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I.Accounting Principles
- Legal Basis
These accounting treatment rules are specific rules regulating "securities borrowing and lending transaction," specified under Regulations Governing Securities Lending by Securities Firms: Chapter III Lending of Other Types of Securities and Taiwan Stock Exchange Corporation Securities Borrowing and Lending Rules.
- Sources of Securities for Lending
Other securities lending by securities firms came from three sources (pursuant to Article 22 of the Regulations Governing Securities Lending by Securities Firms) including: securities held for its own account, securities borrowed through the securities lending system of a securities exchange and collateral securities obtained in connection with customer margin purchases when conducting securities trading margin purchase and short sale business. To proceed with lending securities held for its own account (including operating securities possessed by dealers and underwriters, and securities invested by brokers) the original account name should be changed to "lending securities" and price as of the valuation date should be based on the fair value. Gains and losses shall be recorded under the original account prior to the lending of securities. As for the latter two sources of securities for leading, if the securities firms have not made entries into accounts (only recorded as a memorandum entry and would only record as "payable securities" when the securities firm sold the borrowed securities), and that the collateral securities obtained when conducting securities trading margin purchase and short sale business are perceived as collateral received from customers; then those securities are not recorded as the securities firm's assets (provided that a separate account ledger should be set up for each customer to control the entries). Accordingly, the latter two sources of securities will be described in the securities firm's operational statements but not recorded as accounting entries.
- Collateral
No accounting entries are needed if the collateral received from other securities lending by securities firms (pursuant to Article 25 of the Regulations Governing Securities Lending by Securities Firms) are securities, provided that the securities firm shall set up a separate account ledger for each customer and record the collateral related transaction matters on a transaction-by-transaction basis as prescribed under Article 9 of the Operating Rules for Securities Lending by Securities Firms. In the event of cash collateral, it should be recorded in the "securities lending refundable deposits" account under the current liabilities. When securities are provided by the borrower as collateral, they shall be separately presented in the financial statements or disclosed in the notes. In the event of cash collateral, it should be recorded in the "securities borrowing margin" account under the current assets. Cash collateral should be recorded as excess interest (revenue) on an accrual basis.
- Income from securities lending, Service Fee and Default Penalty
Income from securities lending and service fee received from other securities lending by securities firms should be recorded as "income from securities lending". Also, default penalties received from borrowers in pursuant to Article 33 paragraph 2 of the Operating Rules for Securities Lending by Securities Firms should be recorded as "other non-operating revenues and gains - other".
- Selling and Returning of Borrowed Securities by the Borrower
Securities borrowed by the borrower are only recorded as a memorandum entry. When the borrowed securities are sold, they should be recorded as "Liabilities on sale of borrowed securities" in accordance to the selling price, price as of the valuation date should be based on the fair value of the borrowed securities and any price difference should be recorded as "gain on valuation of borrowed securities and bonds with resale agreement -short sales". Securities purchased in the market by the borrower for purpose of returning should be recorded as "operating securities" and make entries as "gains (losses) on the covering of securities borrowing and short sales of bonds with reverse repurchase agreements" when actually returned to the lending securities firms. Securities firms carry out securities lending with securities held for its own account should off set "lent securities" when the borrower returned the borrowed securities and make record in the original account.
- Collateral Calls Made to the Borrower
When the value of the collateral is insufficient to cover the securities loan and the securities firms made collateral calls in order to increase the overall value of the collateral, the process shall comply with paragraph III above. Collateral calls paid by cash shall comply with accounting principles for cash collateral. A separate account ledger for each customer should be set up for collateral calls paid by securities and collateral related transaction matters should be recorded on a transaction-by-transaction basis.
- Compensation for Entitlement of Dividends During the Term of a Securities Loan
When customers purchased securities on margin and offered the same for short sales, if the issuing company is forced into a lock up period as a result of distributing stock dividend, cash dividend and shareholders' meeting, the short sales account shall satisfy the requirement of returning the borrowed securities in order to effect title transfer. Therefore, if securities firms purchased securities on margin and used the same as lending securities, they should carry out self-scheduling tasks such as requesting for early return of borrowed securities, borrowing securities through securities lending centers or return securities by securities held for its own account in order to facilitate title transfer, so that there can be no situations such as compensation for entitlements or that the short sales account cannot exercise its subscription rights to new shares. Where securities firms return securities to short sales account through borrowed securities or securities held for its own account, compensation for entitlements should be made to the same securities firms which lent out the securities, and such securities firms should make different accounting entries based on whether the lent securities are borrowed from securities lending centers or held on its own account. For the compensation for entitlements arising out of securities held for the securities firms' own account, they should be recorded as dividend revenue or gain on selling of securities. For the compensation for entitlements arising out of securities borrowed from the securities lending centers, as the lending securities firms are also the borrower to the securities lending centers, such compensation for entitlements shall be returned to the lender of the securities lending center and be considered as payments or receipts under custody.
- Subscription Rights to New Shares During the Term of a Securities Loan
【Lender】
When the securities loaned by the securities firm carry subscription rights to new shares and the securities firm intends to subscribe, the securities firm shall deliver the subscription price to the customer before the expiration of the subscription period as stipulated, and at the same time Dr. as "securities receivable" and Cr. as "bank deposits".
【Borrower】
Borrowers should merely record as loans for cash capital increase collected and paid on behalf of others on the payment date for the lender's new shares subscription. If the borrower sold the borrowed securities but has purchased in the market securities equivalent to the price of cash capital increase, then a credit entry as "Liabilities on sale of borrowed securities" should be made based on the actual purchase price, and any price difference should be recorded as "loss from securities borrowing transactions". If the borrower did not purchase securities equivalent to the price of cash capital increase on the payment date for the lender's new shares subscription, then a Cr. entry as "Liabilities on sale of borrowed securities" should be made based on the closing price of the said payment date, and any price difference should be recorded as "loss from securities borrowing transactions". The price difference between the actual purchase price of securities equivalent to the price of cash capital increase and the aforementioned closing price on the payment date should be recorded as "losses on covering of borrowed securities and bonds with resale agreement -short sales".
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