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Taiwan Stock Exchange Corporation (TSEC) Operation Guidelines Governing Liquidity Providers of Exchange Traded Fund Beneficial Certificates(2008.02.26) |
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I. These Operation Guidelines are adopted pursuant to Article 13 of the TSEC Rules Governing Trading of Beneficial Certificates.
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II. A securities investment trust enterprise (SITE) that issues exchange-traded fund beneficial certificates (ETFs), or a domestic general agent designated by an issuer that issues ETFs in a foreign country ("general agent") may, as it deems necessary with respect to business operations, choose an ETF liquidity provider ("liquidity provider"). Each type of ETF shall have a maximum of 3 liquidity providers, and any addition of liquidity providers may be reported by a letter to the TSEC for approval.
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III. A liquidity provider shall meet the following requirements:
1. A liquidity provider must have the qualifications of a participating securities firm as specified in the TSEC Guidelines for In-kind Creation/Redemption of Exchange Traded Fund Beneficial Certificates, and of a securities firm that conducts proprietary securities trading business.
2. It must be approved by the TSEC to operate the business of an ETF liquidity provider.
3. It must have entered into a contract for provision of ETF market liquidity ("liquidity contract") with a SITE that issues ETFs, or with the Taiwan general agent for ETFs that are issued overseas.
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IV. If a liquidity provider fails to meet any or all of the following requirements, the TSEC may deny approval for its operation of ETF liquidity provision business:
1. The most recent financial report audited and attested by the certified public accountant shows net worth per share of not less than par value, and financial status meeting the requirements under the Regulations Governing Securities Firms;
2. Has not been issued a warning by the competent authority under subparagraph 1 of Article 66 of the Securities and Exchange Act within the most recent 3 months;
3. Has not been subject to any sanction imposed by the competent authority during the most recent half year ordering the securities firm to remove from office any of its directors, supervisors, or managerial officers or to replace any of its responsible persons or other relevant personnel.
4. Has not been subject to any sanction imposed by the competent authority during the most recent year involving suspension of business activities.
5. Has not been subject to any sanction imposed by the competent authority during the most recent 2 years involving voidance of any part of its permission for business.
6. Has not been subject during the most recent year to any measures taken by a securities exchange, an over-the-counter securities market, or the Taiwan Futures Exchange Corporation under the bylaws or rules of such exchange involving suspension of or restriction on the trading activities of the securities firm.
7. Other requirements prescribed by the competent authority.
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V. A liquidity provider must use its segregated ETF account ("777777-7" under the securities dealer account) to conduct trading orders for liquidity provision.
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VI. The liquidity contract shall at least prescribe the following matters with respect to the responsibilities and obligations of a liquidity provider:
1. The calculation formula for the best bid/ask spread of the ETF as disclosed in the TSEC centralized securities exchange market is as follows:
(the best bid/ask spread) = [(lowest unexecuted ask quote) - (highest unexecuted bid quote)]/( lowest unexecuted ask quote)
2. The minimum number of participations by a liquidity provider in matching of the ETF. The number of participations in matching means the designated minimum number of participations in matches in the TSEC's trading system in a buy or sell order in which the price is within a specified range above the previous lowest unexecuted ask quote, within a specified range below the previous highest unexecuted bid quote, or within a specified range above and below the execution price. Minimum numbers shall be set for participations in matches of bid and ask quotes calculated as specified above.
3. The minimum amount of buy/sell quotes that a liquidity provider shall make during a suspension of matching when there occurs a circumstance specified in paragraph 3 of Article 58-3 of the TSEC Operating Rules with respect to the ETF during the trading session.
4. Except when the price of the ETF goes limit-up or limit-down, the disclosure of market trading prices is limited only by the duration of time of bid or ask prices; however, the aforesaid calculation of time may be excluded when matching time must be postponed due to a circumstance specified in paragraph 3 of Article 58-3 of the TSEC Operating Rules.
5. Agreement that the TSEC provide to the SITE or the general agent all the buy/sell quotes and itemized statements of trading of the ETF done through the liquidity provider's segregated ETF account.
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VII. If a SITE or a general agent adds or terminates a liquidity provider, it shall, by 3 p.m. on the day three days before the effective day or the termination day of the contract, notify the TSEC by letter, annexing the certificates and documents proving the qualifications specified in Point III of these Operation Guidelines.
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VIII. Preferential treatment for liquidity providers
1. A liquidity provider may, during the same settlement period, use netting when settling block trades, regular trades, after-hours fixed-price trades, and odd-lot trades, and spot trades on the same day therewith, of the ETF. If there remains a balance of sell trades of the ETF after netting, the liquidity provider may, within the same day, borrow those ETFs through the TSEC's securities lending system or from a securities firm pursuant to regulations, or, no later than the following business day, apply to borrow securities to perform settlement pursuant to Article 109 of the TSEC Operating Rules.
2. A liquidity provider that applies to borrow securities for settlement pursuant to Article 109 of the TSEC Operating Rules may be exempted from the relevant sanctions on its general manager, managerial officer, and responsible staff member.
3. The TSEC provides a discount on transaction charges for liquidity providers that achieve a certain performance level. Relevant requirements and criteria shall be separately prescribed by the TSEC.
4. If the amount of securities borrowed to perform settlement pursuant to Article 109 of the TSEC Operating Rules as aforementioned exceeds the number of beneficial units per unit of such ETF's in-kind creation, the liquidity provider's eligibility for discounts or exemption of transaction charges for the current month shall be cancelled.
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IX. If any of the following circumstances applies to the liquidity provider, the TSEC may cancel its qualification as a liquidity provider, or may, depending on the severity of circumstance, temporarily suspend the preferential treatment as mentioned in Point VII of these Operation Guidelines.
1. Violation of relevant regulations prescribed by the competent authority or the TSEC.
2. Termination of the liquidity contract with a SITE or a general agent.
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X. These Operation Guidelines, and any amendments hereto, shall be publicly announced and implemented following submission to and approval by the competent authority.
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