Chapter III Trading Regulations |
| Article 15 | A securities firm providing financial derivatives trading services to a professional institutional investor or high net worth juristic person investor shall enter into an ISDA Master Agreement with the trading counterparty, or be subject to other standard agreements and market practices. If the financial derivative product contract that a securities firm enters into with a customer other than a professional institutional investor or high net worth juristic person investor, and the trading documents so furnished, including the master agreement (or ISDA Master Agreement), product prospectus, risk disclosure statement, and trade confirmation document, are in the English language, the securities firm shall provide a Chinese-language translation thereof.
When the trading counterparty of the preceding paragraph is a natural person, the written contract shall stipulate agreement that the competent authority and the TPEx may collect, process, and use the person's personal data.
When a securities firm enters into a contract with a customer other than a professional institutional investor or high net worth juristic person investor, it may proceed only after meeting the requirement that an appropriate unit or personnel review the contract signing procedures and the completeness of the information provided by the customer.
The financial derivative product contract that a securities firm enters into with the counterparty may stipulate the method for determining the amount payable for settlement in the event of early termination of a trade, which shall reflect and calculate the current market value of the trade, including the value that originally would be paid under the early-terminated trade upon expiration after the early termination date.
The conditions for early termination of a trade and the method for determining the amount payable for settlement in the event of early termination, as referred to in the preceding paragraph, shall be clearly specified in relevant contracts or otherwise fully disclosed to the counterparty.
The contracts entered into between a securities firm and its customers, and other written documents required for the provision of financial derivative services to customers, may be made in the form of electronic documents as defined in the Electronic Signatures Act.
The execution, signing, or signing as confirmation, specified in these Regulations may be done by electronic signature, digital signature, or other means agreed upon between the parties.
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| Article 16 | When entering into a financial derivatives trade with an ordinary customer, a securities firm shall fully specify in the written contract the important content of the trade and disclose the risks, and shall comply with the following requirements:
- It shall adhere to the principle of good faith, and shall use text or other means that the customer is capable of fully understanding.
- All information or data in all explanations or disclosures must be accurate. All statements or diagrams shall be fairly presented, and there may not be any falsehood, fraud, concealment, or anything that otherwise could be misleading. The aforesaid information or data shall be dated.
- The language used in sales documents shall be Chinese, and every effort shall be made to ensure that it is clear and easy to understand. When necessary, the original language text may be appended in notes.
- All sales documents must use printed page numbers or another appropriate method to enable customers to confirm whether they have received complete information.
When a securities firm specifies important content and discloses risks to the customer pursuant to the preceding paragraph, it shall retain the relevant materials on file, and incorporate them into the securities firm's internal control and auditing systems for management.
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| Article 17 | The "important content" in the preceding article is as follows:
- The method for and restrictions on the customer's exercise of rights, amendment, rescission, and termination with respect to the financial derivatives trade.
- The important rights, obligations, and duties of the securities firm with respect to the financial derivatives trade.
- The fees and financial penalties the customer is required to bear, including the times at which they are to be collected and the method of their calculation and collection.
- Whether the financial derivatives trade is protected by deposit insurance, an insurance stabilization fund, or other relevant safeguard mechanisms.
- Channels for resolution and complaints/appeals for disputes arising in connection with financial derivatives trades provided by the securities firm.
- Other matters required to be reported regularly or from time to time, and other matters required to be specified, in connection with any of the financial derivatives trades pursuant to laws and regulations.
The important content of the preceding paragraph shall be expressed in the written contract by a conspicuous typeface or method.
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| Article 18 | When entering into a financial derivatives trade with an ordinary customer, a securities firm shall specify in the written contract whether the dispute resolution procedures of the Financial Consumer Protection Act shall apply in the event of a financial consumer dispute.
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| Article 19 | A securities firm that provides financial derivatives trading services to customers shall do so with the due care of a good administrator, in accordance with fiduciary obligations, and based on the principle of good faith.
