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Operating Rules for Securities Firms Handling Non-Restricted Purpose Loan  CH

Amended Date: 2017.11.27
   Chapter I General Provision
Article 1    These Operating Rules are adopted pursuant to the proviso of paragraph 1 of Article 45 of the Securities and Exchange Act ("the Act") and Point 5 of the Order of Financial Supervisory Commission 18 Jan 2016 Jin-Guan-Zheng-Quan-Zi No. 1040053607.
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Article 2    When conducting non-restricted purpose loan business, securities firms shall abide by the Securities and Exchange Act, these Operating Rules, and related Rules, Regulations, Announcements, Explanations of the Taiwan Stock Exchange Corporation ("TWSE"), Taipei Exchange (TPEx), Taiwan Depository & Clearing Corporation ("TDCC").
    The non-restricted purpose loan business prescribed under these Operating Rules is limited to financing with securities or other instruments as collaterals and the scope of collaterals are as follows:
  1. TWSE or TPEx listed securities, but not including ETF beneficial certificates traded in foreign currency and international bonds, shares subject to an altered trading method, or TPEx managed stocks.
  2. TPEx traded open-end funds beneficial certificates or physical gold.
  3. Beneficial certificates of securities investment trust funds or futures trust funds that are domestically offered and that invest domestically (hereinafter as beneficial certificates of open-end securities investment trust funds or beneficial certificates of futures trust funds).
  4. Other collateral approved by the competent authority.
    The TPEx traded open-end funds beneficial certificates of the above paragraph refer to beneficial certificates of securities investment trust funds registered for trading on TPEx according to Taipei Exchange Rules Governing the Review of Beneficial Certificates of Open-end Funds for Trading on the TPEx; the beneficial certificates of open-end securities investment trust funds or beneficial certificates of futures trust funds refer to trust funds prescribed under Article 23 of Regulations Governing Securities Investment Trust Funds and Article 8, 9, 10, and 10-1 of Regulations Governing Futures Trust Funds.
    The beneficial certificates of open-end securities investment trust funds or beneficial certificates of futures trust funds of the above Paragraph shall be limited to those denominated in New Taiwan Dollar.
Article 3    A securities firm that conducts non-restricted purpose loan shall adopt an effective internal control system.
    The internal control system of the preceding paragraph shall adopt "know your customer" assessment and credit investigation procedures, and operating procedures, division of powers and duties, financing limit controls, and account management, loan counterparty, financing conditions for the conduct of non-restricted purpose loans, as well as related risk management mechanisms.
    When a securities firm conducts non-restricted purpose loan, the prospective borrowers shall be decided by the securities firm according to its own internal control system and conduct credit investigation procedures according to the preceding paragraph; as for the stipulations between the parties, a securities firm shall set the applicable financing conditions in accordance with the internal control system of the Paragraph 1 and such conditions shall be stated clearly in the non-restricted purpose loan contract.
    For the stipulations between a securities firm and its client, securities firm shall make in accordance with the internal control system set forth in the preceding paragraph and stated clearly in the non-restricted purpose loan contract.
Article 4    For non-restricted purpose loan conducted by securities firms, the financing period applied by clients shall be limited within 6 months. Prior to the expiration of the financing period, the client may apply for extension, and a securities firm may grant an extension for 6 months depending on each client's credit status. Prior to the expiration of 1 year, a securities firm may grant another extension of 6 months upon reviewing such client's credit status.
    The collaterals provided by the clients of the preceding paragraph may be replaced during the financing period, the application method shall be stipulated by both parties.
    If a client makes partial repayment for the loan before the expiration of the financing period, a securities firm may return to the client the collateral it originally provided on a proportional basis, the returning method shall be stipulated by both parties. However, where it is less than one trading unit, the collateral shall not be returned. Notwithstanding, a securities firm and its client may also agree that after the repayment of the loan, a securities firm may be exempted from returning part of or all the collaterals, and the client may apply for non-restricted purpose loan again in respect of such collaterals not returned.
    For the non-restricted purpose loan prescribed under Paragraph 1, a securities firm shall notify its client in writing or through communication, electronic methods agreed by its clients 10 business days prior to the expiration of the financing period, the notification methods shall be clearly stated in the non-restricted purpose loan contract.
Article 5    To apply for conducting non-restricted purpose loan business, a securities firm shall fill out an application form and submit it together with the related documents to TWSE. After the TWSE has reviewed an application and found the applicant qualified and in compliance with the applicable provisions of these Operating Rules, it shall forward the application to the competent authority for approval.
