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Definitions:
- 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” that issues exchange-traded fund (ETF) beneficial certificates for the operation of creation and redemption of the ETF beneficial certificates for its own account or on behalf of its customers.
- The term “custodian institution”refers to a financial institution that has signed a trust agreement with a SITE that issues ETF beneficial certificates.
- The term “applicant”refers to a customer who engages in creation or redemption of ETF beneficial certificates through the account opened in a participating dealer or a participating dealer that engages in creation or redemption of ETF beneficial certificates for its own account.
- 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 securities and estimated cash component that would be required to apply for in-kind creation or redemption of one creation unit of beneficial certificate on the next trading day.
- The term “in-kind creation”refers to the participating dealer for its own account or on behalf of its customer delivering a portfolio of securities 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 beneficial certificates.
- The term “in-kind redemption”refers to the participating dealer for its own account or on behalf of its customer delivering ETF beneficial certificates to the SITE in exchange for a portfolio of securities and cash component per basket as published on the PCF as notified by the SITE for one creation unit or its integer multiples.
- 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 beneficial certificates; the calculation basis for the monetary amount and units of the creation shall comply with the trust agreement.
- The term "cash redemption" refers to the participating dealer for its own account or on behalf of its customer delivering ETF beneficial certificates to the SITE in exchange for cash; the calculation basis for the monetary amount of the redemption shall comply with the trust agreement.
- The term "ETF with domestic component securities" refers to an ETF in which the component securities of its underlying index are all domestic securities.
- The term "ETF with foreign component securities" refers to an ETF in which the component securities of its underlying index contain one or more foreign securities, or to an ETF as specified under Article 37, paragraph 4 of the Regulations Governing Securities Investment Trust Funds (“linked ETF”).
- 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 securities into a portfolio of securities 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 beneficial certificates from a SITE.
- The term “minimum in-kind creation ”refers to the situation where a participating dealer may, with the consent of the SITE, create the beneficial certificates of ETF with domestic components securities for its own account by delivering at least ninety percent (90%) of the kind of securities 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 quantity of securities on the next trading day and delivering the securities to the custodian institution.
- The term “cash in-lieu”refers to the practice where the in-kind creation or redemption of ETF beneficial certificates by an applicant may be tendered in cash as determined by the SITE if a specific security included in the portfolio of securities as published on the PCF is in any of the following situations:
- The applicant is restricted by law to hold or transfer said specific security.
- The trading of said security has been stopped on the exchange.
- Said security may be substituted by cash as published on PCF by the SITE.
- The SITE does not own said security or has insufficient shares of the security and is unable to borrow sufficient shares to deliver to the applicant when the applicant redeems the ETF beneficial certificates in-kind.
- Said security cannot be settled in the foreign market by the applicant, and is approved by the management company for its in-kind creation.
- Situations in which the trust agreement of the ETF provides that cash in-lieu is permitted.
- 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 beneficial certificates or the SITE should pay the amount to the applicant when the applicant redeems ETF beneficial certificates; if the cash payment is negative, it means the SITE should pay the amount to the applicant when the applicant creates ETF beneficial certificates or the applicant pays the amount to SITE when it redeems ETF beneficial certificates.
- The term “shortfall”refers to the securities in the portfolio of securities published on the PCF not delivered by a participating dealer when it transacts on “minimum in-kind creation ”basis.
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Operating principles for participating dealers carrying out in-kind creation (redemption) of ETF with domestic component securities, or selling beneficial certificates (portfolio of securities) on the same day for its own account or on behalf of its customers:
- TWSE accepts the applications of participating dealers to carry out in-kind creation (redemption) of ETF, or sell beneficial certificates (portfolio of securities) 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.
- 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, foreign national, or mainland China area investor, 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:
- Application No.: The code of the head office of the participating dealer followed by a three-digit serial number.
- The account numbers of the applicants: there shall be no more than three applicants in the case of aggregate creation.
- Type of application: In-kind creation, in-kind redemption, aggregate creation, minimum in-kind creation, in-kind creation and sale of beneficial certificates, in-kind redemption and sale of portfolio of stocks, minimum in-kind creation and sale of beneficial certificates.
- Quantity of beneficial certificates for in-kind creation or redemption.
- Details of kind and quantity of the securities (beneficial 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, or shortfall of securities, or in-kind redemption (creation) on the previous trading day.
- Kind and quantity of securities that adopt cash in lieu, and the reasons for cash in lieu.
