector policy. For example, FPO will need to develop a basic working knowledge of financial sector supervision, taxation, investment incentives and other fiscal matters.

8 4 A. Impact and Outcome 10. The impact of the TA will be increased domestic participation in the nonbank finance subsector. The outcome of the TA will be enhanced financial sector development. To achieve this impact and outcome, the TA will have three outputs: (i) strengthened regulatory oversight, (ii) improved market infrastructure, and (iii) increased growth in contractual savings. B. Methodology and Key Activities 11. Output 1: Strengthened regulatory oversight. The TA will continue support to a key ADB sponsored policy reform that established OJK. Specifically, the TA project will provide high-level technical advice to senior policy makers in OJK to guide the formulation of the institution s organizational structure and corporate culture, governance, operations and staffing. Capacity development will also be provided to strengthen select areas of financial sector supervision that will be identified during the transition process. The TA will also help strengthen the FPO s ability to coordinate financial sector development strategies, to conduct macro prudential supervision, and to develop and implement crisis management protocols. Finally, the TA will support efforts to draft implementing regulations for the three revised sector laws governing the capital markets, pensions, and insurance sectors. The revision of these sector laws, which will provide for supervisory immunity and the power to resolve problematic institutions, was a policy action under the FMDIP. Drafts of these revised laws have been completed and socialized and are programmed for parliamentary review over the period Output 2: Improved market infrastructure. The TA will continue to help the government promote financial sector development by providing high-level technical advice to senior policy makers in OJK and the FPO. The TA will also support specific CMNMP initiatives, including coordinated efforts by market stakeholders to deepen the capital markets. In particular, the TA will support government efforts to establish market makers to enable the eventual introduction of exchange traded funds and basic hedging instruments to manage interest rate and currency risks. The TA will also provide ancillary support to the ongoing ADB project to introduce the Global Master Repurchase Agreement to Indonesia and will provide evaluations and supportable recommendations to rationalize the tax code covering financial products and transactions. 7 In addition, the TA will provide continuing support to the government s initiative to establish standards of market conduct. 13. Output 3: Increased growth in contractual savings. The TA will seek to increase domestic demand from the contractual savings subsector for capital market instruments by fostering greater cooperation among stakeholders. Specifically, this initiative will seek to foster a more unified approach to financial sector development by sponsoring research in Indonesia s universities into the linkages between contractual savings, capital market development, and economic growth. The best of the research papers produced will be published by ADB and will serve as a domestic catalyst to foster a greater alignment of stakeholder interests. The TA will also enhance risk management in the insurance sector which is a prerequisite to introducing more effective asset allocation methodologies. Specifically, this activity will develop a formal platform through which professionals can acquire the basic actuarial skills needed to strengthen and eventually consolidate the less-efficient nonlife insurance segment. This activity will also 7 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of Indonesia for Subprogram 2 of the Capital Market Development Program Cluster. Manila; ADB Technical Assistance to the Republic of Indonesia for Strengthening Indonesia s Capital Market. Manila.

