Settlement, Clearance and Custody (Level 3, Unit 3)

Correct: Under OJK regulations and the operational framework of PT Kustodian Sentral Efek Indonesia (KSEI), segregation is achieved by maintaining separate sub-accounts for each client. This ensures that client assets are legally and physically distinct from the custodian’s own proprietary assets, providing a clear audit trail and protecting the assets from the custodian’s creditors in the event of insolvency.

Incorrect: The strategy of combining client assets with the firm’s own holdings in a single account is a fundamental violation of segregation principles and increases the risk of asset loss. Opting to use client securities for the bank’s own liquidity needs, even temporarily, constitutes a breach of fiduciary duty and regulatory standards regarding the use of client assets. Relying solely on internal ledger entries without external sub-account registration at the central depository fails to provide the independent verification and legal protection required for robust safekeeping.

Takeaway: Safekeeping requires the strict legal and physical segregation of client assets from a firm’s proprietary holdings to ensure investor protection and transparency.

Correct: Central matching utilities like DTCC CTM or OSTTRA are designed to automate the pre-settlement process. They allow both the buy-side (investment manager) and the sell-side (broker) to submit trade details to a central platform. The system then automatically matches these details and generates an affirmation. This process is critical for achieving straight-through processing (STP), as it ensures that both parties agree on the trade terms before settlement instructions are sent to the custodian, thereby reducing the risk of settlement failure.

Incorrect: The strategy of viewing a matching utility as a central counterparty is incorrect because these platforms are data-matching services and do not provide financial guarantees or step into the trade as a principal. Focusing on the safekeeping of assets misidentifies the provider’s role, as custody and dematerialization are functions performed by Central Securities Depositories (CSDs) or custodians rather than matching utilities. Opting to rely on these platforms for regulatory compliance is also a mistake, as firms remain responsible for their own transaction reporting obligations to the Otoritas Jasa Keuangan (OJK) regardless of the matching tools they use.

Takeaway: Central matching utilities streamline pre-settlement by providing a standardized platform for automated trade affirmation between counterparties to ensure data accuracy.

Correct: The first ten Giovannini Barriers are grouped under technical or system requirements, which specifically include the lack of standardized communication protocols and the diversity of IT interfaces between national settlement systems.

Incorrect: Relying on legal and regulatory barriers is incorrect as these specifically address issues like conflict of laws or restrictions on where securities are held. The strategy of focusing on fiscal and taxation barriers is misplaced because those barriers concern withholding tax procedures and transaction taxes. Choosing to classify these as credit and liquidity risk barriers is inaccurate as these are financial risks rather than structural or technical obstacles to settlement harmonization.

Takeaway: The Giovannini Barriers identify technical and system inconsistencies as the primary group of obstacles to harmonized cross-border securities settlement.

Correct: Failure to reconcile corporate action entitlements prevents the custodian from accurately identifying which clients are eligible for elective events. This leads to missed deadlines for rights issues or dividend choices, causing direct financial loss to clients. Under OJK regulations, custodians have a fiduciary duty to maintain accurate records and safeguard client assets; failing to reconcile these entitlements constitutes a significant operational and regulatory risk.

Incorrect: The strategy of assuming an automatic buy-in by the IDX is incorrect because buy-ins are triggered by settlement failures on trade dates, not by internal reconciliation delays related to corporate actions. Focusing on the immediate transfer of assets to the SIPF is a misunderstanding of the law, as the SIPF provides protection in cases of intermediary insolvency rather than acting as a repository for unreconciled records. Opting to view this as a BI-RTGS systemic failure misidentifies the regulatory oversight, as Bank Indonesia focuses on macro-prudential payment systems while OJK specifically supervises the conduct and operational integrity of securities custodians.

Takeaway: Timely reconciliation of corporate actions is critical to prevent client financial loss and ensure compliance with OJK’s asset protection standards.

Correct: In the Indonesian capital market, the C-BEST system operated by KSEI requires specific standardized data points to match instructions. These include the trade date, settlement date, International Securities Identification Number (ISIN), quantity, net consideration, and the counterparty’s identity code to ensure both sides of the transaction are synchronized.

