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Amended Article

Title：

Regulations Governing Securities Borrowing and Lending by Securities Firms  CH

Amended Date： 2015.11.02 
Article Content Chapter Content Search Article No. Search Legal Basis Subordinate Legislation Amended Article Legislative History Chinese
Article 1     These Regulations are adopted pursuant to Article 60, paragraph 2, of the Securities and Exchange Act (the "Act").
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Article 2     A securities firm shall obtain approval from the competent authority to conduct securities borrowing and lending business.
    The term "securities borrowing and lending business" referred to in the preceding paragraph means business activities in which a securities firm borrows or lends securities from or to a customer, another securities firm, or a securities finance enterprise under an agreement stipulating redelivery of securities of the same class and quantity.
Article 3     A securities firm applying to conduct securities borrowing and lending business shall meet the following eligibility requirements:
  1. Have net worth per share of not less than par value, as shown in the latest CPA-audited and certified financial report, and financial condition meeting the requirements of the Regulations Governing Securities Firms.
  2. Have a regulatory capital adequacy ratio of 150 percent or higher for the half-year period immediately prior to the date of application.
  3. Have not been sanctioned by any warning imposed by the competent authority under Article 66, subparagraph 1, of the Act during the 3 most recent months.
  4. Have not been subject to any sanction imposed by the competent authority during the most recent half-year ordering the securities firm to remove from office any of its directors, supervisors, or officers or to replace any of its responsible persons or other related persons.
  5. Have not been subject to any sanction imposed by the competent authority during the most recent year involving suspension of business activities.
  6. Have not been subject to any sanction imposed by the competent authority during the two most recent years involving partial revocation of permission for business.
  7. Have not been subject to any measures taken by a securities exchange, an over-the-counter securities market, or a futures exchange during the most recent year under its rules and regulations involving suspension of or restriction on trading activities.
  8. Such other eligibility requirements as may be imposed by the competent authority.
    A securities firm not meeting any of the eligibility requirements in subparagraphs 3 to 7 of the preceding paragraph may be exempted from restriction thereunder if the circumstances have been specifically corrected and the corrections have been recognized by the competent authority.
    A securities firm having received approval from the competent authority to conduct securities borrowing and lending business shall suspend conducting such business if its regulatory capital adequacy ratio has been lower than 150 percent for a period of 2 consecutive months and may not resume the business until and unless it has been in compliance with the requirement for a period of 3 consecutive months and the business resumption has been filed with and approved by the competent authority; the same requirement shall apply to a securities firm that has received the approval but not yet commenced such business.
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Article 4     A securities firm applying to conduct securities borrowing and lending business shall fill out an application form, attach the documentation listed below, and submit them to the securities exchange or over-the-counter securities market to review and forward to the competent authority for approval:
  1. Internal control system.
  2. A financial report for the most recent fiscal year, audited and certified by a CPA. If at the time of application 6 months have elapsed since the beginning of the current fiscal year, a CPA-audited and certified financial report for the first half-year shall be submitted additionally.
  3. Board of directors meeting minutes.
  4. Documentation evidencing compliance with Article 3, paragraph 1, subparagraphs 1, 2, and 7.
  5. Other documents as required by the competent authority.
     If a securities firm has obtained qualification to conduct securities margin purchase and short sale business, it need not submit the documentation set out in subparagraph 2 of the preceding paragraph when applying to conduct securities borrowing and lending business.
Article 5     An officer or associated person of a securities firm who is charged with the conduct of securities borrowing and lending business shall have attended training, and passed the test, held by an institution recognized by the competent authority.
    An associated person conducting securities borrowing and lending business under the preceding paragraph may concurrently provide services relating to margin purchases and short sales of securities and securities business money lending.
Article 6     For the purposes of this Chapter, the term "subject securities" of securities borrowing and lending transactions refers to those securities eligible for margin purchases and short sales, and such other securities as may be approved by the competent authority.
Article 7     A securities firm shall adopt an effective internal control system for the conduct of securities borrowing and lending business.