    After a securities firm has been approved by the competent authority to conduct non-restricted purpose loan business, a securities firm shall apply for change of registration of securities business scope with the TWSE before beginning the non-restricted purpose loan business; and the personnel handling non-restricted purpose loan shall possess the qualifications prescribed under the Regulations Governing Responsible Persons and Associated Persons of Securities Firms.
    After a securities firm has been approved by the competent authority to conduct non-restricted purpose loans, if its regulatory capital adequacy ratio falls below 150% for 2 consecutive months, it shall suspend such lending business, which may be resumed only after the securities firm is in compliance with regulations for 3 consecutive months and is approved by the competent authority; the same requirement shall apply to a securities firm that has already received approval to conduct such non-restricted purpose loan but has not yet commenced it.
Article 6    The clients of non-restricted purpose loan of a securities firm are limited to the following:
  1. An R.O.C. national who has reached their 20th year of age with full capacity to make juridical acts.
  2. Domestic juristic person organized and registered under the R.O.C. law.
  3. Onshore overseas Chinese and foreign nationals.
    Before applying for non-restricted purpose loan, a client shall already open a securities trading account with the securities firm and shall open a securities depository account with TDCC (hereinafter as Centrally Deposited Account) or open a central government securities account with central government securities settlement bank to proceed with book-entry transfer of the collaterals.
    In case that the client in the first paragraph is a director, supervisor, manager of a TWSE or TPEx listed company, or a shareholder holding more than 10% of the total outstanding shares of the company (hereinafter as Insider) and the client intends to use the shares of the company he/she belongs to as financing collateral or provide these shares as additional collateral, pledge shall be created over these share for the above purpose.
    Shares held by the Insider shall include such shares held by his/her spouse, minor child/children or those held in another's name.
    In case where a client becomes an Insider after he/she has signed the non-restricted purpose loan contract, the provisions of paragraph 3 shall apply to all transactions that take place subsequently as well as the collateral he/she has provided.
    Matters relating to creation of pledge, removal of pledge, and exercise of pledge under paragraph 3 shall all be processed in accordance with the Operating Rules of the Taiwan Depository & Clearing Corporation (TDCC) and the TDCC Instructions on Participant's Pledge and Delivery of Securities for Book-Entry Transfer.
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Article 7    A securities firm that conducts non-restricted purpose loan may charge its clients interest and processing fees for the loans; the interest rate and fee rate shall be decided by each securities firm. The interest rate shall be calculated on a per annum basis and be posted at its place of business.
    When there is an adjustment to the interest rate and fee rate of the preceding paragraph, for the portion of funds already financed but not yet repaid, from the adjustment date, such portion shall be calculated, collected and paid according to the post-adjustment rates.
    The interest of paragraph 2 shall be calculated based on the number of days from the financing date of the securities firm until the day before the settlement date.
    The client shall be responsible for costs relating to creation of pledge.
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Article 8    A securities firm conducting non-restricted purpose loans may not accept as collateral the securities or other commodities listed below:
  1. Pledged securities or other commodities.
  2. A company's own shares or other equity securities acquired through a buyback of its own shares, donation, merger, transfer of operations, or other reason.
  3. Assets or beneficiary rights trusted by or entrusted to the clients according to trust related regulation.
    For the collateral provided by the clients, the client shall warrant the completeness of the right to the collateral. If there is defect or legal dispute to the collateral, a securities firm shall not grant the loan.
Article 9    Collateral that a securities firm obtains in conducting non-restricted purpose loans and for which a client has issued a collateral transfer agreement may not be transferred for any other purposes except for the purposes listed below, and shall be deposited in central custody:
  1. As collateral for securities borrowing through the securities lending system of the TWSE.
  2. As collateral for securities borrowing or refinancing through a securities finance enterprise.
   Chapter II Execution and Termination of Contract
Article 10    After receiving a client's application, a securities firm conducting non-restricted purpose loans may conduct such loan only after examining the client's credit and executing non-restricted purpose loan contract with the client.
    Securities firm's entering into non-restricted purpose loan contract with its client under the preceding paragraph shall be conducted according to the following rules:
  1. If the client is domestic natural person, he/she shall, in person, present his/her original ID card and related document proving his/her income and assets.
  2. If the client is domestic juristic person, the authorized person shall submit power of attorney, the original ID cards of the authorized person and the representative of such juristic person, the original copy of the corporate registration (or change of registration) card, and its original certification of incorporation.
  3. When onshore overseas Chinese and foreign natural person entering into non-restricted purpose loan contracts, he/she shall obtain an identity number and submit an application along with related document proving his/her income and assets to securities firm according to the following rules:
    1. Onshore overseas Chinese and foreign natural person: Passport and Overseas Compatriot Identity Certificate (or Alien Resident Certificate).
