Chapter 1 General Principles
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| Article 1 | These Operating Rules are adopted pursuant to Article 38, paragraph 2 of the Regulations Governing Securities Lending by Securities Firms. |
| Article 2 | A securities firm conducting securities lending business shall do so in compliance with securities trading laws and regulations, these Operating Rules, and the relevant bylaws, operating rules, public announcements, and circular letters of the Taiwan Stock Exchange Corporation (TSEC), GreTai Securities Market (GTSM), or Taiwan Depository & Clearing Corporation (TDCC). |
| Article 3 | "Securities lending business" conducted by a securities firm means business activities in which the securities firm lends securities to a customer under an agreement stipulating return of securities of the same type and quantity within a specified period.
The "specified period" referred to in the preceding paragraph may not exceed six months. However, before that period expires and with the consent of the securities firm, the customer may apply once only to extend that period, and may not change the lending terms and conditions.
The subject of "securities lending" referred to in paragraph 1 term means securities eligible for margin purchase and short sale, and other securities approved by the competent authority. |
| Article 4 | To apply to conduct securities lending business, a securities firm shall fill out an application form and submit it to the TSEC together with the relevant documentation.
After the application materials are reviewed by the TSEC and the securities firm is found to be qualified and in conformance with the relevant provisions of these Operating Rules, the application shall be forwarded to the competent authority for approval.
A securities firm approved by the competent authority to conduct securities lending business shall submit the following in document form to the TSEC for recordation and open a securities borrowing and lending account two days before commencing such business.
1. Photocopies of the documents approved by the competent authority.
2. List of supervisors and associated persons handling securities lending business and their certificates of qualification.
The responsible and associated persons under the preceding paragraph shall register with the TSEC before conducting such business; where there is any change thereto, a change of registration shall be carried out within five days.
A securities firm of the first paragraph approved by the competent authority to conduct securities lending business shall amend the registration of its securities business items with the TSEC before commencing the conduct of such business. In addition, the securities firm's business personnel that conduct such business shall possess the relevant qualifications prescribed by the competent authority in the Regulations Governing Responsible Persons and Associated Persons of Securities Firms.
After a securities firm has been approved by the competent authority to conduct securities lending business, if its regulatory capital adequacy ratio is below 200 percent for two consecutive months, it shall suspend such business, and may resume it only after the securities firm achieves compliance with regulations for three consecutive months and receives approval from the competent authority. If the securities firm has already been approved to conduct such lending but has not begun doing so, it shall suspend proceeding with such business. |
| Article 5 | Securities collateral obtained by a securities firm in conducting securities lending business shall be deposited in the dedicated account for securities lending collateral opened by that securities firm at the TDCC. If the customer issues a written statement of consent for collateral rehypothecation, the securities collateral may be utilized for the purposes listed below and no others:
1. As collateral for securities borrowed through the TSEC securities lending system.
2. As collateral for refinancing of securities by securities finance enterprises.
If the securities collateral of the preceding paragraph are book-entry central government bonds, they shall be handled by transfer of registration at the clearing bank in accordance with the Directions for the Operation of Book-Entry Central Government Securities.
A securities firm that utilizes any of its collateral securities obtained in the course of lending securities to customers shall return the same quantity and type of securities when the customer returns the securities it borrowed. |
Chapter 2 Opening and Management of Securities Lending Accounts
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| Article 6 | A securities firm shall enter into a securities lending agreement with a customer and open a securities lending account before it may begin to accept securities lending transaction-related business from that customer.
The Taiwan Securities Association shall draft a model securities lending agreement referred to in the preceding paragraph. |
| Article 7 | When applying to open a securities lending account, a customer that is an ROC citizen shall present in person their original national ID card and sign an account opening application and securities lending agreement on the spot.
A customer organized and registered as a juristic person under ROC law shall conduct the account opening procedures of the preceding paragraph by having its authorized person submit originals of the power of attorney, national ID cards of its authorized person and representative, corporate registration (or registration amendment) card, and evidentiary documentation of corporate registration.
When applying to open an account, a customer other than those specified in paragraphs 1 and 2 shall conduct the account opening procedures by presenting the relevant proof of identity documents in accordance with the TSEC Operating Rules or the relevant provisions regarding the opening of a brokerage account prescribed by the GTSM.
