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Taipei Exchange Regulations Governing Over-the-Counter Trading of Financial Derivatives by Securities Firms(2017.06.19) |
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Article 6
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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:
- A professional institutional investor: means 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.
- A high net worth juristic person investor: means a juristic person that has applied to the securities firm in writing, and that concurrently meets all of the following conditions.
- Net worth exceeds NT$20 billion according to its latest CPA-audited or reviewed financial report; however, the financial reports of juristic persons outside of the Republic of China need not be CPA-audited or reviewed.
- Has a dedicated investment unit, staffed by capable professionals and the person in charge of the unit meets one of the following conditions.：
- Has 3 years or more of work experience engaging in financial product investment business at a financial, securities, futures, or insurance institution.
- Has 4 years or more of work experience related to financial product investment.
- Possesses other academic or professional qualifications or experience sufficient to show that he or she has professional knowledge and management experience in financial product investment, and can soundly and effectively manage the business of an investment department.
- Holds securities position or derivatives product portfolios reaching NT$1 billion according to its latest CPA-audited or reviewed financial report; however, the financial reports of juristic persons outside of the Republic of China need not be CPA-audited or reviewed.
- Has an internal control system with suitable investment procedures and risk management measures.
- A juristic person or fund that meets each of the following requirements and has applied in writing to the securities firm for the status of professional customer:
- Its CPA-audited or reviewed financial report for the most recent period shows total assets in excess of NT$50 million. However, the financial reports of juristic persons outside of the Republic of China need not be CPA-audited or reviewed.
- The persons authorized by the customer to conduct trades possess adequate professional knowledge and trading experience with respect to financial products.
- The customer fully understands that the securities firm may be exempted from liability for financial derivatives trades conducted with a professional customer, and consents to sign for trades as a professional customer.
- A natural person that meets each of the following conditions and has applied in writing with the securities firm for the status of professional customer:
- 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.
- Possession of adequate professional knowledge and trading experience with respect to financial products.
- 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.
- A trust enterprise entering into a trust agreement, the trustor of which meets the conditions of subparagraph 2, 3, or 4.
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. The securities firm's method for evaluation of whether a professional customer possesses adequate professional knowledge and trading experience with respect to financial products shall be incorporated into its know-your-customer evaluation procedures and be submitted for adoption by the board of directors. However, if a foreign securities firm has no board of directors, the evaluation method shall be agreed to by its responsible person within the territory of the ROC.
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Article 31
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When the securities firm elects to sell shares of the underlying security by borrowing from security holders in a securities borrowing and lending transaction, if the security is a TWSE listed or TPEx 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 then, as required for hedging purposes, transfer the shares into the hedge account in separate lots upon application by the securities firm.
When the securities firm elects to short-sell shares in a TWSE or TPEx 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 TPEx and the TWSE.
The opening of the aforementioned margin account shall be carried out in accordance with the Operating Regulations for Securities Firms Handling Margin Purchases and Short Sales of Securities and the provisions of the various securities finance companies related to the aforesaid Regulations.
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 financial derivatives and applications to cover short sales with spot securities. When the securities firm uses the margin account to engage in short sales or buy-to-cover transactions for the purpose of hedging, reports of out-trades and account number corrections may not be filed for this account, except in cases where the appointed securities broker has committed an error.
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 35
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When a securities firm engages in the trading of financial derivatives related to Taiwan equities with counterparties, the scope of eligible linked underlying assets shall be limited to the following:
- TWSE listed or TPEx listed stocks eligible to be the underlying in the issuance of TWSE listed or TPEx listed call (or put) warrants, or eligible for margin purchase or short sale transactions, provided that if the trading counterparty is an ordinary customer, the scope of eligible linked underlying assets shall be limited to TWSE listed or TPEx listed stocks eligible to be the underlying in the issuance of TWSE listed or TPEx listed call (or put) warrants.
- Exchange traded funds (ETFs) or offshore ETFs.
- Taiwan depositary receipts (TDRs).
- Stock indexes published by the TWSE or the TPEx.
- Convertible (or exchangeable) corporate bonds that have been listed on the TWSE or TPEx for no less than 5 trading days.
- Publicly offered beneficial certificates of securities investment trust funds.