    2. Foreign Institute Investor: Recognition certificate issued by Ministry of Economic Affairs, company registration certificate, and ID (or Alien Resident Certificate or passport) of the responsible person.
  4. A client who is not an Insider under Article 6, paragraph 3 shall submit a statement.
    The copies of the identity verification documents, juristic person registration (change of registration) card, and the original copy of the Power of Attorney referred to in the preceding paragraph shall be retained by the securities firm, the copies shall be stamped with the wording "It has been reviewed and confirmed that this person or the authorized person did apply for the loan in person, and this is a true and faithful copy of the original".
    When accepting application of applicant who meets the conditions in paragraph 2 for entering into non-restricted purpose loan contract, a securities firm may handle by correspondence or electronic means that the securities firm can sufficiently identify the client as the applicant him/her/itself and confirm his/her/its expression of intent.
    The template of non-restricted purpose loan contract will be drafted by Taiwan Securities Association and submitted to the competent authority for record.
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Article 11    A securities firm shall decide the credit limit that may be extended to its client according to the credit investigation result under Article 3. If a client already has a line of credit approved by the securities firm for other credit extension business before signing the non-restricted purpose loan contract, the credit limit and the already approved line of credit shall be calculated in the aggregate and the proof of assets provided by the client shall reach at least 30% of the amount of the total aggregate credit line. After entering into the non-restricted purpose loan contract, any line of credit that the client applies for under any other credit extension business at the securities firm shall be calculated as part of the aggregate.
    The proof of assets that shall be provided for the customer's total aggregate line of credit under the preceding paragraph means proof of income and various assets provided by the client for the past one year.
    The proof of assets of the first paragraph shall consist of only the following papers and documents of the client or the client's spouse, parents, or adult children.
  1. Photocopy of certificate of ownership, transcript of the registration, or tax return for real property. The securities firm shall calculate the value of the real property after checking whether there are encumbrances on the real property.
  2. Documentary evidence of deposits at a financial institution (such as a certificate of deposit balance, bankbook, or certificate of deposit). The basis of calculation will be the average balance for the past month.
  3. Documentary evidence of securities holdings.
  4. Documentary evidence of deposit balance in a gold account issued by a financial institution (such as a gold account passbook, or a certificate of balance for gold passbook or gold account).
  5. Documentary evidence of trust assets in a money trust, a securities trust, or a real estate trust issued by a trust enterprise (such as a reconciliation statement, list of trust assets, or certificate of trust assets). Both the trustor and the beneficiary of the trust must be the client, and trust assets may only consist of real estate, deposits at financial institutions, securities, and the balance in a gold account at financial institutions.
    If the client provides proof of financial assets not owned by the client, the actual owner of the assets must be a joint and several guarantor of the client.
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Article 12    A securities firm that conducts non-restricted purpose loan business shall set up a separate account ledger for each client and record the matters listed below on a transaction-by-transaction basis:
  1. Matters regarding the loan, including financing purpose, financed amount, etc.
  2. Type of financing collateral.
  3. Collateral calls and disposal of collateral.
    A securities firm shall prepare and deliver to the client a monthly reconciliation statement based on the account ledger records of the preceding paragraph, provided that this requirement shall not apply where there is no record of any transaction in that month, and the client has not submitted a written request for such statement.
Article 13    A client shall notify the securities firm if there is a change to the name or ID number, VAT number, juristic person uniform number of the client itself, its agent, or representative, or to the mailing address, recorded on its non-restricted purpose loan contract in writing or by correspondence or electronic means that is sufficient to identify the client as the principal itself and confirm its indication of intent agreed by both parties, which shall be clearly stated in the non-restricted purpose loan contract.
Article 14    Notice of matters by a securities firm as required under these Operating Rules shall be effected by mail or personal signature confirming of the receipt by the client, or subject to the consent of the client, be effective by correspondence or electronic means and such notification methods shall be clearly stated in the non-restricted purpose loan contract.
    Where a securities firm's notice sent by mail cannot be delivered on time because the client fails to make notice under the preceding article, or due to other reason attributable to the client, such notice shall be deemed effective on the date of the post office's first delivery attempt.
    Where the client signs in person to acknowledge receipt of a securities firm's notice, the client's signature or seal shall match the signature on the original non-restricted purpose loan contract or the original seal/signature-of-record and shall be accompanied by the date.
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Article 15    To terminate a non-restricted purpose loan account, a client shall fill out an "application for termination of the non-restricted purpose loan account". After checking and confirming that all the collaterals and loans have been settled, the securities firm shall agree to carry out account cancellation procedures.