    The internal control system under the preceding paragraph shall set out "Know your Customer" assessment and credit review procedures, operating procedures for the conduct of securities lending, division of authority and responsibilities, controls on borrowing and lending transaction limits, customer accounts management, as well as relevant risk management mechanisms.
Article 8     A securities firm may lend only the following securities in conducting securities borrowing and lending business:
  1. Securities held for its own account.
  2. Securities borrowed through the securities lending system of a securities exchange.
  3. Collateral securities obtained in connection with customer margin purchases when conducting securities trading margin purchase and short sale business.
  4. Securities borrowed from a customer.
  5. Securities borrowed from another securities firm or securities finance enterprise conducting securities borrowing and lending business or securities margin purchase and short sale business.
    If a securities firm is short of subject securities to meet its obligations to redeliver securities, it may seek refinancing from a securities finance enterprise.
Article 9     A securities firm may lend securities to the following persons only:
  1. A person who has a brokerage contract with the securities firm that has been in effect for a period of more than 3 months.
  2. Another securities firm or securities finance enterprise conducting securities borrowing and lending business or securities margin purchase and short sale business.
  3. Such other persons as may be approved by the competent authority.
Article 10     Securities associated with securities borrowing and lending business conducted by a securities firm may be used only for the following purposes:
  1. The purposes of use by customers:
    1. To sell through brokerage orders placed with the securities firm.
    2. To redeliver securities borrowed or to compensate for securities entitlements.
    3. To fulfill settlement obligations associated with call/put warrants, equity options, and other equity-type financial instruments.
    4. To use in the in-kind creation or redemption of exchange traded fund (ETF) or offshore ETF units.
    5. To cover shortfalls of securities in day trading.
    6. To redeliver spot securities borrowed in short sales.
  2. The purposes of use by the securities firm:
    1. To redeliver securities borrowed or to compensate for securities entitlements.
    2. To use as a source of securities for conducting securities margin purchase and short sale business.
    3. To use as a source of securities to return collateral to customers in conducting securities margin purchase and short sale business.
    4. To cover shortfalls of securities in short selling and day trading.
    5. To fulfill settlement obligations on securities trading markets.
    6. To lend to another securities firm or securities finance enterprise conducting securities borrowing and lending business or securities margin purchase and short sale business as a source of securities for conducting securities borrowing and lending business or securities margin purchase and short sale business.
    7. To lend through the securities lending system of a securities exchange.
    8. To participate in competitive auction lending transactions or negotiated lending transactions conducted by a securities finance enterprise.
  3. Such other purposes as may be approved by the competent authority.
Article 11     A securities firm conducting securities borrowing and lending business shall collect collateral from borrowers at the collateral ratio required by the competent authority or require the customer to provide a bank guarantee.
    The collateral under the preceding paragraph may only take the form of:
  1. cash;
  2. Book-entry central government bonds; and
  3. Securities eligible for margin purchases and short sales.
    A securities firm shall mark to market on a daily basis the ratio of the value of collateral deposited by a customer to the dollar amount of securities it lends to that customer; when that ratio is below a stated percentage, it shall immediately issue a margin call requiring the customer to cover the shortfall within a stated period of time.
    The calculation of value, substitution, and ratios with respect to collateral and time limits for meeting margin calls shall be prepared by the securities exchange in joint consultation with the over-the-counter securities market, and submitted to the competent authority for ratification.
     A securities firm that borrows securities from a customer shall allocate on a monthly basis a performance bond that accounts for a certain percentage of the total monetary amount of the borrowed securities.
     The performance bond under the preceding paragraph shall be deposited with the TWSE. The regulations governing the deposit, custody, payment, and return of the performance bond shall be jointly drafted by the TWSE and TPEx, and submitted to the competent authority for final approval.
Article 12     A securities firm conducting securities borrowing and lending business may not lend, borrow, or accept as collateral, subject securities that are:
  1. Securities that are subject to a pledge; or
  2. Shares, or any other equity-type securities, of the securities firm itself that it acquires through share buybacks, gifts from others, mergers, transfer of business from others, or otherwise.
