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Taipei Exchange Regulations Governing Over-the-Counter Trading of Financial Derivatives by Securities Firms(2020.10.16) |
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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 conditions listed below:
- 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 possesses one of the following qualifications:
- 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. However, in the case of a customer that is a TWSE or TPEx listed company, the securities firm is exempted from the requirement to obtain from the customer supporting evidence regarding the qualifications possessed by the person in charge of its dedicated investment unit or the persons authorized to conduct trades.
The securities firm's method for evaluation of whether a professional customer that is not a professional institutional investor possesses adequate professional knowledge and management or 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 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 other than a professional institutional investor or high net worth juristic person 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.
The customer characteristic assessments and rated assessment results produced by the securities firm under the product suitability system referred to in the preceding paragraph shall be reviewed by an appropriate unit or personnel, and shall be reexamined at least once per year. The assessment results, and any subsequent amendment thereto, must furthermore be confirmed by the customer by affixing its signature or seal of record or by another method agreed upon between the parties.
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, 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 24
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A securities firm that provides structured instrument trading services to a customer other than a professional institutional investor or high net worth juristic person investor shall carry out the following assessments:
- 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.
- 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 items listed below:
- Assessment and confirmation of the legality of the given structured instrument, the related investment assumptions, the reasonableness of the risk/return profile, the appropriateness of the transaction, and whether there are any conflicts of interest.
- Overall assessment and confirmation of the degree of risk inherent in structured instruments, 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 instruments.
- Assessment and confirmation of the adequacy and accuracy of the disclosures made in the product information and marketing documents provided to the customer.
- Confirmation of whether only professional customers can invest in the given structured instrument.
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Article 25
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A securities firm that provides structured instrument trading services to customers other than professional institutional investors and high net worth juristic person investors 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 customers shall fulfill its duty of disclosure. For a product targeted for sale to 10 or more persons and furthermore having identical terms and conditions of transaction and a duration in excess of 6 months, the securities firm shall provide ordinary customers with a review period of not less than 7 days to review the related contracts of the structured instrument, and a review period of not less than 3 days for professional customers to do the same, unless the professional customer provides a signed statement expressly indicating that the customer has fully reviewed the product. 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. However, in the case of a professional customer, it may instead deliver the information in writing or by means of an audiovisual medium.
- A securities firm that provides structured instrument trading services to a natural person customer shall assign dedicated personnel to explain the products. If the products provided are non-principal-protected products, the securities firm shall use audio or video recording means to retain a record of the content of the explanatory procedures carried out by the designated personnel. Once it has done so, the securities firm will subsequently be exempted from assigning dedicated personnel to give explanations regarding trading of the same type of structured instrument.
- When a securities firm undertakes a structured instrument trade with a 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 following the requirements of subparagraph 3.
- The "same type of structured instrument" as used in the preceding two subparagraphs 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, video 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 items listed below:
- 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 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 securities firm shall establish and maintain an effective valuation and control mechanism for financial derivatives to prudently review the reasonableness of the transaction quotation and mark-to-market value of products.
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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