   Chapter III Borrowing and Return
Article 16    The collateral financing calculation standards for a securities firm that operate non-restricted purpose loan business shall be as follows, save in the event of fractions of one trading unit or of one unit of beneficial rights.
  1. The value of TWSE and TPEx traded securities, except for central book-entry bonds, municipal bonds, common corporate bonds and financial bonds, is 60% of the closing price of the business day immediately prior to financing. However, for securities not eligible for margin purchase and short sale, the value shall be calculated as 40% of the closing price of the business day immediately prior to financing.
  2. The value of beneficial certificates of open-end funds traded on the TPEx is 60% of the net asset value of each unit of beneficial rights of the business day immediately prior to financing. The value of physical gold is 60% of the closing average at the closing of the business day immediately prior to financing.
  3. The value of beneficial certificates of open-end securities investment trust funds or futures trust funds is 60% of the net asset value of the business day immediately prior to financing. The value of physical gold is 60% of the closing average of the business day immediately prior to financing.
  4. The value of central book-entry bonds is 80% of the face value.
  5. The value of municipal bonds, common corporate bonds and financial bonds is 60% of the face value.
    A security firm may adopt a stricter standard of the calculation standard of preceding paragraph in accordance with the market status of the collateral market and the client credit risk.
    If there is no closing price of the business day immediately prior to financing prescribed under subparagraph 1 of paragraph 1, the price shall be replaced with the price calculated according to the principles prescribed in Article 58-3, paragraph 2, subparagraph 2 of the Operating Rules of the Taiwan Stock Exchange Corporation or Article 57, paragraph 1 of the Taipei Exchange Rules Governing Securities Trading on the TPEx.
    The financing calculation standard of the collateral set forth in paragraph 1 may be adjusted by TWSE in consultation with TPEx based on the conditions of the collateral.
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Article 17    For the collateral in the form of securities or other commodities provided by a client applying non-restricted purpose loan, a securities firm or custodian institution shall transfer the client's collateral to the collateral account opened by the securities firm at the TDCC or central government securities settlement bank. Such collateral account, excluding that for securities on which pledge shall be created under Article 6, paragraph 3, may be shared with the loan collateral account of Article 16, paragraph 1 of the Operating Rules for Securities Business Money Lending by Securities Firms. If a collateral is purchased in the securities firm's name, the authorized securities firm shall keep a registration log for management purposes.
    After a securities firm completes the process set forth in the preceding paragraph, it shall transfer the financing amount to the client's designated financial institutes account. The account shall be the client's own account and the transfer fee shall be born by the client.
    The financial institutes account of the preceding paragraph shall be stated clearly in the non-restricted purpose loan contract. If there is any change to such financial institutes account, Article 13 of these Operating Rules shall apply.
    For the transfer of the financing amount set forth in paragraph 2, a securities firm may make in a lump sum or separately per client's application by calculating, once or separately, the finance limit for the collateral provided by the client according to Article 16 and the transfer method shall be stipulated by both parties.
    For the application of paragraph 1, if a client submits the loan application by a method other than in person, the client shall submit a consent letter for exemption from affixing signature or seal on the loan application. If a securities firm has verified and retained the record of the consent letter on file, the securities firm may proceed with loan application related matters accordingly without requiring the client to affix signature or seal on the loan application.
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Article 18    When a client repays the loan by cash or by selling the collateral, it shall fill out a Non-Restricted Purpose Loan Repayment Application Form.
    When repaying the loan by cash, the client shall deposit (transfer) the repayment amount into the designated financial institute account, or authorize the securities firm in the non-restricted purpose loan contract to deduct the financing amount from the financial institute account. A securities firm or custodian institute shall transfer the collateral and supplementary collateral to the client's designated account from the collateral account opened according to paragraph 1 Article 17 on the next business day. If the collateral and supplementary collateral is not owned by the client, the security firm shall transfer to the owner's depository account or central government securities account. For the collateral on which pledge is created under Article 6, paragraph 3, the securities firm may remove the pledge on the collateral before transferring it to the account designated by the client.
    When repaying the loan by selling the collateral, the client shall agree in writing that the securities firm sells the collateral in the designated account opened with the securities firm, and related handling fee and tax shall be born by the client. After the transaction is completed, the securities firm shall calculate the financing principal and interest amount payable by the client, if the selling price is higher than such amount, a security firm shall return the surplus to the client. If the selling price is not sufficient to repay the loan, a securities firm may deduct the shortfall from any returned amount from other financing transaction. If it is still not sufficient to repay the loan, within the scope of debt repayment, the securities firm may dispose the account balance in the client warranted finance account or other credit account, and any surplus shall be returned to the client. If it is still not sufficient to repay the loan, the securities firm may collect the debt according to the laws and regulations. The handling fee for transferring the surplus amount shall be born by the client. In case of creation of pledge under Article 6, paragraph 3, the securities firm shall proceed to exercise the pledge.