Article 13     Securities collateral that a securities firm receives in a securities lending transaction, for which the customer has signed a re-collateralization agreement, may not be used for purposes other than the following, and shall be delivered for deposit in a central depository:
  1. As collateral to borrow securities from the securities lending system of a securities exchange.
  2. As collateral to refinance securities through a securities finance enterprise.
Article 14     Cash collateral that a securities firm receives in a securities lending transaction may not be used for purposes other than the following:
  1. As collateral to borrow securities from the securities lending system of a securities exchange.
  2. As collateral to refinance securities from a securities finance enterprise.
  3. As a source of funds for conducting securities margin purchase and short sale business.
  4. As a source of funds for conducting securities business money lending.
  5. For bank deposits.
  6. To purchase short-term bills.
    A securities firm shall pay interest on the money it receives from a customer under the preceding paragraph, at a rate agreed between the two parties.
Article 15     A securities firm conducting securities borrowing and lending business shall enter into a securities lending agreement with each customer, and shall open one and only one securities borrowing/lending account for each customer.
    The securities firm shall approve a line of credit to a customer based on the result of a credit check against such customer, and furnish a risk disclosure statement disclosing therein the risks associated with securities lending transactions.
    A securities firm conducting securities borrowing and lending business shall set up a separate account ledger for each customer and record therein on a daily basis the following:
  1. Subject matter of securities borrowing and lending transactions and outstanding balances.
  2. Itemized collaterals and their values.
  3. Margin calls for and disposal of collaterals.
Article 16     A securities borrowing and lending agreement shall at least contain the following:
  1. Borrowing/lending period.
  2. Handling fee rate, and lending fee rate expressed as percentage.
  3. Purpose for borrowing the securities.
  4. Methods of custody and redelivery of securities, and conditions for early redelivery.
  5. Collateral type, substitution, ratio, and maintenance ratio.
  6. In the event the market value of the collateral exceeds the required ratio, the mode for returning the excess amount or offsetting it against other collateral requirements.
  7. Calculation and payment of interest on cash collateral.
  8. Compensation of entitlements.
  9. Actions upon event of default.
  10. Handling of customer information.
  11. Cause for termination.
Article 17     Securities may be loaned only for a period of no more than 6 months starting from the execution date of a lending transaction.
     With the consent from both the lender and the borrower prior to the expiration of the borrowing/lending period under the preceding paragraph, the period may be extended for no more than 6 months, and an extension may be granted two times only. However, the parties may not request a change in any other terms or conditions of a borrowing/lending transaction.
Article 18     A securities firm conducting securities borrowing and lending business shall, when a borrower fails to cover a collateral shortfall by the due date, or fails to redeliver the securities by the end of the stipulated time period, dispose of the collateral immediately, provided that this rule does not apply if both parties have an agreement otherwise.
Article 19     If during the term of a securities borrowing and lending agreement, because of a natural disaster or other emergency, trading on the securities market is suspended across the board or is suspended for a security that is a subject matter of the agreement, and the time for resumption of trading has not been determined, the securities firm shall notify the customer to close out the securities borrowing and lending transaction in either of the following manners within a stated period of time:
  1. Apply to the securities exchange or over-the-counter securities market for purchase of the subject security by public tender offer, with any expense arising from the public tender offer to be borne by the customer.
  2. Settle the transaction by cash, as agreed between the two parties.
Article 20     Where the lender is unable to obtain stock dividend, cash dividend, or any other entitlement accrued on securities loaned to a borrower in a securities borrowing or lending transaction by a securities firm, the borrower shall repay the same to the lender or otherwise make repayment in cash as may be agreed between the two parties.
Article 21     The borrower in a securities borrowing and lending transaction with a securities firm may redeliver the borrowed securities at any time earlier than the expiration of the agreed term of the loan. Notwithstanding the foregoing, the securities firm may not call for early redelivery of the securities unless so agreed by the borrower.
