Chapter I General Provisions
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| Article 1 | This policy was established according to Article 38, Paragraph 2 of Regulations Governing Securities Lending by Securities Firms.
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| Article 2 | Securities firms are bound by the Securities and Exchange Act, this policy, and the directives, rules, announcements, and instructions of the Taipei Exchange (TPEx), Taiwan Stock Exchange Corporation (TSEC), and Taiwan Depository and Clearing Corporation when engaged in the lending of book-entry central government bonds.
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| Article 3 | This policy governs the lending of book-entry central government bonds by a securities firm to its customer for a specified term, after which the customer agrees to return the same type and quantity of book-entry central government bonds back to the lender.
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| Article 4 | To engage in the lending of book-entry central government bonds, the securities firm must satisfy the eligibility criteria and submit a proper application along with relevant supporting documents to the authority.
For securities firms that are part of the Contract for Use of the Centralized Securities Exchange Market, all matters requiring prior approval in connection with the business activity described in the preceding Paragraph shall be forwarded to the competent authority through TSEC. Securities firms that are part of the Contract for Trading Securities on the Over-the-Counter Market may have their applications forwarded to the competent authority through TPEx.
Securities firms that have been authorized by the competent authority to lend book-entry central government bonds are required to submit the following documents to TPEx two days before commencing:
- A photocopy of the approval document issued by the competent authority.
- A list managers and officers who will be involved in the lending of book-entry central government bonds, supported by valid eligibility proofs.
The abovementioned managers and officers must also be registered as practitioners before commencing business activities. Any changes to the roles of these personnel must be updated to the registry within 5 days.
Securities firms that have been authorized by the competent authority to lend book-entry central government bonds are required to register this new business activity at the appropriate institution before commencing. In addition, all personnel involved in the lending of book-entry central government bonds must satisfy the eligibility stipulated in "Regulations Governing Responsible Persons and Associated Persons of Securities Firms".
Securities firm approved by the competent authority to lend book-entry central government bonds will be mandated to suspend all lending activities except returning transactions, if the firm's capital adequacy ratio falls below 200% for two consecutive months, whether or not the firm has commenced lending since approval. Securities firms that are suspended from lending due to the above may only resume activities after having satisfied the capital adequacy requirement for three consecutive months, subject to the approval of the competent authority. Those that are approved but have yet to commence lending activities must cease immediately.
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Chapter II Book-entry Central Government Bond Lending Practices
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| Article 5 | Securities firms are required to establish lending agreements with customers and issue Risk Declaration Statements to disclose to customers the possible risks involved in lending book-entry central government bonds.
The sample formats for the abovementioned lending agreement and Risk Declaration Statement are determined by the Securities Investment Trust and Consulting Association of the R.O.C. (SITCA).
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| Article 6 | Securities firms shall maintain a separate account for each customer and maintain the following details on a daily basis:
- Lending and return of securities.
- The name and value of collaterals and the percentage of coverage.
- Placement, withdrawal, replacement, and disposal of collaterals.
- Compensation payable to the other party.
Securities firms shall provide customers with monthly statements containing the above details; no statement is required provided that no transaction has taken place in the current month and the customer has not request for it in writing.
Securities firms shall obtain written consents from customers, thereby allowing securities lending data to be legally gathered, computer-process, used or transmitted cross-border by TPEx, TSEC, or any institution designated by the competent authority.
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| Article 7 | All notifications to advise customers for which securities firms are bound to provide as stipulated under this policy shall be delivered by mail, courier, or other method agreed upon between the two parties.
Notifications served by mail are deemed effective from the day the postal service makes its first delivery, if it does not reach the customer on time for reasons attributable to the customer.
Where notifications are served by courier, the customer's signature must be dated and be consistent with the one printed on the lending agreement.
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Chapter III Lending and return of securities
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| Article 8 | Business hours for lending of book-entry central government bonds is from 9:00 am to 3:00 pm.
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| Article 9 | Book-entry central government bonds may not be lent for more than six months, starting from the deal date. Furthermore, the lending period must not cover the two business days before the interest pay date of the lent security or any government bond secured by which. This excludes situations where the securities firm and the customer have agreed in writing on how the principal, interests, taxes, and expenses relating to the book-entry central government bonds are handled.