    A securities firm shall engage a securities firm to place a sell order on the TWSE or the TPEx for the sale prescribed in the preceding paragraph in accordance with the amount and price prescribed by the client. Nevertheless, the sale of central book-entry bonds, municipal bonds, common corporate bonds or financial bonds may be handled through price negotiation at the business place of the securities firm.
    When repaying the financing amount by selling the collateral under Paragraph 3, both parties may agree in the non-restricted purpose loan contract that the client may repay the financing amount with the proceeds from placing an order to sell the securities in the securities trading account opened with the securities firm in writing, correspondence, or electronic methods. In case of creation of pledge under Article 6, paragraph 3, the securities firm shall proceed to remove the pledge.
    If the collateral sold by the client for repayment is beneficial certificates of open-end securities investment trust funds or beneficial certificates of futures trust funds, the repayment shall be made after the securities firm's redemption.
    Where a client repaying the financing amount according to paragraph 1 has agreed with the securities firm that part of or all of the collaterals need not to be returned according to paragraph 3 of Article 4, the securities firm may follow such agreement.
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Article 19    When the competent authority approves and announces suspension of trading or termination of the TWSE listing or TPEx trading of a security that a client has posted as collateral; when the principal of central book-entry bonds, municipal bonds, common corporate bonds or financial bonds is repaid partially; when the beneficial certificates of open-end securities investment trust funds and those of futures trust funds are combined or when the deed of the trust terminates or expires, then the aforementioned suspension date, termination date, repayment date, combination date, or termination or expiration date of the deed of trust shall be deemed as the expiration date of the financing period. After being notified by the securities firm, the client shall repay the financing amount and the interest by the tenth business day before the aforementioned suspension date, termination date, repayment date, combination date, or expiration date of the deed of trust, provided that this requirement shall not apply if the client has replaced the collateral, or in cases where the issuing company of a TPEx listed security is applying to convert the security to a TWSE listed security, or where the securities of both the surviving and non-surviving listed (or TPEx) companies in a merger or the beneficial certificates of open-end securities investment trust funds and of futures trust funds being the surviving beneficial certificates of open-end securities investment trust funds and of futures trust funds after merger qualify as the collateral under Article 2, paragraph 2.
    When during the collateral period, the client replaces collateral it provided with the collateral under Article 2, paragraph 2, the securities firm may accept that collateral until the expiration date of the financing period.
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   Chapter IV Calculation of the Collateral Maintenance Ratio
Article 20    In non-restricted purpose loan business conducted by a securities firm, the client's overall-account collateral maintenance ratio shall be calculated as follows:
    Collateral maintenance ratio=(market value of the collateral+market value of the supplementary collateral) ÷ (financing amount)×100%
    In regard to the market value of collateral referred to in the preceding paragraph, the market value of TWSE and TPEx listed securities is the closing price of the current day; that of central book-entry bonds is 80 percent of their face value; that of municipal bonds, common corporate bonds and financial bonds is 60% of their face value; that of physical gold is the Closing Average of the current day, and that of TPEx traded beneficial certificates of open-end funds, open-end securities investment trust funds and futures trust funds is the net asset value of the preceding business day. If there is no current day's closing price for a given TWSE or TPEx security, the market value shall be determined by the following principles:
  1. If the current day's highest buy order price at the close of market is higher than the current day's auction reference price at market opening for a TWSE listed security, or than the current day's benchmark price at trade opening for a TPEx listed security, the market value shall be the highest buy order price.
  2. If the current day's lowest sell order price at the close of market is lower than the current day's auction reference price at market opening for a TWSE listed security, or than the current day's benchmark price at trade opening of trading for a TPEx listed security, the market value shall be the lowest sell order price.
  3. When neither of the above circumstances applies, the market value shall be the current day's auction reference price at market opening for a TWSE listed security, or the current day's benchmark price at trade opening for a TPEx listed security.
