Chapter I General Principles
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| Article 1 | These Regulations 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 Regulations; any matters not provided for herein shall be governed by the bylaws of the GreTai Securities Market (GTSM) and directives supplementary to these Regulations. |
| Article 3 | "Competent authority," as used in these Regulations, 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 Regulations, 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 Regulations, 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 5-1 | "Professional customer," as used in these Regulations, means a juristic person or natural person that meets any of the following conditions:
1. Qualified institutional investors: refers to 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.
2. A juristic person or fund whose CPA-audited or reviewed financial report for the most recent period shows total assets in excess of NT$50 million.
3. Natural persons that meet each of the three following conditions and have applied in writing with the securities firm for the status of professional customer:
(1) Proof of financial resources of NT$30 million or more; or, a single trade in excess of NT$3 million combined with total investment assets at the given securities firm in excess of NT$15 million, along with provision of a statement of financial resources showing total assets of NT$30 million or more.
(2) Possession of adequate professional knowledge or trading experience with respect to financial products.
(3) Complete awareness that the securities firm may be exempted from liability for financial derivatives trades undertaken with a professional customer, and consent to sign for trades as a professional customer.
The securities firm shall carry out to the full its responsibility to make a reasonable investigation of the qualifications required of a professional customer under each subparagraph of the preceding paragraph, and shall obtain reasonable and reliable supporting evidence from the customer. |
| Article 5-2 | "Ordinary customer," as used in these Regulations, means any customer other than those meeting the qualifications for professional customers under Article 5-1.
Any professional customer, with the exception of qualified institutional investors, may make written application with the securities firm for a change of status from professional customer to ordinary customer. |
| 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. |
| 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 Regulations, 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 48 or Article 54 of these Regulations. |
| 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 Regulations 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 Regulations, 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 Regulations, "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 professional customer. |
| 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 Regulations, "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 professional customer. |
Section III Convertible Bond Asset Swap Transaction Transactions
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| Article 25 | In these Regulations, "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 engages in asset swap transactions shall carry out hedging against the market risk of the linked underlying assets, and shall adopt rigorous internal control standards and enhanced internal auditing procedures. It shall carry out regular review and analysis and keep records thereof for future inspection or auditing.
The asset swap hedging position of the preceding paragraph may not be the subject of a pledge or a repo-style 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 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 Regulations 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 Regulations, "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.
Where the structured instruments sold by a securities firm are linked to the publicly offered certificates of beneficial interest of a securities investment trust fund, consent from the securities investment trust enterprise (SITE) shall be obtained prior to the sale. When the sales staff recommend or sell products to investors, relevant documents involving description of the fund shall comply with the Code of Conduct for Members of the Securities Investment Trust and Consulting Association of the ROC and Their Sub-distributors Governing the Advertising and Business Activities of Securities Investment Consulting Enterprises. An explanation shall be given to non-institutional investors that these products are not funds. |
| 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 30-1 | A securities firm that provides structured note trading services to ordinary customers shall carry out the following assessments:
1. The securities firm shall assess the customer's characteristics to ascertain whether the customer is a professional customer or an ordinary customer, and shall perform an overall assessment of the customer's degree of risk tolerance on the basis of factors including the customer's age, investing knowledge and experience, status of assets, trading objectives, and understanding of the product. At least three discrete levels of risk tolerance shall be distinguished, and the ordinary customer shall be required to sign a confirmation of the assessment.
2. The securities firm shall undertake an assessment of the product's characteristics, and shall retain a written record for verification. The assessment shall include at least the following items:
(1) Assessment and confirmation of the legality of the given structured note, the related investment assumptions, the reasonableness of the risk/return profile, the appropriateness of the transaction, and whether there are any conflicts of interest.
(2) Overall assessment and confirmation of the degree of risk inherent in structured notes, in which at least three discrete levels of risk are distinguished, with respect to factors such as their characteristics, the risk and probability of principal loss, liquidity, structural complexity, and the term of the notes.
(3) Assessment and confirmation of the adequacy and accuracy of the disclosures made in the product information and marketing documents provided to the customer.
(4) Confirmation of whether only professional customers can invest in the given structured note. |
| Article 30-2 | A securities firm that provides structured note trading services to ordinary customers shall impose the following controls on its marketing procedures:
1. The securities firm shall indicate, in a prominent typeface in the notice to customers and in the prospectus, the degree of product risk for the given structured note, based on the assessment of the product's characteristics pursuant to Article 30-1, subparagraph 2. The securities firm may not sell to an ordinary customer a structured note that exceeds the level appropriate to the customer, nor may it sell to an ordinary customer a structured note restricted to investment by professional customers.
2. A securities firm that provides structured note trading services to ordinary customers shall fulfill its duty of disclosure. For products with identical terms and conditions of transaction but with durations in excess of six months, and sale of the product to 10 or more persons is planned, an ordinary customer shall be given a review period of not less than seven days prior to the initial transaction for review of the contracts connected with the structured note. When such a period of review is not required for a given product, the fact that there is no review period for the given product shall be clearly stated in the product's prospectus.
