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Operating Rules for Securities Firms Handling Margin Purchases and Short Sales of Securities(2016.01.28) |
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Article 6
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A securities firm shall fix, and file with the competent authority for recordation, the interest and fee rates with respect to the margin loan interest and short sale handling fees receivable from customers, as well as short sale proceeds and short sale margin interest payable to customers, for conducting securities trading margin purchase and short sale operations.
Before providing securities borrowed through the TWSE securities lending system, securities borrowed from customers in money lending conducted in connection with securities business, securities borrowed from securities firms or securities finance enterprises conducting money lending in connection with securities business or conducting margin purchases and short sales of securities ("Borrowed Securities"), or its proprietary shares of securities ("Proprietory Securities"), to a customer for short selling, a securities firm shall determine the rate, calculation, and method of collection of the short sale fee with the customer, where the interest rate shall be below 20% per annum.
Upon adjustment to any interest rates or fee rates described in the preceding two paragraphs, the adjusted interest or fee rates shall apply to any and all open positions in margin purchases and short sales as from the date of the adjustment.
A securities firm shall charge a short sale handling fee from customers for providing securities acquired through margin purchases to them for short selling, and shall charge a short sale fee from customers for providing Borrowed Securities or Proprietary Securities to them for short selling.
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Article 7
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In conducting securities trading margin purchase and short sale operations, a securities firm may not use retained short sale proceeds and short sale margins for purposes other than those listed below:
- As a source of funds for conducting margin purchase business.
- As collateral for refinancing of securities from securities finance enterprises.
- As a source of funds for conducting money lending in connection with securities business.
- As collateral for borrowing securities through the TWSE securities lending system.
- For deposit with bank.
- To purchase short-term bills.
In conducting securities trading margin purchase and short sale operations, a securities firm may not use securities received from such operations for purposes other than those listed below and shall deposit the securities with a central securities depository:
- As a source of securities for conducting short sale business.
- As collateral for refinancing of funds or securities from securities finance enterprises.
- As a source of lendable securities in conducting securities lending business.
- As collateral for borrowing securities through the TWSE securities lending system.
- To lend to a securities firm or securities finance enterprise conducting securities borrowing and lending business as a source of securities for conducting securities borrowing and lending business or securities margin purchase and short sale business.
- To lend through the TWSE securities borrowing and lending system.
- To participate in competitive auction lending transactions or negotiated lending transactions conducted by a securities finance enterprise.
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Article 14
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A securities firm shall set up a separate account ledger for each customer margin account, and record therein on a daily basis the following:
- Matters relating to margin purchases and short sales.
- Collateral.
- Any margin calls for, or disposal of, collateral.
A securities firm shall, based on the account entry records under the preceding paragraph, prepare a reconciliation statement each month and deliver it to the customer, unless there is no record of margin trading for the given month and the customer moreover has not submitted a written request for a statement.
Upon execution of a consent letter by the customer to allow collection, processing, use and international transmission of the customer's personal data by the TWSE, TPEx, or any institution designated by the competent authority in accordance with relevant laws and regulations, a securities firm shall promptly transmit the data concerning credit line, balance of margin purchases and short sales, and any changes therein, to the TWSE and TPEx computer database systems.
When borrowing securities from other securities firms, securities finance enterprises and the TWSE securities lending system, a securities firm shall record the lendings, borrowings and returns of securities as well as the delivery of the performance bond.
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Article 19
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Upon execution of a margin purchase or short sale, the securities firm shall, by 10 a.m. on the second business day after the trade date, collect from the customer a margin for the margin purchase, based on the balance of the trade price of the margin purchase less the dollar amount of the margin loan, or in the case of a short sale, a margin for the short sale, based on the trade price of the short sale multiplied by a required percentage (any amount less than NT$100 shall be calculated as NT$100).
Notwithstanding the provisions of Article 31, where a TWSE or TPEx listed security is bought on margin and sold short on the same day in an account, if the customer has signed a consent letter with the securities firm, then a net settlement is allowed for offsetting a portion of the settlement obligation under the margin purchase against an equal amount of the settlement obligation under the short sale, in which case the securities firm shall prepare an Application to Settle Margin Purchases with Cash and an Application to Settle Short Sales with Spot Securities on behalf of the customer.
If the customer having signed the consent letter under the preceding paragraph does not wish to have netting settlement thereunder carried out, the customer shall give a written instruction to the securities firm before close of market on the day on which the trades are executed.
