Cablegate: Bank of America Questioned About Fx Manipulation

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RR RUEHGH
DE RUEHIN #2387 1950628
ZNR UUUUU ZZH
R 140628Z JUL 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 1102
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
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RUEHBY/AMEMBASSY CANBERRA 4241
RUEHWL/AMEMBASSY WELLINGTON 1525
RUEHHK/AMCONSUL HONG KONG 6618
RUEHGH/AMCONSUL SHANGHAI 0232
RUEHGZ/AMCONSUL GUANGZHOU 9413

UNCLAS TAIPEI 002387

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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

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