Chapter I General Principles
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| Article 1 | These Rules are adopted pursuant to Article 19, paragraph 3 of the Regulations Governing Securities Firms. |
| Article 2 | A securities firm that engages in over-the-counter (OTC) trading of financial derivatives shall comply with these Rules; any matters not provided for herein shall be governed by the bylaws of the GreTai Securities Market (GTSM) and directives supplementary to these Rules. |
| Article 3 | As used in these Rules, "competent authority" means the Financial Supervisory Commission of the Executive Yuan. |
Chapter II Conditions for Application
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| Article 4 | A securities firm engaging in OTC trading of financial derivatives shall submit a separate application to the GTSM for any subject of trade named in Article 9. No OTC trading of financial derivatives may be undertaken without GTSM approval of such an application.
When a securities firm applies to engage in the business of the preceding paragraph and the GTSM does not expressly reject the application within ten days from the day after it receives the application, it means that approval is granted. The securities firm may not, however, engage in the business for which it is applying during the aforesaid ten-day period.
The qualification of a securities firm that has passed GTSM review pursuant to paragraph 1 will remain in effect and further yearly applications will not be required. |
| Article 5 | A securities firm must possess the following qualifications to apply for OTC trading of financial derivatives:
1. It must be an integrated securities firm that concurrently engages in brokerage, underwriting, and dealership business, while also having obtained approval to operate as an OTC bond dealer. A securities firm applying to engage in the business under Article 9, subparagraph 5 shall in addition obtain qualification from the competent authority as an issuer of call and put warrants.
2. Its long-term credit rating must meet one of the following standards:
(1) A rating of twBBB- or above from Taiwan Ratings Corporation.
(2) A rating of BBB- or above from Standard & Poor's Corp.
(3) A rating of BBB-(twn) or above from Fitch Ratings Limited, Taiwan Branch.
(4) A rating of BBB- or above from Fitch, Inc.
(5) A rating of Baa3.tw or above from Moody's Taiwan Corporation.
(6) A rating of Baa3 or above from Moody's Investors Service.
3. It must have reported a self-owned capital adequacy ratio in excess of 200 percent for each month of the preceding half year.
4. It must not have received of any of the following sanctions:
(1) Any sanction during the preceding three months equal to or greater than is provided in Article 66, subparagraph 1 of the Securities and Exchange Act or Article 100, paragraph 1, subparagraph 1 of the Futures Exchange Act.
(2) Any sanction during the preceding six months equal to or greater than those under Article 66, paragraph 1, subparagraph 2 of the Securities and Exchange Act or Article 100, subparagraph 2 of the Futures Trading Act.
(3) Any sanction from the competent authority during the preceding year requiring a suspension of business.
(4) Any sanction from the competent authority during the preceding two years voiding approval for any part of its business.
(5) Any sanction during the preceding year whereby the GTSM, the Taiwan Stock Exchange Corporation, or the Taiwan Futures Exchange Corporation, acting pursuant to its operating rules or corporate bylaws, has suspended or restricted the firm's trading privileges.
Any securities firm in non-conformance with the conditions of subparagraph 4 but which has effected improvement and submitted concrete verification thereof shall not be subject to the restrictions of that subparagraph. |
| Article 6 | A foreign securities firm that intends to apply to engage in OTC trading of financial derivatives may, after its head office furnishes an approval letter or a performance undertaking from its board of directors, submit an application to the GTSM in the name of the foreign entity via a branch unit in ROC territory or via a branch unit established in ROC territory by a directly or indirectly wholly-owned subsidiary. The businesses operated by the head office and its long-term credit rating must respectively meet the standards of subparagraph 1 and subparagraph 2 of the preceding article, while its self-owned capital adequacy ratio must meet a standard similar to that of subparagraph 3 of the preceding article; it shall also have received no sanction similar to those under subparagraph 4 of the preceding article from its governing competent authority for securities regulation during the half year preceding the date of application. The businesses operated by the aforesaid subsidiary and by its branch unit in
ROC territory shall further be in compliance with the provisions of subparagraph 1 of the preceding article. |
| Article 7 | A securities firm applying to engage in OTC trading of financial derivatives shall submit an application review fee to the GTSM in the amount of NT$200,000; the same fee shall be submitted with any re-application following the termination pursuant to these Rules of a securities firm's qualification for OTC trading of financial derivatives. |
| Article 8 | The application documents and appended materials that shall be submitted when a securities firm applies to conduct OTC trading of financial derivatives at its places of business are given in Appendix 1.
The directions for GTSM review and approval of securities firms' applications are as given in Appendix 2. |
Chapter III Types of Financial Derivatives and Their Trading
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| Article 9 | Pursuant to this chapter, a securities firm that has obtained qualification to conduct OTC trading of financial derivatives may trade the types of contracts set out below:
1. Bond derivative transactions.
2. Interest-rate derivative transactions.
3. Convertible bond asset swap transactions.
4. Structured instrument transactions.
5. Equity option transactions. |
| Article 10 | Except where these Rules provide otherwise, a securities firm that enters into a financial derivatives trade with a counterparty shall execute with that counterparty the Master Agreement and accompanying Schedule of the International Swaps and Derivatives Association, Inc. (ISDA), and shall stipulate the terms of each subsequent trade through the execution of separate written trade confirmations. The above Schedule and written trade confirmations shall be in Chinese, or shall list the terms and conditions in a bilingual Chinese-English format to allow the trading counterparty to confirm the relevant terms and conditions of the trade, provided that when the securities firm's trading counterparty is a financial institution, an overseas Chinese, or a foreign national, English may be used.
The Schedule and written trade confirmations of the preceding paragraph shall specify the type of product, the underlying instrument, and other stipulations regarding the calculation of benefits in accordance with the code of practice for that particular type of trade. |
| Article 11 | When a securities firm undertakes a financial derivatives trade, it shall limit the amount of each trade based on the counterparty's financial condition, cash management status, and degree of professional expertise, or it may request the provision of collateral as a guarantee of performance.
The securities firm shall formulate a set of thorough know-your-customer assessment procedures for customers that are natural persons, in order to ascertain the suitability of the sale of a given product, the investment attributes of the customer, and the customer's understanding of risk and degree of risk tolerance. |
| Article 12 | Prior permission shall be obtained from the Central Bank of China when a securities firms' OTC trading of financial derivatives involves foreign exchange.
When a securities firm engages in the business of the preceding paragraph and undertakes related hedging transactions, foreign exchange settlement matters shall be carried out in accordance with the Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions. |
| Article 12-1 | When OTC trading of financial derivatives by a securities firm involves foreign exchange, 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:
1. 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.
2. 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 in accordance with the Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions.
3. 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 that engages in the business of the preceding paragraph shall submit to the foreign exchange authority and the GTSM by the fifth of the following month a monthly operations statement and a statement showing changes in remittances of payables into counterparties' designated foreign exchange accounts. |
| Article 13 | In these Rules, "bond derivatives transaction" means a transaction in the following contracts:
1. Outright transaction in bond forwards: Refers to a contract between a securities firm and a trading counterparty stipulating purchase or sale of an underlying bond under terms and conditions that set a specific date, pricing, and quantity of the transaction, or settlement of the spread at maturity (below, "forward transaction").
