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Taiwan’s central bank said this past week that it will require complex, high-risk Forex derivative instruments to go through regulatory approval before allowing banks to sell such products to clients, as first reported by Reuters.
Currently, some financial products can be sold by banks to their customers without much regulatory oversight.
The tightening comes after Taiwanese banks were hurt earlier in the year by defaults on yuan derivatives.
Particularly, yuan-related derivatives called target redemption forwards (TRF), which allow investors to bet on the direction of the yuan, fell into the red when China unexpectedly allowed the yuan to depreciate.
TRFs pay the holder a monthly income so long as the yuan remains above a trigger price against the dollar. If the yuan falls, the investor has to pay out.
TRFs had been seen as a sure bet to a steady income as the value of the yuan rose steadily against the dollar. But when it weakened sharply back in January, investors and banks who sold the products were on the hook.
Under draft revisions issued on the website of Taiwan’s central bank, “new types of complex, high-risk forex derivative financial products” will need regulatory approval before they can be sold.
Another way to hedge risk in Taiwan on yuan would be on the Taiwan Futures Exchange, where renminbi futures contracts have been gaining in volume since being launched last year.
The draft revisions could take effect later this month, after a customary public comment period.