UPDATE 1-Taiwan punishes banks for improper yuan derivative sales

Wed Apr 30, 2014 4:58am EDT

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By Emily Chan and Saikat Chatterjee

TAIPEI/HONG KONG, April 30 (Reuters) - Taiwan's financial regulator said on Wednesday it will penalise three more banks due to improper foreign currency derivative sales, after already punishing one bank for failing to disclose risks associated with such products.

The latest action by Taiwan's regulators has focused attention on the rapid growth of structured derivative products tied to the trend in the Chinese currency in the newer offshore yuan markets such as Taiwan and South Korea.

The renminbi has weakened rapidly in recent days, falling to an 18-month low on Wednesday on concerns around the economy's outlook after stabilising briefly following a landmark widening of its currency trading band in March to 2 percent on either side of a daily fixing.

"Apart from Hong Kong, most of the other centers have come to the offshore yuan structured product business near the top of the market and that is why they are facing these problems," said the head of currency trading at a European Bank in Hong Kong who declined to be named due to the sensitivity of the subject.

Taiwan's Financial Supervisory Commission (FSC) made the comments in a legislative session, though it did not disclose which banks would be punished or the nature of the punishment. Seoul inspected units of four foreign banks over a spike in yuan holdings in March.

Bankers say one of the reasons why regulators in Taiwan are nervous is that it is a new market where offshore yuan business officially kicked off in February 2013 and many of these structured product positions were built up within a relatively short period when the yuan was heading higher.

The FSC said on Monday it would bar Bank SinoPac, a unit of SinoPac Financial Holdings Co Ltd, from issuing new foreign-currency derivative products for one year.

Bank SinoPac had not properly hedged against foreign currency falls or warned clients of the potential for depreciation, the FSC said earlier.

Morgan Stanley analysts estimate if Sinopac, a Taiwanese bank and a prolific seller of these products, had to close out all its client positions, it would have to buy $6 billion in the spot market and if this were extended to all Taiwanese banks, that would translate into an estimated $32 billion in purchases.

These products called target-redemption forwards offer buyers leveraged bets to speculate on FX gains and offer regular income as long as the yuan did not weaken sharply. Deutsche Bank and Morgan Stanley estimate a total of $350 billion of the products have been sold since 2013.

The move comes as client complaints about losses mounted amid the recent sharp fall in the Chinese yuan and indicates players have turned more cautious.

More importers are running fully hedged positions and banks are demanding bigger margins from customers for doing structured currency trades these days.

"The peak to sell such kinds of structured products is over given the sharp depreciation of the yuan this year. I don't see anyone interested in it in the short term," said a trader at a bank in Taiwan who declined to be named. (Additional reporting by Michelle Chen in HONG KONG; Editing by Jacqueline Wong)

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