Taiwan to Impose Margin Payments on Derivatives as Yuan Retreats

  • New rules will affect Target Redemption Forwards, options
  • Fitch warned Taiwanese banks may face losses if yuan drops

Taiwan’s financial regulator plans to impose new margin requirements on some foreign-exchange derivatives as a retreat in the yuan heightens the risk of client defaults.

The Financial Supervisory Commission will require an initial margin requirement of 2 percent for complex, high-risk derivative products, Sherri Chuang, chief secretary at the banking bureau, said Monday. The regulator will also demand margins of 5 percent for foreign-exchange put options with tenors of over a year, she said.

"Taiwan has a relatively big exposure to yuan target redemption products and we’re monitoring the risks," Chuang said from Taipei.

Scrutiny of Target Redemption Forwards -- which bet on a currency appreciating and terminate after reaching a cumulative profit -- has tightened amid the yuan’s 5.6 percent drop over the past six months to 6.5793 a dollar. Fitch Ratings estimated in December that a 10 percent slide in China’s currency from 6.35 would saddle Taiwan’s banks with losses of NT$79 billion ($2.3 billion), assuming that TRF holders fail to honor 40 percent of their obligations. The outstanding notional amount of TRFs and discrete knock-outs, a similar derivative, was NT$110 billion at the end of last year, according to FSC data.

The banking bureau will issue notices to lenders by early February regarding the new margin requirements and the rules will then take effect within a month, Chuang said.

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