* New offshore yuan centers face bulk of risk
* Demand for structured products may wane on FX losses
* Billions of dollars in structured product notes sold to
(Adds details, quotes)
By Emily Chan and Saikat Chatterjee
TAIPEI/HONG KONG, April 30 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
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