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SinoPac Ban to Drive Offshore Yuan Weaker, Morgan Stanley Says

Taiwan’s ban on Bank SinoPac’s yuan derivative sales may prompt lenders to remove their structured products, driving the offshore yuan beyond a 16-month low, according to Morgan Stanley.

Taiwan’s Financial Supervisory Commission this week said it has prohibited SinoPac from selling yuan derivatives known as Target Redemption Forwards for a year as the lender didn’t fully disclose their risks while selling them. The regulator will also penalize three more banks for TRF sales, Minister Tseng Ming-chung said by phone today, without identifying the institutions. He said Bank SinoPac won’t be forced to take over clients’ positions.

Reports of further regulatory action contributed to the offshore yuan’s decline today, said Geoffrey Kendrick, a Hong Kong-based strategist at Morgan Stanley. The currency touched 6.2718 yuan per dollar, the weakest level since October 2012, and traded 0.05 percent lower at 6.2618 yuan per dollar as of 5:57 p.m. in Hong Kong today, data compiled by Bloomberg show.

Structured products used to bet on the yuan’s gains have gone awry as the onshore currency slid 3.3 percent this year in the biggest drop in Asia. There are $150 billion of TRFs outstanding, with banks in Taiwan accounting for a quarter of the market, Morgan Stanley estimated. As the offshore yuan fell to 6.27 per greenback, losses on these products have jumped to about $5 billion globally, according to the U.S. bank.

“All banks involved in the TRF market will now be looking at their positions, especially if they haven’t called in full collateral,” Kendrick said. “Can the offshore yuan overshoot significantly? I suspect the answer is yes, given the structured products story.”

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