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Taiwan Stock Exchange Corporation Procedures for Handling Default on Settlement Obligations by Securities Firms  CH

Amended Date: 2005.11.10
1     These procedures are promulgated pursuant to Article 6 of the Regulations Governing Ad-Hoc Review and Handling of Violations of Settlement Obligations by Securities Firms.
2     When a securities firm defaults on its settlement obligations, the Taiwan Stock Exchange Corporation ("the TSE"), the defaulting securities firm ("the suspended firm") and the authorized securities firm ("the authorized firm") shall handle matters relating to suspension of the suspended firm in accordance with the following procedures:
  1. Matters to be undertaken by the TSE:
    1. The TSE shall immediately order a temporary suspension of trading by the suspended firm in accordance with Article 142, Paragraph 1 of the Operating Rules of the Taiwan Stock Exchange Corporation, and file a letter of report with the competent authority. In addition, the TSE shall send official notice by the highest priority to the suspended firm and the relevant units, and publicly announce the suspension by means of the Market Information System (MIS).
    2. The TSE shall appoint a securities firm that has entered into a mandate agreement with the suspended firm that will allow it to undertake settlement matters on behalf of the suspended firm. The authorized firm shall handle settlement matters for the two business days prior to the suspension of trading as well as subsequent matters relating to centralized securities custody for the suspended firm's clients, including delivery and deposit, withdrawal, stock transfers, and fund transfers. The TSE may appoint other securities firms to undertake matters it deems necessary, and shall note the appointments in the letter of report regarding the suspension.
    3. TSE personnel shall immediately proceed to the suspended firm to assist with matters relating to the suspension, and shall request the Taiwan Securities Central Depository Co., Ltd. ("the TSCD") and related securities financing companies to also dispatch personnel to provide assistance.
    4. The TSE shall convene a meeting between the suspended firm and the authorized firm to coordinate matters relating to the suspension.
    5. The TSE shall assist the suspended firm in transferring settlement operations for the two business days prior to the suspension to the authorized firm, and in transferring information on the depository accounts of the suspended firm's clients to the authorized firm for handling.
    6. The TSE shall assist the suspended firm in helping clients open brokerage trading accounts at the authorized firm.
    7. The TSE shall supervise the authorized firm in opening, with all due haste, a special account at the bank where the suspended firm has its settlement account for the purpose of transferring settlement funds for the clients of the suspended firm. The TSE shall also notify the relevant units that funds for brokerage trades originally to be transferred to the suspended firm shall be transferred to the aforementioned special account of the authorized firm.
    8. The TSE shall verify that, prior to suspension, the suspended firm has completed all procedures for securities in accordance with the application for default correction under Article 109 of the Operating Rules of the Taiwan Stock Exchange Corporation, and that borrowed securities have been returned.
      If the aforesaid matters have not been completed, the TSE may designate the authorized firm to do so on behalf of the suspended firm.
    9. The TSE shall verify that the settlements of securities and funds with clients on the two business days preceding the suspension have been carried out accurately and without impediment.
    10. Beginning from the day of suspension, the TSE shall work with the authorized firm to establish files on customer accounts. When necessary, it will make timely postponements in file establishment and transmission times.
    11. The TSE shall check the assets of the suspended firm, including the volume of outstanding shares held at the Centralized Securities Depository, deposit account balances, the business guarantee bond and the settlement and clearing fund, and shall forthwith initiate statutory procedures for preservation of assets.
    12. The TSE shall notify the Securities and Futures Investors Protection Center to accept and process investor applications in connection with the Securities Investors Protection Fund.
  2. Matters to be undertaken by the suspended firm:
    1. The suspended firm shall immediately post the TSE notice of suspension on the announcement board in its trading room, and shall notify its clients of the following matters:
      1. Procedures relating to settlements of securities and funds for trades completed during the two business days prior to suspension shall be transferred to the authorized firm for handling.
      2. From the date of suspension, the authorized firm shall handle matters relating to centralized securities custody for the suspended firm's clients, including delivery and deposit, withdrawal, stock transfers, and fund transfers.
      3. Beginning on the date of suspension, clients who complete account-opening procedures at the authorized firm may, from the account-opening date, place orders with the authorized firm to undertake securities trades.