When a securities firm undertakes a financial derivatives trade with a customer other than a professional institutional investor or high net worth juristic person investor, it shall not encourage or induce the customer to conduct trades through borrowing funds or debt financing, and shall establish a system for protection of customer rights and interests based on product suitability, notification and disclosure of product risks, and handling of trading disputes. Trades shall be carried out in accordance with the operating procedures set out under that system.
When a securities firm provides financial derivatives trading services to a customer other than a professional institutional investor or high net worth juristic person investor, the securities firm shall establish a product suitability system, which shall at the least include a set of know-your-customer assessment procedures, customer characteristic assessments, and product characteristic assessments in order to clearly ascertain the customer's investment experience, the status of the customer's assets, the customer's trading objectives, the customer's understanding of the product, and the suitability of the product for trading by the customer.
The customer characteristic assessments and rated assessment results produced by the securities firm under the product suitability system referred to in the preceding paragraph shall be reviewed by an appropriate unit or personnel, and shall be reexamined at least once per year. The assessment results, and any subsequent amendment thereto, must furthermore be confirmed by the customer by affixing its signature or seal of record or by another method agreed upon between the parties.
A securities firm, except as otherwise provided, may not provide an ordinary customer with financial derivatives trading services that exceed the level appropriate to the customer, nor may it sell to an ordinary customer any financial derivative product that is restricted to investment by professional customers or that is a complex high risk product. This restriction, however, does not apply to trades of financial derivatives other than structured instruments that an ordinary customer enters into with a securities firm for hedging purposes.
A securities firm entering into trading of any complex high-risk product with a customer other than a professional institutional investor or high net worth juristic person investor shall fully explain to the customer the important content of the financial derivative products and related services and contracts, including the important parts of the transaction terms and conditions, and shall disclose associated risks. Unless the transaction is made in an automated manner other than in person or the customer disagrees, a record of the above explanation and disclosure shall be retained by audio or video recording.
"Complex high-risk product" in these Regulations means a financial derivative that has more than three settlement or price comparison periods, and that contains an embedded put option, but excluding the following
- Structured instruments.
- Swaps.
- A series of plain vanilla options or forward exchange transactions under a single signing of a contract for multiple transactions, of which the customer may rescind a specific number of the transactions at any time.
- Other types of products as approved by the competent authority.
With respect to a securities firm conducting the business of financial derivatives trades, the compliance requirements, such as product suitability, product risk notification and disclosure, method of audio or video recording, and the types of financial derivatives that may be provided to an ordinary customer, will be prescribed by the TPEx, and will be publicly announced after submission to and approval by the competent authority.
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| Article 20 | A securities firm shall handle customer complaint cases in a fair, reasonable, and effective manner, with the goal of protecting customer rights and interests.
A securities firm that enters into financial derivatives trades with ordinary customers shall adopt procedures for the handling of customer complaints, which shall include the following:
- Establishment of a channel for customer opinions and customer complaints.
- Adoption of appropriate methods and procedures for investigation of complaints.
- Establishment of a unit or personnel with responsibility and authority for investigations.
- Establishment of methods and procedures for responding to complaints, and procedures for follow-up management. The methods and procedures must conform to the requirements of the Financial Consumer Protection Act.
When there is a cumulative total of five unresolved customer complaints under the preceding paragraph, the general manager shall convene an internal meeting to propose methods of resolving the cases and produce a concrete plan for reducing the number of customer complaints. A record shall also be made at the meeting of related matters, the status of implementation, and an assessment of effectiveness, which shall be reported to the board of directors. Within 2 weeks after reporting to the board, the record shall be submitted by letter to the TPEx.
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| Article 21 | Prior permission shall be obtained from the Central Bank when a securities firm's OTC financial derivatives trading and related hedging transactions involve foreign exchange Foreign exchange settlement matters shall be carried out in accordance with the Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions and related regulations.