    A securities firm shall calculate a client's overall account collateral maintenance ratio each business day. If a client's overall account collateral maintenance ratio is lower than 130% due to a change in the value of the collateral or supplementary collateral, the securities firm shall notify the client to cover the collateral shortfall and bring the collateral maintenance ratio above 166% within 2 business days from receipt of the notice, and the following provisions shall be complied with, unless the parties agree otherwise:
  1. If the client fails to cover the collateral shortfall within 2 business days from the date on which the notice is served and the overall account collateral maintenance ratio is still lower than 130%, from the third business day, the securities firm shall dispose of the client's collateral under the mutatis mutandis application of Article 25, Paragraph 1.
  2. If the client fails to cover the collateral shortfall within 2 business days from the date on which the notice is served and the overall account collateral maintenance ratio has risen to 130% or higher, the securities firm may temporarily refrain from disposing of the collateral on the third business day. However, if on any subsequent business day in which its overall account collateral maintenance ratio again falls below than 130% and the client does not deposit additional collateral on its own initiative in the afternoon of that day, its collateral shall be disposed of from the next business day under the mutatis mutandis application of Article 25, paragraph 1.
  3. If the collateral maintenance ratio rises to 166% or higher even though the client has not covered, or has covered only a portion of, the collateral shortfall, or if the total collateral deposits made by the client is sufficient to cover the shortfall notified to cover in the notice before its collateral has been disposed of according to the preceding subparagraphs, the record of the collateral call shall be expunged.
    The covering of shortfall under the preceding paragraph is for the situation where the overall account collateral maintenance ratio of the financing account is below 130%.
    If, as a result of any change in share price, there is an increase in the net value of the collateral in a client's financing account less the client's obligations, the securities firm is prohibited from delivering to the client any cash or securities equivalent to the amount of the increase. However, this does not apply when the client applies to change the credit limit, and the securities firm reapproves its credit limit.
    The disposal of collateral under subparagraph 1 and 2, Paragraph 3 shall be carried out in accordance with Article 25 of these Operating Rules. If the proceed from such disposal is insufficient to make repayment, the client shall be notified to make repayment within a certain time period, with interest accruing at the financing interest rate from the date on which the claim occurred until the date of repayment.
    The supplementary collateral under these Operating Rules means the securities or other commodities provided by the client or any third party when the overall account collateral maintenance ratio is lower than the required ratio and such collateral is supplemented to make up the shortfall upon the notification made by the securities firm.
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Article 21    Except in the case of a cash capital increase, beginning from 6 business days before the ex-dividend date of the collateral and supplementary collateral provided by a client, a securities firm may calculate the collateral maintenance ratio for each day based on that day's closing price or net asset value of each security on each given day minus the value of the share rights or dividends, and the provisions of the preceding article shall apply mutatis mutandis.
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Article 22    The client may use the securities or other commodities prescribed under Article 2 to cover the finance shortfall, and the supplementary value may be calculated according to Article 16. However, the collateral to which either of the circumstances listed below applies may not be used as supplementary collateral:
  1. Securities comprising less than one trading unit.
  2. Where the securities are registered shares of the issuing company acquired by its shareholders or capital contributors as a result of that company's conduct of a capital increase from earnings, capital increase through contributions by that company's employees out of their bonuses to the industry in which they serve, or capital increase by a venture capital company out of undistributed earnings pursuant to Article 13 of the Statute for Encouragement of Investment or Articles 16 and 17 of the Act for Upgrading Industries, and such shares have not been transferred or reported for taxes.
    When calculating a client's overall account collateral maintenance ratio, a securities firm is not required to apply a haircut to the value of the supplementary collateral securities or other commodities.
    If the rate of bonus shares or stock dividend shares distributed on collateral or additional collateral securities or other commodities provided by a client is 20% or higher, except where the competent authority has imposed restrictions on trading of the securities or pledge has been created under Article 6, paragraph 3, all such new shares shall serve as collateral, and the right to defer income tax shall be waived. The TDCC shall transfer the shares by book-entry transfer into the segregated loan collateral account opened by each securities firm, and the provisions of Article 33 of the Criteria Governing Handling of Stock Affairs by Public Stock Companies shall not apply.
    Bonus shares or stock dividends referred to in the preceding paragraph may not be used as collateral for borrowing securities from the TWSE securities lending system or for obtaining refinancing from a securities finance enterprise.
    The provisions of Article 21 shall not apply to bonus shares or stock dividend shares used as collateral. After ex-rights trading has commenced, the market value of such shares shall be calculated at 60% of the closing price of the TWSE or TPEx listed securities. After the shares have been transferred to the securities firm's segregated loan collateral account, the haircut need not be applied to the calculation of their value.
    For the calculation standard set forth in paragraph 1 and preceding paragraph, a securities firm may adopt a stricter standard depending on the market status of the collateral and the client credit risk.