- Futures or options contracts of the Taiwan Futures Exchange Corporation.
- Combinations of the foregoing eligible linked underlyings.
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Article 37-1
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A securities firm operating the business of options on convertible (or exchangeable) corporate bond asset swaps ("asset swaptions") related to Taiwan equities shall do so in compliance with the following provisions:
- The securities firm shall confirm that the total of the unearned notional principal of asset swaptions with the same underlyings purchased by the customer from various financial institutions, plus the notional principal of the asset swaptions with the same underlyings currently being purchased by the customer shall not exceed 10 percent of the par value of the underlying convertible (or exchangeable) corporate bonds; the securities firm shall obtain a written statement issued by the customer of compliance with the aforesaid requirement, and shall not help the customer to evade the customer transaction ceiling in this subparagraph.
- The securities firm shall not help the customer or underwriter to evade the rules set out in Articles 27 and 43-1 of the Taiwan Securities Association Rules Governing Underwriting and Resale of Securities by Securities Firms.
- With respect to the reasonableness of the price of convertible (or exchangeable) corporate bonds purchased through OTC negotiated trading, the securities firm shall establish an internal evaluation system to analyze the difference from market prices.
- With respect to the business of convertible (or exchangeable) corporate bonds asset swaptions related to Taiwan equities, the securities firm shall establish an internal evaluation system for the prevention of illegal transactions.
The securities firm shall incorporate the provisions of the preceding paragraph into its internal control and internal audit items. It shall undertake regular review and analysis, and produce records for future audit or inspection.
Purchases made by the customer and his or her spouse, minor children, and nominees shall be included in the calculation of the ceiling set out in paragraph 1, subparagraph 1.
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Article 53
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When any of the following circumstances applies to a securities firm, the TPEx may issue a warning and notify it to take supplementary or corrective action within a prescribed time period:
- Violation of Article 4, Article 14, paragraph 3, Article 29, Article 30, Article 37, Article 37-1, paragraph 1, subparagraphs 1, 3, or 4, or paragraph 2, Article 39, Article 40, Article 43, or Articles 45 to 50.
- Failure to take supplementary or corrective action within the time period prescribed in the preceding article.
- A violation of these Regulations or of related TPEx Regulations such as to affect the rights and interests of investors or orderly trading in the market.
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Article 54
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When any of the following circumstances applies to a securities firm, the TPEx may impose a penalty of not less than NT$50,000 and not more than NT$3 million.
- Violation of Article 5, Articles 8 to 10, Article 37-1, paragraph 1, subparagraph 2, Article 39, or Article 40.
- Failure to take supplementary or corrective action within the time period prescribed in the preceding article.
- A violation of these Regulations or of related TPEx Regulations that has a material effect on the rights and interests of investors or orderly trading in the market.
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Article 55
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When any of the following circumstances applies to a securities firm, the TPEx may suspend or terminate its financial derivatives trading, provided that such action shall not affect the validity of an already-transacted derivative product:
- Imposition of a penalty pursuant to subparagraph 2 of the preceding article three or more times during the preceding half-year.
- Failure to pay a penalty imposed pursuant to subparagraph 2 of the preceding article.
- Noncompliance with the conditions of Article 11, paragraph 1, subparagraph 1 or 2.
- Noncompliance with Article 12 by a foreign securities firm.
- The regulatory capital adequacy ratio of the securities firm has remained below 200 percent for 3 consecutive months.
- Receipt of a sanction from the competent authority under Article 66, subparagraph 2 of the Securities and Exchange Act due to financial derivatives business.
- Violation of Article 37-1, Article 39 or Article 40 and the violation is of a material nature.
- A violation of these Regulations or of related TPEx Regulations that has a material effect on the rights and interests of investors or orderly trading in the market.
- A material instance of inability to perform on a financial derivatives trade.
- Assessment, in accordance with the Directions for Risk Management Assessment Systems of Securities Firms, finding that the securities firm was Grade 5 during the most recent period or Grade 4 during the two most recent periods, or failure to conduct an assessment.
- The securities firm has failed to engage in financial derivative product trading business for 1 year after becoming qualified to engage in such business.
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 TPEx may restore the firm's qualification after performing a verification review and reporting to and receiving the consent of the competent authority.
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