Chapter I Securities Firms
These Regulations are promulgated pursuant to Article 7 of the Rules Governing Securities Finance Enterprises and Article 109 of the Operating Rules of the Taiwan Stock Exchange Corporation ("Operating Rules").
When a securities firm cannot settle a securities trade because it has committed an error in the consignment or transaction, because a consignor has failed to settle the trade on time, because the circumstances under Article 109 Paragraph 1 of the Operating Rules apply to the securities, or because there are other legitimate reasons preventing settlement, the securities firm shall report the settlement failure or file an application according to the Operating Rules and then borrow the securities.
When a securities firm applies to borrow securities, it shall deposit collateral with the Exchange equal to 120 percent of the closing price of the security on the day of the transaction multiplied by the volume of the borrowed security and carry out the matters prescribed in the Exchange's Guidelines for Provision of Settlement Collateral by Securities Firms ("Securities Settlement Guidelines").
Should a securities firm fail to settle an outstanding securities trade by the time provided for under Article 104 of the Operating Rules yet fail to report the settlement failure or file an application, the Exchange may borrow securities on its behalf and notify the securities firm the following day unless the securities firm is required to tender a check under the preceding Guidelines. The securities firm may not object to any consequent borrowing costs.
Securities may be lent only if they are listed on the Exchange and entered in a custodial account with the Taiwan Securities Central Depository Co., Ltd. ("TSCD"). If the owner of the securities is willing to lend them out, the owner shall complete a lending consignment form authorizing his securities firm or a custodian bank approved by the competent authority to provide depository services that serves as the owner's depository institution ("Depository Institution") to enter the relevant information into the securities borrowing computer system and issue a quotation for the loan. Until the securities are lent, the quotation may be changed or cancelled at any time.
The lending consignment form shall include the name and the volume of the lent security and the loan rate. The format will be promulgated by the Exchange.
The volume lent shall be quoted in single trading units pursuant to Article 60 of the Exchange's Operating Rules. The loan rate shall not exceed seven percent of the security's closing price.
On an ex-right ex-dividend date, the borrowing securities firm shall reimburse the lender in cash using the right/dividend value calculated by the Exchange for the lent security.
On the business day following its application to borrow a security, the securities firm shall borrow securities through the securities lending and borrowing computer system according to the loan rates offered by the lenders ordered from lowest to highest. If the volume of securities offered at the same loan rate exceeds the amount needed, the system may choose the lender randomly.
The securities firms that applied to borrow a security shall divide the loan costs generated by the security among themselves according to the volume that each has applied to borrowed.
Borrowed securities shall be returned on the business day following the loan.
After the securities firm borrows securities, it shall buy back or correct the securities within the regulatory or agreed-upon period. Until it has bought back or replaced them, the securities firm shall continue to borrow securities each business day to return securities pursuant to the preceding paragraph.
If the securities firm buys back or replaces securities within the regulatory or agreed-upon period, it shall return the securities through the TSCD book-entry system. After the TSCD notifies the Exchange that the securities have been returned and transferred, the Exchange shall deduct the lending fee from the borrower's collateral and pay it to the lender through the lender's securities firm or Depository Institution. The Exchange shall then return the balance of the collateral to the securities firm.
The lender's securities firm or Depository Institution shall notify the lender of the loan of the security and its return. The lender's securities firm or Depository Institution may charge the lender a processing fee. The processing fee shall not exceed ten percent of the lending fee.
If the borrowing securities firm has unreturned outstanding shares and the lending fee has been deducted from the securities firm's collateral, the securities firm shall increase its collateral to 120 percent of the amount of the latest closing price of the security multiplied by the number of outstanding shares if the collateral funds are below 107 percent of that amount.
In the event that a securities firm that has borrowed a security does not deposit collateral according to regulation or cannot return the borrowed securities for reasons that may be attributed to that securities firm, the Exchange shall buy back the securities on the market and return it to the lender. The required funds and all costs shall first be drawn from the balance of the collateral. Should this be insufficient, the Exchange shall recover the difference from the borrowing securities firm. Should a balance remain, the Exchange shall return it to the securities firm.
When a securities firm defaults on its settlement obligations, the Exchange shall halt borrowing and lending of securities by that firm.
Chapter II Securities Finance Enterprises
Where the sum of a Securities Finance Enterprise's total margin balance for a security and the balance of refinanced stock loans extended to it by other securities firms exceeds the Securities Finance Enterprise's total holdings in that security and where a shortfall remains after refinancing by other Securities Finance Enterprises, the Securities Finance Enterprise shall begin borrowing from shareholders of that security on the following business day at 8:00 AM. If there is still a shortfall, the Securities Finance Enterprise shall contact specified persons to negotiate loans by 2:00 PM. If the volume of securities obtained through the procedure in the preceding paragraph is still insufficient, the Securities Finance Enterprise shall consign a securities firm between 3:00 PM and 3:30 PM that day to hold an auction on the Exchange.
When a Securities Finance Enterprise holds a loan auction, it shall file an application with the Exchange and then have its personnel enter the name of the security to be borrowed, the volume, the time, and the unit price of the highest bid into the Exchange's loan auction computer system by 9:00 AM on the morning of the day on which the application was filed. The Exchange shall publicly report these matters in its market information report beginning at 9:00 AM.
The unit price of the highest bid shall be limited to seven percent of the closing price of the borrowed security on the day that the stock loan shortfall occurred. The Securities Finance Enterprise shall borrow securities based on unit prices offered by bidding that day ordered lowest to highest. If the volume of securities at an offered bid price exceeds the number of shares required, the Securities Finance Enterprise shall borrow the securities according to the order in which the bids were received.
