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Title: Operating Rules for Securities Firms Handling Margin Purchases and Short Sales of Securities
Date: 2005.10.13 ( Announced )
Date: 2016.07.21 ( Amended )

Article Content

 
Chapter I General Principles
Article 1     These Rules are adopted pursuant to Article 28 of the Regulations Governing the Conduct of Securities Trading Margin Purchase and Short Sale Operations by Securities Firms.
Article 2     A securities firm conducting margin purchase and short sale lending operations in securities trading ["securities trading margin purchase and short sale business"] shall do so in accordance with securities trading laws and regulations, these Rules, as well as other relevant bylaws, rules, regulations, public announcements, and circular letters of the Taiwan Stock Exchange Corporation (TWSE), Taipei Exchange (TPEx), and central securities depositories.
Article 3     Upon approval by the competent authority to conduct securities trading margin purchase and short sale business, a securities firm shall submit the following documents by letter to the TWSE for recordation two days before commencing such business:
  1. A photocopy of the permit from the competent authority.
  2. A description of the system of internal controls over securities trading margin purchase and short sale operations.
  3. A roster of the responsible and associated persons of the department in charge of these operations and documents certifying their qualifications.
    The responsible and associated persons under the preceding paragraph shall be registered with the TWSE before they may engage in such business. Any change of personnel in such positions shall be registered within five days.
    A securities firm which has been approved by the competent authority to conduct securities trading margin purchase and short sale business shall cease to engage in such business if its capital adequacy ratio is lower than 150% for 2 continuous months. However, repayment and satisfaction is not included. Until 3 months of continuous compliance and obtain the competent authority's further approval, a securities firm may re-open its business; for securities firms which have obtained the approval but yet to commence its business, the aforesaid rules shall also apply.
Article 4     A securities firm shall confine its securities trading margin purchase and short sale operations for TWSE-listed securities to those funds and securities that are deliverable after execution of customer orders for normal-settlement brokerage trades on the TWSE centralized securities exchange market, for which the underlying securities are those publicly announced by the TWSE as eligible for margin purchases and short sales.
    A securities firm shall confine its securities trading margin purchase and short sale operations for TPEx listed securities to those funds and securities that are deliverable after execution of customer orders for trades through the TPEx automated trade matching system, for which the underlying securities are those publicly announced by the TPEx as eligible for margin purchases and short sales.
    None of odd-lot or block trades or the trades specified in Article 74 of the TWSE Operating Rules or Article 39 of the GreTai Securities Market Rules Governing Securities Trading on the TPEx (hereinafter, the "TPEx Trading Rules") are eligible for margin purchases or short sales.
Article 5     A securities firm conducting securities trading margin purchase and short sale operations shall be subject to the requirements of the competent authority in relation to amount limit, duration, margin purchase leverage ratio, and short sale margin.
    The securities firm shall give a written notice to the customer of a margin purchase or short sale no later than 10 business days before the end of the duration as fixed by the competent authority under the preceding paragraph. Notwithstanding the foregoing, the notice is not required if, pursuant to the Operational Guidelines Governing Securities Firms and Securities Finance Enterprises Accepting Applications by Customers for Extending the Duration of Each Margin Purchase and Short Sale the customer has entered into application documentation for extending the duration of each margin purchase and short sale on a blanket basis and the securities firm has granted consent to the customer for such extension.
Article 6     A securities firm shall fix, and file with the competent authority for recordation, the interest and fee rates with respect to the margin loan interest and short sale handling fees receivable from customers, as well as short sale proceeds and short sale margin interest payable to customers, for conducting securities trading margin purchase and short sale operations.
    Before providing securities borrowed through the TWSE securities lending system, securities borrowed from customers in money lending conducted in connection with securities business, securities borrowed from securities firms or securities finance enterprises conducting money lending in connection with securities business or conducting margin purchases and short sales of securities ("Borrowed Securities"), or its proprietary shares of securities ("Proprietory Securities"), to a customer for short selling, a securities firm shall determine the rate, calculation, and method of collection of the short sale fee with the customer, where the interest rate shall be below 20% per annum.