    2. The suspended firm shall assist clients in transferring funds for settlement to the special bank account for settlements provided by the authorized firm.
    3. The suspended firm shall, from the date of suspension, provide the authorized firm with a terminal for use in handling trading orders and in procedures for establishing files related to centralized securities depository accounts.
    4. When, prior to suspension, the suspended firm has applied for correction for securities in accordance with Article 109 of the Operating Rules of the Taiwan Stock Exchange Corporation, correction procedures shall be completed with all due haste. Where correction has not been effected or where borrowed securities have not been returned, the suspended firm shall notify the authorized firm to undertake those matters on its behalf.
    5. For account errors which occurred on the business day preceding the suspension, the suspended firm shall report the error to the TSE. When repurchase or resale of securities to offset the error was not effected on the day the error occurred, the suspended firm shall entrust the authorized firm with handling of the error on the date suspension begins.
    6. The suspended firm shall appoint sales agents to go to the authorized firm (where they may not enter the counter area) to assist clients with securities brokerage trading and handling of settlement matters at the authorized firm.
    7. The suspended firm shall deliver client information to the authorized firm, including basic depository account information, volumes of shares in custody and changes in volumes of shares in custody, as well as clients' seal impression cards. Beginning from the date of suspension, the authorized firm shall handle deposit and withdrawal of securities and transfers of securities and funds on behalf of the suspended firm, and the suspended firm shall dispatch clearing and settlement agents to assist the authorized firm in handling such matters.
  3. Matters to be undertaken by the authorized firm:
    1. The authorized firm shall open a special account at the bank where the suspended firm has its settlement account to allow payment and receipt of settlement funds by the suspended firm's clients.
    2. During the period of suspension, matters such as the lawful deposit, withdrawal, account transfer and transfer of title of securities shall be undertaken by the authorized firm on behalf of the suspended firm in accordance with the rules of the Taiwan Securities Central Depository Co., Ltd.
    3. The authorized firm shall assist the suspended firm's clients in opening new accounts and shall be prepared to accept trading orders from those clients on the day account-opening procedures are completed.
    4. The authorized firm shall keep good custody of the information transferred to it by the suspended firm, and return such information to the suspended firm upon its resumption of business.
3     With regard to the margin trading of the suspended firm, the relevant units shall, in addition to the matters listed above, handle margin trades in accordance with the procedures listed below:
  1. Matters to be undertaken by the TSE:
    1. If the suspended firm operates its own margin trading business, the TSE shall designate another firm that operates a margin trading business as the authorized firm.
    2. When convening the meeting between the suspended firm and the authorized firm for coordination of matters entrusted to the authorized firm, information regarding margin trades shall be transferred to the authorized firm for the purposes of coordination, and the TSE shall additionally retain a copy of said information.
    3. When the suspended firm operates its own margin trading business:
      For margin trade and short sale orders with transaction dates up to and including the third business day before the date of suspension, where settlement was completed but the investor has not yet received funds or shares from the margin sales or short purchases, the TSE will refer the matter to the Securities and Futures Investors Protection Center for processing of claims against the Securities Investors Protection Fund; or where the investor has applied for but not received settlement in cash or spot securities, the TSE shall request the investor to seek compensation from the suspended firm.
    4. When the suspended firm and the authorized firm are agents for the same securities finance company:
      The TSE shall assist clients of the suspended firm in transferring margin accounts to the authorized firm by means of amending the designation of their brokerage securities firm.
    5. When the suspended firm and the authorized firm act as agents for different securities finance enterprises:
      The TSE shall advise the authorized firm and securities finance company represented by the suspended firm to sign an agency contract, so that margin transactions may be conducted by means of amending the designation of brokerage securities firm to the authorized firm.
      An investor may also open a margin trading account at the securities finance enterprise for which the authorized firm is an agent. With regard to the balance in the margin account at the securities finance enterprise for which the suspended firm acted as agent, the authorized firm may only engage in margin sales, short purchases, cash settlement and settlement in spot securities.
    6. When the suspended firm is a margin trading agent for a securities finance enterprise and the authorized firm operates its own margin trading business:
      The TSE shall assist the suspended firm in advising investors with already-opened margin accounts that they may open new margin trading accounts at the authorized firm; however, with regard to outstanding balances in margin trading at the securities finance enterprise for which the suspended firm was agent, the authorized firm may only engage in margin sales and short purchases or settlement in cash or spot securities.