2. Transaction in bond options: Refers to a contract between a securities firm and a trading counterparty stipulating that the purchaser of the option pay a premium allowing the right to purchase or sell, within a specified period, an underlying bond under terms and conditions setting the specific pricing and volume of the transaction. When the purchaser exercises the option, the seller is obligated to perform the contract as stipulated; alternatively, the two parties may agree to settlement of the spread prior to or at the time of maturity (below, "options transaction"). |
| Article 14 | When a securities firm undertakes a bond derivatives transaction with a trading counterparty for the first time, it may enter into a "Bond Derivative Master Agreement" with the counterparty, or an ISDA Master Agreement as set forth in Article 10, paragraph 1.
The Bond Derivative Master Agreement set out in the preceding paragraph will be separately formulated by the GTSM. |
| Article 15 | The underlying bonds in a bond derivatives transaction between a securities firm and a trading counterparty shall be government bonds or other OTC-listed financial bonds, corporate bonds (not including convertible corporate bonds), or foreign bonds.
Except where the Directions for the Conduct of Wealth Management Business by Securities Firms provide otherwise, a securities firm that undertakes a pure foreign currency bond derivatives transaction in which the underlying bond is a foreign bond and the transaction is denominated and settled in foreign exchange shall do so only with an institutional investor.
The foreign bonds set out in paragraph 1 do not include corporate bonds issued overseas by domestic enterprises or bonds issued by a government, enterprise, or institution of the mainland China area.
"Institutional investors" under paragraph 2 includes both foreign and domestic banks, insurance companies, bills finance companies, securities firms, fund management companies, government investment institutions, government funds, pension funds, mutual funds, unit trusts, securities investment trust companies, securities investment consulting companies, trust enterprises, and futures commission merchants. |
| Article 16 | The period from the bond forward outright transaction trade date to the performance date shall be a minimum of three business days and a maximum of one year.
The duration of an options transaction, calculated from the trade date, must be one year or less. |
| Article 17 | When a securities firm undertakes a bond derivatives transaction, the par value of its net purchases or the par value of its net sales of the underlying bond may not exceed one-tenth of the total outstanding value of that bond.
In calculating options transaction positions under the preceding paragraph, the aggregate of call purchases and put sales will be deemed a long position and the aggregate of put purchases and call sales a short position. |
| Article 18 | When a securities firm undertakes a bond derivatives transaction, it may stipulate with the trading counterparty that the contract be performed either through delivery of bonds or through cash settlement.
When the method of performance stipulated pursuant to the preceding paragraph is delivery of bonds, the securities firm shall either effect payment and delivery directly with the trading counterparty, or deliver bonds as provided in the Directions for the Operation of Book-Entry Central Government Securities, and shall also fill out a delivery statement and a performance and settlement statement to be signed or sealed by the trading counterparty. For cash settlements, the securities firm shall fill out a settlement statement to be signed or sealed by the trading counterparty. |
| Article 19 | At the close of business each business day, the GTSM will announce the following information on bond derivatives transactions:
1. Forward transactions: The highest, lowest, and average yields of forward transactions of various maturities, and their volumes.
2. Options transactions: The principal contract amounts of call options purchased, call options sold, put options purchased, and put options sold for each series of the underlying bonds. |
| Article 20 | In these Rules, "interest rate derivatives transaction" means a transaction in any of the following contracts based on interest rates or on benefits derived from them:
1. Forward rate agreement (FRA): An agreement between a securities firm and a trading counterparty for settlement of the difference between an agreed level of interest and the actual level of an interest rate index at a future date, pursuant to the terms and conditions stipulated by the agreement.
2. Interest rate swap: An agreement between a securities firm and a trading counterparty for periodic cash settlements of the difference between an agreed level of interest and the actual levels of an interest rate index at specified future intervals according to differing interest rate calculations, pursuant to the terms and conditions stipulated by the agreement.
3. Interest rate option: An agreement between a securities firm and a trading counterparty in which the interest rate option buyer pays a premium for the right to exercise the option to settle the difference between an agreed level of interest and the actual levels of an interest rate index at specified future intervals, pursuant to the terms and conditions stipulated by the agreement, or the right to exercise the option, at a specified future period, to undertake an interest rate swap based on the terms and conditions of the agreement; the contract obligates the seller of the interest rate option contract to perform in accordance with contractual stipulations when the buyer exercises the option.
A securities firm may conduct, either singly or in combination, any of the types of business listed in the preceding paragraph for which it has obtained approval.
The "terms and conditions" of paragraph 1 shall include the notional principal, interest rate, interest payment period, and contract period, as stipulated by the securities firm and its trading counterparty. |
| Article 20-1 | Except where the Directions for the Conduct of Wealth Management Business by Securities Firms provide otherwise, a securities firm that undertakes a pure foreign currency interest rate derivatives transaction whose subject is a foreign currency interest rate product and is denominated and settled in foreign exchange shall do so only with an institutional investor.
The foreign interest rate products set out in the preceding paragraph do not include mainland China area bonds or money market interest rate indexes.
"Institutional investors" under paragraph 1 includes domestic banks, insurance companies, bills finance companies, securities firms, fund management companies, government investment institutions, government funds, pension funds, mutual funds, unit trusts, securities investment trust companies, securities investment consulting companies, trust enterprises, and futures commission merchants. |
| Article 21 | In these Rules, "convertible bond asset swap transaction" means a transaction in any of the following types of contracts:
1. Fixed-income side transactions: Agreements in which the underlying instrument is a position in OTC-traded convertible corporate bonds ("convertible corporate bonds") held by a securities firm through underwriting or dealing. The agreements stipulate with the trading counterparty that the securities firm may exercise a call option on the convertible corporate bonds at any time prior to the contract's expiration date, and in addition, that the monetary amount of the convertible bond transaction with the counterparty will be taken as the contract's notional principal and that, during the term of the contract, the securities firm may swap interest payments at an agreed rate with the counterparty for the accrued coupon and interest premium on the convertible corporate bonds.
Exchangeable government bonds whose underlying shares are exchange-listed or OTC-listed stocks may also be the subject of asset swaps by securities firms, which shall be governed by the mutatis mutandis application of the provisions of these Rules regarding convertible corporate bonds.
2. Options-side transactions: Refers to a securities firm's resale to a third party of the call option on convertible corporate bonds acquired in accordance with the preceding paragraph, or the securities firm's sale to a trading counterparty of a call option for convertible corporate bonds on the basis of a position in convertible corporate bonds held by the securities firm itself. |
| Article 22 | Before commencing options-side transactions on convertible bond asset swaps with a trading counterparty, a securities firm shall first execute a master agreement with the trading counterparty, and for each individual transaction undertaken thereafter shall further execute an individual contract with the counterparty stipulating the rights and obligations of the two parties.