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   Chapter V Covering of Shortfalls for Collateral
Article 23    A client shall warrant that the change of collateral or supplementary collateral it provides are free and clear of all liens, claims, and encumbrances of any nature whatsoever. If there is any defect in rights or legal dispute regarding the securities, within 3 business days of the notice from the securities firm, the client shall replace such securities or commodities with securities or other commodities eligible for use as additional collateral or pay their equivalent value in cash. The same applies when the supplementary collateral belongs to a third party.
    Where the client is not the owner of supplementary collateral, it shall be responsible for obtaining the household registration information, verification of source, and consent letter of the owner of such collateral.
Article 24    The interest of the collaterals and supplementary collaterals belongs to the collateral owner, and the issuer or its institute agent shall directly distribute to the owner's designated book-entry account or centralized custody account. In case of creation of pledge under Article 6, paragraph 3, the securities firm and the owner of such collateral shall have a separate agreement on this matter.
    Where a client posts central book-entry bonds as collateral and supplementary collateral securities, the securities firm may collect any interest payment on behalf of the client through the central government securities settlement bank and shall, before the next business day of the interest payment date, transfer the interest to the client after deducting the tax withheld on the client's behalf, according to the agreement between the parties.
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   Chapter VI Handling of Violations
Article 25    When any of the circumstances below applies to a client, at market opening on the business day on which disposal is required, the securities firm shall, through the Money Lending Default Handling Account opened with another securities broker, dispose of the respective collateral and supplementary collateral on the TWSE centralized exchange market or through the TPEx Securities market trading system, with the exception of central book-entry bonds, municipal bonds, common corporate bonds and financial bonds, which may be subject to price negotiation and trading with the bond dealers at the place of business. If an order to dispose of the collateral is not executed, it shall continue to be quoted on the next business day, and the related processing fees and tax shall be borne by the client, unless the parties agree otherwise.
  1. Repayment has not been made at the expiration of the financing period.
  2. The loan has not been repaid pursuant to Article 19.
  3. A collateral shortfall has not been covered pursuant to Article 20.
  4. Replacement of securities or other commodities has not been made pursuant to Article 23.
    Where a securities firm disposes of collateral pursuant to the preceding paragraph and the proceed from such disposal is insufficient to offset the debt, it shall notify the client to cover the shortfall on the next business day. If the client fails to do so, the securities firm may dispose of the collateral and supplementary collateral provided by that client up to the amount required to repay the debt. If any surplus remains, it shall be returned to the client; if any shortfall remains, the client shall be notified to repay it within a prescribed time period. However, the securities firm and the client may agree as otherwise.
    Before a case of a default or violation under the preceding paragraph is closed, the customer may have the collateral and supplementary collateral it provided sold by the securities firm through the Money Lending Default Handling Account opened with another securities broker to repay the loan.
    Where the registration of an overseas Chinese or a foreign national has been cancelled by the TWSE or the TAIFEX, the securities firm, after receiving notice of such cancellation, may not accept such customer's request for new loan transactions, and shall notify such customer to close out any loan transactions, and terminate the loan contract after the closeout.
    The Money Lending Default Handling Account set forth in Paragraph 1 may be together used with the Money Lending Default Handling Account prescribed under Article 27, paragraph 1 of the Operating Rules for Securities Business Money Lending by Securities Firms.
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Article 26    If the client is in any of the following situations, the securities firm shall terminate the non-restricted purpose loan contract:
  1. Where a shortfall still exists after the securities firm has disposed of collateral pursuant to paragraph 2 of the preceding article, the securities firm shall notify the customer to make repayment within a time limit. Customer's failure to make repayment constitutes a violation, and the securities firm shall file a report with the TWSE or TPEx. The TWSE or TPEx shall promptly forward notice to all securities finance enterprises and securities firms
  2. There is other breach or violation to the other contract between the client and the securities firm.
    When any of the circumstances in paragraph 1 of the preceding Article applies to a client, in addition to taking the measures set out in that paragraph, the securities firm may collect a default penalty equal to 10% of the stipulated financing interest rate from the day repayment is overdue until the date of repayment.
    If a client's non-restricted purpose loan contract is terminated by the securities firm due to a violation specified in paragraph 1, the securities firm may not enter into any new financing contract with that client until the obligation has been settled in full.
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   Chapter VII Title Transfer for Collateral and Supplementary Collateral Used for Financing
Article 27    Where a client posts TWSE or TPEx securities or TPEx traded beneficial certificates of open-end funds as collateral and supplementary collateral, on the business day preceding book closure of or suspension of interest payment on the issuer's securities, a securities firm shall prepare a customer-by-customer list of the collateral and supplementary collateral provided by each customer and send it to the TDCC according to TDCC requirements.