- Amount of deposit required for shortfall.
- Description of why this application is allowed to adopt cash in lieu.
- Estimated cash payment based on PCF.
- When carrying out the in-kind creation (redemption) of ETF beneficial certificates, the participating dealer should, based on the particulars stated in the Application Form, examine the holdings of securities (beneficial certificates) in the applicant’s central depository account, which in combination with borrowed stocks (beneficial certificates) balance of securities (beneficial 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 TWSE.
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, TWSE will forward all application data to the CSD for handling of the earmark operation. - If the applicant uses the balance of securities bought on the previous trading day, and/or securities bought on the day of application for the securities required for in-kind creation or redemption of beneficial certificates, 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. - 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 TWSE. Upon the receipt of such application, TWSE 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, foreign national, or mainland China area investor), 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. - Before submitting customer’s application for buying portfolio of securities (beneficial certificates) and selling beneficial certificates (portfolio of securities) on the same day according to Article 12 of the Regulations Governing Trading of Beneficial Certificates of TWSE, 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 Beneficial Certificates and the Represented Portfolio of Securities 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 beneficial certificates (securities) 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 sum of the securities (beneficial certificates) holding of the participating dealer or its customer, in combination with balance of securities (beneficial certificates) bought on the previous business day, and on the application day in regular trading, and the borrowing quantity and quantity of in-kind redemption (creation) on the previous business day is insufficient to meet the requirements published in the PCF that in-kind creation (redemption) cannot be effected, the shares of securities or units of ETF bought shall be processed in accordance with the relevant rules and regulation of TWSE, while the shares or units sold may be handled in the following manners:
- Changing the trading type of beneficial certificates sold from regular sale to short sale on the same day;
- Borrowing securities pursuant to Article 109 of the TWSE Operating Rules by 10 a.m. of the second trading day following the application day to cover the securities sold; and
- 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 beneficial certificates (securities) credited to the applicant into the applicant’s central depository account.
- 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 beneficial certificates before placing a sell order of said certificates.
- If an applicant cannot hold or transfer certain securities 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 securities on a temporary basis for in-kind creation or redemption of ETF beneficial certificates with the consent of the relevant competent authority, TWSE 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 securities. 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 TWSE.
- 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 beneficial certificates and other necessary transfers as well as buying and selling ETF beneficial certificates or the portfolio of securities represented in the ETF beneficial certificates 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 securities as those underlying the put (call) warrants issued by the participating dealer for hedging purpose, and if deemed necessary, hold the alternate constituent securities.) 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 and subsequently sell those securities. To open such specific account with TWSE, 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 securities of the underlying index for 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 securities of the underlying index for an OTC ETF contain listed securities. - Where the component securities of the underlying index contain OTC securities, only after participating dealers apply for in-kind creation (redemption) of the ETF beneficial certificates to the TWSE will the TWSE forward the application information to the GreTai Securities Market.
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Operating principles for participating dealers carrying out creation and redemption of beneficial certificates of ETFs with foreign component securities for its own account or on behalf of its customers
- 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.
- A participating dealer carrying out creation and redemption of beneficial certificates for ETFs with foreign component securities on behalf of customers shall comply with the following provisions:
- If the applicant uses the balance bought through a single account in ordinary trading on the previous trading day to meet the need for the beneficial certificates required for the redemption of beneficial certificates of ETFs with foreign component securities, the participating dealer shall, on the day of application, collect in advance on the application date the price required to be paid for the balance of such ETFs bought by the applicant.
- When accepting a customer’s order to create or redeem ETFs, the participating dealer may collect in advance the cash difference and other relevant charges or payments as calculated by the SITE. After ascertaining the actual payment due, the participating dealer should notify the applicant to make additional payment if the pre-collected payment is insufficient or to receive a refund if the pre-collected payment is excessive.
- The participating dealer shall open a separate segregated deposit account with its clearing bank specifically for the deposit and payment of amounts collected in advance in association with the redemption operations under Point IV, paragraph 2, subparagraph (1) hereof, and of cash payments and other relevant charges or payments in association with creation or redemption operations under Point IV, paragraph 2, subparagraph (2) hereof.
- The provisions of paragraphs 7, 8, and 9 under Point III shall apply mutatis mutandis where a participating dealer carries out creation or redemption of beneficial certificates of ETFs with foreign component securities for its own account or on behalf of its customers.
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