James Sweeney, head of Republic Bank's securities division, has been suspended and the management of the futures unit has been replaced. The moves followed a letter from the Japanese Financial Supervisory Agency earlier this week informing the bank that it was investigating the matter and requesting further information.
The alleged irregularities are believed to involve Princeton Global Management, an offshore fund targeting large Japanese institutional investors, which is understood to have been a client of Republic.
HSBC, Britain's largest bank, said yesterday it was waiting for further information but it was likely that the deal with Republic, which had been due to close at the end of this month, would be delayed by the investigation.
One banker said: "Either it is a small issue or alternatively it is material and might involve a renegotiation at the very least or, in the worst case scenario, it could be a deal-breaker."
Officials at HSBC said that while the bank was being informed on the progress of the investigation, the matter was an internal one for Republic. "We are working with Republic to close our merger but in the meantime we are reserving our rights," a spokesman said.
News of the problems at Republic comes just days after HSBC's attempts to acquire Seoul Bank in Korea for $900m collapsed after haggling over price.