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GreTai Securities Market Rules Governing Over-the-Counter Trading of Financial Derivatives by Securities Firms(2006.02.23) |
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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 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, or when the theoretical hedge exceeds 3000 lots of stock and differs by more than plus or minus 10 percent during the three business days prior to maturity, 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, or when the theoretical hedge exceeds 3000 lots of stock and differs by more than plus or minus 25 percent during the three business days prior to maturity, 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.
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 31-1
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The method of hedging adopted by a securities firm with respect to structured instrument transactions may consist of any, or any combination, of the following: offsetting with a position used to hedge other structured instruments with the same underlying security as the instrument it is transacting; outsourcing the hedging to another institution; or taking underlying securities that it is entitled to borrow from the holders for the purpose of short hedging, and either selling the underlying securities short on a securities market, or selling the underlying securities for the purpose of transaction needs or contract performance as set out in Article 82-1 of the Operating Rules of the Taiwan Stock Exchange Corporation.
When the securities firm elects to sell shares of the underlying security by borrowing from the holders in a securities borrowing and lending transaction, if the security is an exchange- or OTC-listed stock, it shall first establish a contract for the securities loan in accordance with Article 32-1, paragraph 2 of the Regulations Governing Securities Firms. The lender shall then apply through its securities firm to the Taiwan Securities Central Depository Co., Ltd. for a transfer of all loaned shares into the hedge account of the securities firm, or shall first earmark the loaned shares and, at later times, transfer the shares into the hedge account in separate lots upon application by the securities firm as required for hedging purposes.
When the securities firm elects to short-sell shares in an exchange- or OTC-listed stock, it shall open a margin account with another securities firm or with a non-affiliate securities finance company, and report information relating to such account by letter to the GTSM and the TSEC.
The opening of the aforementioned margin account shall be done in accordance with the Operating Rules for Securities Firms Handling Margin Purchases and Short Sales of Securities, the Terms for Establishment of Margin Accounts With Securities Firms for Margin and Stock Loans, and the provisions of the various securities finance companies related to the aforesaid Rules and Terms.
The securities broker at which the aforementioned margin account is opened may only accept short sale orders or buy-to-cover orders from securities firms seeking to hedge structured instruments, as well as applications to cover short sales with spot securities. Reports of out-trades and account number corrections may not be filed for this account.
When a securities firm sells securities through borrowing or short sale and does not enter into a structured instrument transaction according to plan or the instrument reaches maturity, it shall close out its open position by the next business day following the start date or the maturity date of the product.
The holders of the underlying security referred to in paragraph 1 may not be any person regulated under Article 22-2, paragraph 1 or 3 of the Securities and Exchange Act.
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Article 31-2
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A securities firm that conducts structured instrument trading may not influence fair market pricing or damage investors' rights and interests when calculating the product's income, or when settling upon cancellation or expiration.
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Article 46
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When any of the following circumstances applies to a securities firm, the GTSM may issue a warning and notify it to take supplementary or corrective action within a prescribed time period:
1. Violation of Article 16, Article 17, Articles 29 to 31, Article 31-2, Article 37, or Articles 39 to 44.
2. Failure to take supplementary or corrective action within the time period prescribed in the preceding article.
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