A securities firm may carry out hedging transactions in the capacity of a customer with designated banks and foreign financial institutions that have received Central Bank approval for derivatives and foreign exchange business.
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| Article 22 | When financial derivatives trading business operated by a securities firm involves foreign exchange business, matters relating to payment and receipt of settlement money and fees, and payment of funds upon early cancellation or expiration of contracts, shall be carried out as follows:
- For derivatives denominated in New Taiwan Dollars, all payments and receipts of settlement money and fees between the securities firm and the counterparty shall be in New Taiwan Dollars.
- For derivatives denominated in a foreign currency, all payments and receipts of settlement money and fees between the securities firm and the counterparty shall be in foreign currency. Payments by the counterparty may be made by account transfer from the counterparty's own foreign exchange deposit account; where foreign exchange settlement is required, it may be carried out by the counterparty at a designated foreign exchange bank, or at the same securities firm that handles spot foreign exchange trading business, in accordance with the Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions.
- Upon expiry of the contract or early cancellation by the counterparty, the securities firm shall deposit the funds receivable by the counterparty, in the denominating currency and on the settlement date stipulated by the contract, in the counterparty's New Taiwan Dollar or foreign exchange deposit account.
A securities firm operating the business of the preceding paragraph shall submit a monthly operations statement to the foreign exchange authority and the TPEx within 5 business days after the end of each month.
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| Article 23 | For structured instruments sold by a securities firm, the maximum potential loss shall be limited to the original transaction price and a distinction shall be made between principal-protected and non principle-protected products. However, when a structured instrument is sold under the name of a principal-protected product or claims principal protection benefits, it shall be stipulated that the customer may, at maturity or when early rescission made in accordance with the terms of the contract, recover the total amount of the original transaction price.
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| Article 24 | A securities firm that provides structured instrument trading services to a customer other than a professional institutional investor or high net worth juristic person investor shall carry out the following assessments:
- The securities firm shall assess the customer's characteristics to ascertain whether the customer is a professional customer or an ordinary customer, and shall perform an overall assessment of the customer's degree of risk tolerance on the basis of factors including the customer's age, investing knowledge and experience, status of assets, trading objectives, and understanding of the product. At least three discrete levels of risk tolerance shall be distinguished.
- The securities firm shall undertake an assessment of the product's characteristics, and shall retain a written record for verification. The assessment shall include at least the items listed below:
- Assessment and confirmation of the legality of the given structured instrument, the related investment assumptions, the reasonableness of the risk/return profile, the appropriateness of the transaction, and whether there are any conflicts of interest.
- Overall assessment and confirmation of the degree of risk inherent in structured instruments, in which at least three discrete levels of risk are distinguished, with respect to factors such as their characteristics, the risk and probability of principal loss, liquidity, structural complexity, and the term of the instruments.
- Assessment and confirmation of the adequacy and accuracy of the disclosures made in the product information and marketing documents provided to the customer.
- Confirmation of whether only professional customers can invest in the given structured instrument.
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| Article 25 | A securities firm that provides structured instrument trading services to customers other than professional institutional investors and high net worth juristic person investors shall impose the following controls on its marketing procedures:
- The securities firm shall indicate, in a prominent typeface in the notice to customers and in the prospectus, the degree of product risk for the given structured instrument, based on the assessment of the product's characteristics pursuant to Article 24, subparagraph 2.
- A securities firm that provides structured instrument trading services to customers shall fulfill its duty of disclosure. For a product targeted for sale to 10 or more persons and furthermore having identical terms and conditions of transaction and a duration in excess of 6 months, the securities firm shall provide ordinary customers with a review period of not less than 7 days to review the related contracts of the structured instrument, and a review period of not less than 3 days for professional customers to do the same, unless the professional customer provides a signed statement expressly indicating that the customer has fully reviewed the product. When such a period of review is not required for a given product, the fact that there is no review period for the given product shall be clearly stated in the product's prospectus.
