Eleven banks join TAIFEX program to clear derivatives

The new activity would facilitate trading, reduce risk and eliminate the need for expensive brokers, the futures exchange said.

Eleven domestic financial institutions have signed up as members of a new over-the-counter (OTC) derivatives clearing business that the Taiwan Futures Exchange (TAIFEX) launched on Monday last week to build resilience in the financial system and s align with international trends in supervision, says the exchange.

The 11 financial institutions are CTBC Bank (中信銀行), Yuanta Commercial Bank (元大銀行), Taipei Fubon Commercial Bank (台北富邦銀行), Bank SinoPac (永豐銀行), SinoPac Securities Co (永豐金證券), E.Sun Commercial Bank (玉山銀行), Taiwan Cooperative Bank (合庫銀行), Cathay United Bank (國泰世華銀行), Chang Hwa Commercial Bank (彰化銀行), Shin Kong Commercial Bank (新光銀行), and Bank of Taiwan (臺灣銀行), said the exchange.

Over-the-counter transactions are transactions that take place off-exchange. Usually, transactions are negotiated between financial institutions or conducted by brokers as intermediaries between buyers and sellers. Brokers typically ask potential buyers or sellers for their acceptable trading prices and terms over the phone or the Internet and seek to facilitate transactions, with buyers and sellers bearing credit and default risk themselves.

Photo courtesy of Taiwan Futures Exchange

However, OTC derivative transactions are complex and offer high financial leverage. For buyers and sellers, when one party defaults, it can trigger a domino effect and affect financial market stability, the exchange said, citing the 2008 global financial crisis as an example caused by investments in derivatives. complex by international financial institutions. and ultimately created systemic risks for global financial markets.

By establishing central clearing mechanisms for OTC derivatives, the risk of trading default can be transferred to TAIFEX, and the original creditor-debtor relationship between buyers and sellers would become the relationship between the exchange and the buyers or sellers, did he declare.

By doing so, traders no longer need to deal with various counterparties with different risks, only TAIFEX, which can simplify risk management operations and reduce costs.

Photo: Chien Jung-feng, Taipei Times

In addition, the risks of each participant’s long and short positions in multiple transactions would offset each other, leaving only one net position with TAIFEX, which can reduce total credit risk exposure, he said. added.

TAIFEX said it assesses the value of each contract daily based on the market price and its central clearing mechanism can handle profit and loss payments and implement risk management.

As a result, each participant’s risk status can be captured in real time and alerted in advance, he said.

Even if one party defaults, the exchange’s financial defense pool can absorb the shock and prevent the risk from further expanding and triggering a financial crisis, he added.

According to the regulations of the Financial Supervision Commission, only 2% risk weighting is required for financial institutions when calculating accumulated capital for counterparty credit risk after performing TAIFEX clearing.

Therefore, it can effectively reduce the capital accumulation of financial institutions while improving their fund utilization efficiency, the exchange said.

Also, in the past, domestic financial institutions usually centrally cleared through foreign settlement institutions such as the London Clearing House, and the fees were very high, he said.

The exchange’s central OTC clearing mechanism therefore enables transactions to be processed domestically, providing financial institutions with more convenience and lower operating costs, he added.

The clearing mechanism is the central nervous system of a nation’s financial market. To ensure control over the core technologies of the Taiwanese financial market, TAIFEX independently developed the clearing system by integrating 15 modules rather than purchasing one, he said.

Only by ensuring smooth clearing and settlement can Taiwan build confidence in trade and allow the market to flourish, TAIFEX said, adding that the central OTC clearing mechanism would ensure trade safety. people’s transactions and reduce the operating costs of the financial sector, as well as create a favorable business and hedging environment in the country.

Overall, the establishment of the new central OTC clearing mechanism is expected to provide more convenience to market participants, strengthen the resilience of the financial system, attract foreign capital to the local market and improve the international visibility of Taiwan, the exchange said.

TAIFEX has applied for accreditation as a qualified central counterparty in the US, EU, UK and Canada to attract foreign capital and improve the international competitiveness of the domestic market, he said. .

Besides launching the new OTC derivatives clearing business on Monday, TAIFEX also held charity activities on the same day to fulfill its corporate social responsibility. In the presence of Prime Minister Su Tseng-chang (蘇貞昌) and Financial Supervisory Commission Chairman Thomas Huang (黃天牧), TAIFEX Chairman Wu Tzu-hsin (吳自心) made donations totaling NT$3 million ( US$100,207) on behalf of the exchange to six organizations in an effort to help disadvantaged groups such as the physically and mentally handicapped, seniors with dementia, single parent families, and people with rare diseases.

TAIFEX also hopes to reduce the gap between urban and rural areas, expand its focus on arts and cultural organizations in remote areas, and encourage more businesses to jointly build a more inclusive society and achieve sustainable development.

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