The structured products that were recently hot items in the Taiwan market are expected to undergo a drastic chill following the passage by the Bankers Association, ROC of draconian rules governing their sale. The new rules, which were drawn up on instructions from the Financial Supervisory Commission (FSC) in response to heavy losses suffered by local investors, were approved on Apr. 24.

The new rules limit the sale of structured products to investors with NT$30 million in assets or those with investment experience in futures and options. They exclude the small investors who have been the major buyers of such products in recent years.

The Bankers Association notes that the restriction is patterned after the practice in the United States, where financial institutions target the sale of structured products mainly at institutional investors and individual investors with large assets.

However, banks can still sell, to individual investors, deposits that are linked to derivative products such as combinations of short-term deposits and options, which are excluded from the definition of structured products.

In addition, banks will have to adhere to a number of requirements when they sell structured products. These include full knowledge of the nature of their clients ("know your clients"), maintenance of sale records for structured products, and the provision to clients of physical explanatory documents for structured products.

The new rules were adopted in the wake of numerous disputes between banks and clients who have suffered heavy losses from structured products recently following the outbreak of the U.S. subprime mortgage crisis.

Many clients contend that the wealth-management specialists at domestic banks understated the risk and complexity of structured products when promoting their sale. They would, for instance, emphasize the products` protection of principal without explaining clearly the conditions attached. In many cases, even wealth-management specialists did not have a full understanding of the complex nature of the structured products they were pushing. Many small investors were surprised to receive notices telling them that the value of their investments had shrunk by, say, by 60% or even more due to the effects of the subprime crisis.

Statistics show that the outstanding value of structured products in circulation on the island at the end of February this year topped NT$1,636 billion, including NT$800 billion in structured notes. In 2007 alone, NT$280 billion worth of structured notes without principal protection were sold domestically. So far the investors have suffered losses averaging 70%, sending some NT$180 billion down the drain, according to the FSC.

(by Philip Liu)