No interest may be accrued on the margin purchase and short sale with respect to the portions that are offset by netting under paragraph 2; nevertheless, the handling fee or short sale fee for that portion of the short sale shall still be calculated and collected/paid.
The portions of the trades that are offset by netting under paragraph 2 shall be handled in accordance with the Directions for Settlement by the Offsetting of Margin Purchases and Short Sales in Margin Trading.
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Article 20
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A securities firm providing a margin loan to a customer shall do so and perform settlement on behalf of the customer based on the amount of the margin loan as calculated by multiplying the trade price of the margin purchase by a required percentage (with any amount less than NT$1,000 excluded from calculation); all securities bought on margin shall serve as collateral.
A securities firm lending a security to a customer for short selling shall do so and perform settlement on behalf of the customer based on the type and quantity of the security sold short in that trade; the proceeds from the short sale conducted by the customer with securities provided by the securities firm acquired through margin purchase shall serve as collateral after deducting the securities transaction tax, the short sale handling fee, and the securities firm handling fee; proceeds from the short sale conducted by the customer with Borrowed Securities or Proprietary Securities shall serve as collateral after deducting the securities transaction tax and securities firm handling fee.
A securities firm borrowing securities from a securities firm or securities finance enterprise conducting money lending in connection with securities business shall deposit a performance bond with the TWSE in accordance with the Regulations Governing the Performance Bond for the Lending of Securities by Securities Firms and Securities Finance Enterprises.
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Article 22
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Where a securities firm charges a customer a short sale fee, expenses incurred from refinancing from a securities finance enterprise due to a shortfall in the security shall be borne by the securities firm.
Where a securities firm charges a customer a short sale handling fee, the various fees and expenses required for any competitive bid loan, negotiated transaction, or purchase by tender offer conducted by a securities finance enterprise shall be borne by the customer. The securities firm shall further calculate pursuant to the following principles for short sellers the fees and expenses for each share of the security sold short based on the short balance for that security for which a short sale handling fee is charged, on the date the shortfall in the security occurs, and then collect payment from each short seller in the short sales in an amount determined by the number of shares it sells short:
- If the margin balance is larger than or equal to the short balance of the security for which a short sale handling fee is charged, and the balance of Borrowed Securities and Proprietary Securities is smaller than the balance of securities lent through securities lending, securities lent to securities firms and securities finance enterprises conducting money lending in connection with securities business, and securities lent through the TWSE securities lending system ("Lending Balance") plus the short balance for which a short sale fee is charged, the short seller does not have to bear the fees.
- If the margin balance is smaller than the short balance for which a short sale handling fee is charged, and the balance of Borrowed Securities and Proprietary Securities is larger than or equal to the Lending Balance plus the short balance for which a short sale fee is charged, the short seller shall bear the fees in full.
- If the margin balance is smaller than the short balance for which a short sale handling fee is charged, and the balance of Borrowed Securities and Proprietary Securities is smaller than the Lending Balance plus the short balance for which a short sale fee is charged, the short seller shall bear a proportion of the fees as calculated pursuant to the following formula:
(short balance for which a short sale handling fee is charged - margin balance)/[(short balance for which a short sale handling fee is charged - margin balance) + (Lending Balance + short balance for which a short sale fee is charged) - (balance of Borrowed Securities and Proprietary Securities)]
The securities firm may collect the fees and expenses receivable under the preceding paragraph by deducting the amount from the short sale collateral funds in the customer's margin account.
For shares of securities obtained and distributable as a result of a securities finance enterprises conducting a purchase by tender offer, the securities firm shall distribute the shares to those short sellers who have a short balance for which a short sale handling fee is charged in the security, on the date the security falls short, in a quantity decided on a pro rata basis in accordance with the principles of paragraph 2 and rounded to an integral trading unit, for them to buy in to cover their short positions; any quantity remaining after the distribution shall further be distributed to these short sellers in the order of the size of the decimal portion of their respective distributable quantity, and if for a decimal number there are multiple short sellers, to one or more of them determined by drawing lots.
Where two or more tender offer purchases are conducted [to cover securities shortfalls arising in the course of short sale operations], the dollar amounts of the purchases that are allocable to the short sellers shall be calculated by the weighted average method.
