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Article 4-1
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A securities firm engaging in financial derivatives trading business whose trading counterparty is a qualified institutional investor is not subject to the provisions of Article 11, Article 26, paragraph 1, Article 26-1, Article 26-2, Article 26-3, Article 37, Article 41, Article 42, and Article 46 of these Rules.
"Qualified institutional investor" as used in these Rules shall mean 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, futures commission merchants, and futures service enterprises.
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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 derivative transactions.
6. Credit derivative transactions.
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Article 13
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In these Rules, "bond derivatives transaction" means a transaction in the following contracts:
1. Bond forward transactions: Refers to a contract between a securities firm and a trading counterparty stipulating purchase or sale of an underlying bond under terms and conditions that set a specific date, pricing, and quantity of the transaction, or settlement of the spread at maturity (below, "forward transaction").
2. Transaction in bond options: Refers to a contract between a securities firm and a trading counterparty stipulating that the purchaser of the option pay a premium allowing the right to purchase or sell, within a specified period, an underlying bond under terms and conditions setting the specific pricing and volume of the transaction. When the purchaser exercises the option, the seller is obligated to perform the contract as stipulated; alternatively, the two parties may agree to settlement of the spread prior to or at the time of maturity (below, "options transaction").
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Article 15
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The underlying bonds in a bond derivatives transaction between a securities firm and a trading counterparty shall be government bonds or other OTC-listed financial bonds, corporate bonds (not including convertible corporate bonds), or foreign bonds.
Except where the Directions for the Conduct of Wealth Management Business by Securities Firms provide otherwise, a securities firm that undertakes a pure foreign currency bond derivatives transaction in which the underlying bond is a foreign bond and the transaction is denominated and settled in New Taiwan Dollars or foreign exchange shall do so only with a professional institutional investor.
The foreign bonds set out in paragraph 1 do not include corporate bonds issued overseas by domestic enterprises or bonds issued by a government, enterprise, or institution of the mainland China area.
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Article 18
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When a securities firm undertakes a bond derivatives transaction, it may stipulate with the trading counterparty that the contract be performed either through delivery of bonds or through cash settlement.
When the method of performance stipulated pursuant to the preceding paragraph is delivery of bonds, the securities firm shall effect payment and delivery with the trading counterparties on the stipulated payment and settlement date in accordance with the regulations for market settlement applicable for each underlying bond.
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Article 20-1
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Except where the Directions for the Conduct of Wealth Management Business by Securities Firms provide otherwise, a securities firm that undertakes an interest rate derivatives transaction whose subject is a foreign currency interest rate product and is denominated and settled in New Taiwan Dollars or in foreign exchange shall do so only with a professional institutional investor.
The foreign interest rate products set out in the preceding paragraph do not include mainland China area bonds or money market interest rate indexes.
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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 derivatives features.
The scope of eligible linked underlying assets of 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 customer, 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.
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 26-3
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The provisions of Article 42 apply mutatis mutandis with respect to structured products linked to credit.
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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 derivatives, 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.
For the purpose of stabilizing the price of an underlying security, after closing out the related transaction, a securities firm may make a transfer of the linked underlying stock in the hedge account to its proprietary trading account.
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Article 34
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As used in these Rules, "equity derivatives product" refers to a contract for options, swaps, or combinations thereof, whose value is derived from stocks, stock indexes, or exchange-traded funds in accordance with the regulations or practices of domestic and foreign financial markets.
The subject of an equity derivatives 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 professional institutional investor.
Except where the Directions for the Conduct of Wealth Management Business by Securities Firms provide otherwise, a securities firm engaging in the business of equity derivatives transactions that are denominated in foreign exchange or linked to an underlying foreign security shall do so only with professional institutional investors.
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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 derivatives transaction in domestic exchange-listed or OTC-listed stocks, the number of the underlying shares that could potentially be exchanged upon exercise of the derivatives contract, 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 derivatives transaction with a trading counterparty, it shall execute the relevant derivatives transaction contract with the counterparty, the content of which shall be determined by the mutatis mutandis application of Article 26-1, or execute an ISDA Master Agreement in accordance with Article 10, paragraph 1.