3. A securities firm that provides structured note trading services to ordinary customers shall read aloud to the customer the important content of the notice to customers and retain an audio recording as a record.
4. When a securities firm undertakes a structured note trade with an ordinary customer that is a juristic person, then in subsequent trades with the same customer for the same type of structured note, the securities firm may be exempt from the requirement of the preceding subparagraph to read aloud the important content of the notice to customers and to retain an audio recording as a record in any transaction in which the customer signs a written consent to that effect. The "same type of structured note" as used above means that the product's structure, denominating currency, and linked underlying asset are all completely the same.
The matters to be set out pursuant to the preceding paragraph in the notice to customers and the product prospectus, and the means by which a recording is to be made, will be formulated by the GTSM and publicly announced after submission to and approval by the competent authority. |
| Article 30-3 | A securities firm shall adopt the content of Article 30-1 and Article 30-2 as part of its internal control and internal auditing systems and carry out related audits and inspections. |
| 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.
When a securities firm enters into structured instrument transactions with customers, it shall establish an after-sale product information disclosure system. The content, frequency, and method of disclosure shall be stipulated between the securities firm and the customer; the content of disclosures shall include market prices, price quote information for early cancellation of structured instrument transactions, and profit and loss status.
When structured instruments with the same transaction terms and conditions are sold to ten or more parties, the securities firm shall disclose on its website relevant market price information or price quote information for early cancellation, and shall also disclose relevant information through the GreTai information 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 Regulations 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 shall adopt rigorous internal control Regulations and strengthen its internal auditing with respect to its structured instrument hedging operations, and shall perform related examinations and analyses on a regular basis which shall be kept on record for future reference. |
| 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 Regulations 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 Regulations 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 | A securities firm shall draft a set of criteria for utilization of funds, to govern utilization of transaction prices received through structured instrument transactions. Those criteria, and any amendments thereto, shall first be passed by a resolution of the board of directors and then submitted by letter to the GTSM for recordation.
The content of the criteria for utilization of funds under the preceding paragraph shall include principles and instruments for fund utilization, scope of utilization, operating procedures, liquidity control measures, and the department in charge of execution and its authorities.
The securities firm shall adopt rigorous standards for internal control and enhanced internal auditing based on the standards for utilization of funds of the preceding paragraph. It shall undertake regular review and analysis, and produce records for future audit or inspection. |
| 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 Regulations, "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 Regulations, 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 meet the requirements for a professional customer. |
| Article 43-1 | A securities firm that trades equity derivatives linked to Taiwan stocks with offshore overseas Chinese or foreign nationals shall first confirm that the trading counterparty has completed registration in accordance with the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals and the Operation Directions for Registration of Offshore Trades by Overseas Chinese and Foreign Nationals in Derivatives Products Linked to Taiwan Stocks. |
| 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 the previous business day's 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.
Trades in derivatives products linked to Taiwan stocks by offshore overseas Chinese and foreign nationals that a securities firm registers with the GTSM must be denominated and settled in foreign currencies and may not involve physical delivery of Taiwan spot securities. |
| 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 Regulations, "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 meet the requirements for a professional 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 Regulations 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 may not engage in financial derivatives trades related to Taiwan equities with any of the following 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; when the trading counterparty is a qualified institutional investor, the securities firm may use available information to make an effective confirmation, by means of its own internal operating procedures, that the trading counterparty is not a related party under paragraph 1. When the securities firm is unable to undertake verification of a trading counterparty, however, and when the trading counterparty is unable to produce an undertaking, the securities firm may not engage in a trade with that counterparty.
A securities firm may enter into trades with the 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.
The restrictions of paragraph 1, subparagraphs 1 through 3 do not apply when the price of a trade by a securities firm, with one individual non-institutional investor, is less than NT$1 million, or when the cumulative price of unexpired trades is less than NT$5 million. |
| 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 Regulations.
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 | Personnel engaged in the recommendation or sale of financial derivatives products shall be qualified as securities firm associated persons, and shall also possess one of the following qualifications:
(1) Graduation from a finance or finance-related department at the university level or higher, along with completion of six credit hours in courses in financial derivatives and risk management or participation in 20 or more hours of course work in financial derivatives and risk management at a foreign or domestic financial training institute.
(2) The qualifications required for senior agent of a securities firm under Article 5 of the Regulations Governing Responsible Persons and Associated Persons of Securities Firms.
(3) Participation in 30 hours or more of courses in financial derivatives and risk management offered by a foreign or domestic financial training institute.
(4) Holding a financial derivatives-related license.
(5) A half year or more of actual experience in financial derivatives business at a foreign or domestic financial institution.
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 5-1, Article 5-2, Article 15, Articles 16 through 20, Articles 22 through 34, Article 38, Articles 40 through 43-1, 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 Regulations, regulations, operating procedures, guidelines, directions, supplementary Regulations, 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 Regulations or of related GTSM Regulations 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 Regulations or of related GTSM Regulations 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 Regulations or of related GTSM Regulations 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 Regulations or to individual financial derivatives specified herein. |
| Article 69 | These Regulations, 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 Regulations shall enter into force following approval by the president of the GTSM. |