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Taipei Exchange Regulations Governing Over-the-Counter Trading of Financial Derivatives by Securities Firms(2015.06.26) |
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Article 15
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A securities firm providing financial derivatives trading services to a professional institutional investor shall enter into an ISDA Master Agreement with the trading counterparty, or be subject to other standard agreements and market practices. If the financial derivative product contract that a securities firm enters into with a customer that is not a professional institutional investor, and the trading documents so furnished, including the master agreement (or ISDA Master Agreement), product prospectus, risk disclosure statement, and trade confirmation document, are in the English language, the securities firm shall provide a Chinese-language translation thereof.
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, the written contract shall stipulate agreement that the competent authority and the TPEx may collect, process, and use the person's personal data.
When a securities firm enters into a contract with a customer that is not a professional institutional investor, it may proceed only after meeting the requirement that an appropriate unit or personnel review the contract signing procedures and the completeness of the information provided by the customer.
The financial derivative product contract that a securities firm enters into with the counterparty may stipulate the method for determining the amount payable for settlement in the event of early termination of a trade, which shall reflect and calculate the current market value of the trade, including the value that originally would be paid under the early-terminated trade upon expiration after the early termination date.
The conditions for early termination of a trade and the method for determining the amount payable for settlement in the event of early termination, as referred to in the preceding paragraph, shall be clearly specified in relevant contracts or otherwise fully disclosed to the counterparty.
The contracts entered into between a securities firm and its customers, and other written documents required for the provision of financial derivative services to customers, may be made in the form of electronic documents as defined in the Electronic Signatures Act.
The execution, signing, or signing as confirmation, specified in these Regulations may be done by electronic signature, digital signature, or other means agreed upon between the parties.
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Article 16
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When entering into a financial derivatives trade with an ordinary customer, a securities firm shall fully specify in the written contract the important content of the trade and disclose the risks, and shall comply with the following requirements:
- It shall adhere to the principle of good faith, and shall use text or other means that the customer is capable of fully understanding.
- All information or data in all explanations or disclosures must be accurate. All statements or diagrams shall be fairly presented, and there may not be any falsehood, fraud, concealment, or anything that otherwise could be misleading. The aforesaid information or data shall be dated.
- The language used in sales documents shall be Chinese, and every effort shall be made to ensure that it is clear and easy to understand. When necessary, the original language text may be appended in notes.
- All sales documents must use printed page numbers or another appropriate method to enable customers to confirm whether they have received complete information.
When a securities firm specifies important content and discloses risks to the customer pursuant to the preceding paragraph, it shall retain the relevant materials on file, and incorporate them into the securities firm's internal control and auditing systems for management.
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Article 19
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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 professional 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 suitability, 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.
A securities firm shall establish a product suitability system under the preceding paragraph, which shall at the least include a set of know-your-customer assessment procedures, customer characteristic assessments, and product characteristic assessments in order to clearly ascertain the customer's investment experience, the status of the customer's assets, the customer's trading objectives, the customer's understanding of the product, and the suitability of the product for trading by the customer.
A securities firm may not provide an ordinary customer with financial derivatives trading services that exceed the level appropriate to the customer, nor may it sell to an ordinary customer any financial derivative product that is restricted to investment by professional customers or that is a complex high risk product. This restriction, however, does not apply to trades of financial derivatives other than structured instruments that an ordinary customer enters into with a securities firm for hedging purposes.
A securities firm entering into trading of any complex high-risk product with a customer that is not a professional institutional investor shall fully explain to the customer the important content of the financial derivative products and related services and contracts, including the important parts of the transaction terms and conditions, and shall disclose associated risks. Unless the transaction is made in an automated manner other than in person or the customer disagrees, a record of the above explanation and disclosure shall be retained by audio or video recording.
"Complex high-risk product" in these Regulations means a financial derivative that will expire early if the comparative price in any given period cumulatively reaches a certain threshold, and that contains an embedded put option.
With respect to a securities firm conducting the business of financial derivatives trades, the compliance requirements, such as product suitability, product risk notification and disclosure, method of audio or video recording, and the types of financial derivatives that may be provided to an ordinary customer who is a natural person, will be prescribed by the TPEx, and will be publicly announced after submission to and approval by the competent authority.