Article 22     The delivery and redelivery of the subject securities and collateral securities in a securities borrowing and lending transaction shall be made either by book-entry transfer or by title transfer registration.
    A securities firm shall transmit the information about any delivery and redelivery of subject securities and collateral securities to the securities exchange or the over-the-counter securities market, with a copy to the centralized securities depository enterprise for delivery of the securities by book-entry transfer, or a notice to the clearing bank for account transfer registration.
Article 23     A securities firm conducting securities borrowing and lending business shall publish the following information at its place of business or on its website, and also transmit such information to the securities exchange or the over-the-counter securities market:
  1. Classes and amounts of securities borrowed and loaned each day.
  2. Securities borrowing and lending fees and service charges.
  3. Such other information as the competent authority may require to be disclosed.
Article 24     A securities firm shall on a daily basis transmit information about the transaction amount, transaction details, and outstanding balance with respect to securities borrowing and lending transactions for each customer, to the securities exchange or the over-the-counter securities market, and the latter shall compile such information and publish the outstanding amount of all securities borrowing and lending transactions before the opening of market on the next business day.
Article 25     A securities firm may not enter into a securities borrowing and lending transaction with any of the following related parties:
  1. A director, a supervisor, a representative of a juristic-person director or supervisor, an employee, or a shareholder holding more than ten percent of the shares, of the securities firm.
  2. A juristic-person shareholder of the securities firm that, through a representative, is elected as a director or supervisor of the securities firm as under Article 27, paragraph 2, of the Company Act.
  3. The spouse of a director, supervisor, or of a representative of a juristic-person director or supervisor, of the securities firm.
  4. A minor child of a person in a position described in subparagraph 1.
    A securities firm may not lend securities to a related party or affiliate other than those described in the preceding paragraph on terms, including the securities lending fee, more favorable than for other customers.
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Article 26     The maximum limit on the amount of securities that a securities firm conducting securities borrowing and lending business lends to or borrows from any one customer shall be regulated by the securities firm. The securities firm shall adopt internal procedures for credit extension operations and risk control, in order to appropriately assess customer credit limits and control risks.
    The internal procedures for credit extension operations and risk control under the preceding paragraph shall include control of credit limits for related accounts. The matters for compliance in such procedures shall be jointly drafted by the TWSE and TPEx, and submitted to the competent authority for final approval.
Article 27     The total monetary amount of securities loaned by a securities firm conducting securities borrowing and lending business, combined with the total monetary amount of securities it provides for short sales by customers in margin purchase and short sale business, may not exceed 400 percent of the securities firm's net worth.
Article 28     The combined total monetary amount of any one type of securities that a securities firm lends in securities borrowing and lending business and in securities margin purchase and short sale business may not exceed 5 percent of its net worth.
Article 29     A securities firm conducting securities borrowing and lending business shall stop lending any given type of securities immediately when, for that type of securities, the aggregate total of the outstanding balance of shares it lends to securities borrowers in conducting securities borrowing and lending business, plus the outstanding balance of shares it lends to short sellers in conducting securities margin purchase and short sale business, reaches the aggregate total quantity under the subparagraphs under Article 8, paragraph 1.
Article 30      Except for Article 11, paragraphs 1 to 4, Article 13, Article 14, and Article 18, the provisions of this Chapter shall apply mutatis mutandis where a securities firm borrows from or lends to another securities firm or securities finance enterprise conducting securities borrowing and lending business, or securities margin purchase and short sale business.
Article 31     A securities firm may only use the following bonds as a source for its conduct of book-entry central government bond borrowing and lending business.
  1. Book-entry central government bonds held for its own account.
  2. Bonds borrowed through the securities lending system of an over-the-counter securities market.
  3. Bonds acquired through reverse repo trades.
  4. Bonds borrowed from a customer.
  5. Bonds borrowed from other securities firms or securities finance enterprises that conduct securities borrowing and lending business.
Article 32     A securities firm conducting book-entry central government bond borrowing and lending business shall enter into a borrowing and lending agreement with each customer.