Photocopies of the relevant proof of identity documents and the original power of attorney used to apply to open an account shall be retained; the following statement shall be stamped on the photocopied portion, "It has been verified that the account opening application has been made in person by the applicant or by the authorized person thereof and that the photocopies are true and faithful copies of the original."
A securities firm processing the opening of a securities lending account shall decide whether to open that account based on a detailed and faithful credit check in accordance with its internal control system. It shall record the detailed credit check method, information, and results on the account opening application, and record the account opening date and the account number. It shall transmit the account opening information that same day to the TSEC or GTSM computer database, and shall do likewise for account cancellation information. If the customer is a juristic person, it shall separately notify the customer in writing to confirm that the account is being opened with its authorization.
A securities firm shall approve its customer's line of credit based on that customer's credit check results, and provide a risk disclosure statement disclosing the possible risks of securities lending transactions.
A model for the risk disclosure statement of the preceding paragraph shall be drafted by the Taiwan Securities Association. |
| Article 8 | If for three consecutive years or longer there is no record of any lending transaction by the customer that opens a securities lending account, the securities firm shall promptly cancel the securities lending transaction account and notify the customer.
If a customer must terminate a securities lending account that it opened, it shall fill out an application for termination of the securities lending account. When the securities firm has investigated and determined that all its lending transactions have been closed out and all relevant obligations settled, it shall promptly carry out account cancellation procedures. |
| Article 9 | A securities firm shall set up a separate account ledger for each customer and record the matters listed below on a transaction-by-transaction basis each day:
1. Matters regarding securities borrowing and return.
2. Collateral details, value, and collateral ratio.
3. Matters regarding collateral calls, and withdrawal, exchange, and disposal of collateral.
4. Matters regarding compensation for entitlements.
A securities firm shall compile and deliver to the customer a monthly reconciliation statement based on the account ledger record of the preceding paragraph, provided that this requirement shall not apply where there is no record of any lending transaction in that month, and the customer has not submitted a written request for such statement.
A securities firm shall obtain a letter of consent signed by the customer agreeing that the securities firm may provide information regarding its individual securities borrowing to the TSEC, GTSM, and institutions designated by the competent authority as needed for collection, computer processing, and international transmission or use in accordance with acts and regulations. |
| Article 10 | A customer shall promptly notify the securities firm in writing if there is a change to the name or identification documents of the customer itself, its agent, or representative, or to the mailing address or contact phone number, recorded on its application to open a securities lending account.
Where a customer fails to make the notice of the preceding paragraph the securities firm shall continue to process transactions based on the original registration information, and the customer shall be solely liable, without recourse, for any resulting legal issues. |
| Article 11 | Required notice of matters by a securities firm pursuant to these Operating Rules shall be effected by mail with personal signature confirmation of receipt by the customer, or other mutually agreed-upon method.
Where a securities firm's notice sent by mail cannot be delivered on time because the customer failed to make notice under the preceding Article, or due to other reason attributable to the customer, such notice shall be deemed effective on the date of the post office's first delivery attempt.
Where the customer signs in person to acknowledge receipt of a securities firm's notice, the customer's signature or seal shall match the signature on the original securities lending agreement or the original seal/signature-of-record, and shall be accompanied by the date. |
Chapter 3 Applications for the Borrowing and Return of Securities
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| Article 12 | The business hours of a securities firm for securities lending business shall be 9 a.m. to 3 p.m. |
| Article 13 | A customer that borrows or returns securities to a securities firm shall fill out an application form marked with the word "Borrow" or "Return", and after the securities lending transaction has been executed, the securities firm shall complete a lending report bearing that same word; the TSEC and the GTSM will make a joint public announcement of the matters that shall be recorded therein by the securities firm.
The provisions of the preceding paragraph shall be subject mutatis mutandis to Article 75, subparagraphs 7 to 11 and Article 80, paragraphs 4 to 6 of the TSEC Operating Rules and to Articles 62 and 62-2 of the GTSM Rules Governing Securities Trading on Over-the-Counter Markets. |
| Article 14 | Where a securities firm conducts securities lending, the securities firm and the customer shall negotiate and fix the rate at which the transaction will be executed, at a rate not to exceed 20 percent per annum, and with a tick of 0.01 percent.
