Two weeks ago, the Financial Supervisory Commission announced that it was banning Bank SinoPac from selling Target Redemption Forwards (TRFs) — a structured financial derivative — for a year, citing the lender’s history of misselling products and its resulting disputes with customers.
It is the strictest punishment the commission has handed out over a financial product sold by a bank since it was established in 2004; much more severe than the nine-month ban on certain investment trust businesses that it meted out to several banks in 2008 for misselling structured notes linked to bankrupt Lehman Brothers Holdings.
A TRF is a complex set of currency-linked option products classified as a type of Treasury Marketing Unit (TMU) business, which has seen solid growth over the past two years and had increased efects on banks’ earnings in the domestic low interest rate environment.
Among the foreign currency-denominated options, yuan-based TRFs have been selling like hot cakes over the past two years, during which the Chinese currency appreciated strongly and corporate investors bought currency hedging products intending to manage fluctuations in foreign exchange rates, while earning extra income by betting on the yuan to stay strong.
The yuan’s one-way appreciation over this period has enabled banks to enjoy robust growth in their TMU businesses. Conversely, the yuan’s weakness this year has prompted a rapid slowdown in speculative demand of the currency and its continued decline has forced a number of corporate investors to either book losses or sell their holdings to meet margin calls.
TRFs have exposed the risks of derivative products denominated in yuan and that is why the commission wants to put a brake on their sale. Last week, the commission reiterated that it might soon sanction more banks over TRF disputes or ban other structured products.
The issues around TRFs are not the result of flawed product design, but of a market in which bank employees are not properly trained to sell the products and corporate executives are blinded by greed. Therefore the commission is sending the message that banks face severe punishment for selling customers complicated derivative products without full disclosure of the investment risks, the likelihood of over-leveraging and potential exit costs involved.
The regulator is also imposing the penalty on Bank SinoPac to warn all banks from selling derivative products based primarily on rewards and incentives for bank employees rather than customers’ real hedging needs.
However, with preferential interest rates reaching 3 percent or higher, yuan deposits in Taiwan have increased by about 14 billion yuan (US$2.3 billion) per month since February last year, when banks started to accept deposits and make loans in the Chinese currency. As of the end of March, there was 268.39 billion yuan saved in Taiwanese accounts.
Given the yuan’s sharp fall in recent months, the commission is hoping that current market conditions could serve as a reality check — not just for individual investors in TRFs, but for all market participants — about the credit risks these instruments carry.
The commission has not provided estimates of how many corporate investors were involved in the missold TRFs, what are the likely mark-to-market losses for holders of the derivative products, or how much it would cost banks to redress their malpractice. As the commission investigates these matters, it should also push for market discipline in the banking industry and help ease investors’ worries about potential losses.
Yet for investors, the lesson of the Bank SinoPac case is that investing is not just about making money and if they do not change their greedy mindsets, they will have only themselves to blame when things go horribly wrong.
The gutting of Voice of America (VOA) and Radio Free Asia (RFA) by US President Donald Trump’s administration poses a serious threat to the global voice of freedom, particularly for those living under authoritarian regimes such as China. The US — hailed as the model of liberal democracy — has the moral responsibility to uphold the values it champions. In undermining these institutions, the US risks diminishing its “soft power,” a pivotal pillar of its global influence. VOA Tibetan and RFA Tibetan played an enormous role in promoting the strong image of the US in and outside Tibet. On VOA Tibetan,
Sung Chien-liang (宋建樑), the leader of the Chinese Nationalist Party’s (KMT) efforts to recall Democratic Progressive Party (DPP) Legislator Lee Kun-cheng (李坤城), caused a national outrage and drew diplomatic condemnation on Tuesday after he arrived at the New Taipei City District Prosecutors’ Office dressed in a Nazi uniform. Sung performed a Nazi salute and carried a copy of Adolf Hitler’s Mein Kampf as he arrived to be questioned over allegations of signature forgery in the recall petition. The KMT’s response to the incident has shown a striking lack of contrition and decency. Rather than apologizing and distancing itself from Sung’s actions,
US President Trump weighed into the state of America’s semiconductor manufacturing when he declared, “They [Taiwan] stole it from us. They took it from us, and I don’t blame them. I give them credit.” At a prior White House event President Trump hosted TSMC chairman C.C. Wei (魏哲家), head of the world’s largest and most advanced chip manufacturer, to announce a commitment to invest US$100 billion in America. The president then shifted his previously critical rhetoric on Taiwan and put off tariffs on its chips. Now we learn that the Trump Administration is conducting a “trade investigation” on semiconductors which
By now, most of Taiwan has heard Taipei Mayor Chiang Wan-an’s (蔣萬安) threats to initiate a vote of no confidence against the Cabinet. His rationale is that the Democratic Progressive Party (DPP)-led government’s investigation into alleged signature forgery in the Chinese Nationalist Party’s (KMT) recall campaign constitutes “political persecution.” I sincerely hope he goes through with it. The opposition currently holds a majority in the Legislative Yuan, so the initiation of a no-confidence motion and its passage should be entirely within reach. If Chiang truly believes that the government is overreaching, abusing its power and targeting political opponents — then