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 | "Competent authority," as used in these Rules, means the Financial Supervisory Commission of the Executive Yuan. |
| Article 4 | A securities firm that engages in financial derivatives business shall perform risk-benefit analyses prior to commencing such business and at periodic intervals thereafter and shall formulate management strategies and operational guidelines for its financial derivatives business. The management strategies and operational guidelines, and any subsequent amendments thereto, shall be implemented after submission to and approval by the board of directors.
When a foreign securities firm establishes a branch unit in the ROC to engage in financial derivatives business, the duties to be performed by the board of directors under the preceding paragraph may be performed by persons authorized by the securities firm's head office. |
Chapter II Conditions for Application
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| Article 5 | "Financial derivatives," as used in these Rules, means forward contracts, options contracts, or swaps, or combinations of two or more of the above, or hybrid contracts that also include fixed-income products, whose value, in conformity with regulations or common practice on domestic or foreign OTC markets, is derived from stocks, interest rates, currencies, indexes, commodities, credit, or other interests.
Except where otherwise provided in these Rules, the financial derivatives of the preceding paragraph may not be linked to any of the following underlying products:
1. Securities privately placed domestically or abroad.
2. Securities issued overseas by domestic enterprises or certificates of beneficial interest issued overseas by domestic securities investment trust enterprises.
3. Any Taiwan stock index compiled by a domestic or foreign institution and related financial commodities, provided that this restriction shall not apply to an index compiled by the GTSM or the Taiwan Stock Exchange Corporation, either singly or in cooperation.
4. Any of the following commodities or contracts related to the mainland China area:
(1) Securities of mainland China securities markets.
(2) Securities issued or traded by a government, enterprise, or institution of the mainland China area.
(3) Mainland China area stock indexes or stock index futures.
(4) Interest rate indexes related to the mainland China bond or currency market.
(5) Other products connected with application of the Act Governing Relations Between Peoples of the Taiwan Area and the Mainland Area or regulations and directions adopted under that Act.
Any financial derivative business conducted by a securities firm that involves foreign exchange business shall be subject to approval by the Central Bank. |
| Article 6 | 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 14. 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 15 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 engaging in financial derivatives business that has passed GTSM review will remain in effect and further yearly applications will not be required. |
| Article 7 | When a securities firm initiates a derivatives trade with a qualified institutional investor for a financial derivatives product outside the securities firm's prior-approved scope of derivatives business, after-the-fact registration will be used and the firm shall not be subject to the provisions of Article 6, paragraph 1.
Within 15 days of commencing the new business under the preceding paragraph, the securities firm shall submit a letter with registration documents to the GTSM for recordation. When an incomplete set of recordation documents is submitted, the GTSM may notify the securities firm to suspend the new business prior to supplementation of the necessary documentation, and may also, as it otherwise deems necessary, notify the securities firm to suspend the new business.
"Qualified institutional investor," as used in these Rules, means a foreign or domestic bank, insurance company, bills finance company, securities firm, fund management company, government investment institution, government fund, pension fund, mutual fund, unit trust, securities investment trust company, securities investment consulting company, trust enterprise, futures commission merchant, futures service enterprise, or other institution approved by the competent authority. |
| Article 8 | When a securities firm initiates a financial derivatives trade with a qualified institutional investor with any underlying listed under Article 5, paragraph 2, it shall first submit an application to the GTSM with the relevant documentation. The GTSM will forward the application to the competent authority, and trading of such a financial derivative product may only take place subsequent to the competent authority's first issuance of an approval to a securities firm for such a trade. An application must be submitted to the Central Bank for any financial derivative trade given under Article 5, paragraph 3.
After the competent authority grants approval to the first securities firm, the provisions of Article 6, paragraphs 2 and 3 shall apply mutatis mutandis to other securities firms applying to trade the same type of financial derivative. |
| Article 9 | Securities firms engaging in the business given in Article 7, paragraph 1 and Article 8 shall be limited to those that have obtained approval to engage in financial derivatives business in accordance with Article 6 of these Rules, and shall not include those which have obtained approval only for bond forward contracts.
