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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 8
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A securities firm that meets the qualification requirements set forth in Article 11 may submit an application and relevant documents to the TPEx to operate the business of OTC trading of financial derivatives. No OTC trading of financial derivatives may be undertaken without TPEx approval of such an application.
When a securities firm applies to engage in the business of the preceding paragraph and the TPEx does not expressly reject the application within 10 days from the day after it receives the application, it means that approval is granted. The securities firm may not, however, engage in the business for which it is applying during the aforesaid 10-day period.
The qualification of a securities firm engaging in financial derivatives business that has passed TPEx review will remain in effect and further yearly applications will not be required.
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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 29
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When a securities firm operating the business of financial derivatives related to Taiwan equities needs to trade TWSE listed and TPEx listed stocks and convertible (exchangeable) corporate bonds for hedging purposes, it shall open a hedging account at the TWSE and the TPEx.
The hedging accounts of the preceding paragraph shall uniformly be "888888-1" accounts under the securities dealers' accounts. However, a foreign securities firm that applies to open a hedging account through a branch unit established within the territory of the ROC by a directly or indirectly wholly-owned subsidiary shall establish a dedicated hedging account under the offshore foreign institutional investor account it opened in the ROC.
No securities in the hedging account of paragraph 1 may be made the subject of a pledge, loan, or withdrawal.
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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 40
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A securities firm that operates OTC financial derivatives transactions may not use any such transaction, on its own behalf or on behalf of a customer, for the purpose of merger or acquisition, or to otherwise engage in an unlawful transaction, and it may not use any such transaction to embellish or manipulate financial statements by, for example, deferring or concealing losses, falsely reporting earnings, or recognizing earnings early. In options transactions, the securities firm shall take care to avoid using premiums (especially for long-term or extremely short-term options) to embellish financial statements.
A securities firm shall stipulate with the customer that the customer may not refuse a request from the competent authority for review of relevant data (including data on the ultimate beneficial owner) for the purpose of market regulation.
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