The individual contract between the securities firm and its trading counterparty shall expressly stipulate the securities firms' automatic early exercise of repurchase rights in the event of an early bond redemption by the issuer pursuant to the terms of issuance, and the termination price and the means of terminating the given convertible bond asset swap contract. |
| Article 23 | A securities firm that undertakes a convertible bond asset swap transaction shall remit payment through the Taiwan Securities Central Depository Co., Ltd. on the contract transaction date, the date it transacts the repurchase of the convertible corporate bonds from the trading counterparty, and/or the date the option is exercised in accordance with Article 83 of the GreTai Securities Market Rules Governing Securities Trading on Over-the-Counter Markets (below, "the GreTai Market Rules"), Article 17 of the [GreTai Securities Market] Rules Governing Trading of Convertible Corporate Bonds and Bond Conversion Entitlement Certificates, and the applicable provisions of the Rules of Business Operation of the Taiwan Securities Central Depository Co., Ltd. |
| Article 24 | Before a securities firm commences convertible bond asset swaps with a trading counterparty, the trading counterparty shall first complete account opening procedures in accordance with Chapter 4, Section 3 of the GreTai Market Rules. |
| Article 25 | As used in these Rules, "structured instrument" means a contract for a hybrid product combining fixed-income and options features.
The scope of eligible linked underlying assets of options in structured notes is given in Appendix 3.
The duration of a structured product transaction, from the initial transaction date to the date the contract matures, shall be a minimum of one month and a maximum of 10 years.
A securities firm that sells a structured instrument must stipulate that the original transaction price is the maximum potential loss that will be borne by the customer, provided that when it sells a structured instrument under the name of a principal-guaranteed product or with a claim of principal guarantee benefits, the stipulated principal protection percentage at maturity may not be lower than 80 percent of the transaction price. |
| Article 26 | Before commencing structured instrument transactions with a trading counterparty, a securities firm shall first execute a master agreement with the counterparty, and for each individual transaction undertaken thereafter shall further execute a separate contract with the counterparty stipulating the rights and obligations of the two parties.
When a securities firm undertakes transactions in structured instruments linked to foreign financial products and denominated in New Taiwan Dollars, the contracts shall clearly state that matters connected with foreign exchange settlement are to be carried out in accordance with the Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions and that such settlements will be counted toward the total allowed cumulative foreign exchange settlement amount of the counterparty.
When a securities firm undertakes structured instrument transactions and a dispute arises in the course of trade, it shall handle the matter promptly in accordance with the business dispute resolution procedures provided by its internal control system.
The securities firm shall provide price quote information for early cancellation of structured instrument transactions at its place of business or on its website. |
| Article 26-1 | The master agreement to be signed between the securities firm and the trading counterparty before commencing structured instrument transactions shall include the following:
1. Definitions and specifications.
2. Trading contract content.
3. Transaction procedures and related operations.
4. Procedures for handling of breach of contract.
5. Procedures for handling damage claims.
6. Other provisions. |
| Article 26-2 | The individual contracts that a securities firm enters into with a trading counterparty for structured instrument transactions shall include the following:
1. The terms and conditions of the transaction, including its price and denominating currency, its underlying linked assets, the term of the contract, terms of payment at maturity, and other stipulations of rights and obligations.
2. A description of the principal risks associated with the instrument, such as liquidity risk, foreign exchange risk, interest-rate risk, tax risk, and cancellation risk.
3. The principal protection percentage for structured instruments that are sold under the name of principal-guaranteed products or with claimed principal guarantee benefits, with the percentage set out in boldface or other conspicuous typeface beneath the title of the contract.
4. A statement of the greatest possible loss, to be set out in the contract.
5. The transaction fees or fees of any other kind that the securities firm will collect from the customer for the given transaction.
6. The channels through which the trading counterparty may seek remedy for disputes arising out of the transaction. |
| Article 27 | The two parties in a structured instrument transaction may stipulate that payment at exercise will be by means of cash settlement or delivery of the linked underlying securities by the securities firm.
When delivery of the linked underlying securities by the securities firm under the preceding paragraph is in exchange-listed or OTC-listed stocks, delivery shall be effected by means of a structured instrument hedging account position in accordance with the Rules of Business Operation of the Taiwan Depository and Clearing Corporation. |
| Article 28 | When the securities firm and the trading counterparty stipulate that payment for a structured instrument at exercise will be effected by delivery of exchange-listed or OTC-listed stocks, the counterparty shall first open a central securities depository account. |
| Article 29 | (deleted) |
| Article 30 | (deleted) |
| Article 31 | A securities firm that trades domestic exchange-listed or OTC-listed stocks for hedging purposes shall open a hedging account at the relevant institution with a GTSM letter of approval.
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 qualified foreign institutional investor (QFII) account it opened in the ROC.
No securities in the hedging account of paragraph 1 may be made the subject of a pledge.
A securities firm undertaking structured instrument transactions shall report hedging information daily through the GTSM information system, in the prescribed format, for the duration of the trading contract. When it reports a projected hedge position that differs from the actual hedge position by more than plus or minus 20 percent for any three business days out of the most recent six, or when the theoretical hedge exceeds 3000 lots of stock and differs by more than plus or minus 10 percent during the three business days prior to maturity, then except where the difference is less than one trading unit or where the GTSM has made other provision, the GTSM may request an explanation by the securities firm and conduct an on-site inquiry. If the explanation is found unreasonable, one demerit will be issued, and where a total of three demerits have been issued, the GTSM will restrict the securities firm from further handling of structured instrument trading for a period of one month. When the difference exceeds plus or minus 50 percent, or when the theoretical hedge exceeds 3000 lots of stock and differs by more than plus or minus 25 percent during the three business days prior to maturity, then except where the difference is less than one trading unit or where the GTSM has made other provision, the GTSM may compel the securities firm to bring its actual hedge position closer to the projected hedge position.
The GTSM will conduct on-site inquiries into securities firms' hedging operations periodically or from time to time.
Securities firms engaging in structured instrument transactions shall produce a monthly statement of utilization of funds from structured instruments (Appendix 4), to be retained for reference.
A foreign securities firm shall issue an undertaking stating that it will not remit the transaction price obtained through a structured instrument transaction out of the country until after the transaction matures, provided that this restriction shall not apply to necessary remittances of the transaction price for instruments linked to foreign financial products. |
| Article 31-1 | The method of hedging adopted by a securities firm with respect to structured instrument transactions may consist of any, or any combination, of the following: offsetting with a position used to hedge other structured instruments, equity options, OTC contract-based call (put) warrants, or call (put) warrants with the same underlying security as the instrument it is transacting; outsourcing the hedging to another institution; or taking underlying securities that it is entitled to borrow from the holders for the purpose of short hedging, and either selling the underlying securities short on a securities market, or selling the underlying securities for the purpose of transaction needs or contract performance as set out in Article 82-1 of the Operating Rules of the Taiwan Stock Exchange Corporation.
When the securities firm elects to sell shares of the underlying security by borrowing from the holders in a securities borrowing and lending transaction, if the security is an exchange- or OTC-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, at later times, transfer the shares into the hedge account in separate lots upon application by the securities firm as required for hedging purposes.
When the securities firm elects to short-sell shares in an exchange- or OTC-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 GTSM and the TSEC.