The method for the calculation and collection of the securities lending fee shall be negotiated between the securities firm and customer and recorded in the agreement, provided that any fee arising from refinancing under Article 22, paragraph 2 of the Regulations Governing Securities Lending by Securities Firms shall be borne by the securities firm. |
| Article 15 | When a securities firm accepts a customer's application to borrow securities, it shall collect collateral from the customer calculated at an initial collateral ratio of not less than 140 percent based on the opening reference price for the security on that day.
A securities firm shall notify the TSCE or GTSM regarding the delivery information of the loan securities and the collateral securities (except for book-entry central government bonds), and forward such notice to the TDCC to immediately conduct the securities transfer procedures. The TDCC shall annotate the borrowed securities. Central government bonds shall be handled using the title transfer registration method pursuant to the Directions for the Operation of Book-Entry Central Government Bonds.
It is prohibited to transfer or withdraw securities that have been annotated, except for those used for purposes listed under Article 24 of the Regulations Governing Securities Lending by Securities Firms. |
| Article 16 | When a securities firm wishes to use proprietary securities, or collateral securities obtained in connection with customer margin purchases, for purposes listed in Article 24 of the Regulations Governing Securities Lending by Securities Firms, it must remit them into a securities borrowing and lending account before doing so, except where otherwise provided by the TSEC or laws and regulations. |
| Article 17 | When securities are transferred from a securities firm's own securities account to a securities borrowing and lending account, the securities firm shall first return any securities of the same type that had been remitted from the securities borrowing and lending account into its own account, with the remaining balance transferred being taken as the amount of securities remitted from its own securities account into the securities borrowing and lending account; the same procedure shall govern the transfer of securities from a securities borrowing and lending account to a securities firm's own account.
Borrowed securities in the securities firm's own securities account may not be loaned out. |
| Article 18 | A securities firm that conducts securities lending shall notify the TSEC or GTSM of any transfer of securities into or out of its securities lending collateral account and forward such notice to the TDCC to conduct the securities transfer procedures.
Securities in a securities firm's own securities account opened at another securities firm must be transferred into the securities firm's securities lending collateral account before they may be posted as collateral in the TSEC securities lending system. |
| Article 19 | When handling securities lending business, a securities firm may accept the following types of assets as collateral, to be valued at the valuation percentages indicated:
1. Cash.
2. Book-entry central government bonds. Calculate at 90 percent of face value.
3. Securities eligible for margin purchases and short sales. The collateral value of securities eligible for margin purchase and short sale transactions shall be 70 percent of the most recent closing price if they are exchange-listed securities, or 60 percent of the most recent next day's reference price if they are OTC-listed securities.
The closing price and reference price of the preceding subparagraphs 2 and 3 shall be set pursuant to Article 58-3 of the TSEC Operating Rules or Article 57 of the GTSM Rules Governing Securities Trading on Over-the-Counter Markets.
Securities collateral that a securities firm collects from a customer shall be limited to securities that the customer itself owns.
The collateral valuation percentages in paragraph 1 may be adjusted by the TSEC in conjunction with the GTSM based on the condition of the collateral. The lender and borrower may separately agree to a collateral valuation percentage lower than the prescribed percentage.
A securities firm may refuse to accept, or lower the valuation percentage for, the collateral listed in paragraph 1, subparagraph 3, depending on the market liquidity and risk status of that collateral. |
| Article 20 | A securities firm that receives a customer's application to replace collateral shall effect such replacement by the second business day after the receipt thereof; the replacement method shall be stipulated between the two parties. |
| Article 21 | A securities firm shall notify the customer in writing 10 days before the expiration of the loan period for any loaned securities, and shall return the collateral on the same day that the customer returns the securities upon expiration.
After a securities firm accepts a customer's application to return securities, it shall notify the TSEC or GTSM, and shall forward such notice to the TDCC to immediately conduct transfer procedures for the subject securities and securities collateral (except for book-entry central government bonds).
