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Taiwan Stock Exchange Corporation Rules Governing Early Warnings for Overall Operational Risk of Securities Firms  CH

Amended Date: 2014.08.15
Article 1     These Rules are established to early detect the operational risks of securities firms and timely issue warnings to strengthen inspection and guidance for purposes of maintaining the security of the securities exchange market.
Article 2     These Rules apply to securities firms that have started business for not less than three months.
Article 3
  1. General risk indexes:
  2. A securities firm shall be rated based on its operational information for the current period according to the following indexes.
    1. Monthly scoring indexes:
      1. Debt to net worth ratio:
      2. Total liabilities (excluding collected payment of shares underwritten) divided by net worth.
      3. Current ratio:
      4. Current assets divided by current liabilities.
      5. Ratio of real estate and equipment and non-commercial real estate to total assets:
      6. Real estate and equipment and non-commercial real estate divided by total assets.
      7. Ratio of error account occurrence:
      8. With regard to the current period, number of error accounts occurred divided by total number of orders.
      9. Ratio of losses from error accounts to trading amount:
      10. With regard to the current period, amount of losses from error accounts divided by total trading amount.
      11. Income before tax ratio:
      12. With regard to the current period, income before tax divided by operating income.
      13. Ratio of average daily turnover to net worth:
      14. With regard to the current period, average daily dollar amount of transactions undertaken divided by net worth.
      15. Operating ratio of selected stocks:
      16. With regard to the current period, dollar amount of stock trading undertaken under Articles 2 and 4 of the Taiwan Stock Exchange ("TWSE") or GreTai Securities Market ("GTSM") Directions for Announcement or Notice of Attention to Trading Information and Disposition divided by total dollar amount of trading undertaken.
      17. Business dispersion ratio:
      18. With regard to the current period, dollar amount of trading undertaken for top five stocks with the largest trading amount divided by total dollar amount of trading undertaken.
      19. Ratio of concentration of trading counterparties:
      20. With regard to the current period, dollar amount of trading undertaken of top 20 clients with the largest trading amount divided by total dollar amount of trading undertaken; provided, however, that trading with the National Financial Stabilization Fund, government funds or local life insurance companies of a certain size or above shall be excluded.
      21. Ratio of losses of operating securities assessed by profits and losses based on fair value (including underwriting and dealing) to net worth:
      22. Sum of adjustments in valuation of financial assets below divided by net worth. If the sum is credit balance (losses on valuation), the ratio is negative; and if the sum is otherwise debit balance (gains on valuation), the ratio is positive:
        1. Adjustments in valuation of operating securities-underwriting.
        2. Adjustments in valuation of operating securities-dealing.
        3. Adjustments in valuation of financial assets reclassified from being operating securities-dealing and operating securities-underwriting to being held for trading purpose - noncurrent.
      23. Ratio of the dollar amount of treasury stocks (including underwriting and dealing) to net worth: The dollar amount of treasury stocks (including operating securities-underwriting, operating securities-dealing, and financial assets held for trading purpose-noncurrent reclassified from the above two items) divided by net worth.
      24. Ratio of the dollar amount of the lending auction/negotiation and settlement borrowing caused by short selling for same day offsetting to the dollar amount of that business: The monetary volume of the lending auction/lending negotiation and settlement borrowing caused by short selling for same day offsetting divided by the total dollar amount of the short selling for same day offsetting.
    2. Weekly scoring indexes:
      1. Ratio of average daily turnover to net worth:
      2. With regard to the current period, average daily dollar amount of transactions undertaken divided by net worth.
      3. Operating ratio of selected stocks:
      4. With regard to the current period, dollar amount of stock trading undertaken under Articles 2, 4 and 6 of the TWSE or GTSM Directions for Announcement or Notice of Attention to Trading Information and Dispositions divided by total dollar amount of trading undertaken.
      5. Business dispersion ratio:
      6. With regard to the current period, dollar amount of trading undertaken for top five stocks with the largest trading amount divided by total dollar amount of trading undertaken .