The opening of the aforementioned margin account shall be done in accordance with the Operating Rules for Securities Firms Handling Margin Purchases and Short Sales of Securities, the Terms for Establishment of Margin Accounts With Securities Firms for Margin and Stock Loans, and the provisions of the various securities finance companies related to the aforesaid Rules and Terms.
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 structured instruments, as well as applications to cover short sales with spot securities. Reports of out-trades and account number corrections may not be filed for this account.
When a securities firm sells securities through borrowing or short sale and does not enter into a structured instrument transaction according to plan or the instrument reaches maturity, it shall close out its open position by the next business day following the start date or the maturity date of the product.
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. |
| Article 31-2 | In conducting financial derivatives business for hedging purposes, or in calculating a product's income or carrying out settlement upon cancellation or expiration, a securities firm may not prejudice the process of fair price formation or the rights and interests of investors. |
| Article 32 | The transaction price a securities firm obtains through a structured instrument transaction may only be used to invest in domestic or foreign fixed-income products, linked underlying securities, or index funds, or to trade in futures or derivatives products as a hedge on the transaction currency or the linked underlyings, provided that this restriction does not apply to financial products related to the mainland-China area or the MSCI Taiwan Index. |
| Article 33 | A securities firm undertaking a structured instrument transaction shall pay to the GTSM a performance bond based on the following standards:
1. For a securities firm with a long-term credit rating of (tw) BBB+ or above from Taiwan Ratings Corporation or Standard & Poor's Corp., BBB+ (twn) or above from Fitch Ratings Limited, Taiwan Branch or Fitch, Inc., or Baa1 (tw) or above from Moody's Taiwan Corporation or Moody's Investors Service, the bond shall be three percent of the outstanding balance of the structured instrument contract.
2. For a securities firm with a long-term credit rating lower than those of the preceding paragraph but with a rating of (tw) BBB- or above from Taiwan Ratings Corporation or Standard & Poor's Corp., BBB- (twn) or above from Fitch Ratings Limited, Taiwan Branch or Fitch, Inc., or Ba-a3 (tw) or above from Moody's Taiwan Corporation or Moody's Investors Service, the bond shall be five percent of the outstanding balance of the structured instrument contract.
3. For securities firms with other credit ratings, the bond shall be 10 percent of the outstanding balance of the structured instrument contract.
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 GTSM on or before the 10th of each month in accordance with monthly changes in the outstanding balance of the structured instrument or its own credit rating. |
| Article 34 | As used in these Rules, "equity option transaction" refers to a contract in which a securities firm and a trading counterparty agree that a stock, stock index, or exchange-traded fund (ETF) will serve as the underlying of an option, and that the buyer will pay a premium in exchange for the right to buy or sell the underlying, and that the buyer may, at a specified maturity date or during a specified future period, buy or sell the stipulated underlying of the option under terms and conditions that specify the price and volume of the purchase or sale. The writer of the option bears the obligation to perform the agreement as stipulated when the buyer exercises the option, or the two parties may agree to settle the difference prior to or at the time of maturity.
The subject of an equity option transaction between a securities firm and its trading counterparty must be one of the stocks, stock indexes, or ETFs given in Appendix 3 of these Rules, which provides a list of eligible linked underlying assets of structured notes handled by securities firms. |
| Article 35 | When the trading counterparty of a securities firm is the writer of an equity option, the counterparty must be a qualified institutional investor, which includes both foreign and domestic banks, insurance companies, bills finance companies, securities firms, fund management companies, government investment institutions, government funds, pension funds, mutual funds, unit trusts, securities investment trust companies, securities investment consulting companies, trust enterprises, and futures commission merchants. |
| Article 36 | The duration of the contract for an equity option transaction, calculated from the date of transaction, shall be one year or less, provided that this restriction shall not apply when there has been separate approval of another duration.
When a securities firm enters into a contract for an equity option on domestic exchange-listed or OTC-listed stocks, the number of the underlying shares that could potentially be exchanged upon exercise of the option, plus the number of underlying shares that would be exchanged upon exercise of all the outstanding and unexpired call (put) warrants and contract-based call (put) warrants of all securities firms, may not exceed 10 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:
(1) The total percentage of shares held by directors and supervisors under statutory shareholding ratio requirements.
(2) Pledged shares.
(3) The number of shares that newly exchange-listed or OTC-listed companies are required to place in compulsory central custody.
(4) Shares repurchased under the Regulations Governing Share Repurchase by Listed and OTC Companies, but not yet retired.
(5) Shares on which the competent authority has imposed restrictions for exchange or OTC listing and trading. |
| Article 37 | The first time a securities firm enters into an equity options transaction with a trading counterparty, it shall execute a "master equity options transaction agreement" with the counterparty.
When a securities firm enters into an equity options transaction with trading counterparties, except for trading counterparties that are qualified institutional investors as given in Article 35, the securities firm shall execute an individual agreement with each trading counterparty with respect to each equity option transaction.
The provisions of Article 26-1 apply mutatis mutandis to the required content of the "master equity options transaction agreement" of paragraph 1.
The provisions of Article 26-2 apply mutatis mutandis to the required content of the individual contracts of paragraph 2 to be signed between the securities firm and individual trading counterparties in equity options transactions. |
| Article 38 | The two parties may stipulate the manner in which equity options are to be exercised, either by settlement in cash or by physical delivery of the linked underlying securities by the securities firm or another institution approved by the competent authority to perform physical settlement.
When the underlying of the equity options of the preceding paragraph is a stock index, the method of exercise shall be settlement in cash.
The provisions of Article 27, paragraph 2, Article 28, Article 31, Article 31-1, and Article 31-2 shall apply mutatis mutandis to equity options transactions, provided that a securities firm need not perform hedging when it is the purchaser of the options. |
| Article 39 | A foreign securities firm that writes equity options shall, with respect to the premiums it collects, issue an undertaking that it will not make any outward remittance of such premiums until after the transaction has expired. |
Section I Bond Derivative Transactions
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| Article 13 | In these Rules, "bond derivatives transaction" means a transaction in the following contracts:
1. Outright transaction in bond forwards: Refers to a contract between a securities firm and a trading counterparty stipulating purchase or sale of an underlying bond under terms and conditions that set a specific date, pricing, and quantity of the transaction, or settlement of the spread at maturity (below, "forward transaction").
2. Transaction in bond options: Refers to a contract between a securities firm and a trading counterparty stipulating that the purchaser of the option pay a premium allowing the right to purchase or sell, within a specified period, an underlying bond under terms and conditions setting the specific pricing and volume of the transaction. When the purchaser exercises the option, the seller is obligated to perform the contract as stipulated; alternatively, the two parties may agree to settlement of the spread prior to or at the time of maturity (below, "options transaction"). |
| Article 14 | When a securities firm undertakes a bond derivatives transaction with a trading counterparty for the first time, it may enter into a "Bond Derivative Master Agreement" with the counterparty, or an ISDA Master Agreement as set forth in Article 10, paragraph 1.
