TaiwanÆs FSC plans overhaul of investment rules

FSC commissioner Lee Shyan Yuan says the regulator recognises that the industry's traditional static portfolio theories are inefficient and that change is at hand.
Speaking at the AsianInvestor Annual Taiwan Offshore Investment Forum, Lee Shyan Yuan, commissioner of TaiwanÆs Financial Supervisory Commission (FSC), says the regulator is looking for ways to give local pension funds and insurers greater access to offshore and alternative assets.

ôTraditional static portfolio theories are no longer efficient,ö Lee says, noting that, in many cases, investments in domestic equities or Treasury securities are not generating sufficient yields to match the liabilities of insurers and pension funds.

The regulator is ready to deregulate and introduce more tools to provide an updated and integrated approach to portfolio management, Lee says.

Among the FSC's priorities is to connect Taiwan with international brokerage systems, so investors can access global instruments and diversify their investments.

TaiwanÆs insurers currently control $234.11 billion in assets and about 31% of this money is invested overseas. The FSC has recently allowed insurers to invest up to 45% of their portfolios overseas.

Among the islandÆs four public funds - the Labour Pension Fund, Labour Insurance Fund, Civil Servant Pension Fund and the Taiwan Postal Fund -- only 8.47%, or $15.49 billion, is held overseas. Domestic investments dominate 91.53% of the funds' combined $182.87 billion of assets.

The regulator is also exploring ETFs, extending options, equity futures and managed futures and recognising active currency overlay strategies in investment portfolios. Fund managers are known to have used such tools in the past, disguising them under the regulatorÆs allowance for risk hedging.

Lee notes more investors are looking for sources of alpha and beta û and these can be provided for by introducing new asset classes, such as ETFs, alternative investments in private equity, hedge funds, and real estate.

Lee is also highly supportive of Taiwanese pension funds and insurers exploring leveraged buyouts and infrastructure investments.

ôWe have already signalled the go-ahead for the insurance industry to invest in overseas alternative assets at 5% of net assets,ö Lee says.

As an example he says, ôIf insurers and pension funds can manage the pay-off patterns in infrastructure funds, that would be very good û infrastructure investments can beat bond returns.ö

ôWe are willing to open up and reform,ö Lee says. ôThe key discussion here is risk. It is easier for us to deregulate than to talk about the risk control measures that must follow.ö

The regulator sees challenges ahead in equipping the industry, says Lee. He is concerned about the sophistication level of local investors in the face of the vast number of investment options on the market. Also, domestic institutions may not be sufficiently equipped for the risk management that these new tools would require.

The regulator has learned an essential lesson after the subprime fiasco. Taiwan was one of the key countries affected because of the proliferation of structured products in recent years. Before the market meltdown, many external observers commented on the willingness to adopt innovative strategies, Lee says.
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