||Taiwan Stock Exchange Corporation Criteria Governing Review of Call (Put) Warrant Listings(2003.05.23)
The term "credit rating of a particular grade" in Article 4, Paragraph 2, Subparagraph 3 and Article 6 means a rating of twBB or above obtained from Taiwan Ratings Corporation, or for foreign institutions, a rating of Ba3 or above from Moody's Investors Service, BB or above from Standard and Poor's, or BB or above from Fitch Inc.
Where the issuer or the risk-management institution is a foreign institution or the subsidiary of an ROC financial holding company, it may obtain a credit rating as a group holding company, and the holding company may provide an unconditional and irrevocable guaranty, however, the credit rating of the holding company shall still conform to the standards set forth in the preceding paragraph.
An application for TSEC listing approval for an issue of call (put) warrants shall conform to each of the following conditions:
1. The issue shall comprise 20 million or more issuance units, or 10 million or more units with a total value of NT$200 million or more.
An issuance unit shall represent one share (or a basket of single shares) or every 10 issuance units shall represent one share (or a basket of single shares).
2. Distribution of warrant holders:
(1) There must be 100 or more warrant holders. At least 80 warrant holders must hold between 1,000 and 50,000 issuance units, and their cumulative holdings must comprise 20% or more of the total listed issuance units.
(2) The number of issuance units held by any single warrant holder may not exceed 10% of the total volume of listed issuance units; where a warrant holder is the issuer, the number of issuance units held may not exceed 30% of the total volume of listed issuance units, provided that where the issuer entrusts another institution with risk management, the risk management institution in question may not hold the warrants issued.
(3) The total number of issuance units held by the issuer and the issuer's associated persons and employees may not exceed 35% of the total volume of listed issuance units.
(4) During the sale of the call (put) warrants, the issuer shall restrict the directors, supervisors, and managers of the company whose securities are represented in the call (put) warrants, as well as major shareholders with shareholdings of 10% or more in that company, from holding warrants through which they may subscribe to a number of shares in excess of the number of shares of the underlying security they already hold.
3. Period of validity: Calculated from the date of listing, the period of validity shall be between six months and two years, inclusive.
4. The total number of shares of the underlying security that may be called (or put) through the call (put) warrants and the shares of the same underlying security represented by other existing call (put) warrants already listed on the TSEC may not exceed 20% of the total number of outstanding shares of the issuing company after deduction of each of the following types of shareholdings:.
(1) The total percentage of shares held by directors and supervisors under statutory shareholding ratio requirements.
(2) Already pledged securities.
(3) The number of centrally deposited shares mandatory for newly listed companies.
(4) Shares already repurchased under the Regulations Governing Share Repurchase by Listed and OTC Companies and not yet cancelled.
(5) Shares with restrictions on listing or trading imposed by the competent authority.
5. The issuance plan shall contain the following terms and conditions:
(1) The issuance date and the period of validity.
(2) Detailed information on the underlying security or basket of securities (for the underlying securities of the warrants issued, in addition to the financial statement of the most recent period audited or certified by a certified public accountant and showing no losses, there shall also be a statement of the reason for issuing warrants based on the underlying securities).
(3) The type of call (put) warrant, the volume of issuance units and total value of the issue.
(4) Terms of issuance (including issuance price, strike price, exercise period and number of shares represented per issuance unit; where knock-out call warrants or knock-out put warrants are issued, conditions regarding upper and lower price caps and the fact that the warrants will be deemed to be at maturity, requiring settlement exclusively in cash when the closing price of the underlying security reaches the upper or lower price, cap shall be set out in a prominent typeface). For a call warrant, the strike price referred to may not exceed 150% of the underlying security's price at market close on the date of application; for a put warrant, the strike price may not be lower than 50% of the underlying security's price at market close on the date of application, provided that the above ratios may be exceeded when the strike price and the closing price of the underlying security differ by less than NT$30. There shall be reasonable cause and explanation for any terms of issuance that do not conform to the above standards, and full disclosure shall be given to investors.
(5) The method by which the issuance price is calculated, including the price of the underlying security, the strike price, the period of validity, the interest rate, the rate of fluctuation of the underlying security and other elements used in the calculation, and a table of comparison with other warrants in the preceding year that took the same listed security as the underlying security.
(6) Detailed information on the guarantor and the guaranty agreement or collateral.
(7) Procedures for exercising the option and the terms for cancellation of already-exercised call (put) warrants.
(8) Strategies for offsetting foreseeable risks.
(9) The policy of the issuer regarding adjustment of the strike price of the call (put) warrant and related items with the distribution of dividends and bonuses, increases or decreases in capitalization, stock splits or consolidations, and handling of other related matters by the issuing company of the underlying securities. Where the issuer does not make such adjustments in accordance with the TSEC reference formula, that fact shall be noted in bold lettering in the issuance prospectus.
(10) Methods of handling merger by the company issuing the underlying securities, or alteration in the trading method, suspension of sale, or de-listing of the securities.
