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These procedures are promulgated pursuant to Article 6 of the Regulations Governing Ad-Hoc Review and Handling of Violations of Settlement Obligations by Securities Firms.
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When a securities firm defaults on its settlement obligations, the Taiwan Stock Exchange Corporation ("the TSE"), the defaulting securities firm ("the suspended firm") and the authorized securities firm ("the authorized firm") shall handle matters relating to suspension of the suspended firm in accordance with the following procedures:
(1) Matters to be undertaken by the TSE:
(i) The TSE shall immediately order a temporary suspension of trading by the suspended firm in accordance with Article 142, Paragraph 1 of the Operating Rules of the Taiwan Stock Exchange Corporation, and file a letter of report with the competent authority. In addition, the TSE shall send official notice by the highest priority to the suspended firm and the relevant units, and publicly announce the suspension by means of the Market Information System (MIS).
(ii) The TSE shall appoint a securities firm that has entered into a mandate agreement with the suspended firm that will allow it to undertake settlement matters on behalf of the suspended firm. The authorized firm shall handle settlement matters for the two business days prior to the suspension of trading as well as subsequent matters relating to centralized securities custody for the suspended firm's clients, including delivery and deposit, withdrawal, stock transfers, and fund transfers. The TSE may appoint other securities firms to undertake matters it deems necessary, and shall note the appointments in the letter of report regarding the suspension.
(iii) TSE personnel shall immediately proceed to the suspended firm to assist with matters relating to the suspension, and shall request the Taiwan Securities Central Depository Co., Ltd. ("the TSCD") and related securities financing companies to also dispatch personnel to provide assistance.
(iv) The TSE shall convene a meeting between the suspended firm and the authorized firm to coordinate matters relating to the suspension.
(v) The TSE shall assist the suspended firm in transferring settlement operations for the two business days prior to the suspension to the authorized firm, and in transferring information on the depository accounts of the suspended firm's clients to the authorized firm for handling.
(vi) The TSE shall assist the suspended firm in helping clients open consignment trading accounts at the authorized firm.
(vii) The TSE shall supervise the authorized firm in opening, with all due haste, a special account at the bank where the suspended firm has its settlement account for the purpose of transferring settlement funds for the clients of the suspended firm. The TSE shall also notify the relevant units that funds for consignment trades originally to be transferred to the suspended firm shall be transferred to the aforementioned special account of the authorized firm.
(viii) The TSE shall verify that, prior to suspension, the suspended firm has completed all procedures for securities in accordance with the application for default correction under Article 109 of the Operating Rules of the Taiwan Stock Exchange Corporation, and that borrowed securities have been returned.
(ix) The TSE shall verify that the settlements of securities and funds with clients on the two business days preceding the suspension have been carried out accurately and without impediment.
(x) The TSE shall work with the authorized firm to establish files on customer accounts. Beginning from the day of suspension, the TSE shall convert the suspended firm's terminal for use by the authorized firm in establishing such files.
(xi) The TSE shall check the assets of the suspended firm, including the volume of outstanding shares held at the Centralized Securities Depository, deposit account balances, the business guarantee bond and the settlement and clearing fund, and shall forthwith initiate statutory procedures for preservation of assets.
(xii) The TSE shall accept and process investor applications in connection with the Securities Investors Protection Fund (SPIF).
(2) Matters to be undertaken by the suspended firm:
(i) The suspended firm shall immediately post the TSE notice of suspension on the announcement board in its trading room, and shall notify its clients of the following matters:
(a) Procedures relating to settlements of securities and funds for trades completed during the two business days prior to suspension shall be transferred to the authorized firm for handling.
(b) From the date of suspension, the authorized firm shall handle matters relating to centralized securities custody for the suspended firm's clients, including delivery and deposit, withdrawal, stock transfers, and fund transfers.
(c) Beginning on the date of suspension, clients who complete account-opening procedures at the authorized firm may, from the account-opening date, consign the authorized firm to undertake securities trades.
(ii) The suspended firm shall assist clients in transferring funds for settlement to the special bank account for settlements provided by the authorized firm.
(iii) The suspended firm shall, from the date of suspension, provide the authorized firm with a terminal for use in handling trading consignments and in procedures for establishing files related to centralized securities depository accounts.
