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FSC tightens TRF standards

FSC tightens TRF standards

The Financial Supervisory Commission (FSC) announced new target redemption forward contract (TRF) sales criteria Tuesday. Non-hedge TRF sales will be limited to accredited investors. A stop-loss threshold will be set to clearly specify that maximum loss cannot exceed a certain percentage of the notional amount. Substantive hedging demand documents must be provided in the case of hedging TRF.

FSC Chairman Tseng Ming-Chung stated, of the NT$160.8 billion worth of TRFs sold domestically, 70% are for hedging. It is the non-hedging portion that needs review and enhanced management.

The FSC announced three new criteria Tuesday. One, confirm client trading objective. If a transaction is for hedging purposes, client must provide substantive hedging demand documents. Non-hedging TRFs can only be sold to accredited investors, corporate entities with assets above NT$50 million or individuals with assets over NT$30 million. In addition, clearly specify that maximum loss cannot exceed a certain percentage of the notional amount with different stop-loss thresholds set by banks according to the risk tolerance of individual clients while not exceeding the legal limit.

Two, build client derivative financial instrument limits and disbursement query mechanisms at the Joint Credit Information Center. Three, stipulate the requirement of Chinese documentation. For English documents a Chinese version must be provided.

Amendment of the FSC’s derivatives precautions requires notice. Thus, advance self-regulation by the Bankers Association of the Republic of China is not ruled out with relevant specifications expressed in the statute. Furthermore, the sales commission system must be reviewed, responsibility of imprudent sales personnel increased, and the entire sales process should be recorded.

Regarding existing clients, Tseng remarked that he has requested banks assist these clients in executing hedging strategies.

On Monday, the FSC reported on the status of the TRF case to the Finance Committee of the Legislative Yuan. Under questioning from legislators, the FSC revealed that it knows of nine banks where violations were discovered. Other than Bank SinoPac (2890), which has already been punished, the other eight include Taishin (2887), E. Sun (2884), Fubon (2881), Cathay (2882), and TC Bank (2847). Legislator Alex Fei stated that conditions were the most egregious at China Trust (2891) and Citibank which possessed the most exposure.

Tseng remarked that state-owned institutions and foreign banks were not included in this review. The amount of TRFs undertaken by state-owned institutions is small at less than one tenth of the total amount. Currently there have been no customer complaints and their status will be audited by general inspection in the future.

Updated : 2021-06-21 16:18 GMT+08:00