Article 3

 General risk indexes:
A securities firm shall be rated based on its operational information for the current period according to the following indexes.
 Monthly scoring indexes:
 Debt to net worth ratio:
Total liabilities (excluding collected payment of shares underwritten) divided by net worth.
 Current ratio:
Current assets divided by current liabilities.
 Ratio of real estate and equipment and noncommercial real estate to total assets:
Real estate and equipment and noncommercial real estate divided by total assets.
 Ratio of error account occurrence:
With regard to the current period, number of error accounts occurred divided by total number of orders.
 Ratio of losses from error accounts to trading amount:
With regard to the current period, amount of losses from error accounts divided by total trading amount.
 Return on net worth:
With regard to the current period, accumulated aftertax income divided by the average total net worth.
 Ratio of average daily turnover to net worth:
With regard to the current period, average daily dollar amount of transactions undertaken divided by net worth, provided, however, that trading with the National Financial Stabilization Fund and government funds, and also local life insurance companies, banks and investment trust companies (investment trust funds) of a certain size or above, shall be excluded.
 Operating ratio of selected stocks:
With regard to the current period, dollar amount of stock trading undertaken under Articles 2 and 4 of the Taiwan Stock Exchange ("TWSE") or GreTai Securities Market ("GTSM") Directions for Announcement or Notice of Attention to Trading Information and Disposition divided by total dollar amount of trading undertaken.
 Business dispersion ratio:
With regard to the current period, dollar amount of trading undertaken for top five stocks with the largest trading amount divided by total dollar amount of trading undertaken, provided, however, that trading with the National Financial Stabilization Fund and government funds, and also local life insurance companies, banks and investment trust companies (investment trust funds) of a certain size or above, shall be excluded. Where the index score is lower than sixty, it is adjusted by the ratio of the stocks in the top five stocks that are covered by TWSE Taiwan 50 Index to the trading amount of the top five stocks.
 Ratio of concentration of trading counterparties:
With regard to the current period, dollar amount of trading undertaken of top 20 clients with the largest trading amount divided by total dollar amount of trading undertaken; provided, however, that trading with the National Financial Stabilization Fund and government funds, and also local life insurance companies, banks and investment trust companies (investment trust funds) of a certain size or above, shall be excluded.
 Ratio of losses or gains on valuation of operating securities to net worth:
Sum of adjustments in valuation of financial assets below divided by net worth. If the sum is credit balance (losses on valuation), the ratio is negative; and if the sum is otherwise debit balance (gains on valuation), the ratio is positive:
 Adjustments in valuation of operating securitiesunderwriting.
 Adjustments in valuation of operating securitiesdealing.
 Ratio of the dollar amount of operating securities to net worth: The dollar amount of operating securities (including operating securitiesunderwriting and operating securitiesdealing) divided by net worth.
 Ratio of the dollar amount of the lending auction/negotiation and settlement borrowing caused by short selling for same day offsetting to the dollar amount of that business: The monetary volume of the lending auction/lending negotiation and settlement borrowing caused by short selling for same day offsetting divided by the total dollar amount of the short selling for same day offsetting.
 Weekly scoring indexes:
 Ratio of average daily turnover to net worth:
With regard to the current period, average daily dollar amount of transactions undertaken divided by net worth.
 Operating ratio of selected stocks:
With regard to the current period, dollar amount of stock trading undertaken under Articles 2, 4 and 6 of the TWSE or GTSM Directions for Announcement or Notice of Attention to Trading Information and Dispositions divided by total dollar amount of trading undertaken.
 Business dispersion ratio:
With regard to the current period, dollar amount of trading undertaken for top five stocks with the largest trading amount divided by total dollar amount of trading undertaken .
 Ratio of concentration of trading counterparties:
With regard to the current period, dollar amount of trading undertaken for top 20 clients with the largest trading amount divided by total dollar amount of trading undertaken.
 Amount of penalties for delayed settlement:
Penalties under Article 137 of the Operating Rules of the Taiwan Stock Exchange Corporation (the "Operating Rules") for violation of the provisions of Article 104 of the Operating Rules, or penalties under Article 941 of the GTSM Rules Governing Securities Trading on the GTSM for violation of the provisions of Article 6 of the GTSM Directions Governing Clearing and Settlement Operations for Securities Traded on the GTSM.
