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Article 4
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A securities firm conducting financial derivatives business shall formulate a management strategy and operational guidelines as follows, and shall submit them, and any subsequent amendments thereto, to the board of directors for approval:
- The management strategy for conducting financial derivatives business.
- The operational guidelines shall include the following particulars:
- Business principles and policies.
- Operating procedures.
- Internal control system.
- Methods of periodic evaluation.
- Methods of accounting treatment.
- Internal audit system.
- Risk management measures.
- Measures for protecting customer rights and interests.
In response to changes in products and market conditions, the board of directors shall review the management strategy and operational guidelines referred to in the preceding paragraph, and shall evaluate whether performance is consistent with established operational strategy and whether the risk assumed is within the securities firm's permitted scope of tolerance; such review shall be made at least once every year.
When a foreign securities firm establishes a branch unit in the ROC to engage in financial derivatives business, the duties to be performed by the board of directors under the preceding paragraph may be performed by persons authorized by the securities firm's head office.
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Article 14
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A securities firm applying or registering pursuant to Article 5, paragraph 5 or Articles 8 through 10 shall submit the documents shown in Attachments 1 and 2.
The directions for the TPEx review and approval of securities firms' applications or registrations are as given in Attachments 3 and 4.
A foreign securities firm trading financial derivatives shall issue an undertaking stating that the transaction prices it receives at the beginning of the transaction period will not be remitted out of Taiwan until after the transaction matures. This restriction, however, shall not apply to remittance of any transaction prices as required for instruments linked to foreign financial products.
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Article 29
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When a securities firm operating the business of financial derivatives related to Taiwan equities needs to trade TWSE listed and TPEx listed stocks and convertible (exchangeable) corporate bonds for hedging purposes, it shall open a hedging account at the TWSE and the TPEx.
The hedging accounts of the preceding paragraph shall uniformly be "888888-1" accounts under the securities dealers' accounts. However, a foreign securities firm that applies to open a hedging account through a branch unit established within the territory of the ROC by a directly or indirectly wholly-owned subsidiary shall establish a dedicated hedging account under the offshore foreign institutional investor account it opened in the ROC.
No securities in the hedging account of paragraph 1 may be made the subject of a pledge, loan, or withdrawal.
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Article 30
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As required for hedging purposes, a securities firm that operates the business of trading financial derivatives related to Taiwan equities may borrow or sell short the underlying security without being subject to the restriction that the price of the securities borrowed or sold short may not be lower than the closing price of the previous business day.
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Article 37
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When a securities firm enters into a contract for an equity derivatives transaction in TWSE listed or TPEx listed stocks, the number of the underlying shares that could potentially be exchanged upon exercise of the derivatives contract, plus the number of underlying shares that would be exchanged upon exercise of the previous business day's outstanding and unexpired call (put) warrants and contract-based call (put) warrants of all securities firms, leverage transaction merchants, and banks, may not exceed 15 percent of the total number of the underlying shares issued by the issuer after deduction of the shares set out in each of the following items:
- The total percentage of shares held by directors and supervisors under statutory shareholding ratio requirements.
- Pledged shares.
- The number of shares that newly TWSE listed or TPEx listed companies are required to place in compulsory central custody.
- Shares repurchased under the Regulations Governing Share Repurchase by TWSE Listed and TPEx Listed Companies, but not yet retired.
- Shares on which the competent authority has imposed restrictions for exchange or TPEx listing and trading.
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Article 37-1
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A securities firm operating the business of options on convertible (or exchangeable) corporate bond asset swaps ("asset swaptions") related to Taiwan equities shall do so in compliance with the following provisions:
- The securities firm shall confirm that the total of the unearned notional principal of asset swaptions with the same underlyings purchased by the customer from various financial institutions, plus the notional principal of the asset swaptions with the same underlyings currently being purchased by the customer shall not exceed 10 percent of the par value of the underlying convertible (or exchangeable) corporate bonds; the securities firm shall obtain a written statement issued by the customer of compliance with the aforesaid requirement, and shall not help the customer to evade the customer transaction ceiling in this subparagraph.
- The securities firm shall not help the customer or underwriter to evade the rules set out in Articles 27 and 43-1 of the Taiwan Securities Association Rules Governing Underwriting and Resale of Securities by Securities Firms.