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Article 23
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A securities firm shall calculate, on a daily mark-to-market basis, the collateral maintenance ratio for each margin account as a whole and for each margin purchase and short sale in each margin account by the following formula:
collateral maintenance ratio = {market value of collateral securities for margin purchase(s) + initial collateral and short margin for short sale(s) + market value of securities deposited as collateral or other merchandise} ÷ {original margin purchase amount(s) + market value of underlying securities sold short} × 100 percent
The market value of securities and other merchandise under the preceding paragraph shall be calculated based on the paragraph below , provided that for the six business days prior to an ex-rights or ex-dividend date for a TWSE or TPEx listed security pledged as collateral for a margin purchase, with the exception of in cases of a cash capital increase, the market value of the collateral security and the market value of TWSE or TPEx listed securities pledged as collateral shall be calculated based on the respective current day's closing price, minus the value of the cash dividend, or minus the value of the stock dividend calculated based on the current day's closing price.
- TWSE or TPEx listed book-entry central government bonds, local government bonds, corporate bonds, financial bonds: par value.
- TWSE or TPEx listed securities: the closing price of Taiwan Stock Exchange or Taipei Exchange ("the closing price").
- Gold that is registered for trading over the counter: the average price at closing based on the highest buying price quote and the lowest selling price quote ("the average closing price")
- An open-end type securities investment trust fund beneficiary certificate and futures trust fund beneficiary certificate: the net asset value per beneficiary unit of the prior business day ("the net asset value")
If the security the customer purchases on margin is subject to a 20 percent or more share dividend rate in gratuitous distribution of shares, or the issuer of the securities conducts a demerger and capital reduction, and after the capital reduction, the stock resumes trading and is TWSE or TPEx listed on the same day as the stock of the assignee company of the demerger, then unless the competent authority has otherwise imposed trading restrictions on the security, the newly issued rights shares or the stock of the assignee company of the demerger shall all be pledged as collateral, with the option of income tax deferral to be waived, and shall be transferred through book-entry by the central securities depository into the securities firm's segregated account for margin purchases and short sales, notwithstanding the provisions of Article 33 of the Regulations Governing Handling of Shareholder Services by Public Companies.
The securities firm may not use the newly issued rights shares or the stock of the assignee company of the demerger under the preceding paragraph as a source of securities for lending in its conduct of securities trading short sale operations or as collateral for refinancing.
The provisions of paragraph 2 shall not apply to newly issued rights shares or the stock of the assignee company of the demerger used as collateral. After the security is traded ex-rights, the market value of the newly issued rights shares shall be calculated as 70 percent of the closing price if they are TWSE or TPEx listed securities for margin purchase and short sale, or 50 percent of the closing price if they are not qualified according to Article 2 or 3 of the Standards Governing Eligibility of Securities for Margin Purchase and Short Sale, or are suspended according to Article 4 or 5 of the same Standards. . After such shares have been transferred into the securities firm's segregated account for margin purchases and short sales, their market value is no longer required to be discounted.
The market value of collateral securities for margin purchases and the original collateral and short margin for short sales, the market value of securities deposited as collateral or other merchandise referred to in paragraph 1 means the balance of the money, market value of securities and other merchandise in a customer margin account after deducting the short sale fee, competitive auction lending fee, negotiated lending fee, and fee for purchase of securities by tender offer [to meet a securities shortfall in short selling]; if there is any residual obligation after a settlement trade has been made or after the securities firm has disposed of the collateral, the residual obligation shall also be deducted.
Where the overall collateral maintenance ratio of the customer margin account is lower than 130 percent, the securities firm shall issue a margin call to the customer demanding the deposit, within two business days from the day the margin call is received, of additional margin collateral for the margin purchase or short sale that falls below the collateral maintenance ratio, to cover the margin deficiency.
Margin deficiencies that a customer is required to cover under the preceding paragraph shall be calculated by the following formulas:
■ deficiency in margin for margin purchase = original margin purchase amount - (closing price on the day of calculation × number of shares purchased on margin × margin purchase leverage ratio) - (par value, closing price and average closing price of the day of calculation or net asset value of the prior business day × unit number of shares of the stock under paragraph 3 and securities deposited as collateral or other merchandise under Article 26 × margin purchase leverage ratio)
■ deficiency in margin for short sale = (closing price on the day of calculation × number of shares sold short × margin percentage required for short sale - initial margin for short sale) + (closing price on the day of calculation × number of shares sold short - original short sale proceeds) - (par value, closing price and average closing price of the day of calculation or net asset value of the prior business day × unit number of shares of the securities deposited as collateral under Article 26 or other merchandise).
