Formosa swaptions trade under pressure from new Taiwan rules

Limit on investment by insurers is hitting issuance of Formosa bonds and related options

Dealers say a new regulatory restriction on Taiwanese insurers is depressing demand for callable Taipei-listed US dollar bonds known as Formosas, threatening a once highly lucrative options trade.

A collapse in Formosa issuance, driven by expectations of the rule change, has reduced the supply of Bermudan-style US dollar swaptions – exercisable on a given date per year and embedded in Formosas – that had kept long-end rates volatility low.

Issuers like Formosa bonds because they result in