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Article 4
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A securities firm engaging in OTC trading of financial derivatives shall submit a separate application to the GTSM for any subject of trade named in Article 9. No OTC trading of financial derivatives may be undertaken without GTSM approval of such an application.
When a securities firm applies to engage in the business of the preceding paragraph and the GTSM does not expressly reject the application within ten days from the day after it receives the application, it means that approval is granted. The securities firm may not, however, engage in the business for which it is applying during the aforesaid ten-day period.
The qualification of a securities firm that has passed GTSM review pursuant to paragraph 1 will remain in effect and further yearly applications will not be required.
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Article 8
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The application documents and appended materials that shall be submitted when a securities firm applies to conduct OTC trading of financial derivatives at its places of business are given in Appendix 1.
The directions for GTSM review and approval of securities firms' applications are as given in Appendix 2.
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Article 9
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Pursuant to this chapter, a securities firm that has obtained qualification to conduct OTC trading of financial derivatives may trade the types of contracts set out below:
1. Bond derivative transactions.
2. Interest-rate derivative transactions.
3. Convertible bond asset swap transactions.
4. Structured instrument transactions.
5. Equity option transactions.
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Article 11
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When a securities firm undertakes a financial derivatives trade, it shall limit the amount of each trade based on the counterparty's financial condition, cash management status, and degree of professional expertise, or it may request the provision of collateral as a guarantee of performance.
The securities firm shall formulate a set of thorough know-your-customer assessment procedures for customers that are natural persons, in order to ascertain the suitability of the sale of a given product, the investment attributes of the customer, and the customer's understanding of risk and degree of risk tolerance.
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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 Depository and Clearing Corporation.
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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, equity options, OTC contract-based call (put) warrants, or call (put) warrants 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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In conducting financial derivatives business for hedging purposes, or in calculating a product's income or carrying out settlement upon cancellation or expiration, a securities firm may not prejudice the process of fair price formation or the rights and interests of investors.
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Article 34
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As used in these Rules, "equity option transaction" refers to a contract in which a securities firm and a trading counterparty agree that a stock, stock index, or exchange-traded fund (ETF) will serve as the underlying of an option, and that the buyer will pay a premium in exchange for the right to buy or sell the underlying, and that the buyer may, at a specified maturity date or during a specified future period, buy or sell the stipulated underlying of the option under terms and conditions that specify the price and volume of the purchase or sale. The writer of the option bears the obligation to perform the agreement as stipulated when the buyer exercises the option, or the two parties may agree to settle the difference prior to or at the time of maturity.
The subject of an equity option transaction between a securities firm and its trading counterparty must be one of the stocks, stock indexes, or ETFs given in Appendix 3 of these Rules, which provides a list of eligible linked underlying assets of structured notes handled by securities firms.
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Article 35
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When the trading counterparty of a securities firm is the writer of an equity option, the counterparty must be a qualified institutional investor, which includes both foreign and domestic 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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Article 36
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The duration of the contract for an equity option transaction, calculated from the date of transaction, shall be one year or less, provided that this restriction shall not apply when there has been separate approval of another duration.
When a securities firm enters into a contract for an equity option on domestic exchange-listed or OTC-listed stocks, the number of the underlying shares that could potentially be exchanged upon exercise of the option, plus the number of underlying shares that would be exchanged upon exercise of all the outstanding and unexpired call (put) warrants and contract-based call (put) warrants of all securities firms, may not exceed 10 percent of the total number of the underlying shares issued by the issuer after deduction of the shares set out in each of the following items:
(1) The total percentage of shares held by directors and supervisors under statutory shareholding ratio requirements.
(2) Pledged shares.
(3) The number of shares that newly exchange-listed or OTC-listed companies are required to place in compulsory central custody.
(4) Shares repurchased under the Regulations Governing Share Repurchase by Listed and OTC Companies, but not yet retired.
(5) Shares on which the competent authority has imposed restrictions for exchange or OTC listing and trading.
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Article 37
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The first time a securities firm enters into an equity options transaction with a trading counterparty, it shall execute a "master equity options transaction agreement" with the counterparty.
When a securities firm enters into an equity options transaction with trading counterparties, except for trading counterparties that are qualified institutional investors as given in Article 35, the securities firm shall execute an individual agreement with each trading counterparty with respect to each equity option transaction.
The provisions of Article 26-1 apply mutatis mutandis to the required content of the "master equity options transaction agreement" of paragraph 1.
The provisions of Article 26-2 apply mutatis mutandis to the required content of the individual contracts of paragraph 2 to be signed between the securities firm and individual trading counterparties in equity options transactions.
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Article 38
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The two parties may stipulate the manner in which equity options are to be exercised, either by settlement in cash or by physical delivery of the linked underlying securities by the securities firm or another institution approved by the competent authority to perform physical settlement.