- A securities firm that provides structured instrument trading services to ordinary customers shall read aloud or use electronic equipment to explain to the customer the important content of the notice to customers, and shall retain an audio recording as a record or use electronic equipment to retain a trail of the relevant procedures carried out. However, in the case of a professional customer, it may instead deliver the information in writing or by means of an audiovisual medium.
- A securities firm that provides structured instrument trading services to a natural person customer shall assign dedicated personnel to explain the products. If the products provided are non-principal-protected products, the securities firm shall use audio or video recording means to retain a record of the content of the explanatory procedures carried out by the designated personnel. Once it has done so, the securities firm will subsequently be exempted from assigning dedicated personnel to give explanations regarding trading of the same type of structured instrument.
- When a securities firm undertakes a structured instrument trade with a customer that is a juristic person, then in subsequent trades with the same customer for the same type of structured instrument, the securities firm may be exempt, if the customer signs a written consent to exemption for that specific transaction, from following the requirements of subparagraph 3.
- The "same type of structured instrument" as used in the preceding two subparagraphs means that the product's structure, denominating currency, and linked underlying asset are all completely the same.
The matters to be handled pursuant to the preceding paragraph regarding the notice to customers, the required disclosures in the product prospectus, and the method for audio recording, video recording, or for retention using electronic equipment, will be formulated by the TPEx and publicly announced after submission to and approval by the competent authority.
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| Article 26 | A securities firm shall adopt the content of Articles 24 and 25 as part of its internal control and internal auditing systems and carry out related audits and inspections.
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| Article 27 | When a securities firm provides structured instruments trading services to a customer, the customer may request the securities firm to furnish the marking-to-market information and price quote information relating to early cancellation with respect to the customer's transaction; if a structured instrument is provided to an ordinary customer who is a natural person, the securities firm shall furnish the customer information on marking-to-market..
When structured instruments with the same transaction terms and conditions are sold to ten or more parties, the securities firm shall disclose on its website relevant market price information or price quote information for early cancellation, and shall also disclose relevant information through the TPEx information system.
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| Article 28 | When a securities firm engages in financial derivatives trading, the two parties in the transaction may stipulate that payment upon exercise will be by cash settlement or physical delivery.
When a linked underlying for payment by physical delivery under the preceding paragraph is a TWSE listed or TPEx listed stock, the payment shall be made only by delivery of the linked underlying securities by the securities firm.
The linked underlying security for delivery by the securities firm under the preceding paragraph shall be transferred from the hedging account of the securities firm, and the transfer shall be processed in accordance with the Operating Regulations of the Taiwan Depository & Clearing Corporation.
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| Article 29 | 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 | 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 31 | When the securities firm elects to sell shares of the underlying security by borrowing from security holders in a securities borrowing and lending transaction, if the security is a TWSE listed or TPEx listed stock, it shall first establish a contract for the securities loan in accordance with Article 32-1, paragraph 2 of the Regulations Governing Securities Firms. The lender shall then apply, through its securities firm, to the Taiwan Securities Central Depository Co., Ltd. for a transfer of all loaned shares into the hedge account of the securities firm, or shall first earmark the loaned shares and then, as required for hedging purposes, transfer the shares into the hedge account in separate lots upon application by the securities firm.
When the securities firm elects to short-sell shares in a TWSE or TPEx listed stock, it shall open a margin account with another securities firm or with a non-affiliate securities finance company, and report information relating to such account by letter to the TPEx and the TWSE.
The opening of the aforementioned margin account shall be carried out in accordance with the Operating Regulations for Securities Firms Handling Margin Purchases and Short Sales of Securities and the provisions of the various securities finance companies related to the aforesaid Regulations.