 Special risk indexes:
A securities firm engaging in bonds, underwriting or dealing business shall be rated based on the following indexes on a monthly basis:
 Ratio of bonds business:
Balance of Repo － (Balance of Buyout/Selloff + Balance of Reverse Repo)
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Balance of Buyout/Selloff + Balance of Reverse Repo
 Ratio of risk equivalent of money trust and securities trust under wealth management to net selfowned capital: Sum of money trust and securities trust under wealth management multiplied by 12% and then divided by net selfowned capital.
 Ratio of risk equivalent in OTC derivatives market to net selfowned capital: risk equivalent in OTC derivatives market divided by selfowned capital.
 Ratio of total dollar amount of firm underwriting that remains available to net worth: Total amount of firm underwriting that remains available divided by net worth.
 Ratio of balance of funds and securities loans and margin transactions by securities firm to net worth: Combined amount of monthly loans for securities, balance of securities loans, and balance of margin purchases and short sales divided by net worth of securities firm.
 Ratio of balance of subject smallcap stocks in funds and securities loans and margin transactions by securities firm to total balance: Combined amount of monthly loans for securities, balance of securities loans, and balance of margin purchases and short sales, excluding stocks covered by TWSE Taiwan 50 Index, TWSE Taiwan MidCap 100 Index and Taipei Exchange 50 Index, divided by total balance.
 Ratio of balance of subject securities whose price is too volatile or trading volume is excessively abnormal in funds and securities loans and margin transactions by securities firm to total balance: Shares whose price is too volatile or trading volume is excessively abnormal shall refer to the monthly balance of funds and securities loans and margin transactions that meets the selection standards under Articles 29 and 30 of the TWSE Operating Rules for Securities Firms Handling Margin Purchases and Short Sales of Securities; provided, however, that the selection period is changed to "three consecutive business days" or "any four of the last 10 business days" of the subject securities when their share price is too volatile or trading volume is excessively abnormal.
 Ratio of amount of monthly loss on valuation of issue of call (put) warrants to balance of issued call (put) warrants by end of month: Amount of monthly loss on valuation of issue of call (put) warrants divided by number of issued call (put) warrants that are outstanding at month end, where the amount of loss on valuation shall include profits and losses from issue of warrants, profits and losses for hedging, transaction taxes and operating expenses.
 Ratio of risk equivalent in client's funds and securities in securities firm's custody to net selfowned capital: Total amount of client's funds and securities in securities firm's custody multiplied by 15% and then divided by net selfowned capital.
 Ratio of profits and losses to net worth of invested businesses: Share of profits and losses of associated enterprises (including subsidiaries) and joint ventures entered by the equity method, divided by net worth.

Info

Article 4

 The parties subject to the early warning under these Rules are categorized in the following seven groups according to the type of their business activities:
 Securities firms engaging in brokerage, underwriting and dealing businesses at the same time
 Securities firms engaging only in securities brokerage
 Financial institutions concurrently acting as securities brokers
 Securities firms engaging in brokerage mainly by accepting engagements from qualified institutional investors for trading of securities
 Qualified securities dealers or underwriters
 Financial institutions dealing in GTSMtraded bonds concurrently only
 Taiwanese branches of foreign securities firms
 Index scores of general risks are given to parties subject to early warning in each group as samples by evaluating the difference of the various index values for an individual securities firm against the average for the sample group and are calculated as follows:
 Either of the two calculations below for index scores may apply depending on the nature of a party:
 The larger the value of an index, the smaller the risk, in which case the following formula is used for calculation of the index scores of an individual securities firm:
Index Value － Average
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Standard Deviation
250
×───── ＋75
10
 The smaller the value of an index, the smaller the risk, in which case the following formula is used for calculation of the index scores of an individual securities firm:
Average － Index Value
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Standard Deviation
250
×───── ＋75
10
 The highest score is 100 and the lowest score is zero.
 The extreme values outside three standard deviations of each index are excluded.
 Special requirements (rules) on index scores:
 Where the net worth of a securities firm is less than its paidin capital, its debt to net worth ratio index score is as follows:
 If the ratio of net worth to paidin capital is below 100% and higher than 90%, its debt to net worth ratio index score is 50 points.
 If the ratio of net worth to paidin capital is below 90% and higher than 80%, its debt to net worth ratio index score is 40 points.
 If the ratio of net worth to paidin capital is below 80% and higher than 70%, its debt to net worth ratio index score is 30 points.
