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Taipei Exchange Regulations Governing Over-the-Counter Trading of Financial Derivatives by Securities Firms(2018.04.20) |
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Article 5
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"Financial derivatives," as used in these Regulations, means trading contracts and structured instruments, whose value, in conformity with regulations or common practice on domestic or foreign OTC markets, is derived from an interest rate, exchange rate, equity, index, commodity, credit event, or other interest, or from a combination thereof.
"Structured instruments" in the preceding paragraph means hybrid contracts, combining fixed-income products or gold and financial derivatives, that a securities firm enters into as counterparty with a customer.
Except where otherwise provided in these Regulations, the financial derivatives trading business operated by a securities firm may not be linked to any of the following underlying products:
- Securities privately placed domestically or abroad.
- Certificates of beneficial interest that are issued overseas by domestic securities investment trust enterprises and are not listed and traded on a securities market.
- Any Taiwan stock index compiled by a domestic or foreign institution and related financial commodities, provided that this restriction shall not apply to an index compiled by the TPEx or the Taiwan Stock Exchange Corporation, either singly or in cooperation.
A securities firm that conducts foreign exchange financial derivative business shall comply with the Regulations Governing Foreign Exchange Business of Securities Enterprises, and shall copy the TPEx when it applies to the Central Bank for permission or reports to the Central Bank by letter for recordation.
A securities firm that provides customers other than professional institutional investors and high net worth juristic person investors with a complex high-risk product that has not been approved by the competent authority or has been approved for less than half a year and that furthermore does not involve foreign exchange shall submit an application with the relevant documents to the TPEx, and the TPEx will submit them to the competent authority for approval. After the competent authority has granted approval for the first securities firm to conduct transactions in the product and half a year has elapsed, other securities firms shall submit the relevant documentation to the TPEx for recordation within 7 days after their first transaction of the product, and may conduct subsequent transactions only after having received a letter of consent for recordation from the TPEx.
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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.
- 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.
- 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$100 million.
- 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 fulfill its responsibility to make a reasonable investigation of the qualifications required of a professional customer under each subparagraph of the preceding paragraph, obtain reasonable and reliable supporting evidence from the customer, and shall re-review at least once a year to examine whether the customer continues to qualify as a professional 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 9
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A securities firm that has been approved as qualified to operate the business set out in the preceding article may commence the business of offering financial derivatives and combinations thereof, and within 15 days after commencement of business shall file registration documents with the TPEx for recordation. The only exceptions are the products set forth in Article 5, paragraphs 3 to 5.
If registration documents under the preceding paragraph are not submitted in full or are not supplemented within a required deadline, the TPEx may notify the securities firm to suspend the offering of such products until supplementation is completed.
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Article 10
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When a securities firm initiates a financial derivative trade with a professional institutional investor or a high net worth juristic person investor with any underlying listed under Article 5, paragraph 3, it shall first submit an application to the TPEx with the relevant documentation. The TPEx will forward the application to the competent authority, and trading of such a financial derivative product may only take place subsequent to the competent authority's first issuance of an approval to a securities firm for such a trade.
After the competent authority grants approval to the first securities firm, the provisions of Article 8, paragraph 2 shall apply mutatis mutandis to other securities firms applying to trade the same type of financial derivative.
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Article 11
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A securities firm applying for operating the business of OTC trading of financial derivatives shall meet the following requirements:
- It must be an integrated securities firm that concurrently engages in brokerage, underwriting, and dealership business.
- Its CPA audited or reviewed financial report for the most recent period shows net worth not lower than paid-in capital, and its financial condition meets the provisions of Articles 13, 14, 16, 18, 18-1 and 19 of the Regulations Governing Securities Firms.
- It must have reported a regulatory capital adequacy ratio for each month of the preceding half year that meets the requirements of the competent authority.
- It must not have received of any of the following sanctions:
- Any sanction during the preceding 3 months equal to or greater than provided in Article 66, subparagraph 1 of the Securities and Exchange Act or Article 100, paragraph 1, subparagraph 1 of the Futures Exchange Act.
- Any sanction during the preceding 6 months equal to or greater than those under Article 66, paragraph 1, subparagraph 2 of the Securities and Exchange Act or Article 100, subparagraph 2 of the Futures Trading Act.
- Any sanction from the competent authority during the preceding year requiring a suspension of business.
- Any sanction from the competent authority during the preceding 2 years voiding approval for any part of its business.
- Any sanction during the preceding year whereby the TPEx, the Taiwan Stock Exchange Corporation, or the Taiwan Futures Exchange Corporation, acting pursuant to its operating Regulations or corporate bylaws, has suspended or restricted the firm's trading privileges.
A securities firm that falls out of compliance with the conditions of subparagraph 4 of the preceding paragraph but that effects improvement and subsequently receives approval from the competent authority shall not be subject to the restrictions of that subparagraph.
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Article 14
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A securities firm applying or registering pursuant to Article 5, paragraph 5 or Articles 8 through 10 shall submit the documents shown in Attachments 1 and 2.
The directions for the TPEx review and approval of securities firms' applications or registrations are as given in Attachments 3 and 4.
A foreign securities firm trading financial derivatives shall issue an undertaking stating that the transaction prices it receives at the beginning of the transaction period will not be remitted out of Taiwan until after the transaction matures. This restriction, however, shall not apply to remittance of any transaction prices as required for instruments linked to foreign financial products.