(11) Methods of handling market listing of the call (put) warrants, or suspension of trading or de-listing of the warrants by the TSEC.
(12) Terms stipulating that upon expiration of the period of validity, where the market price of the underlying securities is higher than the strike price of a call warrant (or the strike price of a put warrant is higher than the market price of the underlying securities) and where there is value in the exercise of the option and the terms of exercise require cash settlement, the warrant holder shall be deemed to have exercised the warrant and to have given notice to that effect.
(13) Terms stipulating that the warrant issuer may not substitute another warrant with a period of validity longer than that of the original warrant, or any other security, for the originally issued warrant.
(14) Procedures for delivery and payment when the warrant holder exercises the option.
(15) Terms stipulating that where settlement after exercise of the option referred to in the preceding paragraph shall be in cash, the cash settlement amount shall be calculated based on the closing price of the underlying securities on the exercise date.
(16) Terms stipulating the methods for handling distribution of securities centrally deposited in the Taiwan Central Depository Corporation account where the issuer fails to perform its delivery of the underlying securities or the cash price differential.
(17) Clarification of whether or not there are plans for a reverse issue of call (put) warrants against the same underlying securities within the coming three months.
For applications for TSEC approval for listing of call (put) warrants, the underlying securities shall conform to each of the following conditions:
1. Market value of underlying security: NT$10 billion or more.
2. The volume of shares traded during the most recent three calendar months shall account for 20% of the total of outstanding shares, or the average monthly volume of shares traded in the most recent three months shall reach 100 million shares or more.
3. The financial report for the most recent period, certified or audited by a certified public accountant, shall show no losses, or shall show no accumulated deficit if losses exist.
Conformance of underlying securities with the standards of the preceding paragraph shall be based on quarterly TSEC announcements, provided that if during the period for announcement the financial report required under Article 36 of the Securities and Exchange Law does not conform with Subparagraph 3 of the preceding paragraph, the TSEC will announce cancellation of the given security's qualification as the underlying of a call (put) warrant.
In applications to the TSEC for approval for listing of call (put) warrants, in addition to the financial statement of the most recent period audited or certified by a certified public accountant and showing no losses, there shall also be a statement of the reason for issuing warrants based on the underlying securities.
Where any of the following conditions apply, the TSEC may withhold approval for an application for market listing of a projected issue of call (put) warrants:
1. The required application documents submitted by the issuer are incomplete, and it has failed to supplement the required documents by the deadline prescribed by the TSEC.
2. The particulars of the issuer's application do not conform to laws and regulations, or the issuer has made false and misleading presentations in the application.
3. The issuer or an affiliated company of the issuer has, during the month preceding application, released information or predictions relating to the price of the underlying securities of its projected warrants issue.
4. The issuer or its directors, supervisors, managers, employees, or shareholders hold 10% or more of the issuer's shares, or any of the above hold 10% or more of the shares of another company, and are at the same time a director, supervisor, manager, or shareholder with a stake of 10% or more in the issuing company of the underlying security or any of the issuing companies of the basket of underlying listed securities.
5. The total of the issuer's currently listed and OTC-listed call (put) warrants whose term of validity has not yet expired (OTC-listed warrants shall be converted for calculation and expressed as a figure in listed warrants) together with the projected issue exceeds the limit for the number of warrants it may issue, or where any of the following conditions apply:
(1) The issuer's credit rating is a Taiwan Ratings Corporation Class A rating or above, a Moody's Investors Service Class A rating or above, a Standard & Poor's Corp. Class A rating or above, or a Fitch Inc. Class A rating or above, and the total value of its issue exceeds 60% of its net self-owned capital adequacy requirement.
(2) The issuer's credit rating is a Taiwan Ratings Corporation Class BBB rating or above, a Moody's Investors Service Class Baa1, Baa2, Baa3 rating or above, a Standard & Poor's Corp. Class BBB rating or above, or A Fitch Inc. Class BBB or above, and the total value of its issue exceeds 50% of its net self-owned capital adequacy requirement.
(3) The issuer's credit rating is a Taiwan Ratings Corporation Class BB+ rating or above, a Moody's Investors Service Class Ba1 rating or above, a Standard & Poor's Corp. Class BB+ rating or above, or a Fitch Inc. Class BB+ or above, and the total value of its issue exceeds 30% of its net self-owned capital adequacy requirement.
(4) The issuer's credit rating is a Taiwan Ratings Corporation Class BB rating or above, a Moody's Investors Service Class Ba2 rating or above, a Standard & Poor's Corp. Class BB rating or above, or a Fitch Inc. Class BB rating or above, and the total value of its issue exceeds 20% of its net self-owned capital adequacy requirement.
(5) The issuer's credit rating is a Taiwan Ratings Corporation Class BB- rating or above, a Moody's Investors Service Class Ba3 rating or above, a Standard & Poor's Corp. Class BB- rating or above, or a Fitch Inc. Class BB- rating or above, and the total value of its issue exceeds 10% of its net self-owned capital adequacy requirement.