   Chapter VIII Risk Control
Article 28    A securities firm conducting non-restricted purpose loan business may not engage in transactions with any party having any of the following relationships with it:
  1. A director, supervisor, representative of a juristic-person director or juristic-person supervisor, employee, or shareholder holding more than 10% of the total shares, of the securities firm.
  2. A spouse of a director or supervisor, or of a representative of a juristic-person director or juristic-person supervisor, of the securities firm.
  3. A minor child of a person of a status specified in subparagraph 1 herein.
    A securities firm shall incorporate the provisions of the preceding paragraph into its internal control system.
Article 29    For non-restricted loan conducted by a securities firm, the securities firm shall adopt an internal control system regarding circumstances such as over-concentration of the outstanding balance of financing to clients in a single party, a single group of related parties, or a single security, and shall adopt risk control mechanisms.
Article 30    In non-restricted purpose loan conducted by a securities firm, the sum of the financing amount and total amount of financing to clients plus the total financing amount in margin purchases and short sales of securities may not exceed 400% of the securities firm's net asset value. The securities firm shall report the related information to TWSE daily, and the report shall include finance purpose, finance amount, and collateral type, etc.
    When a securities firm conducts non-restricted purpose loan business, the highest financing limits that it extends to each customer shall be regulated by the securities firm. The securities firm shall adopt its own internal procedures for credit extension operations and risk management, in order to appropriately assess client credit limits and manage credit extension risks. Such procedures shall at least incorporate the following:
  1. To assess the maximum non-restricted loan purpose amount to individual clients, the assessment shall take the loan amounts extended to approved customers in other loan businesses into consideration. The percentage by which the total value of funds or securities loaned to individual customers in the overall loan business may not exceed the net worth shall be prescribed. Approval of the board of directors is required if the financing amount to individual persons reaches the higher of NT$300 million or 1% of the securities firm's NAV.
  2. To assess the maximum non-restricted purpose loan amount of a single security to individual customers, the assessment shall take the loan amounts extended to approved customers in other loan businesses into consideration.
  3. To identify securities or client with a high risk, special monitoring and approval procedures shall be established in regard to the amount of high-risk securities or the lending limit to high-risk customers.
  4. The lending limit to clients shall be determined according to principles that are both fair and reasonable. Lending of such whole amount to a single customer shall be avoided.
  5. If the assessment of the maximum financing amount to individual customers indicates certain individual customers are known or can be determined to be related accounts, which means the credit risks of such customers are related (for example, the risk of providing trading service to such customers), the lines of credit of all such related customers are subject to combined regulations in consideration of the credit risks and apply to renewals and adjustments of credit lines by customers which have opened an account and to new accounts, provided in the event of a change in respect of a related account of a customer, such as credit line adjustment or addition of related accounts, the financing amounts of the customer and its related accounts are still subject to combined regulation.
Article 31    In non-restricted purpose loan conducted by a securities firm, if the amount of financing made available to client on any single business day exceeds 50% of the securities firm's net asset value or reaches NT$1 billion, or if the outstanding balance of financing to customers exceeds 100% of the securities firm's net asset value, the securities firm shall file the relevant financing information with the TWSE on the same day.
Article 32    When a securities firm calculates the amount of the combination of the non-restricted purpose loan business and the securities business money lending, for each securities or beneficiaries certificate eligible as collateral for financing, the outstanding balance of financing shall not exceed 5% of the of such TWSE or TPEx listed stocks or beneficial right; the total amount of non-restricted purpose loan business, the securities business money lending, credit transaction business financing balance, and the balance of securities finance business handling securities delivery shall not exceed 25% of such TWSE or TPEx listed stocks or beneficial right.
    If the total amount of non-restricted purpose loan business, the securities business money lending, credit transaction business financing balance, and the balance of securities finance business handling securities delivery exceed 20% of such TWSE or TPEx listed stocks or beneficial right, the outstanding balance shall be distributed in proportion. The distribution method will be enacted by TWSE or TPEx and submit to the competent authority for approval.
    For the security reaches the outstanding balance set forth in paragraph 1, the adjustment may be made by the TWSE for the non-restricted purpose loan business.
   Chapter IX Supplementary Provisions
Article 33    In the event of a violation of these Operating Rules by a securities firm, its responsible person, or employee, TWSE or TPEx may handle in accordance with its applicable rules and regulations.
Article 34    These Operating Rules are jointly drafted by the TWSE and TPEx and take effect after having been submitted to and approved by the competent authority. Subsequent amendments thereto shall be effected in the same manner.