A securities firm engaging in financial derivatives trading business whose trading counterparty is a qualified institutional investor is not subject to the provisions of Article 16, Article 20, Article 24, Article 32, Article 43, Article 48, Article 49, Article 42, or Article 54 of these Rules. |
| Article 10 | 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.
2. Its long-term credit rating must meet the requirements of the competent authority. A securities subsidiary of a domestic financial holding company or a foreign securities firm's branch unit within the ROC may use the credit rating of its group holding company, which shall provide an unconditional and irrevocable guaranty.
3. It must have reported a regulatory capital adequacy ratio for each month of the preceding half year that meets the requirements of the competent authority.
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 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.
A securities firm that falls out of compliance with the conditions of subparagraph 4 of the preceding paragraph but that effects improvement and subsequently receives approval from the competent authority shall not be subject to the restrictions of that subparagraph. |
| Article 11 | When a foreign securities firm intends to apply to engage in OTC trading of financial derivatives, its head office may furnish an approval letter or a performance undertaking from its board of directors and the securities firm may then submit an application to the GTSM in the name of the foreign entity via a branch unit in ROC territory or 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 paragraph 1, subparagraphs 1 and 2 of the preceding article, while its regulatory capital adequacy ratio must meet a standard similar to that of paragraph 1, subparagraph 3 of the preceding article; it shall also have received no sanction similar to those under paragraph 1, 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 12 | A securities firm applying for the first time to engage in OTC trading of financial derivatives pursuant to Article 6 shall submit an NT$200,000 application review fee to the GTSM; the same fee shall be submitted with any re-application following a termination, pursuant to these Rules, of a securities firm's qualification for OTC trading of financial derivatives. |
| Article 13 | A securities firm applying to conduct or that registers OTC trading of financial derivatives at its places of business pursuant to Articles 6 through 8 shall submit the documents shown in Appendices 1-1 and 1-2.
The directions for GTSM review and approval of securities firms' applications or registrations are as given in Appendices 2-1 and 2-2.
A foreign securities firm trading financial derivatives products shall issue an undertaking stating that the transaction prices it receives at the beginning of the transaction period will not be remitted out of Taiwan until after the transaction matures. This restriction, however, shall not apply to remittance of any transaction prices as required for instruments linked to foreign financial products. |
Chapter III Types of Financial Derivatives and Their Trading
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Section I Bond Derivative Transactions
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| Article 19 | In these Rules, "bond derivatives product" means a financial derivatives product whose value is derived from bonds.
The bonds of the preceding paragraph may not be bonds that are convertible or can be swapped for shares. |
| Article 20 | A securities firm that undertakes a bond derivatives transaction that has an underlying of foreign bonds and is denominated and settled in New Taiwan Dollars or foreign exchange shall do so only with a high net-worth individual who engages in wealth management transactions with the securities firm. |
| Article 21 | When a securities firm undertakes a domestic government bond derivatives transaction, the par value of its net purchases or 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 22 | 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 effect payment and delivery with the trading counterparties on the stipulated payment and settlement date in accordance with the regulations for market settlement applicable for each underlying bond. |
Section II Interest Rate Derivative Transactions
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| Article 23 | In these Rules, "interest rate derivatives product" means a financial derivatives product whose value is derived from interest rates. |
| Article 24 | A securities firm that undertakes an interest rate derivatives transaction with a foreign currency interest rate product as its underlying and denominated and settled in New Taiwan Dollars or in foreign exchange shall do so only with a high net-worth individual who engages in wealth management transactions with that securities firm. |
Section III Convertible Bond Asset Swap Transaction Transactions
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| Article 25 | In these Rules, "asset swap" means options contracts, swap contracts, or combined options and swaps contracts, whose value is derived from convertible bonds or exchangeable bonds.
The bonds of the preceding paragraph shall be domestic OTC listed convertible bonds or exchangeable bonds whose convertible or exchangeable underlying is a domestic OTC-listed or exchange-listed stock. |
| Article 26 | A securities firm that writes an option as part of an asset swap transaction shall maintain a position in the given underlying bond for the duration of the swap contract or hold a corresponding option position for the same period.
