JAKARTA -- Indonesia's Finance Ministry has issued tougher rules for primary bond dealers, requiring them to "maintain partnership with the government" after it terminated contracts with U.S. investment bank JPMorgan Chase over an equity downgrade.
According to documents published on the ministry's website on Wednesday, primary dealers, which buy government bonds at auction and sell them to investors, are "required to maintain partnership with the government of Indonesia based on the principles of professionalism, integrity, avoiding conflicts of interest, and paying attention to the interest of Indonesia." The regulation was signed on Dec. 30.
The regulation also said the ministry will now review its primary dealers annually based on several criteria -- including their track record of cooperation with the ministry, and the effectiveness of the system used by primary dealers. Primary dealers must also notify the ministry of "any merger, acquisition, consolidation, integration and/or restructuring activities." A primary dealer whose contract has been terminated can apply again after a year.
Indonesia sacked JPMorgan after it downgraded the country's recommendation from "overweight" to "underweight" in an equity report in November, citing the spike in volatility of the bond market following Donald Trump's U.S. presidential election victory. Finance Minister Sri Mulyani Indrawati said the downgrade was "misleading" and done "without a credible assessment" of the country's fundamentals.
The move sparked a debate on the relationship between governments, which appoint primary dealers to sell sovereign bonds, and the banks, which have research teams tasked with creating independent recommendations on countries' financial markets. JPMorgan's downgrade came at a particularly sensitive time for Indonesia, an emerging market which saw a sell-off of government bonds in the days following Trump's victory.
Deutsche Bank, Citibank, HSBC and Standard Chartered are among the foreign primary dealers in Indonesia, along with a group of local lenders and securities companies.