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Title:

Taiwan Stock Exchange Corporation Operation Guidelines Governing Liquidity Providers of Beneficial Certificates  CH

Amended Date: 2021.04.29 (Articles 6, 6-1 amended,English version coming soon)
Current English version amended on 2018.12.24 
Categories: Securities Exchange Market > Trading > Beneficial Certificates

Title: Taiwan Stock Exchange Corporation Operation Guidelines Governing Liquidity Providers of Beneficial Certificates(2014.07.18)
Date:
1     These Operation Guidelines are adopted pursuant to Article 13 of the TWSE Rules Governing Trading of Beneficial Certificates.
2     A securities investment trust enterprise (SITE) that offers exchange-traded funds under the Regulations Governing Securities Investment Trust Funds, or a futures trust enterprise that offers exchange-traded futures trust funds ("futures ETFs") under the Regulations Governing Futures Trust Funds, or an offshore fund manager or an institution designated thereby ("offshore fund institution") that offers offshore exchange-traded funds under the Regulations Governing Offshore Funds shall select liquidity providers ("liquidity providers") respectively for exchange-traded fund beneficial certificates, futures ETF beneficial certificates, offshore exchange-traded fund beneficial certificates, shares of funds, or investment units (hereinafter all referred to as "ETFs"). An offshore fund institution may engage a general agent to report by letter to the TWSE.
3     A liquidity provider shall meet the following requirements:
  1. A liquidity provider must be qualified as a participating securities firm that conducts the business of creation and redemption of ETFs, and also as a securities firm that conducts proprietary securities trading business.
  2. It must be approved by the TWSE 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, futures trust enterprise, or offshore fund institution that issues ETFs.
4     If a liquidity provider fails to meet any or all of the following requirements, the TWSE may deny approval for its operation of ETF liquidity provision business. Those not meeting requirements in subparagraphs 2 to 6 need not be subject to this restriction, however, if there has been a concrete improvement in the circumstances, and it has been recognized by the competent authority:
  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.
5     A liquidity provider must open a segregated ETF account ("777777-7" under a securities dealer account) for the purpose of offering buy and sell quotes for liquidity provision.
    To meet hedging needs in connection with liquidity provision, a liquidity provider may open a segregated ETF hedge account ("777777-8" under a securities dealer account) to offer sell quotes for borrowed securities. The quantities of such securities will not be subject to intraday limits on the amounts of sell orders for borrowed securities.
     The securities on which quotes are offered for the sale of borrowed securities through the segregated ETF hedge account shall be limited to those transferred into it from a segregated ETF account ("777777-7" under a securities dealer account), and any remaining balance may only be transferred back to the original segregated ETF account.
6     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 TWSE 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 TWSE'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 4 of Article 58-3 of the TWSE 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 4 of Article 58-3 of the TWSE Operating Rules.
  5. Agreement that the TWSE provide to the SITE, the futures trust enterprise, or the general agent for offshore funds all the buy/sell quotes and itemized statements of trading of the ETF done through the liquidity provider's segregated ETF account.
6-1     If any of the following circumstances in the disclosure of market trading prices has existed for an ETF for 3 consecutive months, the TWSE will notify the SITE or futures trust enterprise issuing the ETF to take corrective measures within 2 months commencing from the following month after the notification is made. The TWSE will issue a warning letter if the SITE or futures trust enterprise fails to take corrective measures within the time limit, and continued failure to take corrective measures within 2 months from the following month shall be deemed a breach of the listing contract, and the TWSE will impose a breach penalty in the amount of NT$30,000 on the SITE or futures trust enterprise, with further investigation conducted once every 3 months and consecutive penalties imposed until such time as correction is made.
    With respect to a domestic component securities ETF under Article 2 of the TWSE Rules Governing Trading of Beneficial Certificates, each of the following circumstances may not occur more than twice per month in the disclosure of market trading prices during regular trading hours:
  1. With the exception of the disclosure of limit-up or limit-down prices, in the disclosure of market trading prices, only either a posted bid price or a posted ask price is available, and the circumstance has continued for more than 3 minutes.
  2. The best bid-ask spread is higher than 1 percent, and the circumstance has continued for more than 10 minutes.
  3. When the TWSE encounters any circumstance under Article 58-3, paragraph 3 or 4 of the TWSE Operating Rules and has to postpone matching for a period of time, such postponement may be excluded from the calculation of the time periods set out above.
     With respect to a foreign component securities ETF or a futures ETF under Article 2 of the TWSE Rules Governing Trading of Beneficial Certificates, each of the following circumstances may not occur more than six times in total per month in the disclosure of market trading prices during regular trading hours:
  1. With the exception of the disclosure of limit-up or limit-down prices, in the disclosure of market trading prices, only either a posted bid price or a posted ask price is available, and the circumstance has continued for more than 10 minutes.
  2. The best bid-ask spread is higher than 3 percent, and the circumstance has continued for more than 10 minutes.
  3. When the TWSE encounters any circumstance under Article 58-3, paragraph 3 or 4 of the TWSE Operating Rules and has to postpone the matching for a period of time, such postponement may be excluded from the counting of the number of occurrences set forth above.
  4. In the case of a foreign component securities ETF, if the foreign securities market of the country of listing of the component securities of the index tracked by the fund is closed on a given day, the disclosure of market trading prices for that given day shall be excluded from the counting of the number of occurrences set forth above.
  5. In the case of a futures ETF, if the exchange market of the foreign futures contracts represented by the fund is closed on a given day, the disclosure of market trading prices for that given day shall be excluded from the counting of the number of occurrences set forth above.
7     If a SITE, a futures trust enterprise, or an offshore fund institution adds a liquidity provider, it shall, by 3 p.m. on the day 3 days before the effective day of the contract, notify the TWSE by letter, annexing the certificates and documents proving the qualifications specified in Point III of these Operation Guidelines; in the case of termination of a liquidity provider, notification shall be made by letter to the TWSE by 3 p.m. on the day 3 days before the termination day of the contract. An offshore fund institution may engage a general agent to report by letter to the TWSE.
8     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 TWSE's securities lending system or from a securities firm pursuant to regulations, or, no later than the second business day following the transaction day, apply to borrow securities to perform settlement pursuant to Article 109 of the TWSE Operating Rules.
  2. A liquidity provider that applies to borrow securities for settlement pursuant to Article 109 of the TWSE Operating Rules may be exempted from the relevant sanctions on its general manager, managerial officer, and responsible staff member.
  3. The TWSE 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 TWSE.
  4. If the amount of securities borrowed to perform settlement pursuant to Article 109 of the TWSE Operating Rules as aforementioned exceeds the number of beneficial units per unit of such ETF's creation, the liquidity provider's eligibility for discounts or exemption of transaction charges for the current month shall be cancelled.
9     If any of the following circumstances applies to the liquidity provider, the TWSE 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 TWSE.
  2. Termination of the liquidity contract with a SITE, a futures trust enterprise, or an offshore fund institution.
10     These Operation Guidelines, and any amendments hereto, shall be publicly announced and implemented following submission to and approval by the competent authority.