The Bond Derivative Master Agreement set out in the preceding paragraph will be separately formulated by the GTSM. |
| Article 15 | The underlying bonds in a bond derivatives transaction between a securities firm and a trading counterparty shall be government bonds or other OTC-listed financial bonds, corporate bonds (not including convertible corporate bonds), or foreign bonds.
Except where the Directions for the Conduct of Wealth Management Business by Securities Firms provide otherwise, a securities firm that undertakes a pure foreign currency bond derivatives transaction in which the underlying bond is a foreign bond and the transaction is denominated and settled in foreign exchange shall do so only with an institutional investor.
The foreign bonds set out in paragraph 1 do not include corporate bonds issued overseas by domestic enterprises or bonds issued by a government, enterprise, or institution of the mainland China area.
"Institutional investors" under paragraph 2 includes both foreign and domestic banks, insurance companies, bills finance companies, securities firms, fund management companies, government investment institutions, government funds, pension funds, mutual funds, unit trusts, securities investment trust companies, securities investment consulting companies, trust enterprises, and futures commission merchants. |
| Article 16 | The period from the bond forward outright transaction trade date to the performance date shall be a minimum of three business days and a maximum of one year.
The duration of an options transaction, calculated from the trade date, must be one year or less. |
| Article 17 | When a securities firm undertakes a bond derivatives transaction, the par value of its net purchases or the par value of its net sales of the underlying bond may not exceed one-tenth of the total outstanding value of that bond.
In calculating options transaction positions under the preceding paragraph, the aggregate of call purchases and put sales will be deemed a long position and the aggregate of put purchases and call sales a short position. |
| Article 18 | When a securities firm undertakes a bond derivatives transaction, it may stipulate with the trading counterparty that the contract be performed either through delivery of bonds or through cash settlement.
When the method of performance stipulated pursuant to the preceding paragraph is delivery of bonds, the securities firm shall either effect payment and delivery directly with the trading counterparty, or deliver bonds as provided in the Directions for the Operation of Book-Entry Central Government Securities, and shall also fill out a delivery statement and a performance and settlement statement to be signed or sealed by the trading counterparty. For cash settlements, the securities firm shall fill out a settlement statement to be signed or sealed by the trading counterparty. |
| Article 19 | At the close of business each business day, the GTSM will announce the following information on bond derivatives transactions:
1. Forward transactions: The highest, lowest, and average yields of forward transactions of various maturities, and their volumes.
2. Options transactions: The principal contract amounts of call options purchased, call options sold, put options purchased, and put options sold for each series of the underlying bonds. |
Section II Interest Rate Derivative Transactions
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| Article 20 | In these Rules, "interest rate derivatives transaction" means a transaction in any of the following contracts based on interest rates or on benefits derived from them:
1. Forward rate agreement (FRA): An agreement between a securities firm and a trading counterparty for settlement of the difference between an agreed level of interest and the actual level of an interest rate index at a future date, pursuant to the terms and conditions stipulated by the agreement.
2. Interest rate swap: An agreement between a securities firm and a trading counterparty for periodic cash settlements of the difference between an agreed level of interest and the actual levels of an interest rate index at specified future intervals according to differing interest rate calculations, pursuant to the terms and conditions stipulated by the agreement.
3. Interest rate option: An agreement between a securities firm and a trading counterparty in which the interest rate option buyer pays a premium for the right to exercise the option to settle the difference between an agreed level of interest and the actual levels of an interest rate index at specified future intervals, pursuant to the terms and conditions stipulated by the agreement, or the right to exercise the option, at a specified future period, to undertake an interest rate swap based on the terms and conditions of the agreement; the contract obligates the seller of the interest rate option contract to perform in accordance with contractual stipulations when the buyer exercises the option.
A securities firm may conduct, either singly or in combination, any of the types of business listed in the preceding paragraph for which it has obtained approval.
The "terms and conditions" of paragraph 1 shall include the notional principal, interest rate, interest payment period, and contract period, as stipulated by the securities firm and its trading counterparty. |
| Article 20-1 | Except where the Directions for the Conduct of Wealth Management Business by Securities Firms provide otherwise, a securities firm that undertakes a pure foreign currency interest rate derivatives transaction whose subject is a foreign currency interest rate product and is denominated and settled in foreign exchange shall do so only with an institutional investor.
The foreign interest rate products set out in the preceding paragraph do not include mainland China area bonds or money market interest rate indexes.
"Institutional investors" under paragraph 1 includes domestic banks, insurance companies, bills finance companies, securities firms, fund management companies, government investment institutions, government funds, pension funds, mutual funds, unit trusts, securities investment trust companies, securities investment consulting companies, trust enterprises, and futures commission merchants. |
Section III Convertible Bond Asset Swap Transaction Transactions
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| Article 21 | In these Rules, "convertible bond asset swap transaction" means a transaction in any of the following types of contracts:
1. Fixed-income side transactions: Agreements in which the underlying instrument is a position in OTC-traded convertible corporate bonds ("convertible corporate bonds") held by a securities firm through underwriting or dealing. The agreements stipulate with the trading counterparty that the securities firm may exercise a call option on the convertible corporate bonds at any time prior to the contract's expiration date, and in addition, that the monetary amount of the convertible bond transaction with the counterparty will be taken as the contract's notional principal and that, during the term of the contract, the securities firm may swap interest payments at an agreed rate with the counterparty for the accrued coupon and interest premium on the convertible corporate bonds.
Exchangeable government bonds whose underlying shares are exchange-listed or OTC-listed stocks may also be the subject of asset swaps by securities firms, which shall be governed by the mutatis mutandis application of the provisions of these Rules regarding convertible corporate bonds.
2. Options-side transactions: Refers to a securities firm's resale to a third party of the call option on convertible corporate bonds acquired in accordance with the preceding paragraph, or the securities firm's sale to a trading counterparty of a call option for convertible corporate bonds on the basis of a position in convertible corporate bonds held by the securities firm itself. |
| Article 22 | Before commencing options-side transactions on convertible bond asset swaps with a trading counterparty, a securities firm shall first execute a master agreement with the trading counterparty, and for each individual transaction undertaken thereafter shall further execute an individual contract with the counterparty stipulating the rights and obligations of the two parties.
The individual contract between the securities firm and its trading counterparty shall expressly stipulate the securities firms' automatic early exercise of repurchase rights in the event of an early bond redemption by the issuer pursuant to the terms of issuance, and the termination price and the means of terminating the given convertible bond asset swap contract. |
| Article 23 | A securities firm that undertakes a convertible bond asset swap transaction shall remit payment through the Taiwan Securities Central Depository Co., Ltd. on the contract transaction date, the date it transacts the repurchase of the convertible corporate bonds from the trading counterparty, and/or the date the option is exercised in accordance with Article 83 of the GreTai Securities Market Rules Governing Securities Trading on Over-the-Counter Markets (below, "the GreTai Market Rules"), Article 17 of the [GreTai Securities Market] Rules Governing Trading of Convertible Corporate Bonds and Bond Conversion Entitlement Certificates, and the applicable provisions of the Rules of Business Operation of the Taiwan Securities Central Depository Co., Ltd. |
| Article 24 | Before a securities firm commences convertible bond asset swaps with a trading counterparty, the trading counterparty shall first complete account opening procedures in accordance with Chapter 4, Section 3 of the GreTai Market Rules. |
Section IV Structured Instrument Transactions
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| Article 25 | As used in these Rules, "structured instrument" means a contract for a hybrid product combining fixed-income and options features.
