The alleged mis-selling case of target redemption forwards (TRF) has broadened following the addition of Taishin International Bank, E Sun Bank and Ta Chong Bank to the list of banks involved in the improper selling of foreign currency structured derivative products to institutions and professional investors, according to local media reports.
A spokesperson from the Financial Supervisory Commission (FSC) declined to confirm if the three banks mentioned in media reports were being targeted by the regulator for their involvement on improper sales of TRFs, and told SRP that Bank Sinopac is the only bank to be penalised so far.
“The investigation throughout the industry will continue and the examination bureau will soon deliver a report on the current status of TRF sales in Taiwan,” said the spokesperson. “At this moment we have no idea how the media found out the names [of the banks] which we have no knowledge of ourselves.”
The FSC spokesperson also pointed that it is not right to compare TRFs with Ponzi schemes as reported by the local media. “[This] is not a new product and has been trading in Taiwan as well as other markets such as Singapore and Hong Kong for many years,” he said. “Investors used to profit from renminbi-linked TRFs due to the appreciation of the currency. The sharp depreciation of the offshore renminbi exchange rate [this year] has led to losses and numerous complaints sent to us.”
The FSC spokwesperson also said that investors in TRFs need to be aware of the risks linked to the fluctuation of the underlying currencies, and that it is the responsibility of the provider to introduce products suitable to the investor risk profile.
Suitability
Jerry Tsai, product manager at Fubon Bank, told SRP that the most common TRFs are linked to CNY/USD and that the minimum threshold starts at $1m with a participation of 200%. This means that if the underlying currency appreciates, investors will gain a profit equal to the growth of the currency multiplied by the initial capital; however once the underlying currency depreciates, investors will lose double the downside of the currency price multiplied by the initial capital.
“Such architecture seems risky enough, but quite a lot of investors were still willing to buy TRFs as no one thought the renminbi would fall and the payoff was high compared with other investments,” said Tsai. “However, as gatekeepers we need to fully inform our clients about the potential risks before they invest.”
According to Tsai, TRFs pose no problem as long as investors have the corresponding risk appetite and are aware of potential losses.
“Not all institutional and professional investors are suitable to invest in TRFs,” he said. “We always try to know the needs and the risk tolerance of our clients before introducing them to any product.”
Tsai refused to reveal the sales volumes and the losses incurred by Fubon Bank-issued TRFs.
Media reports estimate that there are between $4.8bn and $8bn invested in renminbi related TRFs in Taiwan and that the potential loss incurred by investors amounts to around $30m.
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