Sat, Jul 15, 2006 - Page 12 News List

Central bank probes unidentified foreign bank's odd `deal'


The central bank may suspend some or all foreign exchange trading by a foreign bank's Taiwan unit after the bank allegedly tried to influence foreign exchange rates through an unusual transaction on Thursday.

The volume of foreign exchange trading in the Taipei inter-bank market rose suddenly and sharply at 11am on Thursday, causing the exchange rate between the New Taiwan dollar and the US dollar to appreciate from 32.547 to 32.451, the central bank said in a statement on its Web site.

The NT dollar yesterday traded NT$0.111 lower to close at NT$32.687 on the Taipei foreign exchange market, on a turnover of US$1.05 billion after a sharp decline in the local stock market that sparked concerns of foreign fund outflows.

The bank said that it received reports from several anxious domestic and foreign banks that one of the foreign banks had dumped a substantial amount of foreign exchange in the market in an apparent attempt to influence the exchange rate.

The central bank did not identify the bank in the statement. But Chinese-language reports alleged it was the Bank of America that made the unusual transaction.

Bank of America refused to comment on the reports.

The central bank met with the general manager of the Taipei office of the bank on Thursday afternoon to discuss the incident, and would take appropriate action when the facts were established, the statement said.

It was alleged that Bank of America dumped a large quantity of the US dollar and caused a steep appreciation in the NT dollar just before 11am, when the fixing rate for the Non-Deliverable Forward (NDF) and currency options was due.

NDF has become a popular instrument for companies to hedge their exposure to foreign currencies that are not internationally traded. The profit or loss at the time of the settlement date is calculated by taking the difference between the agreed-upon exchange rate and the spot rate.

The dumping or purchasing of foreign exchange is reportedly a common practice among banks to make the exchange rate favorable to them, as the small range of manipulation causes no disruption to the market, which would return to normal trading after 11am.

But the fluctuation in this case was drastic — a nearly NT$0.1 difference.

If Bank of America traded US$100 million on the foreign exchange market on

Thursday, it would have earned NT$10 million on the same day, according to

the reports.

A Chinese-language report said that Barclays Bank worked with Bank of

America on the rate manipulation, but the bank denied the allegation.

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