Renminbi denominated target-redemption-forwards (TRFs) in Taiwan have incurred in capital losses following the devaluation of the yuan. The shock wave of capital loss led by TRFs this year must be more severe than the one in 2014, said a structured products banker in Taiwan. “Although they were all triggered by the fluctuation of the renminbi exchange rate, there has never been a significant drop as much as 200 basis point at the mid-price of the yuan, which has undoubtedly enlarge the scale of the losses.”
According to this banker, more speculative investors suffered from the devaluation of the yuan and have quit this segment, but investors with a need for currency risk heading remain invested in TRFs.
Taiwan’s Financial Supervisory Commission (FSC) has not yet revealed the damage on TRFs but rejected the figure of US$6bn predicted by the market.
The most common TRFs are linked to CNY/USD with a participation of 200% which 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. The lower barrier of the underlying is usually set between 6.25 and 6.3.
After the renminbi devaluation in August, the performance of the underlying has touched or exceed the lower barrier of the products and investors will need to keep paying margin to avoid forced liquidation.
Despite this, said the banker, CNY/USD-linked TRFs will maintain their popularity despite the recent turbulence. “We still see corporate investors with actual hedging demand in need of renminbi denominated TRFs,” he said.
compared with one year ago when the regulator received a significant amounts of complaints by investors who suffered from TRFs losses, an FSC spokesperson said that the same situation didn’t repeat this year.
“We don’t see an obvious increase in the number of complaints around TRFs at the moment, which may which may be related to existence of relevant regulations,” said the spokesperson.
Following the chaos caused by the mis-selling of TRFs last year, the FSC has required a mandatory protected tracker feature , while TRF contracts must be translated into Chinese as well as setting up quota for limited investors to subscribe to the products.
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