The securities broker at which the aforementioned margin account is opened may only accept short sale orders or buy-to-cover orders from securities firms seeking to hedge financial derivatives and applications to cover short sales with spot securities. When the securities firm uses the margin account to engage in short sales or buy-to-cover transactions for the purpose of hedging, reports of out-trades and account number corrections may not be filed for this account, except in cases where the appointed securities broker has committed an error.
The holders of the underlying security referred to in paragraph 1 may not be any person regulated under Article 22-2, paragraph 1 or 3 of the Securities and Exchange Act.
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| Article 32 | For the purpose of stabilizing the price of an underlying security, after closing out the related transaction, a securities firm may make a transfer of the linked underlying stock in the hedge account to its proprietary trading account.
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| Article 33 | A securities firm shall draft a set of criteria for utilization of funds, to govern utilization of transaction prices received through structured instrument transactions. Those criteria, and any amendments thereto, shall first be passed by a resolution of the board of directors and then submitted by letter to the TPEx for recordation.
The content of the criteria for utilization of funds under the preceding paragraph shall include principles and instruments for fund utilization, scope of utilization, operating procedures, liquidity control measures, and the department in charge of execution and its authorities.
The securities firm shall adopt rigorous standards for internal control and enhanced internal auditing based on the standards for utilization of funds of the preceding paragraph. It shall undertake regular review and analysis, and produce records for future audit or inspection.
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| Article 34 | A securities firm undertaking structured instrument transactions shall allocate 3 percent of the total outstanding balance of its structured instrument contracts each month and pay that sum to the TPEx as a performance bond. A securities firm whose regulatory capital adequacy ratio is below 250 percent, however, shall pay 5 percent of the above balance to the TPEx as a performance bond.
A securities firm may pay the performance bond of the preceding paragraph in cash, bank certificates of deposit, or central government bonds, and shall supplement the bond amount or obtain a refund from the TPEx on or before the tenth of each month in accordance with monthly changes in the outstanding balance of the structured instrument and its regulatory capital adequacy ratio.
The TPEx shall open a segregated deposit account for the custody of performance bonds received by the TPEx, and reimburse any accrued interest, after deducting taxes and required fees, to the securities firms by the end of January and July each year.
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| Article 35 | When a securities firm engages in the trading of financial derivatives related to Taiwan equities with counterparties, the scope of eligible linked underlying assets shall be limited to the following:
- TWSE listed or TPEx listed stocks eligible to be the underlying in the issuance of TWSE listed or TPEx listed call (or put) warrants, or eligible for margin purchase or short sale transactions, provided that if the trading counterparty is an ordinary customer, the scope of eligible linked underlying assets shall be limited to TWSE listed or TPEx listed stocks eligible to be the underlying in the issuance of TWSE listed or TPEx listed call (or put) warrants.
- Exchange traded funds (ETFs) or offshore ETFs.
- Taiwan depositary receipts (TDRs).
- Stock indexes published by the TWSE or the TPEx.
- Convertible (or exchangeable) corporate bonds that have been listed on the TWSE or TPEx for no less than 5 trading days.
- Publicly offered beneficial certificates of securities investment trust funds.
- Futures or options contracts of the Taiwan Futures Exchange Corporation.
- Combinations of the foregoing eligible linked underlyings.
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| Article 36 | A securities firm that trades equity derivatives linked to Taiwan stocks with offshore overseas Chinese or foreign nationals shall first confirm that the trading counterparty has completed registration in accordance with the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals.
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| Article 37 | 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 | 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 38 | When a securities firm engages in credit derivatives transactions and the trading counterparty is an assumer of credit risk, the securities firm shall assess the capacity and the appropriateness of the trading counterparty for the credit derivative transaction, and at minimum shall inform the counterparty of the following matters:
- The trading counterparty shall itself assess and monitor the credit risk of the credit entity under the management contract and the credit risk of the securities firm.
- Returns on the given product derive primarily from bearing credit risk associated with the credit entity under the contract; losses may be incurred if a stipulated credit event occurs.