9 5 produce a complimentary benefit by supporting ongoing efforts to enhance risk management in the larger, and more technically demanding life insurance segment by increasing the awareness of the career potential of actuaries. ADB is consulting with stakeholders, including donor partners, industry associations, regulators and academia to ensure this activity is sustainable over the long-term. C. Cost and Financing 14. The TA is estimated to cost $1,000,000, of which $1,000,000 will be financed on a grant basis by the Japan Fund for Poverty Reduction. The government will provide counterpart support in the form of counterpart staff, office accommodations, local phone and fax services, basic office supplies, and other in-kind contributions. The cost estimates and financing plan are presented in Appendix 2. D. Implementation Arrangements 15. The executing agency will be the FPO, reflecting the agency s new responsibility for financial sector stability and for establishing and coordinating broad financial sector development strategies across government agencies. The TA reflects the key importance of this role, and $188,000, or 19% of the total TA budget, is to be allotted to support the FPO. The diversity of the implementing agencies reflects the broad cooperation that will be necessary to implement some of the more technically challenging reforms the TA will support. They will be (i) the FPO, the Directorate General of Debt Management, and the Directorate General of Taxation all under the Ministry of Finance; (ii) Bank Indonesia; (iii) the Indonesian Stock Exchange; (iv) the Indonesian Clearing and Guarantee Corporation; and (v) the Indonesian Central Securities Depository. The implementation period will be from 1 February 2013 to 31 January The packaging of the consulting services will be based on the expressions of interest solicited from qualified consulting firms and individual consultants. These services may involve one or several packages and a combination of firms and individuals. ADB will hire consulting firms through quality- and cost-based selection (80:20), according to its Guidelines on the Use of Consultants (2010, as amended from time to time). Individual consultants will be recruited using the individual consultant selection method. In lieu of direct support, the TA will organize and coordinate the research projects and will provide a platform for their evaluation and publication. The outline terms of reference for consultants are in Appendix 3. Disbursements under the TA will conform to ADB s Technical Assistance Disbursement Handbook (2010, as amended from time to time). The overall evaluation of the TA will be based on a comparison of actual results with the performance targets in the design and monitoring framework in Appendix 1. TA review missions will be scheduled frequently to ensure a smooth transition to the FPO as ADB s executing agency. Knowledge products produced in accordance with a knowledge product and communications plan will form part of the TA outputs. IV. THE PRESIDENT'S DECISION 17. The President, acting under the authority delegated by the Board, has approved ADB administering technical assistance not exceeding the equivalent of $1,000,000 to the Government of Indonesia to be financed on a grant basis by the Japan Fund for Poverty Reduction for Enhancing Financial Sector Governance, Risk Management, and Depth, and hereby reports this action to the Board.

10 6 Appendix 1 DESIGN AND MONITORING FRAMEWORK Performance Targets and Design Summary Indicators with Baselines Impact By 2016: Increased domestic The level of domestic participation in the ownership of tradable nonbank finance government securities subsector increases to 75% (2012 baseline: 60%) Outcome Financial sector development enhanced Proportion of government bonds held by the domestic contractual savings subsector increases to 32% (2012 baseline: 25%) By 2014: OJK initiates operations and completes absorption of bank supervision CMNMP at least 60% complete, including key objectives as follows; procedures for public offerings streamlined, GMRA launched, IPF established, corporate governance standards strengthened, convergence with IAS and launch of straight-through processing (2012 baseline: 30%) Outputs By 2014: 1. Regulatory oversight strengthened At least two high-level seminars delivered to OJK FPO establishes center for coordinated financial sector development Crisis management protocol developed Priority regulations to support revised sector laws drafted Data Sources and Reporting Mechanisms DGDM periodic reports DGDM periodic reports OJK annual report OJK annual report OJK annual report OJK annual report Disclosures on FPO website Ministry of Finance website OJK annual report Assumptions and Risks Assumption Market volatility does not significantly reduce risk appetite of investors. Risks Continuity of reforms is lost in the transition to the FPO as ADB executing agency. Investment grade credit rating causes capital inflows to increase faster than domestic absorption of government bonds. Assumption Government commitment to reform remains high and cooperation is achieved with the regulator and between agencies. Risk Proposed reforms are not completed within established time frames. Assumptions Sponsor governments have sufficient time and resources available to support this initiative. Efforts to merge corporate cultures do not prove to be more problematic than anticipated. New legislation, which the TA is designed to support, will be

