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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 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 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 42
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A securities firm undertaking a financial derivatives transaction with a customer other than a professional institutional investor or high net worth juristic person investor shall in the risk disclosure statement or individual trade confirmation indicate by a conspicuous typeface or other method the maximum possible loss or principal protection percentage, along with a description of the major risks involved, such as liquidity risk, foreign exchange risk, interest rate risk, tax risk, and cancellation risk.
If the "maximum possible loss" and the foreign exchange risk involved in the product under the preceding paragraph cannot be expressed in numerical quantities, they may be expressed in words.
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