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| Article 10 | The delivery and return of book-entry central government bonds shall proceed by way of registered transfers, according to Directions for the Operation of Book-Entry Central Government Securities. Delivery and settlement statements must be produced for sign-off by customers. However, the delivery and return of stripped bonds shall proceed by way of book-entry.
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| Article 11 | Customers are required to submit "Borrowing" and "Returning" applications for the book-entry central government bonds they borrow from or return to the securities firm. Once a lending transaction has been completed, the securities firm shall prepare a "Borrowing Statement" that details the name of the borrower, the account number, deal date, deal reference number, application serial number, transaction type, name of government bond, the quantity borrowed, the agreed rate, lending fees, the type and quantity of collaterals etc.
Articles 62 and 62-2 of Taipei Exchange Rules Governing Securities Trading on the TPEx are applicable with regards to the above.
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| Article 12 | The interest rate at which book-entry central government bonds are lent is negotiated between the securities firm and the customer, subject to a maximum of 20% per annum and a tick size of 0.01%.
The methods for calculating and collecting lending fees are negotiated between the securities firm and the customer, which need to be specified in the agreement.
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| Article 13 | Securities firms are required to set up dedicated accounts for lending book-entry central government bonds. Only the following sources of securities can be lent to customers:
- Book-entry central government bonds held in possession
- Securities borrowed from TPEx's lending system.
- Securities acquired from a reverse repurchase agreement.
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| Article 14 | The types of collaterals that securities firms may request from customers for lending book-entry central government bonds, and the applicable discounts on collateral values, are listed below:
- Cash.
- Book-entry central government bonds. Collateral value is determined at 90% of the face value.
The abovementioned collaterals can not be used for any purposes other than the ones described below:
- To be placed as collateral for borrowing from TPEx's lending system.
- Bank deposits.
- Purchase of short-term notes.
Only bonds that are registered in the customer's name can be placed as collaterals. For collaterals that are placed in cash, the securities firm shall pay interest to the customer at a rate agreed between two parties.
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| Article 15 | Encumbered book-entry central government bonds can neither be lent nor placed as collaterals.
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| Article 16 | Upon receiving the customer's request to replace collaterals, the securities firm must complete the replacement accordingly before the second business day in the manner agreed between the two parties.
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| Article 17 | Securities firm shall notify the customer in accordance with Article 7, Paragraph 1 at least 10 business days before the securities are due for return. Customer's collateral must be returned on the due date when the customer returns the lent securities.
Collaterals that are placed in cash shall be deposited into the customer's bank account, whereas book-entry central government bonds need to be returned in the manner described in Article 10.
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| Article 18 | Securities firm may request for an early return by the customer according to the agreed terms, and shall undertake to return customer's collaterals on the day the securities are recovered.
Customer may request for a partial or full return of borrowed securities before the due date, and arrange the means and timeframe in which the lent securities and collaterals are to be delivered. The securities firm must return customer's collateral no later than the second business day after the customer has returned the lent securities.
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| Article 19 | Securities firms are required to maintain detailed records and documentation of all payments and securities receivable and payable in relation to the lending of book-entry central government bonds, and must prepare the following reports on a daily basis:
- Book-entry central government bond daily lending report.
- Book-entry central government bond daily lending balance report, summarized and detailed.
- Book-entry central government bond collateral delivery, disposal and usage report.
- Collateral details report.
- Collateral shortfalls report.
- Compensation report.
The abovementioned reports must be prepared with all details mandated by TPEx, and may be stored on media to facilitate retrieval.
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Chapter IV Collateral value and remargining
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| Article 20 | Securities firms are required to obtain collaterals totaling no less than 110% of the market value of the lent securities (the initial maintenance ratio) when accepting customers' borrowing requests.
Customer is required to maintain a collateral maintenance ratio of no less than 105% for the borrowing period.
The collateral maintenance ratio is calculated as follows:
- Collateral maintenance ratio equals the collateral value divided by the indicative market value of the borrowed bonds, multiplied by 100%.
- Collateral value equals the indicative market value of bonds placed as collaterals plus cash collaterals.
The indicative market values mentioned above are determined using the daily quotations shown in TPEx's Electronic Bond Trading System.
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| Article 21 | If customer's account collateral maintenance ratio falls below 105%, the securities firm shall notify the customer to remargin the lending deals that have fallen short of the required margin level back to the initial maintenance ratio within 2 business days after the notice is served.