To participate in a lending auction, shareholders of the security shall complete a bid and consign a securities firm to process it. The bid shall include the full name of the consignor, the consigned trading account, the name of the security, the number of shares lent, and the lending unit price. Securities in a loan auction are limited to those deposited in depository accounts at the TSCD. When a securities firm receives a consignment, it should immediately establish an escrow account (excepting lenders who lent the security the previous business day). After receiving the consignment, the securities firm shall record the time and a serial number on the bid and enter the bid into the Exchange's lending auction system.
The entry in the preceding paragraph shall be made on the day the application to hold a lending auction is filed between 9:00 AM and 12:10 PM. The bids shall be automatically opened by 12:30 PM. After the bids have been opened, the Exchange will publicly announce the successful bids and number of shares obtained in its market information report.
Confirmation of the consignment to lend by auction and a successful bid shall both be printed using the consigned securities firm's printer. The Exchange will make it possible to search successful bids from 2:00 PM.
Before 2:00 PM of the day on which an application for a lending auction is made, the Securities Finance Enterprise shall submit to the Exchange as collateral an amount equal to 120 percent of the closing price of the security that day multiplied by the volume of the successful bids.
Once the Securities Finance Enterprise has delivered the collateral to the Exchange, the Exchange shall instruct the TSCD to make an account transfer of the loaned securities for which successful bids were submitted into the account of the Securities Finance Enterprise at the TSCD on the business day (the lending day) following the day on which the application for a stock auction was filed.
The collateral in the preceding paragraph may be offset with unregistered government bonds or unregistered negotiable certificates of deposit. The face value of the collateral shall be discounted 10 percent.
The securities lent by the lender shall be returned through the TSCD on the next day of business. The Securities Finance Enterprise shall pay the stock loan fee to the lender through lender's consigned securities firm by 10:00 AM on the business day (the stock loan fee = the unit price of the loaned securities * volume). The Exchange shall also return the collateral to the Securities Finance Enterprise.
The securities firm receiving the consignment may charge the lender a processing fee. This fee shall not exceed 10 percent of the stock loan fee.
When a Securities Finance Enterprise is unable to return the securities loaned to it by their owner, the Exchange shall utilize the collateral to replace the securities and return them to the lenders. Should a balance remain, the Exchange shall return it to the Securities Finance Enterprise. Should the collateral be insufficient to recover the securities, the Exchange shall deliver the collateral to the lenders.
When two or more Securities Finance Enterprises hold a lending auction for the same security, the total volume shall be auctioned simultaneously. After the lending auction fee has been derived by calculating the average fee of the total successful bids, the lending auction fee shall be collected based on the total number of successful bids that each Securities Finance Enterprise has received.
If the securities lent by auction under the preceding paragraph are insufficient, the securities shall be allocated based on the percentage of the total volume of securities that each Securities Finance Enterprise applied to borrow by auction until no whole lots remain. If there is a remainder, it shall be allocated according to the fractional remainder of shares that each Securities Finance Enterprise still requires ordered from greatest to least. If the fractional remainders are equal, the remainder shall be divided by lots.
When a Securities Finance Enterprise negotiates a securities loan, the Exchange shall dispatch personnel to supervise. The negotiated unit price shall not exceed 10 percent of the closing price of the security on the day of the stock loan shortfall.
After the owner of the security agrees to lend it, the lender shall deliver the endorsed securities with all attachments and a list of lent securities to the Securities Finance Enterprise by 2:00 PM that day. Alternatively, the lender may electronically transfer the securities to the Securities Finance Enterprise's account at the TSCD. The Finance Securities Enterprise shall issue a receipt by 12:00 PM the next business day.
The amount of collateral shall be negotiated by the Securities Finance Enterprise and the lender.
The Securities Finance Enterprise shall return the borrowed securities, pay the stock loan fee (stock loan fee = negotiated unit price * volume), and retrieve its collateral by 2:00 PM of the second business day following negotiation of the loan.
During the period that a Securities Finance Enterprise is borrowing securities to cover a stock loan shortfall and a securities firm has applied for refinancing from a securities finance firm for the same security, the allocation of securities borrowed by auction or negotiation shall be handled according to the procedures for refinancing that the Securities Finance Enterprise has adopted with the securities firms.
The following securities may not be borrowed by auction or through negotiation
1. Incomplete trading lots of less than one trading unit.
2. Securities in which the owner of a security to be loaned should ensure completeness of rights including the securities of enterprises, where, earnings have been reinvested; where the employees and the workers have reinvested their bonuses in the enterprise where they work for the purpose of capital increase; where venture capital enterprises have used undistributed earnings for capital increases and the shareholders or the investors have thereby obtained the registered shares newly issued but the transfer of the security has not been reported to the tax authorities nor has the right to defer taxation been abandoned pursuant to Article 13 of the Statute for Encouragement of Investment and Articles 16 and 17 of the Statute for Upgrading Industries. If the securities are damaged or are subject to a legal dispute, the lender should exchange the securities in question for the same security in the same volume after having been notified by the Securities Finance Enterprise. Those lenders that do not exchange the securities shall return the stock loan fee and assume liability in the event of losses.
Chapter III Supplementary Provisions
Matters for which no provision is made in these Regulations shall be governed by relevant laws, regulations and Exchange's rules.
These Regulations and amendments thereto shall take effect after having been reported to the competent authority for approval.