    Upon adjustment to any interest rates or fee rates described in the preceding two paragraphs, the adjusted interest or fee rates shall apply to any and all open positions in margin purchases and short sales as from the date of the adjustment.
    A securities firm shall charge a short sale handling fee from customers for providing securities acquired through margin purchases to them for short selling, and shall charge a short sale fee from customers for providing Borrowed Securities or Proprietary Securities to them for short selling.
Article 7     In conducting securities trading margin purchase and short sale operations, a securities firm may not use retained short sale proceeds and short sale margins for purposes other than those listed below:
  1. As a source of funds for conducting margin purchase business.
  2. As collateral for refinancing of securities from securities finance enterprises.
  3. As a source of funds for conducting money lending in connection with securities business.
  4. As collateral for borrowing securities through the TWSE securities lending system.
  5. For deposit with bank.
  6. To purchase short-term bills.
    In conducting securities trading margin purchase and short sale operations, a securities firm may not use securities received from such operations for purposes other than those listed below and shall deposit the securities with a central securities depository:
  1. As a source of securities for conducting short sale business.
  2. As collateral for refinancing of funds or securities from securities finance enterprises.
  3. As a source of lendable securities in conducting securities lending business.
  4. As collateral for borrowing securities through the TWSE securities lending system.
  5. To lend to a securities firm or securities finance enterprise conducting securities borrowing and lending business as a source of securities for conducting securities borrowing and lending business or securities margin purchase and short sale business.
  6. To lend through the TWSE securities borrowing and lending system.
  7. To participate in competitive auction lending transactions or negotiated lending transactions conducted by a securities finance enterprise.
Chapter II Opening and Management of Margin Accounts for Margin Purchases and Short Sales
Article 8     A securities firm shall enter into a margin agreement with, and open a margin account for, a customer before accepting any order from the customer to carry out a margin purchase or short sale of securities.
    The margin agreement under the preceding paragraph shall be prepared by the TWSE in conjunction with the TPEx and submitted to the competent authority for ratification.
    A call (or put) warrant issuer, or a securities firm or bank engaged in structured products business or engaged in trading equity derivatives, may, to meet hedging needs, open a margin account and engage in short selling of securities.
    An enterprise exclusively or concurrently engaged in futures proprietary trading (dealing) that is also a market maker for equity options or single stock futures may, for its risk mitigation or hedging needs, open a margin account with which to sell securities short.
    In the case of a privately placed securities investment trust fund managed by a securities investment trust enterprise ("SITE"), the custodian of the trust fund may apply to open a margin account, for which the outstanding balance of long or short margin positions, combined with other sales of borrowed securities, may not exceed 50 percent of the size of the fund, and which shall be controlled by the TWSE as a segregated account. If that limit is exceeded, the TWSE shall through the securities firm notify the SITE to lower the balance to 50 percent within two business days from the date on which it receives the notice from the securities firm. If the SITE fails to do so within the time limit, the TWSE may instruct the securities firm to dispose of the collateral on the next business day, by the mutatis mutandis application of Article 39, paragraph 3, to the extent required to achieve compliance.
    In the case of a discretionary investment account managed by an SITE or a securities investment consulting enterprise (SICE), or of discretionary investment business conducted by a securities broker concurrently operating a SICE, or of discretionary futures trading business operated by a managed futures enterprise, the custodian institution for discretionary investment assets may open a margin account on behalf of its customer. For the margin account, neither the outstanding balance of margin purchase positions nor the outstanding balance of short sale positions, combined with the outstanding balance of other sales of borrowed securities, may exceed 50 percent of the net asset value of the discretionary investment account, except in the case of discretionary futures trading business operated by a managed futures enterprise, for which neither the outstanding balance of margin purchase positions nor the outstanding balance of short sale positions, combined with the outstanding balance of other sales of borrowed securities, may exceed 20 percent of the net asset value of the discretionary investment account.