The bond position of the preceding paragraph may not be the subject of a pledge or a repo-style bond transaction; this restriction, however, shall not apply when the securities firm enters into a repo-style transaction with a trading counterparty which stipulates that early contract rescission and repurchase of the bonds may take place at any time. |
| Article 27 | A securities firm engaging in an asset swap transaction may stipulate payment and settlement with the counterparty through payments of either bonds or cash.
When payment in convertible or exchangeable bonds is stipulated as the method of payment and settlement pursuant to the preceding paragraph, payment and settlement shall take place in accordance with the Operating Rules of the Taiwan Depository & Clearing Corporation. |
| Article 28 | When a securities firm engages in an asset swap transaction with a trading counterparty where payment in exchange-listed or OTC-listed convertible or exchangeable bonds is the stipulated method of performance, the trading counterparty shall first open a central securities depository account. |
Section IV Structured Instrument Transactions
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| Article 29 | As used in these Rules, "structured instrument" means a hybrid contract combining features of fixed-income and financial derivatives products.
The scope of eligible linked underlying assets of structured instruments 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 maximum of 10 years. |
| Article 30 | A securities firm that sells a structured instrument must stipulate with the customer that the customer's maximum potential loss will be limited to the original transaction price, provided that when it sells a structured instrument that is named a principal-protected product or that claims principal guarantee benefits, it shall stipulate a principal protection percentage at maturity no lower than 80 percent of the transaction price. |
| Article 31 | 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.
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. |
| Article 32 | The provisions of Article 42 apply mutatis mutandis with respect to credit-linked structured products. |
| Article 33 | The two parties in a structured instrument transaction may stipulate that payment at maturity will be by means of cash settlement or by the securities firm's delivery of the linked underlying securities.
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 Operating Rules of the Taiwan Depository & Clearing Corporation. |
| Article 34 | When the securities firm and the trading counterparty stipulate that payment for a structured instrument at maturity will be effected by delivery of exchange-listed or OTC-listed stocks, the counterparty shall first open a central securities depository account. |
| Article 35 | A securities firm that engages in structured instruments business shall hedge the structured instruments with securities, derivatives products, or hedging outsourced to another institution, on the basis of the market risk associated with the underlyings. Hedging positions for a given instrument may be calculated in the aggregate.
A securities firm engaging in structured instrument business shall report hedging information daily through the GTSM information system, in the prescribed format, for the duration of the trading contract.
When a securities firm engages another institution to buy or sell domestic exchange or OTC-listed stocks on its behalf for hedging purposes, it shall also report the status of those hedging activities and shall require that the given institution agree to provide related information to either the competent authority or the GTSM as needed.
When a projected hedge position reported by a securities firm pursuant to paragraph 2 has differed from the actual hedge position by more than plus or minus 20 percent on any three out of the most recent six business days, or when the theoretical hedge exceeds 3000 lots of stock and has differed 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 provides otherwise, the GTSM may request an explanation by the securities firm and conduct an on-site inquiry. If the explanation is not found to be reasonable, one demerit will be issued, and where a total of three demerits have been issued, the GTSM will restrict the securities firm from further 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 has differed 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 provides otherwise, the GTSM may require mandatory implementation of risk-offsetting strategies by the securities firm. |
| Article 36 | 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 "888888-8" 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. |
| Article 37 | As required for hedging purposes, a securities firm that engages in structured instruments business may borrow or sell short the underlying security without being subject to the restriction that the price of the securities borrowed or sold short may not be lower than the closing price of the previous business day.
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 38 | When the securities firm elects to sell shares of the underlying security by borrowing from securityholders in a securities borrowing and lending transaction, if the security is an exchange-listed 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 then, as required for hedging purposes, transfer the shares into the hedge account in separate lots upon application by the securities firm.
When the securities firm elects to short-sell shares in 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 carried out 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 and applications to cover short sales with spot securities. Reports of out-trades and account number corrections may not be filed for this account. |
| Article 39 | For the purpose of stabilizing the price of an underlying security, after closing out the related transaction, a securities firm may make a transfer of the linked underlying stock in the hedge account to its proprietary trading account. |
| Article 40 | Utilization of the transaction price received by a securities firm through a structured instrument transaction shall be limited to such investments in domestic and foreign fixed-income products and hedging transactions as are related to the structured instrument. When investment in or hedging through foreign financial commodities is involved, such transactions shall be undertaken in accordance with the relevant regulations of the competent authority.