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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 or high net worth juristic person 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.
When a securities firm provides financial derivatives trading services to a customer that is not a professional institutional investor, the securities firm shall establish a product suitability system, 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, except as otherwise provided, 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 other than a professional institutional investor or high net worth juristic person 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 has more than three settlement or price comparison periods, and that contains an embedded put option, but excluding the following
- Structured instruments.
- Swaps.
- A series of plain vanilla options or forward exchange transactions under a single signing of a contract for multiple transactions, of which the customer may rescind a specific number of the transactions at any time.
- Other types of products as approved by the competent authority.
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 22
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When financial derivatives trading business operated by a securities firm involves foreign exchange business, matters relating to payment and receipt of settlement money and fees, and payment of funds upon early cancellation or expiration of contracts, shall be carried out as follows:
- For derivatives denominated in New Taiwan Dollars, all payments and receipts of settlement money and fees between the securities firm and the counterparty shall be in New Taiwan Dollars.
- For derivatives denominated in a foreign currency, all payments and receipts of settlement money and fees between the securities firm and the counterparty shall be in foreign currency. Payments by the counterparty may be made by account transfer from the counterparty's own foreign exchange deposit account; where foreign exchange settlement is required, it may be carried out by the counterparty at a designated foreign exchange bank, or at the same securities firm that handles spot foreign exchange trading business, in accordance with the Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions.
- Upon expiry of the contract or early cancellation by the counterparty, the securities firm shall deposit the funds receivable by the counterparty, in the denominating currency and on the settlement date stipulated by the contract, in the counterparty's New Taiwan Dollar or foreign exchange deposit account.
A securities firm operating the business of the preceding paragraph shall submit a monthly operations statement to the foreign exchange authority and the TPEx within 5 business days after the end of each month.
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Article 34
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A securities firm undertaking structured instrument transactions shall allocate 3 percent of the total outstanding balance of its structured instrument contracts each month and pay that sum to the TPEx as a performance bond. A securities firm whose regulatory capital adequacy ratio is below 250 percent, however, shall pay 5 percent of the above balance to the TPEx as a performance bond.
A securities firm may pay the performance bond of the preceding paragraph in cash, bank certificates of deposit, or central government bonds, and shall supplement the bond amount or obtain a refund from the TPEx on or before the tenth of each month in accordance with monthly changes in the outstanding balance of the structured instrument and its regulatory capital adequacy ratio.
The TPEx shall open a segregated deposit account for the custody of performance bonds received by the TPEx, and reimburse any accrued interest, after deducting taxes and required fees, to the securities firms by the end of January and July each year.
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Article 38
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When a securities firm engages in credit derivatives transactions and the trading counterparty is an assumer of credit risk, the securities firm shall assess the capacity and the appropriateness of the trading counterparty for the credit derivative transaction, and at minimum shall inform the counterparty of the following matters:
- 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.
- Returns on the given 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.
- 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.
- The given product typically lacks market liquidity, and if such a contract contains a stipulation for early cancellation, 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 cancellation.
When a securities firm engages in credit derivatives transactions, if the securities firm is an assumer of credit risk and the reference entity is a related party of the securities firm as referred to in Article 41, paragraph 1, subparagraphs 1 to 3, the transaction terms may not be more favorable than those offered to other similarly situated counterparties, and the following provisions shall be complied with:
- The transaction must be resolved upon by at least three-fourths of the directors present at a meeting attended by not less than two-thirds of the number of directors; or, if relevant internal operational rules have been adopted, the administering department may be given general authority to conduct such transactions in accordance with those operational rules by a resolution of at least three-fourths of the directors present at a meeting attended by not less than two-thirds of the number of directors.
- The amount of potential loss estimated based on credit risk shall be fully secured by collateral, and measures for controlling the amounts of transactions under this paragraph shall be adopted. The collateral shall be limited to cash, government bonds, Central Bank negotiable certificates of deposit, Central Bank savings bonds, treasury bills, and bank certificates of deposit.
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Article 43
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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 TPEx.
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Article 45
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Securities firm personnel that handle financial derivatives business shall have professional ability, and the securities firm shall adopt professional qualification requirements as well as a system for training and performance evaluation.
Sales and related managerial personnel engaged in financial derivatives business shall be qualified as securities firm associated persons, and shall also possess one of the following qualifications:
- Graduation from a finance or finance-related department at the university level or higher, along with completion of six credit hours in courses in financial derivatives and risk management or participation in 20 or more hours of course work in financial derivatives and risk management at a foreign or domestic financial training institute.
- The qualifications required for senior agent of a securities firm under Article 5 of the Regulations Governing Responsible Persons and Associated Persons of Securities Firms.
- Participation in 30 hours or more of courses in financial derivatives and risk management offered by a foreign or domestic financial training institute.
- Holding a financial derivatives-related license.
- A half year or more of actual experience in financial derivatives business at a foreign or domestic financial institution.
Article 14 of the Regulations Governing Foreign Exchange Business of Banking Enterprises shall apply mutatis mutandis to the required qualifications and the requirements for education and training of a securities firm's relevant personnel who handle foreign exchange derivatives business. The provisions of that article regarding recommendation work shall apply mutatis mutandis to those relevant personnel who handle the work of selling foreign exchange derivatives.
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