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Operating principles for participating dealers carrying out in-kind creation (redemption) of securities investment ETFs with domestic component securities, or selling beneficial certificates (portfolio of securities) on the same day for its own account or on behalf of its customers:
- The participating dealer handles applications for in-kind creation (redemption) of ETF beneficial certificates or for selling beneficial certificates (portfolio of securities) on the same day, through computer linkup. The input time is 9:00 a.m. to 3:30 p.m. on the TWSE's centralized securities exchange market trading days. The deposit and transfer of relevant securities shall be handled via central depository and book-entry transfer service. However, an application for which the central securities depository (CSD) fails to complete the earmark operation may be corrected and input from 9:00 a.m. to 10:00 a.m. of the following business day.
- To carry out in-kind creation or redemption for its own account or on behalf of its customers, the participating dealer shall first produce an Application for In-kind Creation or Redemption of Exchange Traded Fund Beneficial Certificates, with the PCF of the day attached, and then require the applicant to sign up (in the case of an overseas Chinese, foreign national, or Mainland Area investor, the agent broker can act on his/her behalf). All the above documents shall be kept in file for reference.
The Application for In-kind Creation or Redemption of Exchange Traded Fund Beneficial Certificates shall contain the following particulars:
- Application number: The code of the head office of the participating dealer followed by a three-digit serial number.
- The account numbers of the applicants: there shall be no more than three applicants in the case of aggregate creation.
- Type of application: In-kind creation, in-kind redemption, aggregate creation, minimum in-kind creation, in-kind creation and sale of beneficial certificates, in-kind redemption and sale of portfolio of stocks, minimum in-kind creation and sale of beneficial certificates.
- Quantity of beneficial certificates for in-kind creation or redemption.
- Portfolios and quantity of the securities (beneficial certificates) for in-kind creation (redemption) to be delivered, and specifically identify the sources from which of the following: respectively, original holding, purchase on the day of application, purchase on the previous trading day, borrowing, or shortfall of securities, or in-kind redemption (creation) on the previous trading day.
- Kind and quantity of securities that adopt cash in lieu, and the reasons for cash in lieu.
- Amount of deposit required for shortfall.
- Description of why this application is allowed to adopt cash in lieu.
- Estimated cash payment based on PCF.
- When carrying out the in-kind creation (redemption) of ETF beneficial certificates, the participating dealer shall, based on the particulars stated in the Application for In-kind Creation or Redemption of Exchange Traded Fund Beneficial Certificates, ascertain the holdings of securities (beneficial certificates) in the applicant’s central depository account, plus the number of borrowed stocks (beneficial certificates), balance of securities (beneficial certificates) bought on the previous trading day and bought on the day of application in regular trading, and amount obtained through in-kind redemption (creation) on the previous trading day, to ensure the sum total is sufficient for the in-kind creation (redemption), before submitting the application to the TWSE.
The portfolios (including beneficial certificates) of securities to be delivered by the applicant as described in the preceding paragraph may not be bought on margin and the portfolios (including beneficial certificates) of securities bought on the day of application may not be reported for trading errors or correction of account numbers.
After the time for accepting the applications described in the first paragraph above ends, the TWSE will forward all application data to the CSD for handling of the earmark operation.
- If the applicant uses the balance of securities bought on the previous trading day and securities bought on the day of application for the portfolios (including beneficial certificates) of securities required for in-kind creation (redemption) of ETF beneficial certificates, the participating dealer should collect payment for such securities bought on the day of application.
When accepting customer’s order to create or redeem securities investment ETF in-kind, the participating dealer may calculate cash payment, cash in lieu and other relevant charges or payments based on the PCF and ask the customer to pay in advance before applying for in-kind creation or redemption. After ascertaining the actual payment due and before delivering the payment to the custodian institution, the participating dealer should notify the applicant to make additional payment if the prepaid payment is insufficient or to receive a refund if the prepaid payment is excessive. The participating dealer may open another deposit account with its clearing bank specifically for the deposit and payment of cash payment, cash in lieu, and other relevant charges or payment in association with the in-kind creation or redemption service.
The applicant for in-kind creation or redemption of ETF beneficial certificates may, before the deadline of application time for the day, prepare an Application for Canceling Creation or Redemption of ETF Beneficial Certificates by himself or through the participating dealer, and the participating dealer will submit the Cancellation Application to the TWSE. Upon the receipt of such application, the TWSE will confirm the receipt and ask the participating dealer to notify the applicant for confirmation. The participating dealer should print out the receipt notice and save it with the Cancellation Application signed by the applicant (or the agent of applicant in the case of an overseas Chinese, foreign national, or Mainland Area investor), for future reference.
- The Application for Canceling Creation or Redemption of ETF Beneficial Certificates shall state the following particulars: application number, account number of the applicant (no more than three applicants in case of aggregate creation), type of application, and signature of the applicant.