If the customer does not remargin to the required level within 2 business days after being notified, the securities firm shall proceed with the following:
- If the customer's account collateral maintenance ratio still falls short of the required maintenance ratio, the securities firm may proceed to dispose the customer's collaterals in accordance with Article 25, Paragraph 1 on the next business day.
- If the customer's account collateral maintenance ratio rises back above the required maintenance ratio, the disposal of collateral can be postponed temporarily. However, if the collateral maintenance ratio falls short again the next business day and the customer does not remargin by the end of the day, the securities firm may proceed to dispose the customer's collaterals in accordance with Article 25, Paragraph 1 on the next business day.
- If the customer remargins up to the level notified before collaterals are disposed, the securities firm shall purge all records of margins called for this instance.
- Customers whose account collateral maintenance ratios have risen back to the initial maintenance ratio or above shall be purged of all margin call records for this instance.
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| Article 22 | If the customer closes one of the lending deals, thereby causing the collateral maintenance ratio of remaining balances in this account to fall short of the required maintenance ratio, the securities firm may retain part or all of the customer's collaterals to the extent necessary to maintain the required maintenance ratio.
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| Article 23 | Customers need to ensure the integrity of the bonds they place as collaterals. Collaterals that contain defects or give rise to legal disputes shall be excluded from the calculation of collateral maintenance ratio described in Article 20. In the meantime, the customer must be notified to provide eligible collateral of equivalent value within 3 business days after the notice is served.
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| Article 24 | If the customer's account collateral maintenance ratio rises above initial maintenance ratio as a result of price variations, the customer may request, subject to the terms agreed between the two parties, to have bond collaterals in excess of the initial maintenance ratio collateral maintenance ratio returned or used to secure other deals. However, the account collateral maintenance ratio must not fall below initial maintenance ratio once the collateral is returned.
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Chapter V Default and risk management
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| Article 25 | If customer exhibits any one of the following, the securities firm shall dispose the customer's collaterals the next business day and take the necessary measures agreed in the agreement:
- The customer fails to return the borrowed book-entry central government bonds upon the due date or at any earlier date agreed between the two parties.
- The customer fails to pay compensation upon the due date.
- The customer fails to remargin to the satisfactory level or provide eligible collaterals within a given period.
- The customer does not pay the agreed expenses.
If the disposal of customer's collateral does not sufficiently cover customer's outstanding debts, the securities firm may proceed to close customer's other lending deals to the extent necessary to cover outstanding debts. Any amounts remaining after the forced closure are returned to the customer, whereas shortfalls are claimed from the customer within a given notice period.
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| Article 26 | Customers are considered to be in default if they do not reimburse shortfalls according to Paragraph 2 of the preceding Article. In such a case, the securities firm has a duty to report the default to TPEx, thereby allowing TPEx to notify TSEC and other securities firms.
The securities firm may impose a penalty totaling 10% of the agreed lending rate over the amount of shortfall payable by the customer, starting from the date of default until the shortfall is settled.
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| Article 27 | Securities firms are prohibited from lending book-entry central government bonds to the following related parties:
- The firm's directors, supervisors, representatives of corporate directors and supervisors, employees, or shareholders with more than 10% ownership interest.
- Corporate shareholders with representatives elected as the firm's directors or supervisors in accordance with Article 27, Paragraph 2 of The Company Act.
- Spouses to the firm's directors, supervisors, and representatives of corporate directors and supervisors.
- Underage children of personnel listed in Sub-paragraph 1.
Securities firms are required to incorporate the above rules into their internal control policies.
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| Article 28 | A securities firm may not lend book-entry central government bonds totaling more than NT$20 million (in face value) or 1% of the firm's net worth to any single natural person, and may not lend totaling more than 5% of the firm's net worth to any single company. Lending of book-entry central government bonds to a group of related borrowers (in face value) may not exceed 10% of the firm's net worth, in which case the total face value of book-entry central government bonds lent to natural persons may not exceed 2% of the firm's net worth.
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| Article 29 | Securities firms are required to update any confirmed lending deals into TPEx's information system, within the designated timeframe and using the prescribed format.
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Chapter VI Supplemental Provisions |
| Article 30 | If the person-in-charge or an employee of a securities firm is found to have violated this policy, the TPEx may deal with the violations according to the relevant rules.
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| Article 31 | This Policy, and any subsequent amendments hereto, is established by the TPEx and shall take effect once approved and enforced by the competent authority.
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