      7. Ratio of concentration of trading counterparties:
      8. With regard to the current period, dollar amount of trading undertaken for top 20 clients with the largest trading amount divided by total dollar amount of trading undertaken.
      9. Amount of penalties for delayed settlement:
      10. Penalties under Article 137 of the Operating Rules of the Taiwan Stock Exchange Corporation (the "Operating Rules") for violation of the provisions of Article 104 of the Operating Rules, or penalties under Article 94-1 of the GTSM Rules Governing Securities Trading on the GTSM for violation of the provisions of Article 6 of the GTSM Directions Governing Clearing and Settlement Operations for Securities Traded on the GTSM.
  3. Special risk indexes:
  4. A securities firm engaging in bonds, underwriting or dealing business shall be rated based on the following indexes on a monthly basis:
    1. Ratio of bonds business:
    2. Balance of Repo - (Balance of Buyout/Selloff + Balance of Reverse Repo)
      ──────────────────────────────────────
      Balance of Buyout/Selloff + Balance of Reverse Repo
      
    3. Ratio of risk equivalent of money trust and securities trust under wealth management to net self-owned capital: Sum of money trust and securities trust under wealth management multiplied by 12% and then divided by net self-owned capital.
    4. Ratio of risk equivalent in OTC derivatives market to net self-owned capital: risk equivalent in OTC derivatives market divided by self-owned capital.
    5. Ratio of total dollar amount of firm underwriting that remains available to net worth: Total amount of firm underwriting that remains available divided by net worth.
    6. Ratio of balance of funds and securities loans and margin transactions by securities firm to net worth: Combined amount of monthly loans for securities, balance of securities loans, and balance of margin purchases and short sales divided by net worth of securities firm.
    7. Ratio of balance of subject small-cap stocks in funds and securities loans and margin transactions by securities firm to total balance: Combined amount of monthly loans for securities, balance of securities loans, and balance of margin purchases and short sales, excluding stocks covered by FTSE TWSE Taiwan 50 Index and FTSE TWSE Taiwan Mid-Cap 100 Index, divided by total balance.
    8. Ratio of balance of subject securities whose price is too volatile or trading volume is excessively abnormal in funds and securities loans and margin transactions by securities firm to total balance: Shares whose price is too volatile or trading volume is excessively abnormal shall refer to the monthly balance of funds and securities loans and margin transactions that meets the selection standards under Article 4, Paragraph 2 of the TWSE Specific Standards and Procedures for Halting and Reinstating Margin Purchases and Short Sales of Securities, and for Adjusting Margin Purchase Leverage Limits and Short Sale Margin Requirements; provided, however, that the selection period is changed to "three consecutive business days" or "any four of the last 10 business days" of the subject securities when their share price is too volatile or trading volume is excessively abnormal.
    9. Ratio of amount of monthly loss on valuation of issue of call (put) warrants to balance of issued call (put) warrants by end of month: Amount of monthly loss on valuation of issue of call (put) warrants divided by number of issued call (put) warrants that are outstanding at month end, where the amount of loss on valuation shall include profits and losses from issue of warrants, profits and losses for hedging, transaction taxes and operating expenses.
    10. Ratio of risk equivalent in client's funds and securities in securities firm's custody to net self-owned capital: Total amount of client's funds and securities in securities firm's custody multiplied by 15% and then divided by net self-owned capital.
Article 4
  1. The parties subject to the early warning under these Rules are categorized in the following seven groups according to the type of their business activities:
    1. Securities firms engaging in brokerage, underwriting and dealing businesses at the same time
    2. Securities firms engaging only in securities brokerage
    3. Financial institutions concurrently acting as securities brokers
    4. Securities firms engaging in brokerage mainly by accepting engagements from qualified institutional investors for trading of securities
    5. Qualified securities dealers or underwriters
    6. Financial institutions dealing in GTSM-traded bonds concurrently only
    7. Taiwanese branches of foreign securities firms
  2. Index scores of general risks are given to parties subject to early warning in each group as samples by evaluating the difference of the various index values for an individual securities firm against the average for the sample group and are calculated as follows:
    1. Either of the two calculations below for index scores may apply depending on the nature of a party:
      1. The larger the value of an index, the smaller the risk, in which case the following formula is used for calculation of the index scores of an individual securities firm:
      2. Index Value - Average
        ──────────────────
        Standard Deviation
          250
        ×─────  +75
          10
        
      3. The smaller the value of an index, the smaller the risk, in which case the following formula is used for calculation of the index scores of an individual securities firm:
      4. Average - Index Value
        ──────────────────
        Standard Deviation
          250
        ×─────  +75
          10
        