Cash collateral that is returned shall be deposited in the customer's bank deposit account. Return of book-entry central government bonds shall be handled in accordance with the Directions for the Operation of Book-Entry Central Government Securities. |
| Article 22 | A securities firm may notify a customer of a recall of loaned securities as agreed by the two parties, and shall return the collateral on the day the customer returns the securities.
During the loan period, a customer may apply to return early all, or a portion of, the borrowed securities, and at the time of such application stipulate with the securities firm the method and deadline for transfer of the securities and the collateral. The securities firm shall return the collateral, at the latest, by the second business day after it receives the securities returned by the customer. |
| Article 23 | A securities firm shall on a daily basis transmit information regarding the authorized loan limits, loan transaction details, and outstanding balances of securities loans for each customer to the TSEC or the GTSM, which shall compile such information and publish the outstanding balance of securities loans before the next day's market opening. |
| Article 24 | A securities firm shall produce detailed and accurate records and vouchers for all funds and securities receivable and payable that it processes in the course of securities borrowing and lending transactions, and shall compile the following statements on a daily basis:
1. Daily statement of securities lending transactions.
2. Summary statement and itemized statement of securities borrowing and lending position balances.
3. Itemized statement of the receipt, payment, disposal, and utilization of collateral in connection with securities lending and borrowing.
4. Itemized statement of collateral.
5. Itemized statement of collateral margin calls and deposits.
6. Itemized statement of compensation of entitlements.
7. Itemized statement of applications for and repayment of refinancing in connection with securities lending.
8. Itemized statement of refinancing balances in connection with securities lending.
9. Itemized statement of refinancing collateral in connection with securities lending. |
Chapter 4 Collateral Mark-to-Market and Collateral Calls
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| Article 25 | A securities firm shall on a daily basis and for each customer calculate the collateral ratio of the overall securities borrowing and lending account, and each individual securities loan thereunder, based on the closing price published by the TSEC, or the next day's reference price published by the GTSM, according to the following formula:
Collateral ratio = (total collateral value of the collateral － securities lending fees payable ) ÷ (market value of the loaned securities ＋ market value of stock dividend shares to be returned ＋ cash dividends to be returned) × 100%
For the six business days prior to any ex-dividend or ex-rights date for a security that is provided as collateral, its market value shall be calculated at the valuation percentage specified in Article 19, based upon the respective current day's closing price or next day's reference price, minus the value of the dividend or minus the value of the right determined based on the current day's closing price or the next day's reference price.
Where a customer's overall account collateral ratio is lower than the 120 percent collateral maintenance ratio, the securities firm shall promptly notify the customer to provide additional collateral within two business days from the day the notice is delivered to make up the collateral shortfall for each individual securities lending transaction that does not meet the required collateral maintenance ratio, so as to bring the individual collateral ratios thereof above the initial collateral ratio.
The collateral maintenance ratio of the preceding paragraph and the initial collateral ratio of Article 15 may be adjusted by the TSEC in consultation with the GTSM based on market circumstances. |
| Article 26 | If a securities firm notifies a customer to cover a shortfall pursuant to paragraph 3 of the preceding article and the customer fails to do so, or does so only partially, within two business days from service of that notice, the securities firm shall proceed as follows:
1. If a customer's overall account collateral ratio on a given day is still lower than the collateral maintenance ratio, dispose of its collateral beginning from the next business day under the mutatis mutandis application of Article 32, paragraph 1.
2. If the customer's overall account collateral ratio rises and meets or exceeds the collateral maintenance ratio, the securities firm may temporarily refrain from disposing of its collateral. However, if the collateral ratio subsequently falls short again on any given business day, and the customer fails to take the initiative to pay additional collateral on that same day, dispose of its collateral beginning on the next business day under the mutatis mutandis application of Article 32, paragraph 1.
3. If before the collateral has been disposed of under the preceding subparagraph, the sum of any successive collateral deposits made by the customer covers the shortfall of which it was notified, expunge the collateral call record.