- With respect to the reasonableness of the price of convertible (or exchangeable) corporate bonds purchased through OTC negotiated trading, the securities firm shall establish an internal evaluation system to analyze the difference from market prices.
- With respect to the business of convertible (or exchangeable) corporate bonds asset swaptions related to Taiwan equities, the securities firm shall establish an internal evaluation system for the prevention of illegal transactions.
The securities firm shall incorporate the provisions of the preceding paragraph into its internal control and internal audit items. It shall undertake regular review and analysis, and produce records for future audit or inspection.
Purchases made by the customer and his or her spouse, minor children, and nominees shall be included in the calculation of the ceiling set out in paragraph 1, subparagraph 1.
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Article 39
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A securities firm engaging in financial derivatives business may not damage fair market price formation or investor rights and interests when conducting hedging operations or when calculating product gains or carrying out settlement upon cancellation or expiration. The securities firm shall formulate and implement an effective internal control system addressing the aforementioned considerations.
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Article 40
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A securities firm that operates OTC financial derivatives transactions may not use any such transaction, on its own behalf or on behalf of a customer, for the purpose of merger or acquisition, or to otherwise engage in an unlawful transaction, and it may not use any such transaction to embellish or manipulate financial statements by, for example, deferring or concealing losses, falsely reporting earnings, or recognizing earnings early. In options transactions, the securities firm shall take care to avoid using premiums (especially for long-term or extremely short-term options) to embellish financial statements.
A securities firm shall stipulate with the customer that the customer may not refuse a request from the competent authority for review of relevant data (including data on the ultimate beneficial owner) for the purpose of market regulation.
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Article 43
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A securities firm shall complete the amendments to its internal control and auditing systems prior to any application to engage in the business of OTC trading of financial derivatives. The relevant control and auditing measures will be separately prescribed by the TPEx.
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Article 45
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Securities firm personnel that handle financial derivatives business shall have professional ability, and the securities firm shall adopt professional qualification requirements as well as a system for training and performance evaluation.
Sales and related managerial personnel engaged in financial derivatives business shall be qualified as securities firm associated persons, and shall also possess one of the following qualifications:
- Graduation from a finance or finance-related department at the university level or higher, along with completion of six credit hours in courses in financial derivatives and risk management or participation in 20 or more hours of course work in financial derivatives and risk management at a foreign or domestic financial training institute.
- The qualifications required for senior agent of a securities firm under Article 5 of the Regulations Governing Responsible Persons and Associated Persons of Securities Firms.
- Participation in 30 hours or more of courses in financial derivatives and risk management offered by a foreign or domestic financial training institute.
- Holding a financial derivatives-related license.
- A half year or more of actual experience in financial derivatives business at a foreign or domestic financial institution.
Article 14 of the Regulations Governing Foreign Exchange Business of Banking Enterprises shall apply mutatis mutandis to the required qualifications and the requirements for education and training of a securities firm's relevant personnel who handle foreign exchange derivatives business. The provisions of that article regarding recommendation work shall apply mutatis mutandis to those relevant personnel who handle the work of selling foreign exchange derivatives.
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Article 46
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A securities firm operating the business of OTC trading of financial derivatives shall comply with the competent authority's Regulations Governing the Preparation of Financial Reports by Securities Firms, the TSA's Model Accounting System for Securities Firms, and the relevant directives of the competent authority regarding accounting disclosures in relation to financial derivatives.
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Article 47
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A securities firm operating the business of OTC trading of financial derivatives shall handle the disclosure of information in accordance with the Regulations Governing the Acquisition and Disposal of Assets by Public Companies.
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Article 48
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A securities firm conducting the financial derivatives business shall enter the required information into the TPEx information system at the time and in the format prescribed by the TPEx.
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Article 49
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A securities firm that undertakes OTC financial derivatives trading shall calculate the market risk equivalent and counterparty risk equivalent for its trading positions as prescribed in the Regulations Governing Securities Firms in order to reflect those components in the calculation of its regulatory capital adequacy ratio.
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Article 50
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When the regulatory capital adequacy ratio of a securities firm that has obtained qualification to engage in OTC trading of financial derivatives falls below 200 percent, with the exception of hedging transactions relating to financial derivatives, it may not undertake any new trades; new trades may be undertaken only when its regulatory capital adequacy ratio reaches 200 percent.
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