Taiwan watchdog clamps down on overseas investment

Taiwan’s financial markets watchdog has revised regulations governing the investment by domestic insurance companies in certain overseas assets by introducing limits on a their total investment in US government agency issued mortgage-backed securities (MBS).

Taiwanese insurers' investments in Fannie Mae, Freddie Mac and Ginnie Mae MBS “will be limited to a maximum of 50% of the companies’ foreign investment quota, and investments in any one single agency’s paper would be limited to 25% of the total foreign investment quota”, the Financial Supervisory Commission said on October 24.

In addition, the FSC lifted a previous requirement that investments in MBS and other collateralised debt issues have a credit rating of A minus or above. The lifting of this restriction reflected the fact that not all issues by US government agencies were rated by rating agencies and the issues are now backed by the US government, the statement said. The new regulations became effective on 22 October 2008.

Taiwan's insurers held a total of NT$535.6 billion ($17.3 billion) in debt linked to Fannie Mae and Freddie Mac, Huang Tien-mu, director general of the Insurance Bureau of the FSC said in a statement issued in July. Cathay Financial, the island's biggest listed financial services company, had NT$200 billion in debt linked to the US mortgage lenders, it said in a filing to the FSC on July15. Taiwan’s banks were estimated to hold a further NT$79.4 billion, bringing the total to NT$615 billion.

But the change is unlikely to cause a rapid selloff in the securities markets: “According to the data that we have, the holdings of most of those in the insurance industry are well below these levels and for those holdings investments which do exceed the limit, they will be permitted to hold them till maturity,” the FSC said.

The government lifted the percentage of an insurer’s total assets that may be invested in overseas markets to 45% from 35% previously, effective June 2007, and the ceiling is expected to be raised to 50% in the near future. This reform was aimed at enabling these companies to obtain higher yields on their investments to meet future obligations. Yields on Taiwan-dollar denominated investment instruments and commercial paper have trended between 2.0% and 3.0% at best in recent years, about 100 to300 basis points lower that yields on similar US-dollar denominated assets.

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