Overview of Securities Borrowing and Lending (SBL)
Securities Borrowing and Lending (SBL) constitutes a pivotal mechanism within the capital market infrastructure, facilitating the temporary transfer of securities ownership rights - such as stocks or bonds - from a lender to a borrower for a predetermined duration. The purposes underlying such transactions are multifaceted, encompassing the fulfillment of settlement obligations, the implementation of investment or hedging strategies, and the enhancement of overall market liquidity. While the possession of securities is temporarily transferred, the ultimate ownership remains vested in the lender, thereby maintaining the integrity of long-term ownership structures.
From a legal perspective, SBL arrangements are required to satisfy the four fundamental elements of a valid contract as stipulated under Article 1320 of the Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata, or KUHPerdata): (1) mutual consent between the parties, (2) legal capacity, (3) a specific and identifiable object, and (4) a lawful cause. Furthermore, Article 1321 provides that any agreement entered into under mistake, duress, or fraud shall be rendered null and void. Within the context of Indonesia’s capital market, SBL transactions are specifically governed by the KPEI Decree No. II-10 concerning Securities Borrowing and Lending Services, which delineates the operational, procedural, and risk management frameworks applicable to such activities.
Institutions Involved in Securities Borrowing and Lending (SBL) in Indonesia
To ensure that SBL activities are conducted in a secure, transparent, and orderly manner, three key institutions play sequential and interdependent roles within Indonesia’s capital market ecosystem: the Indonesia Stock Exchange (IDX), the Indonesian Clearing and Guarantee Corporation (KPEI), and the Indonesian Central Securities Depository (KSEI).
a. Indonesia Stock Exchange (IDX)
The IDX serves as the primary venue where securities transactions occur. It provides an organized trading platform through which lenders and borrowers of securities can meet and execute their transactions. As the initial gateway for all market activities, the IDX facilitates the trading process, including those that subsequently require SBL mechanisms to fulfill securities delivery obligations.
b. Indonesian Clearing and Guarantee Corporation (KPEI)
Following trade execution at the IDX, KPEI assumes the role of clearing and guarantee institution. Within the SBL framework, KPEI ensures the accurate calculation of rights and obligations between borrowers and lenders, while also providing a settlement guarantee in cases of default or delivery failure. KPEI is also responsible for operating and supervising the official SBL system, thereby ensuring that all participants adhere to regulatory standards and that every transaction is safeguarded under a credible risk management framework.
c. Kustodian Sentral Efek Indonesia (KSEI)
The final stage of the process is managed by KSEI, which oversees the settlement of SBL transactions through the electronic transfer of securities and funds between accounts. Utilizing its Central Depository and Book Entry Settlement System (C-BEST), KSEI records, safekeeps, and settles all securities transactions electronically. This system enables precise and real-time verification of SBL-related transfers, ensuring that securities ownership, delivery, and return are properly documented and legally traceable.
Guidelines for Securities Borrowing and Lending (SBL)
To promote a secure and internationally recognized Securities Borrowing and Lending (SBL) system, Indonesia aligns its regulatory and operational practices with global standards established by the International Securities Lending Association (ISLA). ISLA is a global institution that formulates unified rules and best practices to ensure that securities lending activities worldwide are conducted in a fair, transparent, and risk-mitigated manner. Accordingly, even though SBL transactions in Indonesia are executed domestically through the Indonesia Stock Exchange (IDX), the Indonesian Clearing and Guarantee Corporation (KPEI), and the Indonesian Central Securities Depository (KSEI), they remain grounded in globally accepted principles. This alignment is crucial to maintaining the confidence of international investors and to mitigating the risk of irregular practices such as intra-group profit shifting or transfer pricing. In this sense, ISLA functions as an international reference framework that strengthens Indonesia’s capital market connectivity, safety, and conformity with global standards.
In addition to ISLA, the International Organization of Securities Commissions (IOSCO) provides overarching global guidance on cross-border market supervision to ensure transparency, stability, and integrity in securities markets. In Indonesia, the principles articulated by ISLA and IOSCO are further internalized and translated into domestic regulations by the Financial Services Authority (Otoritas Jasa Keuangan, OJK) and other capital market institutions.