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Article 25
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A securities firm that provides structured instrument trading services to ordinary customers shall impose the following controls on its marketing procedures:
- 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 instrument, based on the assessment of the product's characteristics pursuant to Article 24, subparagraph 2.
- A securities firm that provides structured instrument 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 6 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 7 days prior to the initial transaction for review of the contracts connected with the structured instrument. 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.
- A securities firm that provides structured instrument trading services to ordinary customers shall read aloud or use electronic equipment to explain to the customer the important content of the notice to customers, and shall retain an audio recording as a record or use electronic equipment to retain a trail of the relevant procedures carried out.
- When a securities firm undertakes a structured instrument trade with an ordinary customer that is a juristic person, then in subsequent trades with the same customer for the same type of structured instrument, the securities firm may be exempt, if the customer signs a written consent to exemption for that specific transaction, from the requirements of the preceding subparagraph to read aloud or use electronic equipment to explain the important content of the notice to customers and to retain an audio recording as a record or use electronic equipment to retain a trail of the relevant procedures carried out. The "same type of structured instrument" as used above means that the product's structure, denominating currency, and linked underlying asset are all completely the same.
The matters to be handled pursuant to the preceding paragraph regarding the notice to customers, the required disclosures in the product prospectus, and the method for audio recording or for retention using electronic equipment, will be formulated by the TPEx and publicly announced after submission to and approval by the competent authority.
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Article 44
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When a securities firm operates the business of OTC trading of financial derivatives, it shall establish its risk management system pursuant to the Risk Management Best-Practice Principles for Securities Firms announced and implemented by the TPEx together with the TWSE and the Taiwan Securities Association (TSA) to implement and manage the procedures for identifying, measuring, monitoring, and reporting transaction risks, and shall also comply with the following provisions:
- The securities firm conducting financial derivatives business shall follow appropriate review and approval procedures, and its senior management shall work together with the managerial officers involved in the relevant business to study and adopt a risk management system. Limits on risk tolerance and the use of derivatives shall be regularly reviewed and submitted to the board of directors for examination and approval.
- Financial derivatives business trading operations and settlement operations shall not be concurrently handled by the same personnel. The securities firm shall establish a risk management unit outside of and independent from its trading division to carry out such tasks as identifying, measuring, and monitoring risks. The risk management unit shall regularly report position risks and valuations of gains and losses to the senior management.
- The securities firm shall set the frequency of valuation of financial derivatives positions individually according to the nature of each type of position. In the case of trading positions, valuation shall in principle be carried out in real time or daily marking-to-market. For hedging transactions conducted for the purposes of the securities firm's own business requirements, valuation shall be carried out at least once per month.
- The securities firm shall adopt operational rules for the internal review of new products, with the authority and duties of each relevant department specified therein, and a product review panel shall be formed and consist of managerial officers in charge of finance and accounting, legal compliance, risk control, products, or business units. Before its launching, a new financial derivative shall be subject to review by the product review panel in accordance with the aforementioned rules. When the new product is a complex and high-risk one, it shall be examined by the product review panel and then submitted to the board of directors or the board of managing directors for approval. The securities firm's rules for internal product review shall cover at least the following items:
- Review of the nature of products.
- Review of the operational strategy and business policy.
- Review of risk management.
- Review of internal controls.
- Review of accounting methods.
- Review of safeguards of customer rights and interests.
- Review of compliance with laws and regulations and required legal documents.
- The securities firm shall adopt a remuneration and reward system as well as assessment principles for associated persons conducting the financial derivatives business. The system and principles shall avoid a direct connection with the sales performance of specific financial derivatives, and shall incorporate non-financial criteria that include items such as whether there is any violation of applicable laws and regulations, self-regulatory rules, or operating directions, deficiency discovered in an audit, customer dispute, and faithful implementation of know-your-customer (KYC) procedures; the system and principles shall be approved by the board of directors.
- When formulating its pricing policy for financial derivatives, the securities firm shall take factors such as the position valuation, risk cost, and operating cost of the financial derivatives into consideration, and shall establish internal operating procedures to carefully review the reasonableness of the prices at which the securities firm conducts financial derivative transactions with customers.
The branch unit established within the territory of the ROC by a foreign securities firm may implement the risk management system in accordance with the provisions of the head office, provided that it shall still comply with the provisions of the preceding paragraph.
The TPEx 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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