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II. Definitions:
1. The term “participating dealer” refers to a securities firm that has signed a participant agreement with a securities investment trust enterprise (hereunder referred to as “SITE”) for the operation of creation and redemption of an Exchange Traded Fund (hereunder referred to as “ETF”) for its own account or on behalf of its customers.
2. The term “custodian institution” refers to a financial institution that has signed a trust agreement with a SITE that issues ETF beneficiary certificates.
3. The term “applicant” refers to a customer who engages in creation or redemption of ETF beneficiary certificates through the account opened in a participating dealer or a participating dealer that engages in creation or redemption of ETF beneficiary certificates for its own account.
4. The term “portfolio composition file, or PCF” refers to a list prepared and published by a SITE each day based on the reference data of underlying index forwarded by the index provider, which indicates the portfolio of stocks and estimated cash component that would be required to apply for in-kind creation or redemption of one creation unit of beneficiary certificate on the next trading day.
5. The term “in-kind creation” refers to the participating dealer for its own account or on behalf of its customer delivering a portfolio of stocks and the cash component per basket required for one creation unit as published on the PCF as notified by the SITE, or their integer multiples to the SITE in exchange for ETF beneficiary certificates.
6. The term “in-kind redemption” refers to the participating dealer for its own account or on behalf of its customer delivering ETF beneficiary certificates to the SITE in exchange for a portfolio of stocks and cash component per basket as published on the PCF as notified by the SITE for one creation unit or its integer multiples.
7. The term "cash creation" refers to the participating dealer for its own account or on behalf of its customer delivering cash to the SITE in exchange for ETF beneficiary certificates; the calculation basis for the monetary amount and units of the creation shall comply with the trust agreement.
8. The term "cash redemption" refers to the participating dealer for its own account or on behalf of its customer delivering ETF beneficiary certificates to the SITE in exchange for cash; the calculation basis for the monetary amount of the redemption shall comply with the trust agreement.
9. The term "ETF with domestic component stocks" refers to an ETF in which the component stocks of its underlying index are all domestic securities.
10. The term "ETF with foreign component stocks" refers to an ETF in which the component stocks of its underlying index contain one or more foreign securities.
11. The term “aggregate creation” refers to the situation where no more than three applicants who, based on their mutual agreement, combine their individual holding of stocks into a portfolio of stocks required for one creation unit as published on the PCF or its integer multiples, designate one among them as payer of cash payment required, and jointly appoint one participating dealer (if one of the applicants is a participating dealer with a proprietary trading said applicant shall be the participating dealer) to create ETF beneficiary certificates from a SITE.
12. The term “minimum in-kind creation ” refers to the situation where a participating dealer may, with the consent of the SITE, create the beneficiary certificates of ETF with domestic components stocks for its own account by delivering at least ninety percent (90%) of the kind of stocks required with more than ninety percent (90%) of the aggregate market value of creation basket for the in-kind creation, and paying a deposit for the shortfall, and then purchasing or borrowing the insufficient share quantity on the next trading day and delivering the shares to the custodian institution.
13. The term “cash in-lieu” refers to the practice where the in-kind creation or redemption of ETF beneficiary certificates by an applicant may be tendered in cash as determined by the SITE if a specific stock included in the portfolio of stocks as published on the PCF is in any of the following situations:
(1) The applicant is restricted by law to hold or transfer said specific stock.
(2) The trading of said stock has been stopped on the exchange.
(3) Said stock may be substituted by cash as published on PCF by the SITE.
(4) The SITE does not own said stock or has insufficient shares of the stock and is unable to borrow sufficient shares to deliver to the applicant when the applicant redeems the ETF beneficiary certificates in-kind.
(5) Said stock cannot be settled in the foreign market by the applicant, and is approved by the management company for its in-kind creation.
14. The term “cash payment” refers to the amount equivalent to the cash component multiplied by the number of creation or redemption units; if the cash payment is positive, it means the applicant should pay the amount to the SITE when creating ETF beneficiary certificates in-kind or the SITE should pay the amount to the applicant when the applicant redeems ETF beneficiary certificates in-kind; if the cash payment is negative, it means the SITE should pay the amount to the applicant when the applicant creates ETF beneficiary certificates in-kind or the applicant pays the amount to SITE when it redeems ETF beneficiary certificates in-kind.
15. The term “shortfall” refers to the stocks in the portfolio of stocks published on the PCF not delivered by a participating dealer when it transacts on “minimum in-kind creation ” basis.
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III. Operating principles for participating dealers carrying out in-kind creation (redemption) of ETF with domestic component stocks, or selling beneficiary certificates (portfolio of stocks) on the same day for its own account or on behalf of its customers:
1. TSEC accepts the applications of participating dealers to carry out in-kind creation (redemption) of ETF, or sell beneficiary certificates (portfolio of stocks) on the same day through computer linkup. The input time is 9:00AM ~ 3:30PM on market trading days. The deposit and transfer of relevant securities shall be handled via central depository and book-entry transfer service. However, an application for which the Central Securities Depository (CSD) fails to complete the earmark operation may be corrected and input from 09:00 to 10:00 a.m. of the following business day.