Correct: CHIPS is characterized by its liquidity-saving algorithm, which performs multilateral netting of payment instructions. This allows Indonesian banks and other global participants to settle high-value USD transactions efficiently by offsetting debits and credits. This mechanism significantly reduces the amount of intraday liquidity needed compared to traditional gross settlement systems.

Incorrect: The strategy of treating it as a pure real-time gross settlement system is incorrect because that describes systems like BI-RTGS, which do not utilize the same netting efficiencies. Simply classifying the system as a state-owned infrastructure for physical delivery is inaccurate, as it is a private-sector electronic payment system for cash. Describing the requirement for collateral equal to the maximum historical gross outflow is a misunderstanding of the liquidity pool requirements. Opting for a model that ignores netting fails to recognize the core operational advantage of the platform.

Takeaway: CHIPS utilizes multilateral netting to optimize liquidity, distinguishing its operational model from traditional real-time gross settlement systems.

Correct: According to POJK No. 11/POJK.04/2017, any party that reaches or exceeds 5% of the paid-up capital in a public company must report their ownership to OJK. This report must be submitted within 10 calendar days of the transaction and must include details such as the number of shares, the purchase price, and the purpose of the investment.

Incorrect: Suggesting that reporting is only required at a 10% threshold ignores the fundamental 5% trigger established by OJK to ensure market transparency. Relying on immediate exchange notifications while bypassing formal OJK filings fails to meet the specific statutory requirements for substantial shareholder disclosure. The strategy of delaying disclosure until the end of a fiscal quarter or annual report violates the mandatory 10-day reporting window for material ownership changes.

Takeaway: Shareholders reaching a 5% stake in an Indonesian public company must report to OJK within 10 calendar days of the transaction date.

Correct: SWIFT is the globally recognized standard for financial messaging, providing a secure, standardized, and automated environment. By using ISO standards, Indonesian institutions can achieve high Straight-Through Processing (STP) rates, which reduces manual intervention and mitigates operational risks as encouraged by OJK regulations regarding operational resilience.

Incorrect: Relying on manual data entry into proprietary interfaces is prone to human error and lacks the scalability required for institutional operations. The strategy of using SFTP for scanned physical forms still involves significant manual processing and fails to leverage the benefits of structured data. Opting for Telex-based communication is an obsolete practice that does not provide the necessary security or integration capabilities for modern securities settlement.

Takeaway: SWIFT messaging is the essential standard for automated, secure, and risk-mitigated communication between Indonesian participants and International Central Securities Depositories (ICSDs).

Correct: Under OJK regulations and KPEI rules, settlement discipline is enforced through a mandatory buy-in process. This ensures that the buying counterparty receives their securities despite a seller’s failure. The failing member must cover all price differences and fees, which serves as a financial deterrent against settlement failures and maintains market liquidity.

Correct: In a bare trust arrangement, the nominee company holds the legal title to the securities, but the beneficial owner retains all economic and decision-making rights. The ‘bare’ nature of the trust means the trustee has no active duties or discretionary powers other than to hold the assets and deal with them as specifically directed by the beneficial owner. Therefore, the nominee must execute the client’s instructions regardless of its own internal research or opinions.

Incorrect: The strategy of exercising independent fiduciary discretion is incorrect because a bare trustee is prohibited from making autonomous decisions regarding the underlying assets. Opting to require a notarized power of attorney for every instruction is an unnecessary administrative hurdle that misrepresents the existing legal relationship established by the nominee agreement. Simply choosing to abstain based on external recommendations from the IDX or OJK is inappropriate, as the nominee’s primary obligation is to facilitate the rights of the beneficial owner rather than enforce third-party opinions.

Takeaway: A nominee acting as a bare trustee holds legal title but must act exclusively according to the beneficial owner’s instructions.

Correct: Institutional investors, such as pension funds or insurance companies, are defined by their role in pooling significant capital from many individuals. This collective approach allows them to employ professional managers and access wholesale market pricing and specialized investment opportunities that are generally unavailable to retail participants.