Except where related laws and regulations provide otherwise, the monies under the preceding paragraph may not be utilized for transactions in any of the financial commodities listed under Article 2, paragraph 5.
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. |
| Article 41 | 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 Derivatives Transactions
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| Article 42 | As used in these Rules, "equity derivatives product" refers to a financial derivatives product whose value is derived from stocks, stock indexes, or exchange-traded funds.
The subject of an equity derivatives 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 instruments handled by securities firms. |
| Article 43 | When the trading counterparty of a securities firm is the writer of an equity option or a person engaged in the business of equity derivatives denominated in foreign currencies or linked to foreign underlying securities, the counterparty must be a high net-worth individual who engages in wealth management transactions with that securities firm. |
| Article 44 | 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 derivatives transaction in domestic exchange-listed or OTC-listed stocks, the number of the underlying shares that could potentially be exchanged upon exercise of the derivatives contract, plus the number of underlying shares that would be exchanged upon exercise of all the outstanding and unexpired call (put) warrants and contract-based call (put) warrants of all securities firms and banks, may not exceed 15 percent of the total number of the underlying shares issued by the issuer after deduction of the shares set out in each of the following items:
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 45 | Except where law or regulation provides otherwise, the two parties may stipulate the manner in which equity derivatives linked to Taiwan stocks 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; the provisions of Article 33, paragraph 2 shall apply mutatis mutandis. For equity derivatives linked to foreign equity products, the two parties may stipulate settlement in cash settlement or by physical delivery according to the practices of the relevant market.
When the underlying of the equity derivatives of the preceding paragraph is a stock index, the method of exercise shall be settlement in cash. |
| Article 46 | The provisions of Articles 34 through 39 shall apply mutatis mutandis to equity derivatives transactions. A securities firm, however, need not perform hedging when it is the purchaser of options or when undertaking an equity swap or forward equity transaction. |
Section VI Credit Derivatives Products
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| Article 47 | As used in these Rules, "credit derivative product" refers to financial derivatives products which derive their value from underlying credit in accordance with the regulations or practices of domestic or foreign financial markets.
"Underlying credit" as used in the preceding paragraph refers to default risk, credit spread risk, or ratings downgrade risk associated with the following subjects:
1. Governments and corporations.
2. Government debt or corporate debt.
3. Various types of securitization products. |
| Article 48 | A securities firm trading credit derivatives products shall be limited to the transfer of credit risk on recognized assets or liabilities, unrecognized firm commitments, and forecast transactions certain to occur in future. |
| Article 49 | When the trading counterparty of the securities firm is the credit protection seller, that trading counterparty must be a high net-worth wealth management customer.
The securities firm shall assess the capacity and the appropriateness of the trading counterparty of the preceding paragraph for the credit derivative transaction, and at minimum shall inform the counterparty of the following matters:
1. The trading counterparty shall itself assess and monitor the credit risk of the credit entity under the management contract and the credit risk of the securities firm.
2. Returns on a credit derivative product derive primarily from bearing credit risk associated with the credit entity under the contract; losses may be incurred if a stipulated credit event occurs.
3. The securities firm shall provide a complete explanation defining the stipulated credit default event, the method of settlement to be used after the occurrence of a credit default event, the scope of debt obligations deliverable in the case of physical settlement, and the method of calculation for settlement of the spread in cash.
4. Credit derivative-related contracts typically lack market liquidity, and if such a contract contains a stipulation for early rescission, an explanation must be provided of the costs and the maximum possible loss that will be borne by the trading counterparty should the trading counterparty demand early rescission. |
Chapter IV Trading Regulations
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| Article 50 | Any OTC financial derivatives transaction undertaken by a securities firm beyond the scope provided by these Rules will be deemed to involve another, separate 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 without approval from the competent authority. |
| Article 51 | A securities firm engaging in financial derivatives business may not damage fair market price formation or investor rights and interests when conducting hedging operations or when calculating product gains or carrying out settlement upon cancellation or expiration. The securities firm shall formulate and implement an effective internal control system addressing the aforementioned considerations. |
| Article 52 | A securities firm that engages in OTC financial derivatives transactions may not use any such transaction, on its own behalf or on behalf of a customer, for the purpose of merger or acquisition, or to otherwise engage in an unlawful transaction.