2. To carry out in-kind creation or redemption for its own account or on behalf of its customers, the participating dealer shall first produce the “Application for In-kind Creation or Redemption of Exchange Traded Fund”, which is attached to the PCF of the day, and then require the applicant to sign up (in the case of an overseas Chinese or foreign national, the agent broker can act on his/her behalf). All the above documents shall be kept in file for reference.
The aforesaid “Application for In-kind Creation or Redemption of Exchange Traded Fund” (hereunder referred to as the “Application Form”) shall contain the following particulars:
(1) Application No.: The code of the head office of the participating dealer followed by a three-digit serial number.
(2) The account numbers of the applicants: there shall be no more than three applicants in the case of aggregate creation.
(3) Type of application: In-kind creation, in-kind redemption, aggregate creation, minimum in-kind creation, in-kind creation and sale of beneficiary certificates, in-kind redemption and sale of portfolio of stocks, minimum in-kind creation and sale of beneficiary certificates.
(4) Quantity of beneficiary certificates for in-kind creation or redemption.
(5) Details of kind and quantity of the stocks (beneficiary certificates) for in-kind creation (redemption) to be delivered, and specifically identify the sources from which of the following: respectively, original holding, purchase on the day of application, purchase on the previous trading day, borrowing, shortfall, or in-kind redemption (creation) on the previous trading day.
(6) Kind and quantity of stocks that adopt cash in lieu, and the reasons for cash in lieu.
(7) Amount of deposit required for shortfall.
(8) Description of why this application is allowed to adopt cash in lieu.
(9) Estimated cash payment based on PCF.
3. When carrying out the in-kind creation (redemption) of ETF, the participating dealer should, based on the particulars stated in the Application Form, examine the holdings of stocks (beneficiary certificates) in the applicant’s central depository account, which in combination with borrowed stocks (beneficiary certificates) balance of stocks (beneficiary certificates) bought on the previous trading day and bought on the day of application in regular trading, and obtained through in-kind redemption (creation) on the previous trading day should be sufficient for the in-kind creation (redemption), and then submit the application to TSEC.
The securities to be delivered by the applicant as described in the preceding paragraph may not be bought on margin and the securities bought on the day of application may not be reported for trading errors or correction of account numbers.
After the time for accepting the applications described in the first paragraph above ends, TSEC will forward all application data to the CSD for handling of the earmark operation.
4. If the applicant uses the balance of stocks (ETF) bought on the previous trading day, and/or stocks (ETF) bought on the day of application for in-kind creation (or redemption), the participating dealer should collect payment for such securities bought on the day of application.
When accepting customer’s order to create or redeem ETF in-kind, the participating dealer may calculate cash payment, cash in lieu and other relevant charges or payments based on the PCF and ask the customer to pay in advance before applying for in-kind creation or redemption. After ascertaining the actual payment due and before delivering the payment to the custodian institution, the participating dealer should notify the applicant to make additional payment if the prepaid payment is insufficient or to receive a refund if the prepaid payment is excessive. The participating dealer may open another deposit account with its clearing bank specifically for the deposit and payment of cash payment, cash in lieu, and other relevant charges or payment in association with the in-kind creation or redemption service.
5. The applicant for in-kind creation or redemption of ETF may, before the deadline of application time for the day, prepare an “Application for Canceling Creation or Redemption of ETF” (hereunder called the “Cancellation Application”) by himself or through the participating dealer, and the participating dealer will submit the Cancellation Application to TSEC. Upon the receipt of such application, TSEC will confirm the receipt and ask the participating dealer to notify the applicant for confirmation. The participating dealer should print out the receipt notice and save it with the Cancellation Application signed by the applicant (or the agent of applicant in the case of an overseas Chinese or foreign national), for future reference.
The Cancellation Application shall state the following particulars: Application No., account number of the applicant (no more than three applicants in case of aggregate creation), type of application, and signature of the applicant.
6. Before submitting customer’s application for buying portfolio of stocks (beneficiary certificates) and selling beneficiary certificates (portfolio of stocks) on the same day according to Article 12 of the Regulations Governing Trading of Beneficiary Certificates of TSEC, the participating dealer should check the single-day trading ceiling of the applicant and ask the customer to produce or produce for the customer a “Same-Day Buying and Selling Exchange-Traded Fund Beneficiary Certificates and the Represented Portfolio of Stocks Application Statement” (see attached for specimen), and save the statement after it has been signed by the customer. At the time of submitting the application, the participating dealer shall also input via computer link-up the applicant’s account number, trading information on in-kind creation or redemption, as well as beneficiary certificates (stocks) and quantities already sold on the day, and then proceed with the in-kind creation (redemption) operation according to the provisions specified above.