Incorrect: The strategy of matching orders between other firms describes an inter-dealer broker, which acts as a conduit rather than an investor. Relying on personal capital for trading, even if done frequently or with high volume, characterizes an individual or retail investor rather than an institution. Choosing to focus on currency stability and national payment oversight describes the functions of a central bank like Bank Indonesia, not an investment entity.

Takeaway: Institutional investors pool collective capital to achieve professional management and economies of scale in the capital markets.

Correct: In the Indonesian bond market, following conventions aligned with ICMA standards, interest claims are compensatory in nature. They are calculated using a recognized benchmark reference rate (such as the BI Rate or JIBOR) plus a specific spread. This formula is applied to the settlement amount for the number of days the settlement was delayed, ensuring the non-defaulting party is compensated for the cost of funds or lost liquidity.

Incorrect: Relying on the bond’s coupon rate is an incorrect approach because the coupon represents the issuer’s interest obligation to the holder, not the market cost of liquidity between two trading counterparties. The strategy of using a flat percentage penalty is more characteristic of a regulatory fine or a late fee rather than a market-based interest claim designed to reflect the time value of money. Focusing on capital gains or losses from price fluctuations describes a price protection or buy-in mechanism, which is distinct from the standardized interest claim process for failed deliveries.

Takeaway: Interest claims for failed settlements are calculated using a benchmark rate plus a spread to compensate for lost liquidity.

Correct: In accordance with OJK regulations regarding custodian services, any use of client assets requires specific prior written consent from the client. Furthermore, the custodian must maintain rigorous internal controls and records that clearly identify which assets were used, for what purpose, and for what duration, ensuring that client holdings remain protected and reconcilable at all times.

Incorrect: Relying on a standard indemnity clause is insufficient because Indonesian regulations demand specific authorization for asset utilization to prevent unauthorized commingling or risk exposure. The strategy of maintaining only aggregate records is a failure of the segregation principle, which requires individual client-level tracking. Opting for monthly reporting to the exchange as a substitute for internal records ignores the primary responsibility of the custodian to maintain its own robust audit trail for every movement of client property.

Takeaway: Custodians in Indonesia must maintain specific records and obtain prior written consent before any utilization of client-owned securities.

Correct: Under OJK regulations and general risk management principles, the primary benefit of netting is the reduction of credit exposure. This benefit is only realized if the netting agreement is legally enforceable in the jurisdiction where the counterparty is located, especially during liquidation or insolvency. Without legal certainty, a firm might be forced to settle gross obligations while being unable to collect gross receivables from a defaulted party.

Incorrect: Relying on the frequency of marketing materials is an ineffective measure of risk as it pertains to sales activity rather than financial stability. Simply evaluating historical execution speed fails to account for the creditworthiness of the counterparty and the risk of non-performance on future obligations. The strategy of monitoring total trade volume without assessing credit quality or concentration limits ignores the fundamental principles of credit risk management and exposure control.

Takeaway: Counterparty risk mitigation through netting depends entirely on the legal enforceability of the agreement during a counterparty’s insolvency.

Correct: The BI-RTGS system is the primary infrastructure in Indonesia for high-value payments, operating on a real-time gross settlement basis. This means each payment instruction is processed and settled individually in real-time, provided the sending bank has sufficient liquidity. Once the funds are transferred between the participants’ accounts at Bank Indonesia, the payment is considered final, irrevocable, and unconditional.

Incorrect: The approach of accumulating transactions for a single net position describes a deferred net settlement system, which is typically used for retail payments rather than high-value RTGS. Utilizing a multilateral netting process is a characteristic of clearing houses designed to minimize liquidity needs, whereas RTGS prioritizes the elimination of settlement risk through gross processing. Opting for a deferred settlement with a mandatory verification period describes retail or check-clearing cycles, which do not provide the immediate finality required for large-scale interbank transfers.

Takeaway: BI-RTGS provides immediate and irrevocable settlement for high-value transactions by processing each payment individually in real-time.