When the underlying of the equity options of the preceding paragraph is a stock index, the method of exercise shall be settlement in cash.
The provisions of Article 27, paragraph 2, Article 28, Article 31, Article 31-1, and Article 31-2 shall apply mutatis mutandis to equity options transactions, provided that a securities firm need not perform hedging when it is the purchaser of the options.
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Article 39
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A foreign securities firm that writes equity options shall, with respect to the premiums it collects, issue an undertaking that it will not make any outward remittance of such premiums until after the transaction has expired.
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Article 40
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Any OTC financial derivatives transaction undertaken by a securities firm beyond the scope provided by these Rules will be deemed to involve another, different category of derivatives product; a securities firm may not undertake such business without applying for and receiving approval for such operations pursuant to applicable laws and regulations or obtaining approval from the competent authority.
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Article 41
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A securities firm that engages in OTC financial derivatives transactions may not use such a transaction, on its own behalf or on behalf of a customer, for the purpose of merger or acquisition, or to otherwise engage in an unlawful transaction.
A securities firm shall stipulate with the customer that the customer may not refuse a request from the competent authority for review of relevant data (including data on the ultimate beneficiary) for the purpose of market regulation.
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Article 42
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A securities firm engaging in convertible bond asset swaps, structured instrument transactions, or equity options 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 stocks underlying conversion securities, linked securities, or equity options, or any person related to the issuer as set out in the preceding subparagraph.
Before a securities firm engages in a financial derivatives trade referred to in the preceding paragraph with a trading counterparty, the counterparty shall sign an undertaking 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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Article 43
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A securities firm that undertakes a financial derivatives transaction with a trading counterparty shall provide the counterparty with a risk disclosure statement, and in that statement, or in individual trade confirmations, it shall indicate in boldface or other prominent typeface the maximum possible risk or principal protection percentage, along with a description of the major risks involved, such as liquidity risk, foreign exchange risk, interest rate risk, tax risk, and cancellation risk.
The securities firm is exempt from the requirement to provide a risk disclosure statement if the trading counterparty of the preceding paragraph is an institutional juristic person such as a banking, insurance, securities, or offshore investment institution.
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Article 44
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A securities firm undertaking any financial derivatives transaction shall comply with the competent authority's Regulations Governing the Acquisition and Disposal of Assets by Public Companies. In addition, it shall either adopt procedures for handling transactions in the given derivative product, or incorporate procedures for the given product into its existing procedures for handling of financial derivatives trading, and carry out necessary risk management and information disclosures, while also providing for management and control of transactions by incorporating those procedures into its existing internal control and auditing systems or implementation rules.
A securities firm shall complete the amendments to its internal control and auditing systems prior to any application to engage in the business of OTC trading of financial derivatives. The relevant control and auditing measures will be separately prescribed by the GTSM.
A securities firm that engages in the business of OTC trading in financial derivatives shall comply with the Risk Management Best-Practice Principles for Securities Firms announced and implemented by the GTSM together with the Taiwan Stock Exchange Corporation and the Taiwan Securities Association, making adjustments as necessary in light of its handling of the product and the complexity of its business. The GTSM may carry out special audits on the state of risk management implementation at securities firms or request explanations from securities firms, and when necessary may demand that securities firms take corrective action.
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Article 45
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The basic trading principles and policies to be set out in the procedures referred to in the preceding article must include a limit on contract amounts (either in aggregate or separately for each individual counterparty), stop-loss provisions (either in aggregate or per contract), policies for screening and credit reviews of counterparties, hedging strategies, procedures for and key points of performance evaluations, market information equipment and data, methods of accounting treatment and disclosure of financial statements, experience requirements for traders and risk-management personnel and provisions relating to their training, and provisions for segregation of duties in the approval of trades.
The market information equipment and data set out in the preceding paragraph shall be capable of ensuring accurate and real-time provision of relevant market information.
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Article 46
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The traders and risk-management personnel of a securities firm that undertakes financial derivatives trades linked to foreign financial products shall possess relevant experience in operations in the home market for the linked underlying product.
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Article 47
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A securities firm engaging in the business of OTC trading of financial derivatives shall comply with the competent authority's Regulations Governing the Preparation of Financial Reports by Securities Firms, the Statements of Financial Accounting Standards Nos. 34 and 36 published by the Accounting Research and Development Association of the Republic of China, and the relevant directives of the competent authority regarding accounting disclosures in relation to financial derivatives. In its financial statements or in the accompanying notes, it shall disclose contract information for the given type of transaction such as the amount of notional principal, and the nature and the terms of the transaction (including at least credit risk, market risk, possible liquidity risk, transaction cash flow, and applicable accounting policies).
The method of accounting treatment and journalization for the financial derivatives of the preceding paragraph will be separately prescribed by the GTSM.