The scope of eligible linked underlying assets of options in structured notes is given in Appendix 3.
The duration of a structured product transaction, from the initial transaction date to the date the contract matures, shall be a minimum of one month and a maximum of 10 years.
A securities firm that sells a structured instrument must stipulate that the original transaction price is the maximum potential loss that will be borne by the customer, provided that when it sells a structured instrument under the name of a principal-guaranteed product or with a claim of principal guarantee benefits, the stipulated principal protection percentage at maturity may not be lower than 80 percent of the transaction price. |
| Article 26 | Before commencing structured instrument transactions with a trading counterparty, a securities firm shall first execute a master agreement with the counterparty, and for each individual transaction undertaken thereafter shall further execute a separate contract with the counterparty stipulating the rights and obligations of the two parties.
When a securities firm undertakes transactions in structured instruments linked to foreign financial products and denominated in New Taiwan Dollars, the contracts shall clearly state that matters connected with foreign exchange settlement are to be carried out in accordance with the Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions and that such settlements will be counted toward the total allowed cumulative foreign exchange settlement amount of the counterparty.
When a securities firm undertakes structured instrument transactions and a dispute arises in the course of trade, it shall handle the matter promptly in accordance with the business dispute resolution procedures provided by its internal control system.
The securities firm shall provide price quote information for early cancellation of structured instrument transactions at its place of business or on its website. |
| Article 26-1 | The master agreement to be signed between the securities firm and the trading counterparty before commencing structured instrument transactions shall include the following:
1. Definitions and specifications.
2. Trading contract content.
3. Transaction procedures and related operations.
4. Procedures for handling of breach of contract.
5. Procedures for handling damage claims.
6. Other provisions. |
| Article 26-2 | The individual contracts that a securities firm enters into with a trading counterparty for structured instrument transactions shall include the following:
1. The terms and conditions of the transaction, including its price and denominating currency, its underlying linked assets, the term of the contract, terms of payment at maturity, and other stipulations of rights and obligations.
2. A description of the principal risks associated with the instrument, such as liquidity risk, foreign exchange risk, interest-rate risk, tax risk, and cancellation risk.
3. The principal protection percentage for structured instruments that are sold under the name of principal-guaranteed products or with claimed principal guarantee benefits, with the percentage set out in boldface or other conspicuous typeface beneath the title of the contract.
4. A statement of the greatest possible loss, to be set out in the contract.
5. The transaction fees or fees of any other kind that the securities firm will collect from the customer for the given transaction.
6. The channels through which the trading counterparty may seek remedy for disputes arising out of the transaction. |
| Article 27 | The two parties in a structured instrument transaction may stipulate that payment at exercise will be by means of cash settlement or delivery of the linked underlying securities by the securities firm.
When delivery of the linked underlying securities by the securities firm under the preceding paragraph is in exchange-listed or OTC-listed stocks, delivery shall be effected by means of a structured instrument hedging account position in accordance with the Rules of Business Operation of the Taiwan Depository and Clearing Corporation. |
| Article 28 | When the securities firm and the trading counterparty stipulate that payment for a structured instrument at exercise will be effected by delivery of exchange-listed or OTC-listed stocks, the counterparty shall first open a central securities depository account. |
| Article 29 | (deleted) |
| Article 30 | (deleted) |
| Article 31 | A securities firm that trades domestic exchange-listed or OTC-listed stocks for hedging purposes shall open a hedging account at the relevant institution with a GTSM letter of approval.
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 qualified foreign institutional investor (QFII) account it opened in the ROC.
No securities in the hedging account of paragraph 1 may be made the subject of a pledge.
A securities firm undertaking structured instrument transactions shall report hedging information daily through the GTSM information system, in the prescribed format, for the duration of the trading contract. When it reports a projected hedge position that differs from the actual hedge position by more than plus or minus 20 percent for any three business days out of the most recent six, or when the theoretical hedge exceeds 3000 lots of stock and differs by more than plus or minus 10 percent during the three business days prior to maturity, then except where the difference is less than one trading unit or where the GTSM has made other provision, the GTSM may request an explanation by the securities firm and conduct an on-site inquiry. If the explanation is found unreasonable, one demerit will be issued, and where a total of three demerits have been issued, the GTSM will restrict the securities firm from further handling of structured instrument trading for a period of one month. When the difference exceeds plus or minus 50 percent, or when the theoretical hedge exceeds 3000 lots of stock and differs by more than plus or minus 25 percent during the three business days prior to maturity, then except where the difference is less than one trading unit or where the GTSM has made other provision, the GTSM may compel the securities firm to bring its actual hedge position closer to the projected hedge position.
The GTSM will conduct on-site inquiries into securities firms' hedging operations periodically or from time to time.
Securities firms engaging in structured instrument transactions shall produce a monthly statement of utilization of funds from structured instruments (Appendix 4), to be retained for reference.
A foreign securities firm shall issue an undertaking stating that it will not remit the transaction price obtained through a structured instrument transaction out of the country until after the transaction matures, provided that this restriction shall not apply to necessary remittances of the transaction price for instruments linked to foreign financial products. |
| Article 31-1 | The method of hedging adopted by a securities firm with respect to structured instrument transactions may consist of any, or any combination, of the following: offsetting with a position used to hedge other structured instruments, equity options, OTC contract-based call (put) warrants, or call (put) warrants with the same underlying security as the instrument it is transacting; outsourcing the hedging to another institution; or taking underlying securities that it is entitled to borrow from the holders for the purpose of short hedging, and either selling the underlying securities short on a securities market, or selling the underlying securities for the purpose of transaction needs or contract performance as set out in Article 82-1 of the Operating Rules of the Taiwan Stock Exchange Corporation.
When the securities firm elects to sell shares of the underlying security by borrowing from the holders in a securities borrowing and lending transaction, if the security is an exchange- or OTC-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, at later times, transfer the shares into the hedge account in separate lots upon application by the securities firm as required for hedging purposes.
When the securities firm elects to short-sell shares in an exchange- or OTC-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 GTSM and the TSEC.
The opening of the aforementioned margin account shall be done in accordance with the Operating Rules for Securities Firms Handling Margin Purchases and Short Sales of Securities, the Terms for Establishment of Margin Accounts With Securities Firms for Margin and Stock Loans, and the provisions of the various securities finance companies related to the aforesaid Rules and Terms.
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 structured instruments, as well as applications to cover short sales with spot securities. Reports of out-trades and account number corrections may not be filed for this account.
When a securities firm sells securities through borrowing or short sale and does not enter into a structured instrument transaction according to plan or the instrument reaches maturity, it shall close out its open position by the next business day following the start date or the maturity date of the product.