4. If a customer's overall account collateral ratio rises and meets or exceeds the initial collateral maintenance ratio, expunge the collateral call record. |
| Article 27 | When a customer closes out a portion of its securities borrowing positions, if the overall account collateral ratio for positions still open in the borrowing and lending account is lower than the collateral maintenance ratio, the securities firm shall retain all, or a portion, of the collateral returnable to the customer, to the extent necessary so as not to fall below the required collateral maintenance ratio. |
| Article 28 | A customer shall warrant that the securities it provides as collateral are free and clear of all liens, claims, and encumbrances of any nature whatsoever. If there is any defect in rights, legal dispute, loss of eligibility for margin transactions, suspension of trading, or other cause that disqualifies any of the securities collateral, the securities firm shall subtract that type of security when calculating the collateral ratio under Article 25 herein, and promptly notify the customer to replace it with eligible collateral of equivalent collateral value within three business days after receiving such notice. |
| Article 29 | If the overall collateral ratio of a customer's securities borrowing and lending account exceeds the initial collateral ratio as a result of a change in price, the customer may, as stipulated between the two parties, request that the securities firm return the collateral for those transactions in which the collateral ratio exceeds the initial collateral ratio or apply it toward other securities borrowing transactions, provided that subsequent to such return of collateral, the collateral ratio of the overall account may not be lower than the initial collateral ratio. |
Chapter 5 Handling of the Ex-rights/Dividends of Loaned Securities and Securities Collateral Title Transfer
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| Article 30 | Where a securities firm and customer stipulate compensation of rights and dividend entitlements of loaned securities, the securities firm shall give notice to the customer to make compensation for such entitlements according to the agreed-upon deadlines and method.
When a customer provides securities as compensation to a securities firm pursuant to the preceding paragraph, the securities firm shall notify the TSEC or GTSM and forward such notice to the TDCC to immediately conduct the securities transfer procedures.
When the securities loaned by the securities firm carry subscription rights to new shares and the securities firm intends to subscribe, the securities firm shall deliver the subscription price to the customer before the expiration of the subscription period as stipulated, and the customer shall make the transfer to the securities firm before the expiration of the prescribed subscription period.
When the securities firm wishes to exercise the voting rights of securities during the period in which they are loaned, it must, by the stipulated deadline, notify the customer to return the securities before the last date of record for the shareholders meeting. |
| Article 31 | On the business day preceding book closure of the issuing company, the securities firm shall prepare a customer-by-customer title transfer list and electronic data file of the securities collateral provided by each customer (with the exception of book-entry central government bonds), and send it to the TDCC to effect title transfer with the issuer or the issuer's stock registrar and transfer agent on the customer's behalf.
When a securities firm utilizes securities collateral obtained in the course of conducting securities borrowing and lending for rehypothecation purposes, it shall replace that collateral four business days prior to the date of book closure. |
Chapter 6 Default Procedures
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| Article 32 | Under any of the following circumstances, the securities firm shall, beginning from the next business day, dispose of the collateral from the lending transactions at issue, and also take any necessary measures pursuant to the provisions of the agreement:
1. The loan period has expired, or the parties have agreed to early return and the customer is unable to return the securities within the stipulated time limit.
2. The payment date for compensation for entitlements has arrived, and the customer fails to make such compensation.
3. The customer fails to make up a collateral shortfall or to provide eligible replacement collateral within the required time period.
4. The customer fails to pay any applicable fee as stipulated.
When a securities firm disposes of securities collateral or makes necessary repurchases pursuant to the preceding paragraph, it shall do so, through the Securities Lending Default Handling Account it has opened with another securities broker, on the TSEC central securities market or through the GTSM trading system. If such an order is not executed, it shall continue to be quoted from the next business day, and the relevant processing fees and tax shall be borne by the customer.
After a securities firm disposes of that collateral, if the settlement proceeds are insufficient to offset the debt, it may, within the scope necessary to settle the obligation, liquidate outstanding securities borrowing and lending transactions of the customer and use the funds obtained thereby to offset its debt. If a positive balance remains, it shall be returned to the customer; if the funds obtained are still insufficient, the securities firm shall notify the customer to make up the shortfall within a specified period. |
| Article 33 | A customer that fails to make up a shortfall pursuant to a notice under paragraph 3 of the preceding article is in default. The securities firm shall cancel its securities lending account and file a default report with the TSEC or GTSM. The TSEC or GTSM shall promptly forward notice to all securities finance enterprises and securities firms.
