The Financial Supervisory Commission issued the Jin-Guan-Yin-Wai-10600064741 Circular of June 20, 2017 (hereinafter, the “Circular”) to require that with respect to trading of non-structural derivative financial products by non-professional investors, a bank is required to issue hedging and non-hedging transaction limits separately.
This Circular stipulates that customer transaction limits issued or extended by a bank shall be divided into hedging limits and non-hedging limits. The so-called “hedging limit” refers to a limit used by a customer to reduce its own exposure or the exposure of its affiliated group enterprise or to accommodate relevant operating needs.
In particular, with respect to the hedging limit issued to a customer, the customer’s reasonable hedging needs should be assessed based on the financial reports or other relevant operating information provided by the customer about the customer or its affiliated group enterprise. In addition, the assessment method for issuing the limit should be specified with relevant records retained. When handling a hedged transaction with a customer, a bank should inform the customer and confirm that such transaction is conducted for hedging purposes. In addition, there should be an appropriate control system to ensure that a customer’s hedging transaction position is appropriate to the position that should be hedged and a customer’s hedging transaction position with the entire bank does not exceed its individual and group hedging needs. Further, specific supporting documents for hedging transactions should be requested from the customer. However, if a hedging transaction arranged by a bank with a customer is a plain vanilla forward exchange, foreign exchange swap, cross currency swap or interest rate swap, relevant supporting documents are not required except as otherwise required by the competent authority.
As for the issuance of a customer’s non-hedging limit, such limit should be limited to the customer’s net worth and the value of the collateral provided by the customer, and the non-hedging limit issued by the entire bank should not exceed a customer’s net worth. If a customer receives a joint and several guarantee from its affiliated group enterprise or provides other credit enhancements, a limit may be prudently issued after the assessment principles and methodology are specified for individual cases with relevant supporting documents retained. When handling non-hedging transactions with a customer, a bank is required to confirm the customer’s overall exposure. If the customer’s utilized portion of its non-hedging limit with the entire bank and the exposure utilized this time exceed the customer’s net worth, the portion of the non-hedging limit issued to the customer which may be utilized should be limited to the value of the collateral which is not reflected in the net worth and to the amount of the joint guarantee or other credit enhancements provided by its affiliated group enterprise.
In addition, when issuing or extending a customer’s transaction limit, a bank is required to confirm that the transaction limit (including hedging and non-hedging limits) issued to the customer for risky derivative financial products should not exceed 250% of the customer’s verifiable financial strength. If a bank seeks to extend a customer’s transaction limit, the transaction limit should be appropriately adjusted based on the changes to the verifiable financial strength of the client in the last six months.