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GreTai Securities Market Regulations Governing Over-the-Counter Trading of Financial Derivatives by Securities Firms(2010.01.05) |
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Article 5-1
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"Professional customer," as used in these Regulations, means a juristic person or natural person that meets any of the following conditions:
1. Qualified institutional investors: refers to a foreign or domestic bank, insurance company, bills finance company, securities firm, fund management company, government investment institution, government fund, pension fund, mutual fund, unit trust, securities investment trust company, securities investment consulting company, trust enterprise, futures commission merchant, futures service enterprise, or other institution approved by the competent authority.
2. A juristic person or fund whose CPA-audited or reviewed financial report for the most recent period shows total assets in excess of NT$50 million.
3. Natural persons that meet each of the three following conditions and have applied in writing with the securities firm for the status of professional customer:
(1) Proof of financial resources of NT$30 million or more; or, a single trade in excess of NT$3 million combined with total investment assets at the given securities firm in excess of NT$15 million, along with provision of a statement of financial resources showing total assets of NT$30 million or more.
(2) Possession of adequate professional knowledge or trading experience with respect to financial products.
(3) Complete awareness that the securities firm may be exempted from liability for financial derivatives trades undertaken with a professional customer, and consent to sign for trades as a professional customer.
The securities firm shall carry out to the full its responsibility to make a reasonable investigation of the qualifications required of a professional customer under each subparagraph of the preceding paragraph, and shall obtain reasonable and reliable supporting evidence from the customer.
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Article 5-2
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"Ordinary customer," as used in these Regulations, means any customer other than those meeting the qualifications for professional customers under Article 5-1.
Any professional customer, with the exception of qualified institutional investors, may make written application with the securities firm for a change of status from professional customer to ordinary customer.
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Article 7
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When a securities firm initiates a derivatives trade with a qualified institutional investor for a financial derivatives product outside the securities firm's prior-approved scope of derivatives business, after-the-fact registration will be used and the firm shall not be subject to the provisions of Article 6, paragraph 1.
Within 15 days of commencing the new business under the preceding paragraph, the securities firm shall submit a letter with registration documents to the GTSM for recordation. When an incomplete set of recordation documents is submitted, the GTSM may notify the securities firm to suspend the new business prior to supplementation of the necessary documentation, and may also, as it otherwise deems necessary, notify the securities firm to suspend the new business.
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Article 9
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Securities firms engaging in the business given in Article 7, paragraph 1 and Article 8 shall be limited to those that have obtained approval to engage in financial derivatives business in accordance with Article 6 of these Regulations, and shall not include those which have obtained approval only for bond forward contracts.
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 48 or Article 54 of these Regulations.
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Article 15
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Except where these Regulations provide otherwise, a securities firm that enters into a financial derivatives trade with a counterparty shall execute a written contract with that counterparty stipulating the rights and obligations of both parties. The securities firm shall separately confirm the conditions applicable to each individual trade with the trading counterparty.
When the trading counterparty of the preceding paragraph is a natural person who is an ordinary customer, the written contracts or transaction confirmations shall include the following content:
1. Terms and conditions of the trade and calculation of related fees.
2. The method of trade confirmation.
3. Delivery of the underlying and terms of clearance.
4. Where collateral is stipulated, the type of collateral, calculation of its value, and conditions for and method of disposition.
5. Handling of defaults and damages.
6. Notice of related risks and maximum possible losses.
7. Information on the handling of personal data and consent for the provision of personal data to the GTSM.
8. Matters relating to contract termination or rescission.
9. Governing law of the contract.
10. Method of resolving disputes.
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Article 16
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A securities firm that provides financial derivatives trading services to customers shall do so with the due care of a good administrator, in accordance with fiduciary obligations, and based on the principle of good faith.