A securities firm shall stipulate with the customer that the customer may not refuse a request from the competent authority for review of relevant data (including data on the ultimate beneficial owner) for the purpose of market regulation. |
| Article 53 | A securities firm engaging in business related to Taiwan equity may not engage in 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 securities underlying equity derivatives, or any person related to the issuer as set out in the preceding 3 subparagraphs.
Calculation of the total shareholdings of the shareholders under subparagraph 1 above shall include shareholdings of spouses, minor children, and nominees of the persons under subparagraph 1.
Before a securities firm engages in a financial derivatives trade referred to in the preceding paragraph with a trading counterparty, the counterparty shall sign an undertaking stating that it is not a related party as set out in paragraph 1.
A securities firm may enter into trades with the qualified institutional investors of paragraph 1, subparagraphs 1 through 3, provided that the terms it accords those persons may not be more favorable than those accorded others in the same class of counterparties, and that the trades may be undertaken only after passage of a resolution by three-fourths or more of the company directors in attendance at a director's meeting with a two-thirds quorum or after a resolution granting authorization to the relevant department. |
| Article 54 | 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 55 | 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, carrying 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 56 | 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 authority and 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 57 | 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 58 | 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). |
| Article 59 | In addition to disclosure of information on OTC trading of financial derivatives in accordance with the Regulations Governing the Acquisition and Disposal of Assets by Public Companies, a securities firm shall also submit in duplicate a set of monthly accounting summaries for review and recordation by GTSM audit personnel.
The form for submission of the information as prescribed in the preceding paragraph is shown in Appendix 5. |
| Article 60 | 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 61 | A securities firm that undertakes OTC financial derivatives trading shall calculate the market risk equivalent and counterparty risk equivalent for its trading positions as prescribed in the Regulations Governing Securities Firms in order to reflect those components in the calculation of its regulatory capital adequacy ratio.
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 62 | 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 regulatory 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 regulatory 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. |
| Article 63 | The GTSM may make periodic announcements of information on financial derivatives trading. |
Chapter V Enforcement
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| Article 64 | 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 15, Articles 16 through 20, Articles 22 through 34, Article 38, Articles 40 through 43, Article 45, the portion of Article 46 requiring the mutatis mutandis application of Articles 34 and 38, Articles 47 through 50, Article 53, Article 53, or Article 56.
2. Execution of financial derivatives trades not in conformance with the relevant portions of the securities firm's application or filing.
3. A regulatory 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 65 | 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 4, Article 13 paragraph 3, Article 21, Articles 35 through 37, Article 44, the portion of Article 46 requiring the mutatis mutandis application of Articles 35 through 37, Article 51, Article 55, or Articles 57 to 62.
2. Failure to take supplementary or corrective action within the time period prescribed in the preceding article.
3. A violation of these Rules or of related GTSM rules such as to affect the rights and interests of investors or orderly trading in the market. |
| Article 66 | 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 Articles 5 through 8, Article 51 or Article 52.
2. Failure to take supplementary or corrective action within the time period prescribed in the preceding article.
3. A violation of these Rules or of related GTSM rules that has a material effect on the rights and interests of investors or orderly trading in the market. |
| Article 67 | 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 head office of a foreign securities firm fails to meet the standards under Article 10, paragraph 1, subparagraphs 1 or 2, or businesses operated by the subsidiary of a foreign securities firm or by its branch unit in ROC territory fail to meet the standards under Article 10, paragraph 1, subparagraph 1.
5. The regulatory capital adequacy ratio of the securities firm has remained below 200 percent for three consecutive months.
6. 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.
7. Violation of Article 51 or Article 52.
8. A violation of these Rules or of related GTSM rules that has a material effect on the rights and interests of investors or orderly trading in the market.
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 verification review and reporting to and receiving the consent of the competent authority. |
Chapter VI Supplementary Provisions |
| Article 68 | The GTSM may separately adopt guidelines or other supplementary regulations with respect to these Rules or to individual financial derivatives specified herein. |
| Article 69 | 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. |