The banking, securities and insurance regulatory body of the Taiwanese government, officially referred to as the Financial Supervisory Commission of the Republic of China, announced today in a legislative session that it is going to penalize three local banks over what it deemed improper selling behavior of complex foreign currency derivatives. This move comes just after two days when the regulator had already announced it is punishing another bank over similar charges.
The regulator has yet to announce which the additional three banks are involved in the recent case or what the penalty levied on them will be, but the first bank punished was SinoPac Financial. SinoPac was barred from issuing new FX derivatives products for one year two days ago. The official reason behind the penalties on the four banks according to the regulator, is failing to sufficiently warn clients of the risk of appreciation associated with complex FX derivatives investments.
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In the Forex business every broker has to make sure to warn clients of the inherent risks of trading leveraged products with margin and it is therefore more than likely that the Taiwanese banks also received a risk warning as part of a lengthy trading agreement with their clients. This case shows that if the exact wording of the warning is not dictated by law or regulation in a jurisdiction a local regulator can always decide the warning is not sufficient.
With the Taiwanese financial markets opening up to China and integrating with it, more and more local investors were attracted to investing in the yuan to benefit from its rise. The underlying reason for the bank penalties are that the recent decline in the exchange rate of the Chinese currency must have led to many Taiwanese clients losing money on yuan derivatives and then complaining to the regulator that they did not know what they were getting into.