The Financial Supervisory Commission’s (FSC) Banking Bureau yesterday announced more stringent regulations on complex foreign exchange-linked derivative products, following a meeting with 13 domestic banks.
The latest regulatory adjustment is more stringent than the guidelines set in neighboring Hong Kong and Singapore, in an attempt to prevent excessive risk exposure, the commission said.
The measure take aim at regulating yuan-linked target redemption forwards (TRF), after the instrument recorded explosive sales last year reaching NT$160.8 billion (US$4.93 billion), or 24 percent of global sales and incurring significant losses amid wide swings in the strength of the Chinese currency.
Under the new guidelines, which are applicable for offshore banking units (OBU) and domestic banking units (DBU), the contract duration of complex foreign exchange-linked derivative products must not exceed one year, compared with the typical length of two years of yuan-linked TRFs, while the instrument’s maximum projected loss has to be reduced to three times of the notional principal amount from six times, the bureau said.
In addition, to retain their status as professional institutional investors, the amount of assets required for qualified corporate clients has been doubled to NT$100 million from NT$50 million.
Banks will also be required to assess the risk tolerance of their clients, based on their experience with complex derivatives and financial capacity, the bureau said.
The bureau said that further measures aimed at raising the initial margin and the amount of funds demanded by margin calls, and improving disclosure and explanation of risk exposure to clients will be discussed with the Bankers Association of the Republic of China (銀行公會).
The bureau added that it is also working on devising a standardized data submission scheme for banks to update clientele data to the Joint Credit Information Center, so that banks might better assess the risk capacity of clients based on their current portfolio of derivative investments at other financial institutions.
“We feel that measures are necessary to prevent financial crisis in the future, though their occurrence is infrequent, once is enough to wipe out many clients, such as the nation’s many small to medium-sized enterprises,” Banking Bureau Director-General Austin Chan (詹庭禎) told a media briefing.
“With many notional amounts for TRFs set at US$1 million, a potential loss of 3.6 times that figure is quite a sizable hit,” he said.
Chan said that banks have responded positively to the revised guidelines.
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