The above-mentioned net self-owned capital adequacy requirement shall be calculated based on the methods set forth within the Rules Governing Securities Firms, and the limit on the number of warrants that may be issued shall be calculated according to the following formula:
The limit on the number of warrants issuable = net self-owned capital requirement × the percentage listed corresponding to the above credit ratings ÷ the total value of each warrants issue (NT$300 million). Where the value obtained is less than one, it shall be counted as one; where more than one, decimals shall without exception be rounded down to the nearest whole number.
The above net self-owned capital adequacy requirement shall be applied to ROC issuers. Where the issuer is a foreign institution, limits on the number of warrants it may issue will be separately announced by the TSEC.
6. The issuer is a foreign institution, and at the time of application to issue call (put) warrants, the inward remittance of capital required for a hedge on the issue (the amount remitted into Taiwan minus the amount not required for a hedge on the issue) is less than the market value of the underlying securities represented by the non-matured listed or OTC-listed call (put) warrants (including the current issue). In addition, where a letter of undertaking stating that the premiums collected for the given issue of warrants will only be remitted into Taiwan after the expiration of the period of validity of the warrant or proof of an existing line of credit at a Taiwan bank in an amount equivalent to the premiums collected on the given issue have not been issued.
7. There are irregular fluctuations in the price of the underlying security within the three months prior to the date of application, and a penalty has been imposed in accordance with the Taiwan Stock Exchange Corporation Regulations Governing Implementation of the Stock Market Monitoring System.
8. There is any other factor arising out of the nature of the enterprise or exceptional circumstances that may be deemed to adversely affect the applicant's performance of the option or the price of the underlying securities.
9. There are any of the conditions set forth in the preceding article.
Issuers shall apply to the TSEC to open a specialized account at the time of their initial call (put) warrants issue. Where the issuer will be self-hedging or partially self-hedging, the account shall be used exclusively for establishing a hedge position after issuance of the warrants and for future performance of obligations when the investors exercise the warrants. Where the issuer entrusts another institution with hedging, the account shall be used for performance of obligations when the investors exercise the warrants, and the risk management institution is also required to open a specialized account with the issuer for the purpose of establishing a hedge position after issuance of the warrants.
Account numbers for the issuer's accounts referred to in the preceding paragraph shall uniformly be the "888888-8" number under securities dealers' accounts. Foreign issuers applying to issue warrants through a branch institution established in the territory of the ROC by a subsidiary which is either directly or indirectly fully-owned, the foreign issuer shall establish a sub-account under the qualified foreign institutional investor (QFII) account established in the ROC for hedging. The above-mentioned account shall be first reported to the TSEC, and may only be used for trading in financial hedging instruments as announced by the TSEC. In addition, the securities in the specialized hedging account for the call (put) warrants issue without exception may not be pledged.
The types of financial instruments employed by the issuer in hedging and any related restrictions will be separately announced by the TSEC.
Hedging methods employed by the issuer for put warrants issued may include one or more of the following: offsetting of the hedging positions employed for call warrants issued against the same underlying securities, sales of shares of the underlying security borrowed from shareholders, or short sales of the underlying security on the Taiwan Stock Exchange.
Where the issuer elects to sell shares of the underlying security that have been borrowed from shareholders as a hedging instrument, the lending shareholder shall, following conclusion of a contract between the two parties in accordance with the provisions of Article 32-1, paragraph 2 of the Rules Governing Securities Firms, apply through their securities firm to the Taiwan Securities Central Depository Co., Ltd. for the transfer of all of the shares to be lent into the hedging account of the issuer or shall put said shares in escrow to be divided subsequently up into lots to apply for transfer into the hedging account in accordance with the issuer's hedging needs.
Where the issuer employs short sales of the underlying securities as a hedging instrument, said issuer shall open a margin account with another securities firm or with the securities finance company of a non-affiliated enterprise, and shall observe the provisions of this Corporation's "Operating Rules for Securities Firms Dealing with Margin Purchases and Short Sale," "Terms for the Opening of Margin Accounts Used by Securities Firms to Conduct Long and Short Margin Trading" and the provisions of the various securities finance companies related to the aforesaid two regulations.
The issuer shall, within three days following the borrowing or short sales of marketable securities, apply in accordance with regulations to issue put warrants. Where there is a failure to file application within the deadline, failure to complete the issue within the deadline or the put warrant has reached its expiry date, the issuer shall close out all open positions on the last day of the exercise period or on the expiry date.
The shareholders of the underlying security referred to in paragraph 1 may not be subject to the parameters set forth in paragraph 1 and paragraph 3 of the Article 22-2 of the Securities Trading Law.
Except where the circumstances set forth under Article 10, paragraph 1, subparagraph 5, sub-subparagraph 17 exist, when an issuer, prior to application to the TSEC for issuance of call (put) warrants, releases or divulges information on its own initiative about the application or the warrants issue, the TSEC may bar the issuer from any subsequent application for a period of three months.
When the media have made a concrete announcement or disclosure of information related to the underlying securities of a particular warrants issue in the week prior to the issuer's application, the TSEC will not approve the application for issuance and market listing.