Bank of America Questioned about FX Manipulation

UNCLAS TAIPEI 002387 SIPDIS SIPDIS SENSITIVE BUT UNCLASSIFIED STATE PLEASE PASS USTR STATE FOR EAP/RSP/TC, EAP/EP USTR FOR ALTBACH USDOC FOR 3132/USFCS/OIO/EAP/WZARIT TREASURY FOR OASIA/LMOGHTADER TREASURY PLEASE PASS TO OCC/AMCMAHON E.O. 12958: N/A TAGS: EINV EFIN ECON TW SUBJECT: Bank of America Questioned about FX Manipulation ¶1. (SBU) Summary: Taiwan's Central Bank of China (CBC) is currently questioning the Bank of America (BOA) branch in Taiwan about its dumping of U.S. dollars to manipulate the NTD:USD exchange rate on the morning of July 13. CBC has decided it will penalize BOA, but has not announced the penalties. End summary. Manipulating Exchange Rates by Dumping USD -------------- ¶2. (SBU) Just before 11:00 a.m. (Taipei time) on Thursday July 13, BOA dumped 175 million US dollars in a shallow market in Taipei, instantly driving the foreign exchange (FX) rate from NT$32.547 per USD to NT$32.451 per USD. Soon afterward, BOA bought back some USD on the inter-bank market to drive the FX rate back to NT$32.55 levels. According to Deputy Director General Hsu Chung-I of the CBC Foreign Exchange Department (FED),BOA benefited from the sudden change in the exchange rate by settling its non-physical delivery forward (NDF) contracts at exactly 11:00 a.m., while the NT$32.451 per USD rate was in effect. Our BOA contact confessed to AIT/T that BOA profited from the transaction and that some other banks suffered losses. (Note. According to the practice in Taipei, settlement of NDF and other financial derivative contracts is based on the FX rate at 11:00 a.m. End note.) Disturbing FX Market -------------- ¶3. (SBU) The fluctuation in the NTD:USD exchange rate at 11:00 a.m. on July 13 surprised not only FX traders in the Taipei inter-bank market, but bank officers and bank customers in the FX retail market. Several banks in Taiwan and Hong Kong suffered losses and complained to the CBC. Some traders indicated that they were unable to trade in USD at the NT$32.451/USD level because BOA quickly drove the rate back to NT$32.54/USD level. In the retail market, some customers complained to banks that they found that the NTD:USD exchange rate changed in the few minutes while they filled out transaction forms. Penalties -------------- ¶4. (SBU) CBC Hsu criticized the BOA actions as unethical and said he suspected that BOA did not exercise proper internal controls. According to Hsu, regulatory authorities in the United States and Japan would have quickly imposed severe fines on BOA if this incident had taken place in either of those two countries. ¶5. (SBU) CBC FED Director General George Chou summoned BOA (Taipei) President Lin Ching-chong to his office on the afternoon of July 13 and questioned Lin about the incident. According to Hsu, Lin must report the CBC's questioning to U.S. regulators. Although details are not available, additional penalties could include a request for BOA to improve its internal controls, a censure, or suspension of BOA privileges to do some FX business, according to Hsu. YOUNG