Taiwan’s central bank has taken enforcement action against six banks, including Deutsche Bank, ING and ANZ, for letting commodity traders route transactions through Taiwan to speculate on local currency rates.

In a February statement, the authority says the banks had accepted a large number of forward positions denominated in new Taiwan dollars, but related to trades that did not take place in Taiwan.

Eight major Asian food producers are accused of using foreign grain trades – the Central Bank of China, Taiwan (CBC), gives the example of a supplier in Brazil exporting goods to a buyer in India – as the basis for “foreign exchange speculation in the name of merchant trading”.

Orders would be priced in Taiwan dollars but settled in US dollars, but neither the importers nor exporters were actually based on the island.

That suggests any exposure to the Taiwan dollar was artificially created for financial gain, rather than for any business need, according to a central bank presentation published in January. Since mid-2019, the island’s currency has steadily increased in value against the US dollar.

The trades themselves were halted by July last year, the authority says, but at that point new Taiwan dollar-denominated forward positions worth a total of US$11bn had already been built up.

The transactions “affected the stability of the foreign exchange market”, it says.

Deutsche Bank has had its permits revoked for two foreign exchange products, and is barred from conducting any foreign exchange derivative transactions that involve exchange rates for two years.

The bank did not respond when contacted by GTR, but issued a statement saying it is “working closely with the CBC and our clients to ensure that FX transactions involving the Taiwan dollar have a genuine underlying need”.

The Taipei branches of ING and ANZ have each been suspended from providing those two products for nine months, while Citi has been handed a two-month ban.

An ING spokesperson tells GTR that the bank is required to examine client transactions and documents to determine their FX needs before a transaction is executed.

“The level of detail applied in our review of some client transaction documents was not as robust as that required by CBC,” they say. “We have acknowledged that this was a breach of local FX regulations and have put in place stronger checks in our operating procedures and will continue to strengthen our processes.”

ANZ did not respond when contacted. The other three financial institutions have not been named by the authority.

The commodity traders have also not been named, but the central bank says details are being passed onto other authorities who may choose to take enforcement action.

Trade finance transactions located in jurisdictions not involved in the actual movement of goods have long been an industry flashpoint.

Synthetic or structured letters of credit, for example, are hailed by supporters as a way of boosting working capital and expanding credit lines in emerging markets – yet critics say question marks over the underlying trades mean such products remain beyond some banks’ risk appetite.

In terms of currency restrictions, however, the Taiwan case is relatively unique. In late 2020, following continued appreciation of the new Taiwan dollar since mid-2019, the island was placed on a US Treasury Department watchlist of countries monitored for potential currency manipulation.

The CBC says it was listed because it runs a bilateral trade surplus with the US of more than US$20bn, and that its current account surplus is in excess of 2% of GDP. The decision “has nothing [to] do with the [central] bank’s intervention in the forex market”, it says in a recent online statement.

Christopher Wong, a senior FX strategist at Maybank in Singapore, says offshore forward positions often “have lesser restrictions and are seen as attractive alternative instruments”, compared to onshore markets.

That could mean market participants can benefit from deeper liquidity, longer trading hours or reduced documentation requirements, Wong tells GTR. However they “may have spillover implications on onshore markets” and so can be a cause for concern among policymakers.