A securities firm may, from the default date until the date of settlement, collect a default penalty of 10 percent of the stipulated lending rate on the shortfall portion. |
| Article 34 | If during the term of a securities loan a customer fails to meet settlement obligations on time as set out in Article 91 of the Operating Rules of the TSEC or Article 87 of the GTSM Rules Governing Securities Trading on Over-the-Counter Markets, the securities firm shall notify the customer to close out its securities borrowing and lending transactions on the following business day, and then cancel that customer's securities borrowing and lending account. If the positions have not been closed out by the deadline, the securities firm shall begin on the following business day to close out the securities lending transactions through the mutatis mutandis application of Article 32, paragraph 2 herein.
If during the term of a securities loan a customer commits any breach specified in Article 76, paragraph 3, subparagraph 1 or 3 of the Operating Rules of the TSEC or Article 47, paragraph 2, subparagraph 1 or 3 of the GTSM Rules Governing Securities Trading on Over-the-Counter Markets at another securities firm or futures commission merchant, and the case is not yet closed, after the securities the customer provided as collateral have been sold through the Securities Lending Default Handling Account opened by another securities broker retained by the securities firm, the customer may buy back the securities from the market to return those securities. |
| Article 35 | If a customer is in default under Article 33 herein or its securities lending account is cancelled by the securities firm pursuant to paragraph 1 of the preceding article, the securities firm may again accept and process the opening of a securities lending account by that customer only after it has settled its obligations, made payment in full, or the case has been closed. |
Chapter 7 Risk Management
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| Article 36 | A securities firm may not enter into a securities lending transaction with any party having any of the following relationships with it:
1. A director, supervisor, representative of a juristic-person director or supervisor, employee, or shareholder holding more than ten percent of the shares, of the securities firm.
2. A juristic-person shareholder of the securities firm that, through a representative, is elected as a director or supervisor of the securities firm under Article 27, paragraph 2, of the Company Act.
3. A spouse of a director or supervisor, or of a representative of a juristic-person director or supervisor, of the securities firm.
4. A minor child of a person of a status specified in subparagraph 1.
The securities firm shall incorporate the provisions of the preceding paragraph into its internal control system. |
| Article 37 | Regarding the total monetary value of securities loaned to individual customers by a securities firm conducting securities lending business, loans to a single natural person may not exceed 1 percent of the securities firm's net worth or NT$20 million; those to a single juristic person may not exceed 5 percent of the securities firm's net worth; those to a single group of related parties may not exceed 10 percent of the securities firm's net worth, and the total monetary value of securities loaned to natural persons within such a group may not exceed 2 percent of the securities firm's net worth.
The total monetary value of securities loaned under the preceding paragraph shall be calculated using the closing price on the date on which the securities are loaned, or the next day's reference price. |
| Article 38 | The total monetary value of securities loaned by a securities firm conducting securities lending business may not exceed 250 percent of its net worth.
In conducting securities margin purchase and short sale business, the total monetary value of securities loaned to customers for short sales, plus the total monetary value under the preceding paragraph, may not exceed 400 percent of its net worth. |
| Article 39 | The combined total monetary value of loans and provision for short sale of any given type of security by a securities firm conducting securities lending business and securities margin purchase and short sale businesses may not exceed 5 percent of the securities firm's net worth.
A securities firm conducting securities lending business shall immediately cease lending any given type of security when the sum total of the outstanding balance of shares in that security on loan to customers plus the outstanding balance of shares of that security sold short in margin purchase and short sale business reaches the sum total of the shares of its proprietary shares of that type of security, plus the shares thereof it has borrowed from the TSEC securities lending system, plus the outstanding balance thereof bought on margin in margin purchase and short sale business. |
Chapter 8 Supplementary Provisions |
| Article 40 | The TSEC or GTSM may handle violation of any provision of these Operating Rules by a securities firm, its responsible person, or employee, in accordance with its applicable bylaws, rules, and regulations. |
| Article 41 | These Operating Rules, and any amendments hereto, shall be drafted by the TSEC in conjunction with the GTSM, submitted to the competent authority for final approval, and subsequently publicly announced and implemented. |