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. |
| Article 31-2 | In conducting financial derivatives business for hedging purposes, or in calculating a product's income or carrying out settlement upon cancellation or expiration, a securities firm may not prejudice the process of fair price formation or the rights and interests of investors. |
| Article 32 | The transaction price a securities firm obtains through a structured instrument transaction may only be used to invest in domestic or foreign fixed-income products, linked underlying securities, or index funds, or to trade in futures or derivatives products as a hedge on the transaction currency or the linked underlyings, provided that this restriction does not apply to financial products related to the mainland-China area or the MSCI Taiwan Index. |
| Article 33 | A securities firm undertaking a structured instrument transaction shall pay to the GTSM a performance bond based on the following standards:
1. For a securities firm with a long-term credit rating of (tw) BBB+ or above from Taiwan Ratings Corporation or Standard & Poor's Corp., BBB+ (twn) or above from Fitch Ratings Limited, Taiwan Branch or Fitch, Inc., or Baa1 (tw) or above from Moody's Taiwan Corporation or Moody's Investors Service, the bond shall be three percent of the outstanding balance of the structured instrument contract.
2. For a securities firm with a long-term credit rating lower than those of the preceding paragraph but with a rating of (tw) BBB- or above from Taiwan Ratings Corporation or Standard & Poor's Corp., BBB- (twn) or above from Fitch Ratings Limited, Taiwan Branch or Fitch, Inc., or Ba-a3 (tw) or above from Moody's Taiwan Corporation or Moody's Investors Service, the bond shall be five percent of the outstanding balance of the structured instrument contract.
3. For securities firms with other credit ratings, the bond shall be 10 percent of the outstanding balance of the structured instrument contract.
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 GTSM on or before the 10th of each month in accordance with monthly changes in the outstanding balance of the structured instrument or its own credit rating. |
Section V Equity Option Transactions
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| Article 34 | As used in these Rules, "equity option transaction" refers to a contract in which a securities firm and a trading counterparty agree that a stock, stock index, or exchange-traded fund (ETF) will serve as the underlying of an option, and that the buyer will pay a premium in exchange for the right to buy or sell the underlying, and that the buyer may, at a specified maturity date or during a specified future period, buy or sell the stipulated underlying of the option under terms and conditions that specify the price and volume of the purchase or sale. The writer of the option bears the obligation to perform the agreement as stipulated when the buyer exercises the option, or the two parties may agree to settle the difference prior to or at the time of maturity.
The subject of an equity option transaction between a securities firm and its trading counterparty must be one of the stocks, stock indexes, or ETFs given in Appendix 3 of these Rules, which provides a list of eligible linked underlying assets of structured notes handled by securities firms. |
| Article 35 | When the trading counterparty of a securities firm is the writer of an equity option, the counterparty must be a qualified institutional investor, which includes both foreign and domestic banks, insurance companies, bills finance companies, securities firms, fund management companies, government investment institutions, government funds, pension funds, mutual funds, unit trusts, securities investment trust companies, securities investment consulting companies, trust enterprises, and futures commission merchants. |
| Article 36 | The duration of the contract for an equity option transaction, calculated from the date of transaction, shall be one year or less, provided that this restriction shall not apply when there has been separate approval of another duration.
When a securities firm enters into a contract for an equity option on domestic exchange-listed or OTC-listed stocks, the number of the underlying shares that could potentially be exchanged upon exercise of the option, plus the number of underlying shares that would be exchanged upon exercise of all the outstanding and unexpired call (put) warrants and contract-based call (put) warrants of all securities firms, may not exceed 10 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:
(1) The total percentage of shares held by directors and supervisors under statutory shareholding ratio requirements.
(2) Pledged shares.
(3) The number of shares that newly exchange-listed or OTC-listed companies are required to place in compulsory central custody.
(4) Shares repurchased under the Regulations Governing Share Repurchase by Listed and OTC Companies, but not yet retired.
(5) Shares on which the competent authority has imposed restrictions for exchange or OTC listing and trading. |
| Article 37 | The first time a securities firm enters into an equity options transaction with a trading counterparty, it shall execute a "master equity options transaction agreement" with the counterparty.
When a securities firm enters into an equity options transaction with trading counterparties, except for trading counterparties that are qualified institutional investors as given in Article 35, the securities firm shall execute an individual agreement with each trading counterparty with respect to each equity option transaction.
The provisions of Article 26-1 apply mutatis mutandis to the required content of the "master equity options transaction agreement" of paragraph 1.
The provisions of Article 26-2 apply mutatis mutandis to the required content of the individual contracts of paragraph 2 to be signed between the securities firm and individual trading counterparties in equity options transactions. |
| Article 38 | The two parties may stipulate the manner in which equity options are to be exercised, either by settlement in cash or by physical delivery of the linked underlying securities by the securities firm or another institution approved by the competent authority to perform physical settlement.
When the underlying of the equity options of the preceding paragraph is a stock index, the method of exercise shall be settlement in cash.
The provisions of Article 27, paragraph 2, Article 28, Article 31, Article 31-1, and Article 31-2 shall apply mutatis mutandis to equity options transactions, provided that a securities firm need not perform hedging when it is the purchaser of the options. |
| Article 39 | A foreign securities firm that writes equity options shall, with respect to the premiums it collects, issue an undertaking that it will not make any outward remittance of such premiums until after the transaction has expired. |
Chapter IV Trading Regulations
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| Article 40 | Any OTC financial derivatives transaction undertaken by a securities firm beyond the scope provided by these Rules will be deemed to involve another, different category of derivatives product; a securities firm may not undertake such business without applying for and receiving approval for such operations pursuant to applicable laws and regulations or obtaining approval from the competent authority. |
| Article 41 | A securities firm that engages in OTC financial derivatives transactions may not use such a 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.
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 beneficiary) for the purpose of market regulation. |
| Article 42 | A securities firm engaging in convertible bond asset swaps, structured instrument transactions, or equity options transactions may not undertake financial derivatives trades with any of the following related parties:
1. 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.
2. A spouse, minor child, or nominee of any of the persons referred to in subparagraph 1.
3. 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.
4. The issuer of the stocks underlying conversion securities, linked securities, or equity options, or any person related to the issuer as set out in the preceding subparagraph.
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 that it is not a related party as set out in paragraph 1.
A securities firm may undertake hedging transactions with the following qualified institutional investors, without being subject to the restrictions of any subparagraph under paragraph 1:
Domestic and foreign banks, insurance companies, bills finance companies, securities firms, fund management companies, government investment institutions, government funds, pension funds, mutual funds, unit trusts, securities investment trust companies, securities investment consulting companies, trust enterprises, and futures commission merchants. |
| Article 43 | A securities firm that undertakes a financial derivatives transaction with a trading counterparty shall provide the counterparty with a risk disclosure statement, and in that statement, or in individual trade confirmations, it shall indicate in boldface or other prominent typeface the maximum possible risk 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.