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Article 48
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In addition to disclosure of information on OTC trading of financial derivatives in accordance with the provisions of the Regulations Governing the Acquisition and Disposal of Assets by Public Companies, a securities firm shall also, at the time it submits monthly accounting summaries to the GTSM, submit in duplicate a set of informational materials for review and recordation by GTSM audit personnel on the derivative financial product transactions in which the securities firm has engaged, including their type, terms and conditions, and realized or unrealized gains or losses.
The form for submission of the additional information with the monthly accounting report as prescribed in the preceding paragraph is shown in Appendix 5.
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Article 49
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After a securities firm executes a financial derivatives transaction, it shall promptly enter the transaction information and the outstanding balance into the GTSM information system at the time and in the form prescribed by the GTSM.
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Article 50
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A securities firm that undertakes OTC financial derivatives trading shall calculate the market risk equivalent and counterparty risk equivalent for its trading positions as prescribed in the Regulations Governing Securities Firms in order to reflect those components in the calculation of its self-owned capital adequacy ratio.
Limits on amounts traded by securities firms engaging in OTC financial derivatives trading will be announced by the GTSM subsequent to their formulation and submission to the competent authority for approval.
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Article 51
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After a securities firm has obtained qualification for OTC financial derivatives trading, it shall undergo a credit rating annually and shall report the result to the GTSM by submitting the credit rating report within seven business days after receiving the rating. When there is any change in the securities firm's credit rating, limits on the aggregate total amount of trades by the securities firm shall be set according to the new rating.
When the self-owned capital adequacy ratio of a securities firm that has obtained qualification to engage in OTC trading of financial derivatives falls below 200 percent, it may not undertake any new trades even if its operational risk equivalent does not exceed the aggregate total amount of new trades; new trades may not be undertaken until its self-owned capital adequacy ratio reaches 200 percent.
In addition to regular audits of the matters in the preceding two paragraphs, the GTSM may require the securities firm to submit relevant documents and undergo a special audit, and when necessary may place a limit on the aggregate total amount of trades undertaken by the firm.
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Article 52
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When any of the following circumstances applies to a securities firm, the GTSM may notify it to take supplementary or corrective action within a prescribed time period:
1. Violation of Article 10, Article 11, Article 14, Article 18, Articles 22 to 28, Articles 32 to 37, Article 40, Article 42, Article 43, or Article 45.
2. Execution of financial derivatives trades not in conformance with the relevant portions of the securities firm's application.
3. A self-owned capital adequacy ratio less than 200 percent.
4. Execution of trades not in conformance with the securities firm's "procedures for handling financial derivatives transactions" or its internal control or auditing systems.
5. Violation of the applicable provisions of other GTSM rules, regulations, operating procedures, guidelines, directions, supplementary rules, public announcements, or circulars.
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Article 53
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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, Article 31, Article 31-2, Article 39, Article 44, or Articles 46 to 51.
2. Failure to take supplementary or corrective action within the time period prescribed in the preceding article.
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Article 54
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When any of the following circumstances applies to a securities firm, the GTSM may impose a penalty of not less than NT$50,000 and not more than NT$3 million.
1. Violation of Article 4, Article 12, Article 15, Article 31-2, or Article 41.
2. Failure to take supplementary or corrective action within the time period prescribed in the preceding article.
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Article 55
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When any of the following circumstances applies to a securities firm, the GTSM may suspend or terminate its financial derivatives trading, provided that such action shall not affect the validity of an already-transacted derivatives product:
1. Imposition of a penalty pursuant to subparagraph 2 of the preceding article three or more times during the preceding half-year.
2. Failure to pay a penalty imposed pursuant to subparagraph 2 of the preceding article.
3. Noncompliance with the conditions of Article 5, paragraph 2, subparagraph 1 or 2.
4. The self-owned capital adequacy ratio of the securities firm has remained below 200 percent for three consecutive months.
5. Receipt of a sanction from the competent authority of a severity equal to or greater than that under Article 66, subparagraph 2 of the Securities and Exchange Act or Article 100, paragraph 1, subparagraph 2 of the Futures Trading Act.
6. Violation of Article 31-2 or Article 41.
When a securities firm's qualification for trading of financial derivatives has been suspended or terminated due to circumstances under any subparagraph of the preceding paragraph, upon the extinguishment of the cause and in the absence of a cause under any other subparagraph of that paragraph, the securities firm may apply for restoration of its qualification by submitting relevant evidentiary documentation. The GTSM may restore the firm's qualification after performing a review for verification.
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Article 56
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The GTSM may separately adopt guidelines or other supplementary regulations with respect to these Rules or to individual financial derivatives specified herein.
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Article 57
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These Rules, and any amendments hereto, shall enter into force upon approval and public announcement by the competent authority after passage by the board of directors of the GTSM.
Any addition, deletion, or amendment to the Appendices of these Rules shall enter into force following approval by the president of the GTSM.
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