When a securities firm undertakes a financial derivatives trade with a customer other than a qualified institutional investor, it shall not encourage or induce the customer to conduct trades through borrowing funds or debt financing, and shall establish a system for protection of customer rights and interests based on product characteristics, notification and disclosure of product risks, and handling of trading disputes. Trades shall be carried out in accordance with the operating procedures set out under that system.
When a securities firm provides financial derivatives trading services to ordinary customers, structured notes transactions shall be separately carried out in accordance with the provisions of Article 30-1, and the system for protection of customer rights shall additionally include a set of know-your-customer assessment procedures, customer characteristic assessments, and product characteristic assessments. The securities firm shall also clearly ascertain the customer's investment experience, the status of the customer's assets, their trading objectives, understanding of the product, and degree or risk tolerance to ensure that the product being traded matches the characteristics of the customer.
The types of financial derivatives trading services that a securities firm may provide to a natural person who is an ordinary customer will be prescribed by the GTSM, and will be publicly announced after submission to and approval by the competent authority.
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Article 20
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A securities firm that undertakes a bond derivatives transaction that has an underlying of foreign bonds and is denominated and settled in New Taiwan Dollars or foreign exchange shall do so only with a professional customer.
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Article 24
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A securities firm that undertakes an interest rate derivatives transaction with a foreign currency interest rate product as its underlying and denominated and settled in New Taiwan Dollars or in foreign exchange shall do so only with a professional customer.
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Article 26
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A securities firm that engages in asset swap transactions shall carry out hedging against the market risk of the linked underlying assets, and shall adopt rigorous internal control standards and enhanced internal auditing procedures. It shall carry out regular review and analysis and keep records thereof for future inspection or auditing.
The asset swap hedging position of the preceding paragraph may not be the subject of a pledge or a repo-style transaction; this restriction, however, shall not apply when the securities firm enters into a repo-style transaction with a trading counterparty which stipulates that early contract rescission and repurchase may take place at any time.
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Article 29
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As used in these Regulations, "structured instrument" means a hybrid contract combining features of fixed-income and financial derivatives products.
The scope of eligible linked underlying assets of structured instruments 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 maximum of 10 years.
Where the structured instruments sold by a securities firm are linked to the publicly offered certificates of beneficial interest of a securities investment trust fund, consent from the securities investment trust enterprise (SITE) shall be obtained prior to the sale. When the sales staff recommend or sell products to investors, relevant documents involving description of the fund shall comply with the Code of Conduct for Members of the Securities Investment Trust and Consulting Association of the ROC and Their Sub-distributors Governing the Advertising and Business Activities of Securities Investment Consulting Enterprises. An explanation shall be given to non-institutional investors that these products are not funds.
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Article 30-1
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A securities firm that provides structured note trading services to ordinary customers shall carry out the following assessments:
1. The securities firm shall assess the customer's characteristics to ascertain whether the customer is a professional customer or an ordinary customer, and shall perform an overall assessment of the customer's degree of risk tolerance on the basis of factors including the customer's age, investing knowledge and experience, status of assets, trading objectives, and understanding of the product. At least three discrete levels of risk tolerance shall be distinguished, and the ordinary customer shall be required to sign a confirmation of the assessment.
2. The securities firm shall undertake an assessment of the product's characteristics, and shall retain a written record for verification. The assessment shall include at least the following items:
(1) Assessment and confirmation of the legality of the given structured note, the related investment assumptions, the reasonableness of the risk/return profile, the appropriateness of the transaction, and whether there are any conflicts of interest.
(2) Overall assessment and confirmation of the degree of risk inherent in structured notes, in which at least three discrete levels of risk are distinguished, with respect to factors such as their characteristics, the risk and probability of principal loss, liquidity, structural complexity, and the term of the notes.
(3) Assessment and confirmation of the adequacy and accuracy of the disclosures made in the product information and marketing documents provided to the customer.
(4) Confirmation of whether only professional customers can invest in the given structured note.