- Before submitting customer's application for buying portfolio of securities (beneficial certificates) and selling beneficial certificates (portfolio of securities) on the same day according to Article 14 of the TWSE Rules Governing Trading of Beneficial Certificates, the participating dealer should check the single-day trading ceiling of the applicant and ask the customer to produce or produce for the customer a Same-Day Buying and Selling Exchange-Traded Fund Beneficial Certificates and the Portfolio of Component Securities of the Underlying Index Application Statement (see attached for specimen), and save the statement after it has been signed by the customer. At the time of submitting the application, the participating dealer shall also input via computer link-up the applicant’s account number, trading information on in-kind creation or redemption, as well as beneficial certificates (portfolio of securities) and quantities already sold on the day, and then proceed with the in-kind creation (redemption) operation according to the provisions specified above.
If the sum of the portfolio of securities (beneficial certificates) holding of the participating dealer or its customer, in combination with balance of securities (beneficial certificates) bought on the previous business day, and on the application day in regular trading, and the borrowing quantity and quantity of in-kind redemption (creation) on the previous business day is insufficient to meet the requirements published in the PCF that in-kind creation (redemption) cannot be effected, the shares of securities or units of ETF bought shall be processed in accordance with the relevant rules and regulation of the TWSE, while the shares or units sold may be handled in the following manners:
- Changing the trading type of beneficial certificates sold from regular sale to short sale on the same day.
- Borrowing securities pursuant to Article 109 of the TWSE Operating Rules by 10 a.m. of the second trading day following the application day to cover the securities sold.
- Following other relevant rules and regulations.
For the purpose of risk management, participating dealers may charge the applicant proper amount of deposit when accepting customer orders to buy or sell.
Subsequent to the completion of settlement and in-kind creation or redemption operations, the participating dealer should deposit the remainder of beneficial certificates (securities) credited to the applicant into the applicant's central depository account.
- In the case of aggregate creation, all applicants must deliver with existing holding or borrowed securities, except for participating dealer who may for its own account deliver with balance of portfolio of securities bought on the previous day or on the same day. Applicants of aggregate creation must receive the beneficial certificates before a securities firm may place a sell order of said certificates.
- If an applicant cannot hold or transfer certain securities as restrained by law (e.g. Article 167 of the Company Act, Article 38 of the Financial Holding Company Act, and Article 28-2 of the Securities and Exchange Act), but may hold or sell such securities on a temporary basis for in-kind creation or redemption of ETF beneficial certificates with the consent of the relevant competent authority, the TWSE may, if deemed necessary for management purpose after the participating dealer has submitted the application for in-kind creation or redemption, notify the participating dealer to ask the applicant to take necessary actions to dispose the holding of such securities. In such event, the participating dealer shall relay the message to the applicant on the day of receiving the notice and record the actions taken and report to the TWSE.
- Participating dealers who hold other securities firms' shares temporarily in association with their own in-kind creation or redemption of ETF beneficial certificates for its own account, may be exempted from applying Article 45(3) of the Securities and Exchange Act. However, the daily holding of share position of every other securities firm in the specific account (the account number shall be 777777-7) shall not exceed 100 corresponding amount of the creation unit of each in-kind creation or redemption of ETFs.
- Participating dealers shall set up a designated trading account specifically for the deposit and transfer of securities in association with their own in-kind creation or redemption of the component securities of the underlying index for ETFs and other necessary transfers as well as buying and selling ETF beneficial certificates or the portfolio of the component securities of the underlying index for such funds, for its own account. (The account number of such specific account shall uniformly be 777777-7 under the dealer’s account.) (Such specific account may hold the same securities as those underlying the put (call) warrants issued by the participating dealer for hedging purpose, and if deemed necessary, hold the alternate constituent securities.) The participating dealer shall neither use such specific account to purchase securities and then transfer them to other accounts of its dealer that is subject to restrictions on bid and ask prices, nor accept transfers of securities from other accounts of its dealer and then directly sell those securities.
To open such specific account with the TWSE, the participating dealer shall submit a copy of the participant agreement, a copy of the approval letter for the issuance of ETFs and photocopies of documents evidencing the qualifications of the participating dealer.
Where the component securities of the underlying index for an ETF contain over-the-counter (OTC) securities, participating dealers shall open designated trading accounts for OTC securities in accordance with the relevant rules prescribed by the GreTai Securities Market (GTSM); the provisions of the preceding paragraph regarding account opening shall apply mutatis mutandis where the component securities of the underlying index for an OTC ETF contain listed securities.
- Where the component securities of the underlying index contain OTC securities, only after participating dealers apply for in-kind creation (redemption) of the securities investment ETF beneficial certificates with the TWSE, will the TWSE forward the application information to the GTSM.
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