The securities firm is exempt from the requirement to provide a risk disclosure statement if the trading counterparty of the preceding paragraph is an institutional juristic person such as a banking, insurance, securities, or offshore investment institution. |
| Article 44 | A securities firm undertaking any financial derivatives transaction shall comply with the competent authority's Regulations Governing the Acquisition and Disposal of Assets by Public Companies. In addition, it shall either adopt procedures for handling transactions in the given derivative product, or incorporate procedures for the given product into its existing procedures for handling of financial derivatives trading, and carry out necessary risk management and information disclosures, while also providing for management and control of transactions by incorporating those procedures into its existing internal control and auditing systems or implementation rules.
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 GTSM.
A securities firm that engages in the business of OTC trading in financial derivatives shall comply with the Risk Management Best-Practice Principles for Securities Firms announced and implemented by the GTSM together with the Taiwan Stock Exchange Corporation and the Taiwan Securities Association, making adjustments as necessary in light of its handling of the product and the complexity of its business. The GTSM 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. |
| Article 45 | The basic trading principles and policies to be set out in the procedures referred to in the preceding article must include a limit on contract amounts (either in aggregate or separately for each individual counterparty), stop-loss provisions (either in aggregate or per contract), policies for screening and credit reviews of counterparties, hedging strategies, procedures for and key points of performance evaluations, market information equipment and data, methods of accounting treatment and disclosure of financial statements, experience requirements for traders and risk-management personnel and provisions relating to their training, and provisions for segregation of duties in the approval of trades.
The market information equipment and data set out in the preceding paragraph shall be capable of ensuring accurate and real-time provision of relevant market information. |
| Article 46 | The traders and risk-management personnel of a securities firm that undertakes financial derivatives trades linked to foreign financial products shall possess relevant experience in operations in the home market for the linked underlying product. |
| Article 47 | A securities firm engaging in 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 Statements of Financial Accounting Standards Nos. 34 and 36 published by the Accounting Research and Development Association of the Republic of China, and the relevant directives of the competent authority regarding accounting disclosures in relation to financial derivatives. In its financial statements or in the accompanying notes, it shall disclose contract information for the given type of transaction such as the amount of notional principal, and the nature and the terms of the transaction (including at least credit risk, market risk, possible liquidity risk, transaction cash flow, and applicable accounting policies).
The method of accounting treatment and journalization for the financial derivatives of the preceding paragraph will be separately prescribed by the GTSM. |
| Article 48 | In addition to disclosure of information on OTC trading of financial derivatives in accordance with the provisions of the Regulations Governing the Acquisition and Disposal of Assets by Public Companies, a securities firm shall also, at the time it submits monthly accounting summaries to the GTSM, submit in duplicate a set of informational materials for review and recordation by GTSM audit personnel on the derivative financial product transactions in which the securities firm has engaged, including their type, terms and conditions, and realized or unrealized gains or losses.
The form for submission of the additional information with the monthly accounting report as prescribed in the preceding paragraph is shown in Appendix 5. |
| Article 49 | After a securities firm executes a financial derivatives transaction, it shall promptly enter the transaction information and the outstanding balance into the GTSM information system at the time and in the form prescribed by the GTSM. |
| Article 50 | 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 self-owned capital adequacy ratio.
Limits on amounts traded by securities firms engaging in OTC financial derivatives trading will be announced by the GTSM subsequent to their formulation and submission to the competent authority for approval. |
| Article 51 | After a securities firm has obtained qualification for OTC financial derivatives trading, it shall undergo a credit rating annually and shall report the result to the GTSM by submitting the credit rating report within seven business days after receiving the rating. When there is any change in the securities firm's credit rating, limits on the aggregate total amount of trades by the securities firm shall be set according to the new rating.
When the self-owned capital adequacy ratio of a securities firm that has obtained qualification to engage in OTC trading of financial derivatives falls below 200 percent, it may not undertake any new trades even if its operational risk equivalent does not exceed the aggregate total amount of new trades; new trades may not be undertaken until its self-owned capital adequacy ratio reaches 200 percent.
In addition to regular audits of the matters in the preceding two paragraphs, the GTSM may require the securities firm to submit relevant documents and undergo a special audit, and when necessary may place a limit on the aggregate total amount of trades undertaken by the firm. |
Chapter V Enforcement
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| Article 52 | When any of the following circumstances applies to a securities firm, the GTSM may notify it to take supplementary or corrective action within a prescribed time period:
1. Violation of Article 10, Article 11, Article 14, Article 18, Articles 22 to 28, Articles 32 to 37, Article 40, Article 42, Article 43, or Article 45.
2. Execution of financial derivatives trades not in conformance with the relevant portions of the securities firm's application.
3. A self-owned capital adequacy ratio less than 200 percent.
4. Execution of trades not in conformance with the securities firm's "procedures for handling financial derivatives transactions" or its internal control or auditing systems.
5. Violation of the applicable provisions of other GTSM rules, regulations, operating procedures, guidelines, directions, supplementary rules, public announcements, or circulars. |
| Article 53 | When any of the following circumstances applies to a securities firm, the GTSM may issue a warning and notify it to take supplementary or corrective action within a prescribed time period:
1. Violation of Article 16, Article 17, Article 31, Article 31-2, Article 39, Article 44, or Articles 46 to 51.
2. Failure to take supplementary or corrective action within the time period prescribed in the preceding article. |
| Article 54 | When any of the following circumstances applies to a securities firm, the GTSM may impose a penalty of not less than NT$50,000 and not more than NT$3 million.
1. Violation of Article 4, Article 12, Article 15, Article 31-2, or Article 41.
2. Failure to take supplementary or corrective action within the time period prescribed in the preceding article. |
| Article 55 | When any of the following circumstances applies to a securities firm, the GTSM may suspend or terminate its financial derivatives trading, provided that such action shall not affect the validity of an already-transacted derivatives product:
1. Imposition of a penalty pursuant to subparagraph 2 of the preceding article three or more times during the preceding half-year.
2. Failure to pay a penalty imposed pursuant to subparagraph 2 of the preceding article.
3. Noncompliance with the conditions of Article 5, paragraph 2, subparagraph 1 or 2.
4. The self-owned capital adequacy ratio of the securities firm has remained below 200 percent for three consecutive months.
5. Receipt of a sanction from the competent authority of a severity equal to or greater than that under Article 66, subparagraph 2 of the Securities and Exchange Act or Article 100, paragraph 1, subparagraph 2 of the Futures Trading Act.
6. Violation of Article 31-2 or Article 41.
When a securities firm's qualification for trading of financial derivatives has been suspended or terminated due to circumstances under any subparagraph of the preceding paragraph, upon the extinguishment of the cause and in the absence of a cause under any other subparagraph of that paragraph, the securities firm may apply for restoration of its qualification by submitting relevant evidentiary documentation. The GTSM may restore the firm's qualification after performing a review for verification. |
Chapter VI Supplementary Provisions |
| Article 56 | The GTSM may separately adopt guidelines or other supplementary regulations with respect to these Rules or to individual financial derivatives specified herein. |
| Article 57 | These Rules, and any amendments hereto, shall enter into force upon approval and public announcement by the competent authority after passage by the board of directors of the GTSM.
Any addition, deletion, or amendment to the Appendices of these Rules shall enter into force following approval by the president of the GTSM. |