Correct: Multilateral netting is the process where a central clearing house aggregates all trades of a participant across all counterparties to arrive at a single net credit or debit position. In the Indonesian capital market, this is handled by KPEI to reduce the total volume of cash and securities that must be transferred, thereby lowering liquidity requirements and operational risk.

Incorrect: The strategy of settling each transaction individually as they occur is known as trade-for-trade settlement, which requires significantly more liquidity. Opting for transfers that involve the movement of securities without a simultaneous movement of cash describes Free of Payment (FOP) transactions, which does not involve obligation consolidation. Focusing only on offsetting obligations between two specific parties refers to bilateral netting, which fails to provide the market-wide efficiency of a centralized clearing system.

Takeaway: Multilateral netting through a central counterparty optimizes market liquidity by consolidating all participant trades into one net obligation.

Correct: Straight-Through Processing (STP) allows for the entire trade lifecycle, from initiation to final settlement, to be conducted electronically without manual re-entry of data. This significantly reduces the risk of human error, which is a primary cause of settlement failure, thereby enhancing operational efficiency and reducing settlement risk.

Incorrect: The strategy of assuming market risk is eliminated is incorrect because market risk relates to price movements and is independent of how a trade is processed. Focusing on reporting exemptions is a misconception as OJK reporting remains a mandatory regulatory obligation regardless of the processing method used. Opting for the view that capital requirements are automatically reduced misinterprets prudential regulations, which are based on risk-weighted assets and overall stability rather than the specific level of back-office automation.

Takeaway: Straight-Through Processing minimizes operational and settlement risk by automating the end-to-end transaction lifecycle and removing manual data entry.

Correct: In the Indonesian capital market, KPEI acts as the Central Counterparty (CCP) and utilizes netting to calculate the final obligations of clearing members. This process offsets buy and sell trades in the same security, resulting in a single net delivery or receipt obligation. This significantly reduces the number of movements required in the settlement system and lowers the amount of cash and securities that must be available to fulfill trade obligations.

Incorrect: The strategy of aggregating client trades into a proprietary account is incorrect as OJK regulations require strict segregation of client and firm assets. Converting all obligations to cash-only settlements is not how standard equity clearing works, as the delivery of securities is still required in a net format. Opting to suspend sell orders until buy orders match describes a restrictive matching logic that does not reflect the continuous netting and clearing process used by KPEI.

Takeaway: Netting in pre-settlement reduces operational risk and liquidity needs by consolidating multiple trade obligations into one net position per security.

Correct: The primary purpose of an RFP is to allow the appointing firm to evaluate multiple candidates on a like-for-like basis. It provides a structured method to assess whether a custodian bank has the necessary OJK registrations, technical capabilities, and robust risk management frameworks to handle the specific needs of the investment manager’s portfolio.

Incorrect: The strategy of treating an RFP as a final binding contract is incorrect because the RFP is a solicitation document, whereas the Service Level Agreement (SLA) is a separate document negotiated after the provider is selected. Simply viewing the RFP as a public disclosure for software changes is a misunderstanding of its procurement function. Opting to use RFP responses as a replacement for due diligence is a violation of risk management principles, as firms must independently verify the information provided by potential sub-custodians or custodians.

Takeaway: An RFP is a critical procurement tool used to systematically evaluate and compare the capabilities and compliance of potential custodian banks.

Correct: Under OJK regulations, securities firms must ensure that client assets are strictly segregated from the firm’s own assets. This prevents the firm from using client funds for its own operational needs, even temporarily, and protects client interests if the firm faces financial distress.

Incorrect: Focusing on substantial shareholding reporting addresses ownership transparency rather than the operational safeguarding of assets. The strategy of maintaining physical custody is incorrect because most securities in Indonesia are dematerialized and held through KSEI. Opting for daily market valuation reports to the depository confuses reporting obligations with the core principle of asset segregation.

Takeaway: Strict segregation of client assets from firm proprietary funds is a mandatory requirement to ensure investor protection in Indonesia.

Correct: The Financial Information Exchange (FIX) protocol is an industry-standard messaging language designed to facilitate the electronic exchange of trade-related data. By using a non-proprietary format, it allows diverse systems to communicate seamlessly, which reduces manual intervention and supports straight-through processing (STP) for faster, more accurate execution and reduced operational risk.