(iv) When, prior to suspension, the suspended firm has applied for correction for securities in accordance with Article 109 of the Operating Rules of the Taiwan Stock Exchange Corporation, correction procedures shall be completed with all due haste. Where correction has not been effected or where borrowed securities have not been returned, the suspended firm shall notify the authorized firm to undertake those matters on its behalf.
(v) For account errors which occurred on the business day preceding the suspension, the suspended firm shall report the error to the TSE and immediately enter correction information into the TSCD computer through its terminal. When repurchase or resale of securities to offset the error was not effected on the day the error occurred, the suspended firm shall entrust the authorized firm with handling of the error on the date suspension begins.
(vi) The suspended firm shall appoint sales agents to go to the authorized firm (where they may not enter the counter area) to assist clients with securities consignment trading and handling of settlement matters at the authorized firm.
(vii) The suspended firm shall deliver client information to the authorized firm, including basic depository account information, volumes of shares in custody and changes in volumes of shares in custody, as well as clients' seal impression cards. Beginning from the date of suspension, the authorized firm shall handle deposit and withdrawal of securities and transfers of securities and funds on behalf of the suspended firm, and the suspended firm shall dispatch clearing and settlement agents to assist the authorized firm in handling such matters.
(3) Matters to be undertaken by the authorized firm:
(i) The authorized firm shall open a special account at the bank where the suspended firm has its settlement account to allow payment and receipt of settlement funds by the suspended firm's clients.
(ii) During the period of suspension, matters such as the lawful deposit, withdrawal, account transfer and transfer of title of securities shall be undertaken by the authorized firm on behalf of the suspended firm in accordance with the rules of the Taiwan Securities Central Depository Co., Ltd.
(iii) The authorized firm shall assist the suspended firm's clients in opening new accounts and shall be prepared to accept trading consignments from those clients on the day account-opening procedures are completed.
(iv) The authorized firm shall keep good custody of the information transferred to it by the suspended firm, and return such information to the suspended firm upon its resumption of business.
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With regard to the margin trading of the suspended firm, the relevant units shall, in addition to the matters listed above, handle margin trades in accordance with the procedures listed below:
(1) Matters to be undertaken by the TSE:
(i) If the suspended firm operates its own margin trading business, the TSE shall designate another firm that operates a margin trading business as the authorized firm.
(ii) When convening the meeting between the suspended firm and the authorized firm for coordination of matters entrusted to the authorized firm, information regarding margin trades shall be transferred to the authorized firm for the purposes of coordination, and the TSE shall additionally retain a copy of said information.
(iii) When the suspended firm operates its own margin trading business:
For consigned margin trades and short sales with transaction dates up to and including the third business day before the date of suspension, where settlement was completed but the investor has not yet received funds or shares from the margin sales or short purchases, or where the investor has applied for but not received redemption in cash or spot securities, the TSE shall request the investor to seek compensation from the suspended firm.
(iv) When the suspended firm and the authorized firm are agents for the same securities finance company:
The TSE shall assist clients of the suspended firm in transferring margin accounts to the authorized firm by means of amending the designation of their consigned securities firm.
(v) When the suspended firm and the authorized firm act as agents for different securities finance enterprises:
The TSE shall advise the securities finance enterprises for which the suspended firm and the authorized firm are agents to execute an agency contract.
Where an agency contract has not been executed between the securities finance enterprises, the TSE shall assist the suspended firm to request investors with existing margin accounts to transfer those accounts to other securities firms acting as agent for the given securities finance company. Transfers shall be made with all due speed, based on the investor's preference and by means of amending their designations of consigned securities firms.
For accounts not so transferred, margin trading accounts may also be opened at the securities finance enterprise for which the authorized firm is an agent. With regard to the balance in the margin account at the securities finance enterprise for which the suspended firm acted as agent, the authorized firm may only engage in margin sales, short purchases, cash redemption and redemption in securities.
(vi) When the suspended firm is a margin trading agent for a securities finance enterprise and the authorized firm operates its own margin trading business:
The TSE shall assist the suspended firm in advising investors with already-opened margin accounts that they may open new margin trading accounts at the authorized firm; however, with regard to outstanding balances in margin trading at the securities finance enterprise for which the suspended firm was agent, the authorized firm may only engage in margin sales and short purchases or redemptions in cash or securities.