- The securities firm shall provide a complete explanation defining the stipulated credit default event, the method of settlement to be used after the occurrence of a credit default event, the scope of debt obligations deliverable in the case of physical settlement, and the method of calculation for settlement of the spread in cash.
- The given product typically lacks market liquidity, and if such a contract contains a stipulation for early cancellation, an explanation must be provided of the costs and the maximum possible loss that will be borne by the trading counterparty should the trading counterparty demand early cancellation.
When a securities firm engages in credit derivatives transactions, if the securities firm is an assumer of credit risk and the reference entity is a related party of the securities firm as referred to in Article 41, paragraph 1, subparagraphs 1 to 3, the transaction terms may not be more favorable than those offered to other similarly situated counterparties, and the following provisions shall be complied with:
- The transaction must be resolved upon by at least three-fourths of the directors present at a meeting attended by not less than two-thirds of the number of directors; or, if relevant internal operational rules have been adopted, the administering department may be given general authority to conduct such transactions in accordance with those operational rules by a resolution of at least three-fourths of the directors present at a meeting attended by not less than two-thirds of the number of directors.
- The amount of potential loss estimated based on credit risk shall be fully secured by collateral, and measures for controlling the amounts of transactions under this paragraph shall be adopted. The collateral shall be limited to cash, government bonds, Central Bank negotiable certificates of deposit, Central Bank savings bonds, treasury bills, and bank certificates of deposit.
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| Article 39 | 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 | 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 41 | A securities firm may not engage in financial derivatives trades related to Taiwan equities with any of the following parties:
- A director, supervisor, or officer of the securities firm, or a shareholder that directly or indirectly holds 10 percent or more of its total shares.
- A spouse, minor child, or nominee of any of the persons referred to in subparagraph 1.
- Any investee company in which 10 percent or more of total shares are directly or indirectly held by any person referred to in the preceding two subparagraphs.
- The issuer of the conversion securities, linked securities, or underlying securities, or any person related to the issuer as set out in the preceding 3 subparagraphs.
Calculation of the total shareholdings of the shareholders under subparagraph 1 above shall include shareholdings of spouses, minor children, and nominees of the persons under subparagraph 1.
Before a securities firm engages in a financial derivatives trade referred to in the preceding paragraph with a trading counterparty, the counterparty shall sign an undertaking stating whether or not it is a related party as set out in paragraph 1; when the trading counterparty is a professional institutional investor, the securities firm may use available information to make an effective confirmation, by means of its own internal operating procedures, that the trading counterparty is not a related party under paragraph 1. When the securities firm is unable to undertake verification of a trading counterparty, however, and when the trading counterparty is unable to produce an undertaking, the securities firm may not engage in a trade with that counterparty.
A securities firm may enter into trades with the professional institutional investors of paragraph 1, subparagraphs 1 through 3, provided that the terms it accords those persons may not be more favorable than those accorded others in the same class of counterparties, and that the trades may be undertaken only after passage of a resolution by three-fourths or more of the company directors in attendance at a director's meeting with a two-thirds quorum, or after a resolution granting authorization to the relevant department.
The restrictions of paragraph 1, subparagraphs 1 through 3 do not apply when the price of a trade by a securities firm, with one individual non-institutional investor, is less than NT$1 million, or when the cumulative price of unexpired trades is less than NT$5 million.
Without regard for the restriction in paragraph 1, subparagraph 4, a securities firm may engage, with an issuer of stock appreciation rights, in trading of financial derivatives linked to the Taiwan stock equity of the issuer, and shall comply with the following requirements:
- The securities firm shall ensure that the issuer engages in such trades due to a hedging need arising from the issuance of stock appreciation rights, and shall obtain reasonable and credible supporting evidence from the issuer before engaging in the trades.
- The trades shall be limited to the sale of call options linked to the stock of the issuer.
- The exercise method shall be limited to cash settlement.
