The Financial Supervisory Commission (FSC) yesterday tightened its requirements for the sales of financial derivatives, but allowed banks room for self-discipline, in measured a bid to curb irresponsible promotion of risky investment products without hurting product innovation.
The move came after local banks sold NT$160.8 billion (US$5.32 billion) in yuan-linked target redemption forwards (TRF), accounting for 24 percent of global sales and incurring significant losses on the part of customers after the Chinese currency lost 3.3 percent of its value last month, giving up all of its gains from last year.
“Banks should introduce a stop-loss mechanism, allowing customers to exit the investment contract if they want to,” Austin Chan (詹庭禎), the commission’s Banking Bureau director-general, told a media briefing.
Currently, investors have to fulfill payment obligations until the contracts expire.
The commission is to punish more banks later this month after concluding a probe of TRF operations, Chan said.
The commission has banned Bank SinoPac (永豐銀行), the flagship unit of SinoPac Financial Holdings Co (永豐金控), from selling TRF products for a year.
Some banks have based their bonus policy on TRF sales, encouraging employees to sell the product beyond the risk capability of their customers, Chan said.
“While TRF sales may be used to grade employee performance, they should not be the sole factor,” he said.
There are 3,797 TRF accounts, with 708 at offshore banking units and the rest at domestic banking units, the commission’s data showed.
Only 70 percent of TRFs are intended to hedge against losses related to foreign-exchange transactions by exporters and importers, while the remaining 30 percent are speculative transactions, the commission said.
Hedge-linked TRF positions may benefit from a weak yuan, but that is not the case with speculative transactions.
The commission will not set restrictions on who can buy TRFs or place a quota on individual banks regarding TRF sales, Chan said, as doing so would hamper free-market development and product innovation.
Rather, the regulator requires sales of risky financial derivatives to be approved by a bank’s board of directors prior to their launch, Chan said.
In addition, banks should give a monthly presentation to the commission on their hedge and non-hedge TRF accounts, as well as their portfolios, Chan said.
The Bankers Association of the Republic of China is to come up with self-disciplinary measures regarding sales of risky investment tools after consulting its members, the commission said.
Meanwhile, the commission yesterday allowed insurance funds to invest in funeral facilities and social housing projects in yet another bid to channel private money to public construction projects.
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