(2) Matters to be undertaken by the suspended firm:
(i) The suspended firm shall, with all due speed, compile and verify the accuracy of data on margin trades transacted up to the date of suspension. The data shall be transferred to the authorized firm and a copy sent to the TSE.
(ii) When the suspended firm operates its own margin trading business:
The suspended firm shall deliver to the authorized firm a list of investors making margin purchases or short sales on the two days prior to the suspension, along with the daily business report, contracts, seal impression cards, and other relevant materials, to allow the authorized firm to provide margin loan or stock loan services. Thereafter, the authorized firm may also handle margin sales and short purchases or cash and securities redemptions connected with the given trades of those investors.
(iii) When the suspended firm and the authorized firm are agents for the same securities finance company:
The margin trading accounts of clients of the suspended firm may be transferred to the authorized firm by means of an amendment indicating the consigned securities firm. Investors may carry out settlement transactions at the authorized firm for trades made during the two business days prior to the suspension, and may continue trading after opening an account for consigned trading.
(iv) When the suspended firm and the authorized firm are agents for different securities finance enterprises, or the authorized firm operates its own margin trading business:
(a) Where the authorized firm has an agency contract with the securities finance enterprise for which the suspended firm acted as agent, the method of handling shall be the same as in the preceding paragraph.
(b) Where the authorized firm has not executed an agency contract with the securities finance enterprise for which the suspended firm acted as agent, or the authorized firm operates its own margin trading business:
b.1 The suspended firm shall assist its clients, based on their preference, in transferring their account to another securities firm that does have an agency contract with the securities financing enterprise. Prior to the transfer of accounts, and after the opening of new accounts at the authorized firm, only margin sales and short purchases, or redemptions in cash or securities, may be transacted at the authorized firm with respect to outstanding balances on margin trades transacted prior to the suspension.
b.2 The suspended firm shall assist those of its investors who open new margin trading accounts at the authorized firm.
(3) Matters to be undertaken by the authorized firm:
(i) When the suspended firm operates its own securities financing business, the authorized firm shall handle matters relating to the financing business as follows:
(a) The authorized firm shall keep good custody of all information relating to investors' margin trading transferred to it by the suspended firm, and shall assist clients of the suspended firm who transacted margin purchases or short sales on the two business days preceding the suspension with the procedures for opening new consigned trading accounts.
(b) The authorized firm shall carry out margin and stock loans on behalf of clients of the suspended firm who transacted margin purchases or short sales on the two business days preceding the suspension. The authorized firm shall also perform the subsequent margin sales and short purchases or cash and securities redemptions in connection with the given trades by those investors.
(ii) When the suspended firm and the authorized firm are agents for the same securities finance company:
The authorized firm shall process the transfer of the margin trading accounts of the suspended firm's clients, and shall assist those clients with the procedures for opening new consigned trading accounts. The authorized firm may immediately accept margin trading consignments from those clients on the date account-opening procedures are completed.
(iii) When the suspended firm and the authorized firm are agents for different securities finance enterprises, or the authorized firm operates its own securities financing business:
(a)The authorized firm shall handle, with all due haste, the opening of margin trading accounts for the clients of the suspended firm.
(b) Where a margin trading account of a client at the suspended firm is not transferred to another securities firm acting as agent for the same securities finance enterprise, and following the opening of a new consigned trading account by said client, the authorized firm may only accept the outstanding balance of the suspended firm at the securities finance enterprise on the day of suspension as a margin sale, short purchase, or cash or securities redemptions.
(iv) Handling of cash and securities redemptions:
(a) When the suspended firm operates its own securities financing business, and winding up and settling has not yet been carried out for outstanding balances for margin or stock loans, the authorized firm may not accept application by the related clients for cash or securities redemptions, and shall request those clients to seek compensation from the suspended firm through proper legal procedures.
(b) When the suspended firm is an agent for a securities finance enterprise in margin trading, the authorized firm shall, following its handling of clients' cash and securities redemptions, transfer the prices of securities to the bank accounts of clients subsequent to transfer by the securities finance enterprise of securities into the custody accounts of those investors or of the prices of securities into the bank account of the authorized firm.
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These Procedures and any amendments thereto shall take force upon approval by the competent authority.
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