      5. The highest score is 100 and the lowest score is zero.
    2. Special requirements (rules) on index scores:
      1. Where the net worth of a securities firm is less than its paid-in capital, its debt to net worth ratio index score is as follows:
        1. If the ratio of net worth to paid-in capital is below 100% and higher than 90%, its debt to net worth ratio index score is 50 points.
        2. If the ratio of net worth to paid-in capital is below 90% and higher than 80%, its debt to net worth ratio index score is 40 points.
        3. If the ratio of net worth to paid-in capital is below 80% and higher than 70%, its debt to net worth ratio index score is 30 points.
        4. If the ratio of net worth to paid-in capital is below 70% and higher than 60%, its debt to net worth ratio index score is 20 points.
        5. If the ratio of net worth to paid-in capital is below 60% and higher than 50%, its debt to net worth ratio index score 10 points.
        6. If the ratio of net worth to paid-in capital is below 50%, its debt to net worth ratio index score is zero.
      2. If the current ratio, debt to net worth ratio, and ratio of real estate and equipment and non-operating real estate to total assets fail to satisfy the standards established by the Financial Supervisory Commission, the score in each of the indexes is zero. If these indexes satisfy the standards but the score is below 60 points, the score shall be 60 points.
      3. If the income before tax ratio is a positive value but scores below 60 points, the score shall be 60 points.
      4. The ratio of losses of operating securities assessed by profits and losses based on fair value (including underwriting and dealing) to net worth is a positive value, provided that if the "ratio of the amount of treasury stocks (including underwriting and dealing) to net worth" scores below 60 points, the score shall be 60 points.
  3. Rating standards and early warnings for securities firms are as follows:
    1. General risk indexes:
      1. The weighted scores covering scores of all the monthly scoring indexes shall be the general scores. The fluctuation levels shall be calculated by dividing the standard deviation of the general scores of the securities firm for the preceding 12 months by the average scores. The securities firm will be assigned one of four grades based on the evaluation of both its general scores and fluctuation levels. See the attached table for the grading criteria.
      2. An early warning may be given in the event of a weekly scoring index as below:
        1. The business dispersion ratio is not less than the average plus two standard deviations, and any of the indexes from Indexes a, b or d is not less than the average plus one standard deviation, or the business dispersion ratio is not less than the average plus three standard deviations.
        2. The TWSE or GTSM has imposed a delinquency fine of NT$ 60,000 or more for late settlement.
    2. An early warning may be given in the event of a special risk index as below:
      1. Ratio of bonds business:
        1. Warning 1: The index value for the current period is 20% or above.
        2. Warning 2: The index value for the previous two periods has been 10% or above, or the average of the index value for the previous two periods is 10% or above and the index value for the most current period is higher than that for the previous period.
      2. Ratio of risk equivalent of money trust and securities trust under wealth management to net self-owned capital: The index value is 20% or above.
      3. Ratio of risk equivalent in OTC derivatives market to net self-owned capital: The index value is 10% or above.
      4. Ratio of total dollar amount of firm underwriting that remains available to net worth: The index value is 300% or above.
      5. Ratio of balance of funds and securities loans and margin transactions by securities firm to net worth: The index value is 100% or above.
      6. Ratio of balance of subject small-cap stocks in funds and securities loans and margin transactions by securities firm to total balance: The index value is 50% or above.
      7. Ratio of balance of subject securities whose price is too volatile or trading volume is excessively abnormal in funds and securities loans and margin transactions by securities firm to total balance: The index value is 20% or above.
      8. Ratio of amount of monthly loss on valuation of issue of call (put) warrants to balance of issued call (put) warrants by end of month: The index value is 20% or above.
