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Taiwan may curb lending to derivatives defaulters

According to The Corporate Treasurer, Taiwan's financial markets regulator could take measures to protect its banking sector from FX and trading risk, as well as stem defaults on derivatives, by enabling financial institutions to check whether companies have defaulted on derivatives contracts in the past.

The website reports that Taiwan's Financial Supervisory Commission (FSC) may authorise banks to see corporate derivatives trading records including target redemption forwards (TRF) contracts, before granting credit. The news was sourced from the Economic Daily News (EDN), Taiwan's Chinese-language financial newspaper.

The measure is seen as a move to protect Taiwan's private banks from the use of speculative derivatives by companies, in particularly TRF contracts, a problem that is exacerbated by the renminbi weakening against the dollar. Many companies in Taiwan borrow from banks then use the loan to trade in derivatives, putting the bank's loan at risk.

Losses on TRF trades could be as high as $2.4 billion, says Fitch Ratings.

A final decision on this proposal is due by May, according to The Corporate Treasurer.

CTMfile take: This move is only a proposal – if it goes through, banks in Taiwan will have another tool at their disposal for measuring credit risk. Meanwhile, companies operating in that jurisdiction will be on alert. Defaults on derivatives contracts could mean they don't get bank credit.

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