(Oct 19): Indonesian officials plan to meet with MSCI Inc executives on Monday after saying they were blindsided by the index provider’s threat to reclassify the country as a stand-alone market — a much more severe step than they thought was under discussion during months of talks.

The talks will take place online on Monday afternoon, Indonesia Stock Exchange chief executive Jeffrey Hendrik told reporters at the bourse in Jakarta, confirming an earlier report by Bloomberg.

“We would like to reiterate the progress that has been made, as well as the initiatives we plan to undertake moving forward,” Hendrik said, adding that officials would ask about the “background” behind MSCI’s surprise announcement last Friday and what specific changes the index provider expects.

“We never received any clue — nor any direct warning, either from MSCI or through any other parties — that an announcement like the one we saw last Friday was coming,” he added.

Hendrik’s comments followed a Sunday briefing held locally by the exchange and other entities, including Indonesia’s Financial Services Authority (FSA), with various market stakeholders. Officials there said they would seek clarification on why MSCI put stand-alone status on the table and launched its consultation ahead of a review previously expected in November, people who attended said, asking not to be identified because the discussions were private.

The FSA said in a statement later on Sunday that said the meeting is to provide updates and gather input and perspectives as part of an “ongoing effort to further strengthen market integrity and maintain public trust”.

The FSA referred requests for further comments on Monday to its Sunday statement. Representatives of MSCI did not immediately respond to a request for comments. 

In its announcement last week warning that the country’s emerging-market status was in jeopardy, MSCI said feedback from market participants showed Indonesia hadn’t made sufficient progress in addressing concerns over the investability of its stock market, including opaque shareholding structures and suspected coordinated trading. It said significant concerns also remained about a lack of evidence of meaningful enforcement.

The index provider said a move to frontier-market status wouldn’t adequately reflect the depth of the problems and instead proposed moving Indonesia directly to stand-alone status. MSCI said it expects to proceed with the reclassification unless there is clear evidence of material improvements in market governance and functioning, with a final decision due by the end of June.

MSCI had said in June this year that if sufficient progress on market reforms was not evident by November, it may consider a range of options, including a consultation on moving Indonesia from emerging-market to frontier-market status. At the time, the New York-based firm said Indonesia’s new transparency measures were a “step in the right direction”, but added it should see consistent implementation and a sustained impact.

Officials at Sunday’s briefing in Jakarta said the escalation caught them off guard after multiple interactions with MSCI since January, according to people present at the gathering.

FSA chair Friderica Widyasari Dewi told the briefing that just days before last Friday’s announcement, on the sidelines of last week’s International Monetary Fund meetings in Bangkok, MSCI representatives had expressed appreciation for Indonesia’s reforms at a meeting with Indonesian officials and global investors. She also told Sunday’s gathering that the announcement in the early hours of Friday morning caught her completely by surprise.

At separate sideline gathering in Bangkok last Wednesday, Bank Indonesia deputy governor Thomas Djiwandono expressed confidence in a positive outcome from MSCI come November, according to another person familiar with those discussions. Djiwandono told those present the FSA had more than met the index provider’s requirements, including on demutualisation and ultimate beneficial ownership. He also said Indonesian authorities were meeting with MSCI counterparts twice weekly, the person added.

At the briefing on Sunday, officials rejected suggestions that regulatory enforcement actions unveiled last Friday afternoon, hours after the MSCI announcement, had been rushed out in response. 

In its statement, the FSA said that Hasan Fawzi, the head of capital markets supervision, relayed that the market’s integrity had been strengthened through measured law enforcement and that the fines announced last Friday afternoon were the result of ongoing investigation rather than “a merely reactive response to recent market dynamics”.

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