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Article 30-2
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A securities firm that provides structured note trading services to ordinary customers shall impose the following controls on its marketing procedures:
1. The securities firm shall indicate, in a prominent typeface in the notice to customers and in the prospectus, the degree of product risk for the given structured note, based on the assessment of the product's characteristics pursuant to Article 30-1, subparagraph 2. The securities firm may not sell to an ordinary customer a structured note that exceeds the level appropriate to the customer, nor may it sell to an ordinary customer a structured note restricted to investment by professional customers.
2. A securities firm that provides structured note trading services to ordinary customers shall fulfill its duty of disclosure. For products with identical terms and conditions of transaction but with durations in excess of six months, and sale of the product to 10 or more persons is planned, an ordinary customer shall be given a review period of not less than seven days prior to the initial transaction for review of the contracts connected with the structured note. When such a period of review is not required for a given product, the fact that there is no review period for the given product shall be clearly stated in the product's prospectus.
3. A securities firm that provides structured note trading services to ordinary customers shall read aloud to the customer the important content of the notice to customers and retain an audio recording as a record.
4. When a securities firm undertakes a structured note trade with an ordinary customer that is a juristic person, then in subsequent trades with the same customer for the same type of structured note, the securities firm may be exempt from the requirement of the preceding subparagraph to read aloud the important content of the notice to customers and to retain an audio recording as a record in any transaction in which the customer signs a written consent to that effect. The "same type of structured note" as used above means that the product's structure, denominating currency, and linked underlying asset are all completely the same.
The matters to be set out pursuant to the preceding paragraph in the notice to customers and the product prospectus, and the means by which a recording is to be made, will be formulated by the GTSM and publicly announced after submission to and approval by the competent authority.
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Article 30-3
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A securities firm shall adopt the content of Article 30-1 and Article 30-2 as part of its internal control and internal auditing systems and carry out related audits and inspections.
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Article 43
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When the trading counterparty of a securities firm is the writer of an equity option or a person engaged in the business of equity derivatives denominated in foreign currencies or linked to foreign underlying securities, the counterparty must meet the requirements for a professional customer.
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Article 44
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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 the previous business day's outstanding and unexpired call (put) warrants and contract-based call (put) warrants of all securities firms and banks, may not exceed 15 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 49
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When the trading counterparty of the securities firm is the credit protection seller, that trading counterparty must meet the requirements for a professional 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; losses may be incurred if a 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 53
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A securities firm may not engage in financial derivatives trades related to Taiwan equities with any of the following 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.
Calculation of the total shareholdings of the shareholders under subparagraph 1 above shall include shareholdings of spouses, minor children, and nominees of the persons under subparagraph 1.
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; when the trading counterparty is a qualified institutional investor, the securities firm may use available information to make an effective confirmation, by means of its own internal operating procedures, that the trading counterparty is not a related party under paragraph 1. When the securities firm is unable to undertake verification of a trading counterparty, however, and when the trading counterparty is unable to produce an undertaking, the securities firm may not engage in a trade with that counterparty.
A securities firm may enter into trades with the qualified institutional investors of paragraph 1, subparagraphs 1 through 3, provided that the terms it accords those persons may not be more favorable than those accorded others in the same class of counterparties, and that the trades 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, or after a resolution granting authorization to the relevant department.
The restrictions of paragraph 1, subparagraphs 1 through 3 do not apply when the price of a trade by a securities firm, with one individual non-institutional investor, is less than NT$1 million, or when the cumulative price of unexpired trades is less than NT$5 million.
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Article 64
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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 5-1, Article 5-2, Article 15, Articles 16 through 20, Articles 22 through 34, Article 38, Articles 40 through 43-1, Article 45, the portion of Article 46 requiring the mutatis mutandis application of Articles 34 and 38, Articles 47 through 50, Article 53, Article 53, or Article 56.
2. Execution of financial derivatives trades not in conformance with the relevant portions of the securities firm's application or filing.
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 Regulations, regulations, operating procedures, guidelines, directions, supplementary Regulations, public announcements, or circulars.
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