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Definitions:
- The term "participating dealer" refers to a securities firm that, for the purpose of creating and redeeming exchange-traded fund (ETF) beneficial certificates, exchange-traded futures trust fund (futures ETF) beneficial certificates, or offshore ETF beneficial certificates for its own account or on behalf of its customers, has signed a participant agreement with a securities investment trust enterprise (SITE) issuing securities investment ETF beneficial certificates, a futures trust enterprise (FTE) issuing futures ETF beneficial certificates, or an offshore ETF manager or an institution designated thereby (offshore fund institution).
- The term "custodian institution" refers to a financial institution that has signed a trust agreement with a SITE issuing securities investment ETF beneficial certificates or an FTE issuing futures ETF beneficial certificates.
- The term "applicant" refers to a customer who engages in creation or redemption of ETF beneficial certificates through the account opened in a participating dealer or a participating dealer that engages in creation or redemption of ETF beneficial certificates for its own account.
- The term "portfolio composition file (PCF)" refers to a list prepared and published by a SITE each day based on the reference data of underlying index forwarded by the index provider, which indicates the portfolio of securities and estimated cash component that would be required to apply for in-kind creation or redemption of one creation unit of beneficial certificate on the next trading day.
- The term "in-kind creation" refers to the participating dealer for its own account or on behalf of its customer delivering a portfolio of securities and the cash component per basket required for one creation unit as published on the PCF as notified by the SITE, or their integer multiples to the SITE in exchange for ETF beneficial certificates.
- The term "in-kind redemption" refers to the participating dealer for its own account or on behalf of its customer delivering ETF beneficial certificates to the SITE in exchange for a portfolio of securities and cash component per basket as published on the PCF as notified by the SITE for one creation unit or its integer multiples.
- The term "cash creation" refers to the participating dealer for its own account or on behalf of its customer delivering cash to the SITE or the FTE in exchange for ETF beneficial certificates; the calculation basis for the monetary amount and units of the creation shall comply with the trust agreement.
- The term "cash redemption" refers to the participating dealer for its own account or on behalf of its customer delivering ETF beneficial certificates to the SITE or the FTE in exchange for cash; the calculation basis for the monetary amount of the redemption shall comply with the trust agreement.
- The term "aggregate creation" refers to the situation where no more than three applicants who, based on their mutual agreement, combine their individual holding of securities into a portfolio of securities required for one creation unit as published on the PCF or its integer multiples, designate one among them as payer of cash payment required, and jointly appoint one participating dealer (if one of the applicants is a participating dealer with a proprietary trading said applicant shall be the participating dealer) to create beneficial certificates of an ETF from a SITE with the aforementioned agreed portfolio and cash payment.
- The term "minimum in-kind creation" refers to the situation where a participating dealer may, with the consent of the SITE, create the beneficial certificates of securities investment ETF for its own account by delivering at least 90 percent of the kind of securities required with more than 90 percent of the aggregate market value of creation basket for the in-kind creation, and paying a deposit for the shortfall, and then purchasing or borrowing the insufficient quantity of securities on the next trading day and delivering the securities to the custodian institution.
- The term "cash in-lieu" refers to the practice where the in-kind creation or redemption of ETF beneficial certificates by an applicant may be tendered in cash as determined by the SITE if a specific security included in the portfolio of securities as published on the PCF is in any of the following situations:
- The applicant is restricted by law from holding or transferring said specific security.
- The trading of said security has been stopped or suspended on the exchange.
- Said security may be substituted by cash as published on PCF by the SITE.
- The SITE does not own said security or has insufficient shares of the security and is unable to borrow sufficient shares to deliver to the applicant when the securities investment ETF shall deliver said security to the applicant.
- Situations in which the trust agreement of the securities investment ETF provides that cash in-lieu is permitted.
- The term "cash payment" refers to the amount equivalent to the cash component multiplied by the number of creation or redemption units; if the cash payment is positive, it means the applicant should pay the amount to the SITE when creating ETF beneficial certificates or the SITE should pay the amount to the applicant when the applicant redeems ETF beneficial certificates; if the cash payment is negative, it means the SITE should pay the amount to the applicant when the applicant creates ETF beneficial certificates or the applicant pays the amount to SITE when it redeems ETF beneficial certificates.
- The term "shortfall" refers to the securities in the portfolio of securities published on the PCF not delivered by a participating dealer when it transacts on "minimum in-kind creation" basis.
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