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| Article 42 | A securities firm undertaking a financial derivatives transaction with a customer other than a professional institutional investor or high net worth juristic person investor shall in the risk disclosure statement or individual trade confirmation indicate by a conspicuous typeface or other method the maximum possible loss or principal protection percentage, along with a description of the major risks involved, such as liquidity risk, foreign exchange risk, interest rate risk, tax risk, and cancellation risk.
If the "maximum possible loss" and the foreign exchange risk involved in the product under the preceding paragraph cannot be expressed in numerical quantities, they may be expressed in words.
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| Article 43 | 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 44 | When a securities firm operates the business of OTC trading of financial derivatives, it shall establish its risk management system pursuant to the Risk Management Best-Practice Principles for Securities Firms announced and implemented by the TPEx together with the TWSE and the Taiwan Securities Association (TSA) to implement and manage the procedures for identifying, measuring, monitoring, and reporting transaction risks, and shall also comply with the following provisions:
- The securities firm conducting financial derivatives business shall follow appropriate review and approval procedures, and its senior management shall work together with the managerial officers involved in the relevant business to study and adopt a risk management system. Limits on risk tolerance and the use of derivatives shall be regularly reviewed and submitted to the board of directors for examination and approval.
- Financial derivatives business trading operations and settlement operations shall not be concurrently handled by the same personnel. The securities firm shall establish a risk management unit outside of and independent from its trading division to carry out such tasks as identifying, measuring, and monitoring risks. The risk management unit shall regularly report position risks and valuations of gains and losses to the senior management.
- The securities firm shall set the frequency of valuation of financial derivatives positions individually according to the nature of each type of position. In the case of trading positions, valuation shall in principle be carried out in real time or daily marking-to-market. For hedging transactions conducted for the purposes of the securities firm's own business requirements, valuation shall be carried out at least once per month.
- The securities firm shall adopt operational rules for the internal review of new products, with the authority and duties of each relevant department specified therein, and a product review panel shall be formed and consist of managerial officers in charge of finance and accounting, legal compliance, risk control, products, or business units. Before its launching, a new financial derivative shall be subject to review by the product review panel in accordance with the aforementioned rules. When the new product is a complex and high-risk one, it shall be examined by the product review panel and then submitted to the board of directors or the board of managing directors for approval. The securities firm's rules for internal product review shall cover at least the items listed below:
- Review of the nature of products.
- Review of the operational strategy and business policy.
- Review of risk management.
- Review of internal controls.
- Review of accounting methods.
- Review of safeguards of customer rights and interests.
- Review of compliance with laws and regulations and required legal documents.
- The securities firm shall adopt a remuneration and reward system as well as assessment principles for associated persons conducting the financial derivatives business. The system and principles shall avoid a direct connection with the sales performance of specific financial derivatives, and shall incorporate non-financial criteria that include items such as whether there is any violation of applicable laws and regulations, self-regulatory rules, or operating directions, deficiency discovered in an audit, customer dispute, and faithful implementation of know-your-customer procedures; the system and principles shall be approved by the board of directors.
- When formulating its pricing policy for financial derivatives, the securities firm shall take factors such as the position valuation, risk cost, and operating cost of the financial derivatives into consideration, and shall establish internal operating procedures to carefully review the reasonableness of the prices at which the securities firm conducts financial derivative transactions with customers.
- The securities firm shall establish and maintain an effective valuation and control mechanism for financial derivatives to prudently review the reasonableness of the transaction quotation and mark-to-market value of products.
The branch unit established within the territory of the ROC by a foreign securities firm may implement the risk management system in accordance with the provisions of the head office, provided that it shall still comply with the provisions of the preceding paragraph.
The TPEx may carry out special audits on the state of risk management implementation at securities firms or request explanations from securities firms, and when necessary may demand that securities firms take corrective action.
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| Article 45 | 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 | 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 | 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 | 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 | 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 | 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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| Article 51 | The TPEx may make periodic announcements of information on financial derivatives trading.
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