Incorrect: Confusing the protocol with a centralized clearing house incorrectly attributes risk-guarantee and netting functions to what is essentially a messaging standard. Suggesting it is a legal framework for title transfer misidentifies a communication protocol as a depository or legal mechanism governed by the central securities depository. Characterizing it as a specialized regulatory reporting tool for money laundering overlooks its primary function as a front-office and middle-office trading communication tool used for orders and executions.

Takeaway: The FIX protocol enables efficient, real-time trading communication through a standardized, vendor-neutral messaging format.

Correct: The use of non-standardized messaging formats and diverse IT interfaces represents the primary technical barriers identified in the Giovannini report. These barriers prevent seamless data exchange between different market infrastructures, necessitating manual intervention and increasing operational risk for Indonesian firms interacting with global markets, which is a key concern for the Otoritas Jasa Keuangan (OJK) in maintaining market stability.

Correct: The pre-release facility is a technical mechanism where the depositary bank issues DRs to a broker even if the underlying shares have not yet been deposited with the custodian in the home market. To mitigate risk, the broker must provide collateral and a formal indemnity, ensuring the depositary is protected until the actual shares are delivered.

Correct: In the Indonesian capital market, Kliring Penjaminan Efek Indonesia (KPEI) acts as the Central Counterparty (CCP). When a buying member fails to provide sufficient cash, KPEI ensures the fulfillment of the transaction through its risk management mechanisms, such as the Guarantee Fund. This ensures the selling party receives their funds on time, maintaining market integrity, while the defaulting participant is subject to OJK-regulated penalties, interest claims, and the requirement to reimburse the clearing house.

Incorrect: The strategy of voiding the transaction entirely fails to recognize the legal obligation of the trade and would undermine market confidence in the IDX. Simply extending the settlement cycle to T+5 is not permitted under current OJK regulations, which mandate a T+2 rolling settlement to align with international standards. Opting to force the selling broker to provide liquidity is incorrect because the responsibility for funding lies with the buyer, and the CCP exists specifically to manage such defaults through centralized funds rather than bilateral lending.

Takeaway: Insufficient cash at settlement triggers CCP risk management protocols to ensure market integrity and protect the non-defaulting party.

Correct: PT Kustodian Sentral Efek Indonesia (KSEI) is the designated Central Securities Depository (CSD) in the Indonesian capital market. Its primary functions include the centralized safekeeping of securities, the administration of securities accounts, and the settlement of transactions through book-entry using its electronic system, known as C-BEST. This ensures the efficient movement of scripless securities between market participants.

Incorrect: The strategy of attributing the guarantee of transaction fulfillment and risk management to the depository is incorrect because these are the specific functions of PT Kliring Penjaminan Efek Indonesia (KPEI), the clearing house. Focusing only on regulatory and licensing authority describes the mandate of Otoritas Jasa Keuangan (OJK), which is the financial services regulator rather than a market infrastructure provider. Opting for the description of trading platform operations and listing requirements incorrectly identifies the role of PT Bursa Efek Indonesia (IDX), which is the stock exchange.

Takeaway: KSEI serves as Indonesia’s Central Securities Depository, managing the electronic book-entry settlement and safekeeping of scripless securities.

Correct: Third-party matching platforms facilitate the electronic matching of trade economics between the buy-side and sell-side. By affirming these details early in the post-trade cycle, firms can achieve higher rates of Straight-Through Processing (STP) and ensure that the instructions sent to the central depository are accurate, thereby reducing the likelihood of settlement fails.

Incorrect: Relying on the central counterparty for matching confuses the role of risk assumption with the administrative task of trade affirmation. Simply assuming the depository handles matching ignores the pre-settlement requirement for participants to agree on trade details before submission. Focusing on market surveillance or trading halts misidentifies regulatory oversight functions as operational settlement tasks. Opting for a service provider to maintain the legal register incorrectly attributes the core function of a central securities depository to a third-party matching utility.