      9. Ratio of risk equivalent in client's funds and securities in securities firm's custody to net self-owned capital: The index value is 20% or above.
  4. Exclusions
    1. The monthly scoring indexes and general scores do not apply to financial institutions concurrently acting as securities brokers.
    2. For categories of financial institutions concurrently acting as securities brokers, securities firms engaging in brokerage mainly by accepting engagements from qualified institutional investors for trading of securities, qualified securities dealers or underwriters, and Taiwanese branches of foreign securities firms, the various index values would be listed. An early warning should be given if the value of any single index is notably abnormal and shall be referred to in the selected review (audit).
Article 5     Sources of information based on which scores are given as in the preceding article include financial statements regularly submitted by securities firms and statistical data from relevant units. In case of suspension or termination of business or resumption of business for less than a month, the securities firm shall be excluded from the examination of the current period.
    When an early warning is given for the above special risk indexes, the TWSE will notify the GTSM or the Taiwan Securities Association (TWSA).
    Information about the bonds business of dealers of GTSM-traded bonds will be collected and calculated by the GTSM before being summarized and submitted by the TWSE to the Financial Supervisory Commission.
Info
Article 6
  1. TWSE
    1. In the event of an early warning given for a weekly scoring index, reviews (audits) may be made within one week.
    2. If a party receives a monthly score below Grade C or an early warning is given for an index below, the party may be selected for review (audit).
      1. Ratio of risk equivalent of money trust and securities trust under wealth management to net self-owned capital.
      2. Ratio of risk equivalent in OTC derivatives market to net self-owned capital.
      3. An early warning is given for both the ratio of balance of funds and securities loans and margin transactions by securities firm to net worth and ratio of balance of subject small-cap stocks in funds and securities loans and margin transactions by securities firm to the total balance.
      4. An early warning is given for both the ratio of balance of funds and securities loans and margin transactions by securities firm to net worth and ratio of balance of subject securities whose price is too volatile or trading volume is excessively abnormal in funds and securities loans and margin transactions by securities firm to total balance.
      5. Ratio of amount of monthly loss on valuation of issue of call (put) warrants to balance of issued call (put) warrants by end of month.
      6. Ratio of risk equivalent in client's funds and securities in securities firm's custody to net self-owned capital.
    3. If a party receives a monthly score of Grade D for two consecutive months and shows no sign of improvement, the party may be subject to review (audit) within one month.
    4. The required multiple may be reduced according to the provisions of Article 28-1, Paragraph 5 of the Operating Rules.
  2. GTSM:
    1. If an early warning is given for a weekly scoring index, a monthly score below Grade C is given, or a monthly score of Grade D is given for two consecutive months and there is no sign of improvement, the required multiple may be reduced according to the provisions of Article 35, Paragraph 9 of the Operating Rules and the party may be subject to audit.
    2. If an early warning is given for a securities firm's ratio of bonds business or ratio of money equivalent of risks in OTC derivatives market to net self-owned capital, the securities firm may be subject to audit and the quota for its trading of bonds may be reduced according to the provisions of Article 79 of the Operating Rules.
  3. Taiwan Securities Association (TWSA): An early warning is given for a securities firm's ratio of total dollar amount of firm underwriting that remains available to net worth.
    1. If an early warning is given for a securities firm, the TWSA shall request the securities firm to provide an explanation within a specified time limit and further request the firm to make improvements if necessary.
    2. If an early warning is given for an index for two consecutive months, the party shall be subject to review; where necessary, the TWSA may limit the quota for firm underwriting by the securities firm in the future according to the applicable TWSA policies and rules.
  4. Taiwan Futures Exchange: An early warning is given upon the evaluation of a securities firm engaging in futures business concurrently:
    1. The securities firm will be subject to review (audit) on a priority basis.
    2. The securities firm shall be subject to written review (audit) or placed on the list of parties subject to special inspection.
    3. Other necessary measures may be taken.
Info
Article 7     The risk indexes, weights, scores, grading system, and evaluation of early warnings under these Rules may be amended and adjusted as necessary.