Key national regulations forming the legal foundation for SBL in Indonesia include OJK Regulation (POJK) No. 22/POJK.04/2015 on the Governance Guidelines for Issuers and Public Companies, which emphasizes principles of transparency and accountability in securities transactions. Moreover, KPEI Regulation No. II-10 specifically governs the operational framework for securities borrowing and lending services, covering transaction procedures, guarantees, and collateral management. The Indonesia Stock Exchange (IDX) establishes technical provisions concerning the types of securities eligible for lending and the trading procedures involved, while the Indonesian Central Securities Depository (KSEI) administers the Central Depository and Book Entry Settlement System (C-BEST), which records, safekeeps, and settles securities transactions electronically.
Collectively, these interconnected regulations ensure that SBL activities in Indonesia are conducted in a secure, orderly, and transparent manner, while maintaining alignment with internationally recognized best practices and reinforcing the credibility of Indonesia’s capital market within the global financial ecosystem.
Illustration of the Interaction Between Securities Borrowing and Lending (SBL) and Transfer Pricing in Indonesia
As an illustration, Company A borrows shares from Company B through an SBL facility. The transaction is recorded on the Indonesia Stock Exchange (IDX), cleared and guaranteed by the Indonesian Clearing and Guarantee Corporation (KPEI), and settled by the Indonesian Central Securities Depository (KSEI). Upon maturity, the borrowed shares are returned to the original owner, while the lender receives a lending fee or yield as compensation. Through this integrated system, SBL creates mutual benefits: borrowers gain capital flexibility, lenders earn additional income, and the overall capital market becomes more liquid and efficient.
In practice, however, securities borrowing and lending transactions are not always conducted between independent investors. In some instances, such transactions occur between related parties within the same corporate group to support liquidity needs or specific financial strategies. This is where transfer pricing risks may arise—particularly when the lending fee or interest rate applied in the SBL transaction does not reflect the arm’s length principle or fair market value. For example, consider a scenario where an Indonesian entity lends securities to its overseas affiliate at an interest rate or fee significantly below the prevailing market rate. In such cases, a portion of the potential profit may effectively shift to a lower-tax jurisdiction, thereby reducing the taxable income in Indonesia.
A practical illustration can be seen in the hypothetical ABC Group, which owns two entities: PT ABC Sekuritas Indonesia and ABC Capital Ltd in Singapore. PT ABC Sekuritas holds a large securities portfolio and lends part of it to ABC Capital through KPEI’s SBL facility with a lending fee of 0.4%, whereas the prevailing market rate for similar securities lending transactions is approximately 1%. As a result, PT ABC Sekuritas earns less revenue domestically, while ABC Capital benefits from a greater financial gain abroad. Although the transaction appears legally compliant-being conducted through official capital market infrastructure-it may economically function as a profit-shifting strategy, thereby affecting Indonesia’s tax base. Therefore, every SBL transaction involving related parties must be monitored in accordance with the arm’s length principle and supported by proper transfer pricing documentation to ensure tax compliance and fairness.
Conclusion
Based on the analysis, the interrelationship between SBL and transfer pricing emerges when securities borrowing and lending occur between related entities within the same corporate group, and the agreed lending fee does not represent fair market value (arm’s length pricing). Under such circumstances, SBL may potentially be used as a mechanism for profit shifting, enabling the transfer of income from one entity to another to minimize tax burdens or manipulate financial reporting outcomes. Consequently, it is essential for market participants to ensure that every SBL transaction complies with global best practices established by ISLA and IOSCO, as well as with national regulations, including OJK Regulation (POJK) No. 22/POJK.04/2015, KPEI Regulation No. II-10, and the Directorate General of Taxes (DGT) guidelines on transfer pricing and related-party transactions. By upholding principles of prudence, transparency, and regulatory compliance, Indonesia’s SBL framework can function as a robust and legitimate instrument for enhancing market liquidity, while minimizing the risk of misuse for transfer pricing or tax avoidance purposes.
By: Martua Eliakim Tambunan, Managing Director
Evana Pasaribu, Senior
