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GreTai Securities Market Rules Governing Over-the-Counter Trading of Financial Derivatives by Securities Firms(2005.10.18) |
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Article 25
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As used in these Rules, "structured instrument" means a contract for a hybrid product combining fixed-income and options features.
The scope of eligible linked underlying assets of options in structured notes is given in Appendix 3.
The duration of a structured product transaction, from the initial transaction date to the date the contract matures, shall be a minimum of one month and a maximum of 10 years.
A securities firm that sells a structured instrument must stipulate that the original transaction price is the maximum potential loss that will be borne by the client, provided that when it sells a structured instrument under the name of a principal-guaranteed product or with a claim of principal guarantee benefits, the stipulated principal protection percentage at maturity may not be lower than 80 percent of the transaction price.
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Article 26
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Before commencing structured instrument transactions with a trading counterparty, a securities firm shall first execute a master agreement with the counterparty, and for each individual transaction undertaken thereafter shall further execute a separate contract with the counterparty stipulating the rights and obligations of the two parties.
When a securities firm undertakes transactions in structured instruments linked to foreign financial products and denominated in New Taiwan Dollars, the contracts shall clearly state that matters connected with foreign exchange settlement are to be carried out in accordance with the Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions and that such settlements will be counted toward the total allowed cumulative foreign exchange settlement amount of the counterparty.
When a securities firm undertakes structured instrument transactions and a dispute arises in the course of trade, it shall handle the matter promptly in accordance with the business dispute resolution procedures provided by its internal control system.
The securities firm shall provide price quote information for early cancellation of structured instrument transactions at its place of business or on its website.
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Article 26-1
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The master agreement to be signed between the securities firm and the trading counterparty before commencing structured instrument transactions shall include the following:
1. Definitions and specifications.
2. Trading contract content.
3. Transaction procedures and related operations.
4. Procedures for handling of breach of contract.
5. Procedures for handling damage claims.
6. Other provisions.
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Article 26-2
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The individual contracts that a securities firm enters into with a trading counterparty for structured instrument transactions shall include the following:
1. The terms and conditions of the transaction, including its price and denominating currency, its underlying linked assets, the term of the contract, terms of payment at maturity, and other stipulations of rights and obligations.
2. A description of the principal risks associated with the instrument, such as liquidity risk, foreign exchange risk, interest-rate risk, tax risk, and cancellation risk.
3. The principal protection percentage for structured instruments that are sold under the name of principal-guaranteed products or with claimed principal guarantee benefits, with the percentage set out in boldface or other conspicuous typeface beneath the title of the contract.
4. A statement of the greatest possible loss, to be set out in the contract.
5. The transaction fees or fees of any other kind that the securities firm will collect from the client for the given transaction.
6. The channels through which the trading counterparty may seek remedy for disputes arising out of the transaction.
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Article 27
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The two parties in a structured instrument transaction may stipulate that payment at exercise will be by means of cash settlement or delivery of the linked underlying securities by the securities firm.
When delivery of the linked underlying securities by the securities firm under the preceding paragraph is in exchange-listed or OTC-listed stocks, delivery shall be effected by means of a structured instrument hedging account position in accordance with the Rules of Business Operation of the Taiwan Securities Central Depository Company.
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Article 28
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When the securities firm and the trading counterparty stipulate that payment for a structured instrument at exercise will be effected by delivery of exchange-listed or OTC-listed stocks, the counterparty shall first open a central securities depository account.
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Article 31
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A securities firm that trades domestic exchange-listed or OTC-listed stocks for hedging purposes shall open a hedging account at the relevant institution with a GreTai letter of approval.
The hedging accounts of the preceding paragraph shall uniformly be "888888-1" accounts under the securities dealers' accounts. However, a foreign securities firm that applies to open a hedging account through a branch unit established within the territory of the ROC by a directly or indirectly wholly-owned subsidiary shall establish a dedicated hedging account under the qualified foreign institutional investor (QFII) account it opened in the ROC.
No securities in the hedging account of paragraph 1 may be made the subject of a pledge.
A securities firm undertaking structured instrument transactions shall report hedging information daily through the GreTai information system, in the prescribed format, for the duration of the trading contract. When it reports a projected hedge position that differs from the actual hedge position by more than plus or minus 20 percent for any three business days out of the most recent six, then except where the difference is less than one trading unit or where the GreTai has made other provision, the GreTai may request an explanation by the securities firm and conduct an on-site inquiry. If the explanation is found unreasonable, one demerit will be issued, and where a total of three demerits have been issued, the GreTai will restrict the securities firm from further handling of structured instrument trading for a period of one month. When the difference exceeds plus or minus 50 percent, then except where the difference is less than one trading unit or where the GreTai has made other provision, the GreTai
may compel the securities firm to bring its actual hedge position closer to the projected hedge position.
A securities firm that undertakes structured instrument transactions as referred to in the preceding paragraph may hedge them either by using hedge positions in structured instruments with the same underlying securities as those they are transacting, or by outsourcing the hedging to another institution.
The GreTai will conduct on-site inquiries into securities firms' hedging operations periodically or from time to time.
Securities firms engaging in structured instrument transactions shall produce a monthly statement of utilization of funds from structured instruments (Appendix 4), to be retained for reference.
A foreign securities firm shall issue an undertaking stating that it will not remit the transaction price obtained through a structured instrument transaction out of the country until after the transaction matures, provided that this restriction shall not apply to necessary remittances of the transaction price for instruments linked to foreign financial products.
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Article 32
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The transaction price a securities firm obtains through a structured instrument transaction may only be used to invest in domestic or foreign fixed-income products, linked underlying securities, or index funds, or to trade in futures or derivatives products as a hedge on the transaction currency or the linked underlyings, provided that this restriction does not apply to financial products related to the mainland-China area or the MSCI Taiwan Index.
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Article 35
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A securities firm engaging in convertible bond asset swaps or structured instrument transactions may not undertake financial derivatives trades with any of the following related parties:
1. A director, supervisor, or officer of the securities firm, or a shareholder that directly or indirectly holds 10 percent or more of its total shares.
2. A spouse, minor child, or nominee of any of the persons referred to in subparagraph 1.
3. Any investee company in which 10 percent or more of total shares are directly or indirectly held by any person referred to in the preceding two subparagraphs.
4. The issuer of the conversion securities or linked securities, or any person related, as set out in the preceding subparagraph, to the issuer.
Before a securities firm carries out a financial derivatives transaction with a trading counterparty, the counterparty shall sign a declaration stating that it is not a related party as set out in paragraph 1.
A securities firm may undertake hedging transactions with the following qualified institutional investors, without being subject to the restrictions of any subparagraph under paragraph 1:
Domestic and foreign banks, insurance companies, bills finance companies, securities firms, fund management companies, government investment institutions, government funds, pension funds, mutual funds, unit trusts, securities investment trust companies, securities investment consulting companies, trust enterprises, and futures commission merchants.
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