If the stocks (beneficiary certificates) holding of the participating dealer or its customer, in combination with balance of stocks (beneficiary certificates) bought on the previous day, and on the application day in regular trading are insufficient to meet the requirements published in the PCF that in-kind creation (redemption) cannot be effected, the shares of stocks or units of ETF bought shall be processed in accordance with the relevant rules and regulation of TSEC, while the shares or units sold may be handled in the following manners:
(1) Changing the trading type of beneficiary certificates sold from regular sale to short sale on the same day;
(2) Borrowing securities pursuant to the Paragraph 4, Article 109 of TSEC Operating Rules on the application day or the next trading day to cover the securities sold; and
(3) Following other relevant rules and regulations.
For the purpose of risk management, participating dealers may charge the applicant proper amount of deposit when accepting customer orders to buy or sell.
Subsequent to the completion of settlement and in-kind creation or redemption operations, the participating dealer should deposit the remainder of beneficiary certificates (stocks) credited to the applicant into the applicant’s central depository account.
7. In the case of aggregate creation, all applicants must deliver with existing holding or borrowed securities, except for participating dealer who may for its own account deliver with balance of securities bought on the previous day or on the same day. Applicants of aggregate creation must receive the beneficiary certificates before placing a sell order of said certificates.
8. If an applicant cannot hold or transfer certain stocks as restrained by law (e.g. Article 167 of the Company Law, Article 38 of Financial Holding Company Law, and Article 28-2 of Securities & Exchange Law), but may hold or sell such stocks on a temporary basis for in-kind creation or redemption of ETF with the consent of the relevant competent authority, TSEC may, if deemed necessary for management purpose after the participating dealer has submitted the application for in-kind creation or redemption, notify the participating dealer to ask the applicant to take necessary actions to dispose the holding of such stocks. In such event, the participating dealer shall relay the message to the applicant on the day of receiving the notice and record the actions taken and report to TSEC.
9. Participating dealers shall set up a designated trading account specifically for the deposit and transfer of securities in association with their own in-kind creation or redemption of ETF and other necessary transfers as well as buying and selling ETF or the portfolio of stocks represented in the ETF for its own account. (The account number of such specific account shall uniformly be 777777-7 under the dealer’s account.) (Such specific account may hold the same stocks as those underlying the put (call) warrants issued by the participating dealer for hedging purpose, and if deemed necessary, hold the alternate constituent stocks.) The participating dealer shall neither use such specific account to purchase securities and then transfer them to another accounts of its dealer’s with restriction on bid and ask prices, nor accept transfer of securities from another accounts of its dealer’s and subsequently sell those securities. To open such specific account with TSEC, the participating dealer shall submit a copy of the participant agreement, a copy of the approval letter for the issuance of ETF and photocopies of documents evidencing the qualifications of the participating dealer.
Where the component stocks of an ETF contain over-the-counter (OTC) securities, participating dealers shall open designated trading accounts for OTC securities in accordance with the relevant rules prescribed by the GreTai Securities Market; the provisions of the preceding paragraph regarding account opening shall apply mutatis mutandis where the component stocks of an OTC ETF contain listed securities.
10. Where the component stocks of the underlying index contain OTC securities, only after participating dealers apply for in-kind creation (redemption) of the ETF to the TSEC will the TSEC forward the application information to the GreTai Securities Market.
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IV. Operating principles for participating dealers carrying out creation and redemption of ETF with foreign component stocks for its own account or on behalf of its customers
1. To carry out creation and redemption for its own account or on behalf of its customers, the participating dealer shall first produce an “Application for Creation or Redemption of Exchange Traded Fund with Foreign Component Stocks”; in the case of in-kind creation or redemption, the PCF of the day shall be attached, and then signed by the applicant (in the case of an overseas Chinese or foreign national, the agent broker can act on his/her behalf). All the above documents shall be kept on file for reference.
The aforesaid “Application for Creation or Redemption of Exchange Traded Fund with Foreign Component Stocks” shall contain the following particulars:
(1) Application No.: The code of the head office of the participating dealer followed by a three-digit serial number.
(2) The account numbers of the applicants: there shall be no more than three applicants in the case of aggregate creation.
(3) Type of application: In-kind creation, in-kind redemption, aggregate creation, cash creation, or cash redemption.
(4) Quantity of beneficiary certificates for creation or redemption.
(5) Details of each kind and quantity of the stocks to be delivered for in-kind creation, and amount of stocks that adopt cash in lieu, or amount of cash creation.
(6) Kind and quantity of the domestic stocks to be delivered, and specifically identify and make separate applications for the sources from which of the following: respectively, original holding, purchase on the day of application, purchase on the previous trading day, borrowing, or in-kind creation (or redemption) on the previous trading day and recognized by the SITE.
(7) In the case of in-kind creation or redemption, estimated cash payment based on PCF.
2. The domestic securities to be delivered by the applicant may not be bought on margin and reports of trading errors or correction of account errors may not be submitted with respect to the domestic securities bought on the day of application.
3. The provision of paragraph 9 under Point III shall apply mutatis mutandis where a participating dealer carries out creation or redemption of an ETF with foreign component stocks for its own account or on behalf of its customers.
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