11 Appendix 1 7 Design Summary 2. Improved market infrastructure Performance Targets and Indicators with Baselines Framework for market makers completed Data Sources and Reporting Mechanisms OJK website Assumptions and Risks approved in Parliament by Tax benchmarking study delivered Standards of market conduct introduced Consultant reports OJK website Suitable expertise for producing framework, study, and standards can be acquired within the allowed budget. 3. Increased growth in contractual savings. Activities with Milestones Research papers on the impact of contractual savings on capital market development published Training program for nonlife actuaries completed ADB website Indonesia Society of Actuaries website Inputs Potential publication by ADB provides a sufficient incentive for universities and researchers to conduct research. Private sector and other development partners provide pledged support to actuarial training. 1. Strengthened Regulatory Oversight 1.1. Priority list of regulations to be drafted completed (June 2013) 1.2. Center for coordinated financial sector development launched (December 2013) 1.3. Regulatory benchmarking studies completed (December 2013) 1.4. Crisis management protocol activated (March 2014) 1.5. High-level seminars in support of OJK completed (March 2014) 1.6. Priority regulations to support revised sector laws drafted (March 2014) 2. Improved Market Infrastructure 2.1. Comprehensive review of existing market conventions and standards completed (June 2013) 2.2. Draft market standards completed (December 2013) 2.3. Preliminary assessment of market infrastructure to support market makers completed (March 2014) 2.4. Framework for market makers completed (March 2014) 2.5. Tax benchmarking study delivered (March 2014) 2.6. Self-regulatory structure for market makers completed (June 2014) 2.7 Final recommendations for market makers structure delivered (September 2014) 2.8. Tax recommendations finalized and delivered (September 2014) 2.9. High-level policy advice to support capital market development delivered (November 2014) Japan Fund for Poverty Reduction: $1,000,000 Consulting services, FPO: $112,200 Consulting services, OJK: 187,000 Consulting services, other: 302,500 Travel and per diem: 291,920 Publishing: 10,000 Actuarial training program: 30,000 Other support: 34,500 Contingency reserve: 31,880 The government will provide counterpart support in the form of counterpart staff, office accommodations, local phone and fax services, basic office supplies, and other in-kind contributions.

12 8 Appendix 1 Activities with Milestones Inputs 3. Increased growth in contractual savings 3.1. Stakeholder engagement and stocktaking to support actuarial training program completed (June 2013) 3.2 First draft of training program completed (June 2014) 3.3. Research papers published (September (2014) 3.4. Pilot training program rolled out (November 2014) ADB = Asian Development Bank, CMNMP = Capital Market and Nonbank Financial Industry Master Plan, DGDM = Directorate General of Debt Management, FPO = Fiscal Policy Office, GMRA = Global master Repurchase Agreement, IAS = International Accounting Standards, IPF = Investor Protection Fund, OJK = Otoritas Jasa Keuangan (Integrated Financial Services Authority), TA = technical assistance. Source: Asian Development Bank. Endorsed By: Approved By: Shigeko Hattori Director, SEPF Kunio Senga Director General, SERD

13 Appendix 2 9 COST ESTIMATES AND FINANCING PLAN ($'000) Total Item Cost Japan Fund for Poverty Reduction a 1. Consultants a. Remuneration and per diem i. International consultants ii. National consultants b. International and local travel c. Reports and communications Training, seminars, and conferences b a. Training program b. Other Surveys Contingencies Total 1, Note: The technical assistance is estimated to cost $1,000,000, of which contributions from the Japan Fund for Poverty Reduction are presented in the table above. The government will provide counterpart support in the form of counterpart staff, office accommodations, local phone and fax services, basic office supplies, and other in-kind contributions. The value of government contribution is estimated to account for 20% of the total technical assistance cost. a Administered by the Asian Development Bank. b The Asian Development Bank will administer these activities. Source: Asian Development Bank estimates.