In the formula for calculating the deficiency for margin purchase under the preceding paragraph, if the stock under paragraph 3 or the securities deposited as collateral or other merchandise under Article 26 are categorized as book-entry central government bonds, local government bonds, corporate bonds, financial bonds, gold that is registered for trading over the counter, an open-end type securities investment trust fund beneficiary certificate and futures trust fund beneficiary certificate, its financing ratio shall be calculated based on the maximum financing ratio of TWSE or TPEx listings announced by the competent authority; for others that are not eligible for margin purchase or short sale under Article 2 or 3 of the Standards Governing Eligibility of Securities for Margin Purchase and Short Sale or are temporarily suspended under Article 4 or 5 of the same Standards, then the margin purchase leverage ratio shall be set at zero.
For purposes of this Article, if a closing price is not available for the given day, it shall be calculated as the price determined by the following principles:
- When the highest buy price quoted as of market close on the given day is higher than the auction reference price at market opening on the TWSE or the basis price for the opening of trading on the TPEx, the highest buy price quoted will be the price.
- When the lowest sell price quoted as of market close on the given day is lower than the auction reference price at market opening on the TWSE or the basis price for the opening of trading on the TPEx, the lowest sell price quoted will be the price.
- When the above circumstances are not met, the auction reference price at market opening on the TWSE or the basis price for the opening of trading on the TPEx will be the price.
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Article 31
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A customer applying to settle a margin purchase with cash or a short sale with spot securities shall deliver the money or securities by 12 noon of the current day, and shall fill out an Application to Settle a Margin Purchase with Cash or Application to Settle a Short Sale with Spot Securities and submit the application to the securities firm. Upon verification of the accuracy of the content, the securities firm shall deliver the short sale proceeds and short sale margin to the customer by the second following business day, or in the case of securities bought on margin or securities deposited or other merchandise as collateral, or securities investment trust fund beneficiary certificates purchased not in the name of a securities firm, where the customer has maintained a depository account or a book-entry central government securities account, transfer the securities to the account by the second following business day, or in the case of withdrawal of spot securities by the customer, deliver the securities by the third following business day.
A customer applying to settle a short sale with spot securities which are borrowed from the same securities firm through securities lending business as the source of securities, the short sale collateral, short sale margin, or securities eligible to be deposited as collateral by securities firms for conducting securities lending business may, with the customer's consent, be pledged as collateral of the securities concerned and not be subject to the requirement for transfer through book-entry in the preceding paragraph. Any balance after the pledge as collateral shall be returned pursuant to the preceding paragraph unless the securities firm and customer agree otherwise.
The matters mentioned in the preceding paragraph that are subject to the customer's consent and agreement with the customer shall be recorded by the securities firm.
Except under any of the following circumstances, the customer may not apply to use third-party securities as spot securities to settle a short sale:
- during a period in which trading has been suspended or halted in the underlying securities of the short sale.
- where an order for margin purchase has been placed to cover the short sale at the maximum price of the auction reference price at market opening on the TWSE or the basis price for the opening of trading on the TPEx on the same day and cannot be executed before the start of the trading session of the sixth business day prior to the book closure date of the underlying securities.
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Article 31-1
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Where a customer applies to settle a margin purchase with cash or a short sale with spot securities by means other than in person, the provisions of Article 31 shall still apply, except that the customer's signature or seal is not required on the settlement application form if the customer has already submitted a signed Letter of Consent That Applications to Settle with Cash or Spot Securities Do Not Require a Signature/Seal, and if the securities firm has kept it on record after verification.
When a customer who may submit an application by means other than in person under the preceding paragraph applies by telephone to use cash or spot securities to settle a margin purchase or short sale, the securities firm shall verify the identity of the customer and synchronously record the telephone call. The telephone recording shall be kept at its place of business and preserved for at least 1 year, or in the event of any dispute, until the dispute has been resolved.
Where a customer has submitted a signed Letter of Consent That Applications to Settle with Cash or Spot Securities Do Not Require a Signature/Seal under paragraph 1, except in the circumstance mentioned in paragraph 2 of the preceding article, the short sale collateral price and short sale margin returnable by the securities firm to the customer shall be deposited into the same bank deposit account used for book-entry settlement of the customer's trading orders, and the securities bought on margin and/or the securities deposited or other merchandise as collateral returnable by the securities firm to the customer shall be transferred into the customer's book-entry custody account or a book-entry central government securities account. Securities or other merchandise deposited as collateral that are not owned by the customer shall be returned through book-entry transfer.
