Thu, Nov 05, 2015 - Page 14 News List

FSC chairman defends stringent limits on TRFs

By Ted Chen  /  Staff reporter

The Financial Supervisory Commission (FSC) prioritizes the stability of the financial markets and the interests of consumers over the domestic banking sector’s profits when it comes to the stringent limits on sales of complex foreign exchange-linked derivative products, Financial Supervisory Commission (FSC) Chairman William Tseng (曾銘宗) said yesterday.

Tseng’s comments came after the commission’s Banking Bureau on Tuesday stepped up controls on yuan-linked target redemption forwards (TRF), limiting the contract lengths of the products from two years to one year, and capping the maximum projected losses from six times to 3.6 times, after investors last year incurred massive losses amid wild fluctuations in the Chinese currency.

Although the limits imposed are much more stringent than regulations in Singapore and Hong Kong — where there are no limits on contract length and caps on projected losses — Tseng said that they are necessary.

“In Hong Kong and Singapore, only 8 percent of TRFs were purchased for non-risk hedging needs, while more than 50 percent of TRF sales in Taiwan were found to have been purchased to speculate on foreign exchange gains,” Tseng said on the sidelines of a question-and-answer session of a meeting of the legislature’s Finance Committee.

On whether the limits would hamper product mix differentiation among domestic banks, leading to stifled innovation and diminished profit growth, Tseng said that those issues are not the commission’s priority.

Runaway TRF sales — followed by immense losses from investors — compelled the commission to crack down on sales of the product last year, and regulatory efforts must continue to prevent further escalation of systemic risk that could disrupt market stability, he said.

“With the yuan anticipated to be included in the IMF’s basket of reserve currencies soon, we can only expect to see an increase in the volatility of the Chinese currency going forard,” Tseng said.

Data show offshore banking units that were heavily involved in selling TRFs last year saw their profits plunge 13.2 percent annually in the first three quarter of this year, after the commission cracked down on the products in the second half of last year.

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