14 10 Appendix 4 OUTLINE TERMS OF REFERENCE FOR CONSULTANTS A. Output 1: Strengthened Regulatory Oversight 1. Financial Supervision Expert Regulatory Consolidation (international, 4 person-months, intermittent) 1. The expert should have more than 20 years of direct experience in the regulation and supervision of financial markets. Most of this experience should be related to a unified regulator. The consultant will also be expected to have held a variety of senior level executive positions that have exposed him or her to many of the common issues which would be expected to accompany the consolidation of regulatory functions (e.g., bank supervision, insurance supervision, and capital markets supervision). In particular, the expert should have a demonstrated track record in integrating diverse corporate cultures, developing governance incentives and standards, establishing operating procedures, and designing and implementing staffing plans. The expert should be well grounded in international best practices, including the Basel Capital Accord, and have a working knowledge of capital and insurance markets. Experience in multiple jurisdictions will be considered a plus. The consultant will provide direct assistance to the Government of Indonesia during the transition of financial sector regulation to the newly authorized Integrated Financial Services Authority (OJK). She or he will help guard against the formation of internal silos and will ensure that organizational and operational standards adhere to international sound practices by providing: (i) direct policy advice to the OJK Board of Commissioners to help in the transition to a single, unified regulator with a common, unified culture. (ii) benchmarking studies comparing OJK s internal governance and operating standards against international sound practices; (iii) advice on common risks arising from a transition to a unified regulator and operating standards and procedures that have proven both effective and ineffective in other jurisdictions; (iv) advice on how to maximize information flows throughout OJK and ensure prompt decision making is based on thorough and timely information; and (v) seminars and workshops in related matters, as requested by the government. 2. The consultant will provide the following deliverables: (i) a knowledge product and communication plan, (ii) benchmarking studies, and (iii) a final report of observations and recommendations. 2. Financial Sector Expert Financial Sector Development and Stability (international, 6 person-months, intermittent) 3. The expert should have at least 20 years of direct experience in financial sector supervision. A majority of this experience should have been obtained in the supervision of financial conglomerates. The expert will also have experience in macro prudential supervision, including development of early warning indicators. The expert should have significant experience in developing and/or administering a financial sector forum and, in particular, a financial crisis management protocol. The consultant should be able to produce international benchmarking exercises that focus on comparisons of crisis management protocols across individual countries. Direct experience in managing a financial sector crisis is preferred. The expert will assist the Ministry of Finance s Fiscal Policy Office in developing the structures and competencies necessary to assume responsibility as a central coordinator for policy formulation and capital market development. In addition, the expert will provide direct inputs to the

15 Appendix 4 11 government to support the launching of a macro prudential supervision function and to activate a crisis management protocol. The expert will: (i) serve as a resource to support the government in the development of the Fiscal Policy Office as the central coordinator for policy formulation and capital market development by providing policy advice on the charter, objectives, operations, and resource needs of the agency. (ii) provide high-level assistance to senior policy makers to establish a macro prudential surveillance function, with the intent of identifying economy-wide imbalances that, if left unchecked, could lead to a financial crisis. (iii) support the development and the launching of a crisis management protocol within the Fiscal Policy Office by providing high-level advice to senior policy makers on the design of the protocol, including the creation of an oversight committee s charter, responsibilities, and operating guidelines. The guidelines will include the assignment of authority in both emergency and non-emergency conditions. (iv) conduct training and workshops in related matters, as requested by the government. 4. The consultant will provide the following deliverables: (i) benchmarking studies, as required; (ii) interim monthly reports of observations and progress; and (iii) a final report of observations and recommendations. 3. Financial Sector Expert Legal (international, 3 person-months, intermittent) 5. The expert should have at least 15 years of experience as a lawyer. This should include significant experience in the development of law and implementing regulations governing the financial sector, preferably in a unified regulator. The consultant should also have at least 5 years of international consulting experience in developing both law and implementing regulations for developing markets, including those in Asia. The expert should have a civil law background or, alternatively, significant experience consulting in a civil law environment. The consultant will assist the government as it develops regulations to implement Indonesia s revised primary sector laws on capital markets, insurance, and pension by completing the following tasks: (i) In coordination with the government, the expert will identify the high priority regulations needed to implement the three revised sector laws. (ii) The expert will provide international and regional benchmarking analysis, as requested by the government, to ensure that the proposed implementing regulations reflect international sound practices and provide an appropriate and effective regulatory framework. (iii) The expert will help the government perform a regulatory impact analysis and support efforts to solicit stakeholder inputs, covering the high priority regulations. (iv) In coordination with the government, the expert will draft the prioritized regulations. 6. The consultant will provide the following deliverables: (i) a priority list of regulations to be drafted; (ii) benchmarking studies, as required; (iii) regulatory impact analysis, as required; (iv) draft regulations, as requested; and (v) a final report on observations and recommendations.