 If the ratio of net worth to paidin capital is below 70% and higher than 60%, its debt to net worth ratio index score is 20 points.
 If the ratio of net worth to paidin capital is below 60% and higher than 50%, its debt to net worth ratio index score 10 points.
 If the ratio of net worth to paidin capital is below 50%, its debt to net worth ratio index score is zero.
 If the current ratio, debt to net worth ratio, and ratio of real estate and equipment and nonoperating real estate to total assets fail to satisfy the standards established by the Financial Supervisory Commission, the score in each of the indexes is zero. If these indexes satisfy the standards but the score is below 60 points, the score shall be 60 points.
 If the current ratio index is 1.5 times higher but the score is lower than 75 points, the score shall be 75 points.
 If the debt to net worth ratio index is two times lower but the score is lower than 75 points, the score shall be 75 points.
 If the current ratio is 1.2 times lower and the ratio of real estate and equipment and nonoperating real estate to total assets is higher than 30%, these two index scores shall be 30 points each. If the current ratio is 1.2 times lower and the ratio of real estate and equipment and nonoperating real estate to total assets is higher than 60%, these two index scores shall be 30 points and zero point respectively. If the current ratio is one time lower and the ratio of real estate and equipment and nonoperating real estate to total assets is higher than 30%, these two index scores shall be zero point and 30 points respectively.
 If the income before tax ratioreturn on net worth is a positive value but scores below 60 points, the score shall be 60 points.
 The ratio of losses of operating securities assessed by profits and losses based on fair value (including underwriting and dealing) to net worth is a positive value, provided that if the "ratio of the amount of treasury stocks (including underwriting and dealing) to net worth" scores below 60 points, the score shall be 60 points.
 Rating standards and early warnings for securities firms are as follows:
 General risk indexes:
 The weighted scores covering scores of all the monthly scoring indexes shall be the general scores. The fluctuation levels shall be calculated by dividing the standard deviation of the general scores of the securities firm for the preceding 12 months by the average scores (the standard deviation will be adjusted if the score shows signs of growth). The securities firm will be assigned one of four grades based on the evaluation of both its general scores and fluctuation levels. See the attached table for the grading criteria.
 An early warning may be given in the event of a weekly scoring index as below:
 The business dispersion ratio is not less than the average plus two standard deviations, and any of the indexes from Indexes a, b or d is not less than the average plus one standard deviation, or the business dispersion ratio is not less than the average plus three standard deviations.
 The TWSE or GTSM has imposed a delinquency fine of NT$ 60,000 or more for late settlement.
 An early warning may be given in the event of a special risk index as below:
 Ratio of bonds business:
 Warning 1: The index value for the current period is 20% or above.
 Warning 2: The index value for the previous two periods has been 10% or above, or the average of the index value for the previous two periods is 10% or above and the index value for the most current period is higher than that for the previous period.
 Ratio of risk equivalent of money trust and securities trust under wealth management to net selfowned capital: The index value is 20% or above.
 Ratio of risk equivalent in OTC derivatives market to net selfowned capital: The index value is 10% or above.
 Ratio of total dollar amount of firm underwriting that remains available to net worth: The index value is 300% or above.
 Ratio of balance of funds and securities loans and margin transactions by securities firm to net worth: The index value is 100% or above.
 Ratio of balance of subject smallcap stocks in funds and securities loans and margin transactions by securities firm to total balance: The index value is 50% or above.
 Ratio of balance of subject securities whose price is too volatile or trading volume is excessively abnormal in funds and securities loans and margin transactions by securities firm to total balance: The index value is 20% or above.
 Ratio of amount of monthly loss on valuation of issue of call (put) warrants to balance of issued call (put) warrants by end of month: The index value is 20% or above.
 Ratio of risk equivalent in client's funds and securities in securities firm's custody to net selfowned capital: The index value is 20% or above.
 10. Ratio of profits and losses to net worth of invested businesses: The index value reaches 3% or above.
 Exclusions
 The monthly scoring indexes and general scores do not apply to financial institutions concurrently acting as securities brokers.
 For categories of financial institutions concurrently acting as securities brokers, securities firms engaging in brokerage mainly by accepting engagements from qualified institutional investors for trading of securities, qualified securities dealers or underwriters, and Taiwanese branches of foreign securities firms, the various index values would be listed. An early warning should be given if the value of any single index is notably abnormal and shall be referred to in the selected review (audit).