Takeaway: Third-party matching providers automate trade affirmation between counterparties to ensure accuracy before instructions are submitted for settlement.

Correct: The primary benefit of DLT in securities operations is the ability to move toward real-time or T+0 settlement. This synchronization ensures that all market participants see the same data at the same time, which significantly reduces the duration of counterparty risk exposure and enhances the overall transparency of the Indonesian capital market as promoted by OJK.

Incorrect: The strategy of assuming that technology removes the need for regulatory oversight is incorrect because all financial institutions must still comply with OJK reporting and supervision requirements. Opting to bypass AML and KYC protocols would violate Indonesian Law No. 8 of 2010 and relevant POJK regulations regarding financial crime prevention. Focusing only on absolute irreversibility is a misconception, as operational frameworks must still allow for the correction of errors and the handling of fraudulent activity through governed consensus mechanisms.

Takeaway: DLT improves Indonesian securities settlement by enabling real-time data synchronization and reducing counterparty risk within a regulated framework.

Correct: The primary objective of an interest claim in securities operations is to ensure the non-failing party is not financially disadvantaged by a settlement delay. It compensates for the time value of money or the inability to utilize the securities during the fail period, effectively restoring the party to the position they would have been in had the trade settled on the contractual date.

Incorrect: Focusing only on regulatory penalties is incorrect because while Otoritas Jasa Keuangan (OJK) may impose sanctions for systemic failures, bilateral interest claims are private compensatory matters between the trading counterparties. The strategy of treating it as a price adjustment is flawed as interest claims are separate financial settlements and do not typically alter the original contract price of the security. Opting for administrative fee coverage is also incorrect because fees paid to the Indonesia Securities Central Depository (KSEI) for settlement services are distinct from interest claims, which are paid to the counterparty rather than the central depository.

Takeaway: Interest claims are compensatory payments intended to neutralize the financial impact of settlement delays on the non-failing counterparty.

Correct: Physical settlement involves the actual movement of paper-based securities. For legal title to pass from the seller to the buyer, the physical certificates must be delivered, and the issuer’s Share Registrar (Biro Administrasi Efek) must record the change in the official register of shareholders. This manual process is distinct from the electronic book-entry system used for scripless trading.

Incorrect: The strategy of using the KSEI C-BEST system refers to scripless or dematerialized settlement where ownership is transferred via electronic book-entry rather than physical documents. Suggesting that physical certificates become dematerialized simply by entering bank custody is incorrect, as dematerialization requires a formal process of cancelling the physical certificate and creating an electronic record. Choosing to believe that physical settlements are exempt from Otoritas Jasa Keuangan (OJK) oversight is a misconception, as all securities transactions within the Indonesian capital market framework remain subject to regulatory standards and reporting requirements.

Takeaway: Physical settlement requires the manual delivery of certificates and registrar updates, making it slower and riskier than electronic book-entry settlement.

Correct: Under the FCA Consumer Duty, specifically PRIN 2A.4, firms must ensure a reasonable relationship between the price paid and the benefits received. Simply matching competitor pricing is insufficient to demonstrate fair value. The firm must proactively assess if the total costs, including hidden fees, are justified by the quality of the product for the specific target market. This requires a granular analysis of the expected outcomes for different consumer segments to ensure no group is disadvantaged. This approach aligns with the cross-cutting rule to act in good faith and avoid foreseeable harm to retail customers.

Incorrect: Relying solely on competitive benchmarking fails to address whether the specific benefits of the firm’s own product justify its costs for its unique client base. Simply maintaining existing PROD 3 procedures is inadequate because the Consumer Duty introduces a higher standard of care and more prescriptive requirements for value assessments. The strategy of using cross-subsidization through tiered fees may inadvertently create unfair outcomes for certain segments, potentially violating the requirement to provide fair value to all customers. Focusing only on profitability and median peer pricing ignores the regulatory shift toward outcome-based supervision and consumer-centric value metrics.

Takeaway: The Consumer Duty requires firms to proactively demonstrate that product pricing is reasonable relative to the specific benefits provided to the target market.