16 12 Appendix 4 B. Output 2: Improved Market Infrastructure 1. Capital Markets Expert Advisor (international, 3 person-months, intermittent) 7. The expert should have at least 20 years of experience working in a variety of roles in the international capital markets, including as a senior policy maker. The expert should be experienced and well-versed in all the aspects of capital market activities, including products (e.g., money market, bonds, stocks, and derivatives), trading activities and strategies, financial market infrastructure, regulatory oversight, and current trends regarding capital market development. In addition, the expert is expected to have a general knowledge of international practices, standards, and norms in the contractual savings and banking sectors. Previous international experience in a role overseeing a capital market development agenda is a plus. The expert will provide direct and indirect support to the government, as requested and necessary, to ensure reforms programmed in the Capital Market and Nonbank Financial Industry Master Plan (CMNMP) are effectively implemented. The expert will: (i) provide high-level advice to senior policy makers to support the continuing implementation of the CMNMP and any successor plans. (ii) produce direct technical inputs for specific reform initiatives, acting as project coordinator if necessary, as requested by the government. (iii) identify appropriate modifications to the content and/or sequencing of the CMNMP and provide support to integrating the banking sector into the current master plan. (iv) (v) develop international benchmarking exercises, as requested by the government. conduct training and workshops in related matters, as requested by the government. 8. The consultant will provide the following deliverables: (i) a knowledge product and communications plan; (ii) benchmarking studies, as required; (iii) interim monthly reports of observations and progress; and (iv) a final report of observations and recommendations. 2. Securities Market Expert Market Makers (international, 3 person-months, intermittent) 9. The expert should have at least 10 years of experience as a direct participant in profitmaking capital markets activities e.g., as a broker dealer, trader, and/or market maker. In addition, the expert should have a sound knowledge and understanding of market regulations, market standards, and the structure and role of self-regulatory organizations. The consultant should also have at least 5 years of international experience as a market participant, regulator, or capital markets consultant. The expert will support the government s efforts to develop market makers as a prelude to the introduction of derivatives. The expert will: (i) complete an assessment of the current legal, regulatory, tax, and physical infrastructure (e.g., clearing and settlement systems) to identify whether the necessary preconditions exist to introduce market makers. The expert will: (ii) provide recommendations to address development constraints, if any, identified in the expert s assessment (i). (iii) draft regulations necessary to implement a system of market makers, as well as standards of market conduct. (iv) recommend a structure for a self-regulatory organization governing market makers, including recommendations on its membership, monitoring, and disciplinary measures.