The securities firm shall execute a separate contract for equity derivatives transactions with each individual trading counterparty, the content of which shall be determined by the mutatis mutandis application of Article 26-2.
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Article 38
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Except where law or regulation provides otherwise, the two parties may stipulate the manner in which equity derivatives linked to Taiwan stocks 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; the two parties may stipulate settlement of equity derivatives linked to foreign equity products by means of cash settlement or by physical delivery according to the practices of the relevant market.
When the underlying of the equity derivatives 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 derivatives transactions, provided that a securities firm need not perform hedging when it is the purchaser of options or when undertaking an equity swap.
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Article 40
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As used in these Rules, "credit derivative product" refers to forward contracts, options contracts, swaps contracts, and combinations thereof, which in accordance with the regulations or practices of domestic or foreign financial markets derive their value from underlying credit.
"Underlying credit" as used in the preceding paragraph refers to default risk, credit spread risk, or ratings downgrade risk associated with the following subjects:
1. Governments and corporations.
2. Government debt or corporate debt and the various types of securitization products.
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Article 41
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A securities firm trading credit derivatives products shall be limited to the transfer of credit risk on recognized assets or liabilities, unrecognized firm commitments, and forecast transactions certain to occur in future.
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Article 42
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When the trading counterparty of the securities firm is the protection seller, that trading counterparty must be a high net-worth wealth management customer.
The securities firm shall assess the capacity and the appropriateness of the trading counterparty of the preceding paragraph for the credit derivative transaction, and at minimum shall inform the counterparty of the following matters:
1. The trading counterparty shall itself assess and monitor the credit risk of the credit entity under the management contract and the credit risk of the securities firm.
2. Returns on a credit derivative product derive primarily from bearing credit risk associated with the credit entity under the contract, and losses may be incurred when the stipulated credit event occurs.
3. The securities firm shall provide a complete explanation defining the stipulated credit default event, the method of settlement to be used after the occurrence of a credit default event, the scope of debt obligations deliverable in the case of physical settlement, and the method of calculation for settlement of the spread in cash.
4. Credit derivative-related contracts typically lack market liquidity, and if such a contract contains a stipulation for early rescission, an explanation must be provided of the costs and the maximum possible loss that will be borne by the trading counterparty should the trading counterparty demand early rescission.
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Article 43
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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 44
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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 beneficial owner) for the purpose of market regulation.
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Article 45
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A securities firm engaging in business related to Taiwan equity may not engage in 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 securities underlying equity derivatives, or any person related to the issuer as set out in the preceding 3 subparagraphs.
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 trading with a qualified institutional investor as defined in Article 4-1 shall not be subject to the restrictions of paragraph 1, subparagraphs 1 through 3, and when engaging in hedging transactions therewith shall not be subject to the restrictions of any subparagraph under paragraph 1. The terms accorded thereto, however, may not be more favorable than those accorded to others in the same class of counterparties, and may be undertaken only after passage of a resolution by three-fourths or more of the company directors in attendance at a director's meeting with a two-thirds quorum.
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Article 46
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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 47
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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 48
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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 authority and 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 49
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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 50
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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 51
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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 52
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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 53
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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 regulatory 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 54
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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 regulatory 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 regulatory 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 55
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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 15, Article 18, Article 20-1, Articles 22 to 28, Articles 32 to 37, Article 41, Article 42, Article 43, Article 45, Article 46, or Article 48.
2. Execution of financial derivatives trades not in conformance with the relevant portions of the securities firm's application.
3. A regulatory 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 56
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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 47, or Articles 49 to 54.
2. Failure to take supplementary or corrective action within the time period prescribed in the preceding article.
3. A violation of these Rules or of related GTSM rules such that the rights and interests of investors or orderly trading in the market are affected.
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Article 57
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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, paragraph 1, or Article 44.
2. Failure to take supplementary or corrective action within the time period prescribed in the preceding article.
3. A violation of these Rules or of related GTSM rules that has a material effect on the rights and interests of investors or orderly trading in the market.
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Article 58
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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 regulatory 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, paragraph 1, or Article 44.
7. A violation of these Rules or of related GTSM rules that has a material effect on the rights and interests of investors or orderly trading in the market.
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 59
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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 60
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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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