  2. Matters to be undertaken by the suspended firm:
    1. The suspended firm shall, with all due speed, compile and verify the accuracy of data on margin trades transacted up to the date of suspension. The data shall be transferred to the authorized firm and a copy sent to the TSE.
    2. When the suspended firm operates its own margin trading business:
      The suspended firm shall deliver to the authorized firm a list of investors making margin purchases or short sales on the two days prior to the suspension, along with the daily business report, contracts, seal impression cards, and other relevant materials, to allow the authorized firm to provide margin loan or stock loan services. Thereafter, the authorized firm may also handle margin sales and short purchases or settlement in cash or spot securities connected with the given trades of those investors.
    3. When the suspended firm and the authorized firm are agents for the same securities finance company:
      The margin trading accounts of clients of the suspended firm may be transferred to the authorized firm by means of an amendment indicating the brokerage securities firm. Investors may carry out settlement transactions at the authorized firm for trades made during the two business days prior to the suspension, and may continue trading after opening an account for brokerage trading.
    4. When the suspended firm and the authorized firm are agents for different securities finance enterprises, or the authorized firm operates its own margin trading business:
      1. Where the authorized firm has an agency contract with the securities finance enterprise for which the suspended firm acted as agent, the method of handling shall be the same as in the preceding paragraph.
      2. Where the authorized firm has not executed an agency contract with the securities finance enterprise for which the suspended firm acted as agent, or the authorized firm operates its own margin trading business:
        1. The suspended firm shall assist its clients, based on their preference, in transferring their account to another securities firm that does have an agency contract with the securities financing enterprise. Prior to the transfer of accounts, and after the opening of new accounts at the authorized firm, only margin sales and short purchases, or settlement in cash or spot securities, may be transacted at the authorized firm with respect to outstanding balances on margin trades transacted prior to the suspension.
        2. The suspended firm shall assist those of its investors who open new margin trading accounts at the authorized firm.
  3. Matters to be undertaken by the authorized firm:
    1. When the suspended firm operates its own margin trading business, the authorized firm (which shall be one that operates its own margin trading business) shall handle related matters as follows:
      1. The authorized firm shall keep good custody of all information relating to investors' margin trading transferred to it by the suspended firm, and shall assist clients of the suspended firm who transacted margin purchases or short sales on the two business days preceding the suspension with the procedures for opening new brokerage trading accounts.
      2. The authorized firm shall carry out margin and stock loans on behalf of clients of the suspended firm who transacted margin purchases or short sales on the two business days preceding the suspension. The authorized firm shall also perform the subsequent margin sales and short purchases or settlement in cash or spot securities in connection with the given trades by those investors.
    2. When the suspended firm and the authorized firm are agents for the same securities finance company:
      The authorized firm shall process the transfer of the margin trading accounts of the suspended firm's clients, and shall assist those clients with the procedures for opening new brokerage trading accounts. The authorized firm may immediately accept margin trading orders from those clients on the date account-opening procedures are completed.
    3. When the suspended firm and the authorized firm are agents for different securities finance enterprises, or the authorized firm operates its own securities margin trading business:
      1. The authorized firm shall handle, with all due haste, the opening of margin trading accounts for the clients of the suspended firm.
      2. Where a margin trading account of a client at the suspended firm is not transferred to another securities firm acting as agent for the same securities finance enterprise, and following the opening of a new brokerage trading account by said client, the authorized firm may only accept the outstanding balance of the suspended firm at the securities finance enterprise on the day of suspension as a margin sale, short purchase, or settlement in cash or spot securities.
    4. Handling of settlement in cash and spot securities:
      1. When the suspended securities firm operates its own margin trading business, the authorized securities firm, with respect to applications by clients for settlement in cash or spot securities, shall open a segregated bank account to process collection/payment of funds, and assist clients with the withdrawal or delivery of the securities.
      2. When the suspended firm is an agent for a securities finance enterprise in margin trading, the authorized firm shall, following its handling of clients' settlement in cash and spot securities, transfer the prices of securities to the bank accounts of clients subsequent to transfer by the securities finance enterprise of securities into the custody accounts of those investors or of the prices of securities into the bank account of the authorized firm.