17 Appendix The expert will provide the following deliverables: (i) a report of preliminary assessment of infrastructure, (ii) a report on preliminary recommendations and necessary regulatory changes, (iii) a report on the recommended self-regulatory structure, (iv) a final report of observations and recommendations. 3. Financial Sector Expert Tax (international, 3 person-months, intermittent) 11. The expert should have at least 15 years of relevant experience. The expert should have a thorough understanding of general taxation of the financial sector in developed markets and of taxation of common financial products (e.g., repurchase agreements, securities lending, insurance, and margin trading) in those markets. This experience can be from either a legal or accounting perspective. In addition, the consultant should have at least 5 years of international experience in advising on taxation in developing markets. The consultant should have a civil law background or, alternatively, significant experience consulting in a civil law environment. Some of this experience should have been gained within Asia as a market participant, regulator, or capital markets consultant. The expert will do the following: (i) review Indonesia s existing tax structure and code and identify key aspects that affect the financial sector and individual financial products, covering both capital markets, banking and insurance. (ii) benchmark key aspects of financial sector taxation in Indonesia against taxation in developed markets (e.g., Australia; Hong Kong, China; Singapore; and the United States) and regional peers (e.g., Thailand and Malaysia) and identify elements in the tax code that have a significant adverse effect on financial transactions and financial sector development. (iii) prepare and deliver a presentation to stakeholders that will outline key taxation issues to be prioritized and addressed and a preliminary assessment of revenue to be lost through the proposed rationalization of the tax code (assuming data are available). (iv) provide possible solutions to key taxation issues. 12. The expert will provide the following deliverables: (i) a report on the preliminary identification of key development constraints, (ii) benchmarking studies, (iii) a stakeholder presentation, and (iv) a final report of observations and recommendations. 4. Securities Market Expert Market Standards (international, 1 person-month, continuous) 13. The expert should have at least 10 years of experience as a direct participant in profitmaking capital markets activities. The expert should also have sound knowledge and understanding of market regulations, market standards, and the structure and role of selfregulatory organizations. The expert should have at least 5 years of international experience as a market participant, regulator, or capital markets consultant. The expert will support the government s efforts to develop market standards for the fixed-income market by undertaking the following tasks: (i) undertake a comprehensive review of stakeholders and participants and identify the common business conventions (informal market standards) used to support secondary market transactions in Indonesia s bond market. For example, this will include such general standards as business hours and holidays, infrastructurerelated standards such as dealing systems and deal confirmations, pre-execution standards such as authorization and documentation, and execution standards.

18 14 Appendix 4 (ii) (iii) prepare an as is assessment of current trading practices in the markets for government and corporate bonds, including a breakdown by market segment (e.g., primary dealer to primary dealer, nonprimary dealer to nonprimary dealer, and primary dealer to nonprimary dealer). Complete, in conjunction with stakeholders, a first draft of a comprehensive set of market standards for secondary trading in Indonesia s bond market. The standards will cover all market segments, instruments, and trade types (spot, forward, repo, and securities borrowing and lending). 14. The expert will provide the following deliverables: (i) an assessment report on the current trading practices, (ii) a first draft of a comprehensive set of market standards for secondary trading, and (iii) a final report on observations and recommendations. C. Output 3: Increased Growth in Contractual Savings 1. Insurance Expert (national, 12 person-months, intermittent) 15. The expert should be a practicing actuary (fellow), with at least 10 years of experience both internationally and within Indonesia. The consultant should have a thorough understanding of Indonesia s insurance market, and in particular the nonlife property casualty subsector. In addition, the expert should have teaching experience and the ability to identify stakeholders and organize them in reaching a consensus on the need to strengthen risk management in the nonlife insurance sector. The consultant, in coordination with and in support of the government, will design a training program able to provide a level of actuarial knowledge sufficient to support risk management in small, noncomplex nonlife property casualty insurance companies. The expert will: (i) (ii) (iii) (iv) (v) (vi) engage stakeholders (e.g., regulatory, industry, and trade associations) to determine the nature of the weaknesses in capacity and the skill sets required to meet the objective of providing basic actuarial oversight to the nonlife insurance subsector; develop, in coordination with stakeholders, a preliminary course list and curriculum designed to provide the skills necessary to provide basic actuarial oversight to the nonlife insurance subsector. identify, in coordination with stakeholders, local universities, multilateral and bilateral donors, trade associations, and industry participants willing and capable of delivering specific segments of the training content. provide quality assurance in the development of the curriculum and the content of the courses and ensure that individual segments are integrated and reinforce one another. Determine, in coordination with stakeholders, a costing for the training, as well as for an administrative oversight function that will include competency testing and licensing. facilitate, as necessary, the initial launch of the actuary training program. 16. The expert will provide the following deliverables: (i) a knowledge product and communications plan, (ii) interim monthly reports of observations and progress, (iii) a preliminary course list and curriculum, (iv) a final course list and curriculum that identify providers and costs, and (v) a final report on observations and recommendations.