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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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