Securities firms that accept a customer using securities investment fund beneficiary certificates purchased in the name of the securities firm to settle a margin sale, shall operate according to Article 26(5). The return transfer in the preceding paragraph is not applicable.
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Article 32
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During the period when a securities finance enterprise is engaging in a competitive bid borrowing, negotiated borrowing, or purchase by tender offer to cover a security that falls short of short sale needs, a securities firm may temporarily suspend the short selling of that security, and may also refrain from processing cash settlement of any margin purchase of that security, except in the case of settling a margin purchase at maturity, or where a customer is applying to settle a margin purchase with cash and will use the receivable securities to settle a short sale.
Where a securities firm conducts securities margin purchase and short sale business, and the combined total balance of short sales of any given type of securities plus the balance of loans of that type of securities extended in securities lending business and the Lending Balance in Article 7, paragraph 2, subpararaphs 5 to 7 reaches the combined total balance of margin purchases and the sum of Borrowed Securities and Proprietary Securities, the securities firm, during the resulting period of cessation of provision of short sales, may not withdraw the Proprietary Securities that have been used as a source of securities for short sale business.
A securities firm that has provided Borrowed Securities or Proprietary Securities to a customer for short selling may not request the customer to close out the short sale upon the lender's request for early repayment.
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Article 34
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A securities firm shall maintain accurate and detailed records of and receipt/payment vouchers for funds and securities received and paid in conducting the business of securities trading margin purchase and short sale and refinancing from securities finance enterprises, and shall prepare the following statements on a daily basis:
- Daily operations statement of margin purchases and short sales.
- Summary statement and itemized statement of increments, settlement, and balances of margin purchases and short sales.
- Itemized statement of receipts, deliveries, disposals, and uses of collateral for margin purchases and short sales.
- Statement of settlement with cash and spot securities.
- Summary statement of margin calls and deposits.
- Itemized statement of deposits of securities or other merchandise as collateral.
- Itemized statement of refinancing applications and settlements.
- Itemized statement of refinancing balance.
- Itemized statement of collateral for refinancing.
- Summary statement and itemized statement of increments, settlement, and balances of margin purchases and short sales.
- Itemized statement of performance bond.
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Article 35
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Securities eligible for margin purchases and short sales shall be suspended from being sold short for four days commencing from the sixth business day prior to such book closure; if a short sale has already been made, it shall be covered and closed out by the sixth business day (inclusive) prior to the book closure of the issuing company; where the security has been lent, the securities firm may request early repayment and shall reclaim the security before the last day of book closure (inclusive). A customer applying to settle a short sale with spot securities which are borrowed from the same securities firm through securities lending business as the source of securities shall file its application no later than the seventh business day (inclusive) prior to book closure; the application may be rejected where the securities firm has no source of securities. Provided, this shall not apply where the issuing company closes its books for a reason as follows:
- convening of a special shareholders' meeting.
- a reason that will not affect the exercise of shareholders' rights.
Where a business day under the preceding paragraph is a trading day, but the commencement date of book closure of the issuing company is scheduled to fall on a date from (and inclusive of) the second settlement day after the last trading day before the Lunar New Year Holidays to (and inclusive of) the second trading day following the Lunar New Year Holidays, the following provisions shall apply.
- When the commencement date of book closure is scheduled to fall on the second settlement day after the last trading day before the Lunar New Year Holidays, then the first settlement day after the last trading day is included in the calculation of "business days."
- When the commencement date of book closure is scheduled to fall during the Lunar New Year Holidays or on the first trading day following the Lunar New Year Holidays, then the two settlement days after the last trading day are both included in the calculation of "business days."
- When the commencement date of book closure is scheduled to fall on a weekend or other regular holiday after the first trading day following, or on the second trading day following, the Lunar New Year Holidays, then the first settlement day after the last trading day is included in the calculation of "business days."
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Article 40
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Based on the event of default, a securities firm may, for a period starting from the day of default to the day of payment by a customer, charge the customer a margin purchase default penalty in the amount of the shortfall to be made up multiplied by 10 percent of the stated interest rate on the margin loan, or a short sale default penalty in the amount of the shortfall to be made up multiplied by 10 percent of the short sale fee rate or equivalent to a one-time handling fee based on the stated amount of the short sale handling fee.
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