4     With regard to securities borrowing and lending by the suspended firm for trading purposes and exercise, the relevant units shall follow the procedures listed below:
  1. Matters to be undertaken by the TSE:
    1. Announce termination of the Master Contract for Securities Borrowing and Lending signed between the TSE and the suspended firm.
    2. Designate a securities firm that has already signed a Master Contract for Securities Borrowing and Lending with the TSE to handle follow-up operations for the suspended firm after it has suspended handling of securities borrowing and lending transactions, such follow-up operations to include redelivery of securities, compensation for equity interests, and withdrawal and substitution of collateral.
    3. If the suspended firm connects to the TSE via the internet, cancel its securities lending transaction log-in account number and password; if it connects via link with the host computer, dismantle its computer link system.
    4. If on the given day the suspended firm is unable to pay to the TSE relevant funds that its clients engaging in securities borrowing and lending for trading purposes and exercise have already paid, or to remit to clients securities lending income or cash equity-interest compensation that it already holds, the TSE shall wait until after the related payable and receivable amounts of the clients have been sorted out and itemized and then, if the TSE has margin refundable to a client on that day, the TSE shall deduct the related fees from the margin and then refund the balance to the client. The authorized firm will be responsible for remitting lending income and cash equity-interest compensation funds to the clients once the amounts have been sorted out.
    5. Assist the suspended firm to transfer to the authorized firm relevant information for clients who have opened securities borrowing and lending transaction accounts.
    6. Assist clients of the suspended firm to open securities borrowing and lending transaction accounts from the authorized firm.
  2. Matters to be undertaken by the suspended firm:
    1. From the date of suspension of business, suspend handling of securities borrowing and lending transaction business, including account opening, securities borrowing, compensation for equity interests, and securities redelivery operations.
    2. Transfer to the authorized firm relevant information for clients who have opened securities borrowing and lending transaction accounts up to the last day of operation.
    3. Assign associated persons to the authorized firm during the suspension period to assist clients to carry out follow-up operations at the authorized firm relating to securities borrowing and lending transactions and so forth.
  3. Matters to be undertaken by the authorized firm:
    1. From the date of suspension of business by the suspended firm, handle on a mandate basis the follow-up operations for clients of the suspended firm, including operations relating to securities redelivery, compensation for equity interests, and withdrawal and substitution of collateral.
    2. Assist clients of the suspended firm to sign letters of entrustment for securities borrowing and lending transactions and to open securities borrowing and lending accounts.
    3. If, after deducting relevant expenses, there is any remaining balance in the amount of any fees receivable by the suspended firm before the date of suspension of business, the balance shall be returned to the suspended firm.
5     If the suspended firm is an issuer of warrants, the relevant units shall follow the procedures listed below:
  1. Matters to be undertaken by the TSE:
    1. In its announcement of the suspension, the TSE shall include a statement that the authorized firm will handle, on behalf of the suspended firm, operations relating to exercise of call (put) warrants issued by the suspended firm.
    2. The TSE will guide the suspended firm to transfer information relating to unexpired call (put) warrants to the authorized firm for handling by it.
  2. Matters to be undertaken by the suspended firm:
    1. From the date of suspension, suspend operations relating to handling investor requests for exercise of warrants.
    2. Provide information relating to unexpired call (put) warrants to the authorized firm.
    3. Assist the authorized firm to carry out operations relating to investor requests for exercise of warrants.
  3. Matters to be undertaken by the authorized firm:
    1. During the period of suspended operations by the suspended firm, the authorized firm shall handle on its behalf operations relating to exercise of call (put) warrants issued by the suspended firm.
    2. If the suspended firm lacks the ability to perform exercise, the authorized firm shall notify the TSE and the TSCD, and shall immediately suspend handling of investor requests for exercise of warrants, except in assisting those investors who have already made requests for exercise in the handling of follow-up matters.
    3. The authorized firm shall keep good custody of relevant information transferred by the suspended firm, and return it to the suspended firm when that firm resumes or terminates operations.
6     These Procedures and any amendments hereto shall take force upon approval by the competent authority.