    The borrowing and lending agreement under the preceding paragraph shall at least contain the following:
  1. Methods of trading and confirmation.
  2. Information to be included in a trade confirmation document.
  3. Borrowing or lending period.
  4. Handling fee rate, and lending fee rate expressed as an annual percentage rate.
  5. Method of redelivery and conditions for early redelivery.
  6. Collateral type, substitution, ratio, and maintenance ratio.
  7. Method of transfer or delivery of the subject securities and collateral.
  8. Calculation and payment of interest on cash collateral.
  9. Compensation of entitlements and actions upon event of default.
  10. Handling of customer information.
  11. Cause for termination.
Article 33     A securities firm conducting book-entry central government bond borrowing and lending business shall collect collateral from the customer, or require the customer to provide a bank guarantee, and only the following types of collateral are accepted:
  1. Cash.
  2. Book-entry central government bonds.
    The collateral under the preceding paragraph may not be used for purposes other than:
  1. As collateral to borrow securities through the securities lending system of an over-the-counter securities market.
  2. Bank deposits.
  3. Purchase of short-term bills.
    A securities firm shall pay interest on cash collateral it collects from a borrower at a rate agreed between the two parties.
    A securities firm borrowing book-entry central government bonds from customers shall allocate on a monthly basis a performance bond that accounts for a certain percentage of the total monetary amount of the borrowed book-entry central government bonds.
    The performance bonds under the preceding paragraph shall be deposited with the TPEx. The regulations governing the deposit, custody, payment, and return of the performance bonds shall be drafted by the TPEx, and submitted to the competent authority for final approval.
Article 34     Book-entry central government bonds may be loaned only for a period of no more than 6 months starting from the execution date of a lending transaction, and such period may not overlap with the period of 2 business days prior to any coupon payment date of the subject bonds or of any book-entry central government bonds used as collateral, if applicable, in that transaction. However, if the securities firm has reached a prior written agreement with the customer as to taxation on the payment of principal and coupon interest on the bonds and other relevant fees, such agreement may control.
Article 35     The delivery and redelivery of book-entry central government bonds in a lending transaction shall be made through title transfer registration as provided in the Directions for the Operation of Book-Entry Central Government Securities. However, in the case of government strip bonds, the delivery and redelivery shall be made by book-entry transfer.
Article 36     Book-entry central government bonds that are subject to a pledge may not be borrowed or lent, nor may they be used as collateral.
Article 37     The outstanding balance of a securities firm's loans of book-entry central government bonds plus repo transactions may not exceed 600 percent of its net worth. However, a financial institution concurrently operating securities business is separately subject to the applicable rules set out by the competent authority.
Article 38     The provisions of Article 7; Article 11, paragraphs 1, 3, and 4; Article 15, paragraph 2; Article 19; Article 21; Article 25, and Article 26 hereof shall apply mutatis mutandis to book-entry central government bond lending business.
     This Chapter, except for Article 11, paragraphs 1, 3, and 4, and Article 33, paragraphs 1 to 3, shall apply mutatis mutandis where a securities firm borrows or lends book-entry central government bonds from or to another securities firm or securities finance enterprise conducting securities borrowing and lending business.
Article 39     The net worth of a securities firm shall be determined, if it is a business concurrently operated by a financial institution, by the allocated operating capital, or if it is a branch established within the territory of the Republic of China by a foreign securities firm, by the funds appropriated exclusively for the operation of business within the territory of the Republic of China.
Article 40     The TWSE and TPEx shall prepare regulations governing business operations for securities firms conducting securities borrowing and lending business, which regulations shall make provisions governing the subject securities with respect to securities borrowing and lending transactions, matters relating to application and redelivery, acceptable forms of collateral, substitution and disposal of collateral, calculation of the collateral ratio, procedures for credit extension operations and risk control, and such other matters as may be required by the competent authority, and the regulations shall be submitted to the competent authority for approval.
    A securities firm conducting securities borrowing and lending business shall do so in accordance with the regulations governing such business operations referred to in the preceding paragraph.
Article 41     These Regulations shall be enforced from 1 February 2016.