Taiwan to tighten regulations on CNH derivatives

Taiwan's financial regulator has proposed new regulations towards CNH-linked derivatives, including target redemption forward (TRF) and discrete knock out (DKO). 

Corporates in Greater China region typically invested in these products to bet on a stable movement/appreciation of CNH, and therefore suffered a big loss following the "one-off devaluation" of CNY in August. 

Taiwan's regulator estimated that the country's companies have a total of US$4.2bn in exposure to CNH-linked financial derivative products with unrealized losses valued at US$1.6bn. 

According to the proposed regulations, commercial banks need to prepare risk provisions, lower the leverage ratio and tighten the credit limit for derivative products.

"Under a tighter regulation environment, there could emerge a new wave of unwinding of high-risk CNH derivate products, and CNH volatility could pick up as a result", says Commerzbank.