Article 9     A securities firm may allow a customer to open one and only one margin account. The threshold requirements for opening such an account shall be set out by the TWSE in conjunction with the TPEx and submitted to the competent authority for ratification.
    When securities firms accept margin account opening applications submitted on behalf of customers by custodian institutions for discretionary investment assets, a customer may not simultaneously open or maintain a margin account of its own and a discretionary investment margin account with the same securities firm.
Article 10     A securities firm may not entertain an application to open a margin account from any customer to whom any of the circumstances below applies. If an account has already been opened, the securities firm shall promptly notify the customer to close out all outstanding margin purchases and short sales on the next business day and thereafter cancel the margin account; if the customer fails to close out all outstanding margin trades within this time limit, the securities firm shall, by the mutatis mutandis application of Article 39, paragraph 3, close out the trades for the customer starting from the next business day.
  1. The customer does not meet the account opening threshold requirements.
  2. The customer applies to open a margin account using the name of another person.
  3. Any circumstance under Article 76, paragraph 1 or 3, of the TWSE Operating Rules or Article 47, paragraph 1 or 2, of the TPEx Trading Rules applies to the customer. However, if any circumstance under Article 76, paragraph 3, subparagraph 1 of the TWSE Operating Rules or Article 47, paragraph 2, subparagraph 1 of the TPEx Trading Rules applies to the customer, and the information has been forwarded by the TWSE or the TPEx at 11:30 a.m. the given morning, the securities firm shall notify the customer on the following business day.
  4. A brokerage account previously opened by the customer at the securities firm has been cancelled.
  5. The customer falls in any of the circumstances listed below with the securities firm and the case has not been closed:
    1. Failure to perform a settlement obligation on time under Article 91 of the TWSE Operating Rules or Article 87 of the TPEx Trading Rules.
    2. Breach of the margin agreement it has entered into with the securities firm.
    3. Default under Article 33 of the Operating Rules for Securities Lending by Securities Firms.
    4. Violation under Article 28 of the Operating Rules for Securities Business Money Lending by Securities Firms.
  6. The customer is the subject of a court petition for reorganization, composition, or bankruptcy under the Company Act or the Bankruptcy Act.
  7. A clearinghouse for negotiable instruments has blacklisted the customer.
    Where the sum of financing sought by the customer and the assessed amount of its other loan business with the same securities firm does not exceed NT$500,000, the securities firm may not inquire about the credit information regarding negotiable instruments, provided where an inquiry discloses the customer has been discredited by the clearing house, the preceding paragraph will still apply.
    The provisions of paragraph 1 apply mutatis mutandis where money and/or securities in a margin account are the subject of a court ruling for provisional attachment, provisional injunction, or compulsory execution.
    A securities firm may not entertain an application to open an account from a customer to whom any of the circumstances below applies at another securities firm, securities finance enterprise, or securities exchange, and where the case has not been closed. If an account has already been opened, the securities firm may not accept orders for margin purchase or short sale trades; after the customer has closed out its margin purchase and short sale trades, the securities firm shall immediately cancel the margin account.
  1. Breach of a margin agreement it has entered into with a securities firm or securities finance enterprise.
  2. Default under Article 33 of the Operating Rules for Securities Lending by Securities Firms.
  3. Violation under Article 28 of the Operating Rules for Securities Business Money Lending by Securities Firms.
  4. Event under Article 42, 45, or 49 of the TWSE Securities Borrowing and Lending Rules.
  5. Default or violation under the securities finance enterprise's securities settlement financing operating rules or securities lending operating rules.
    Where any circumstance in the preceding four paragraphs applies to a juristic person or its responsible person, the responsible person or any juristic person represented thereby is also prohibited from opening a margin account. An account that has already been opened shall be subject to the provisions of paragraphs 1 and 4.
Article 11     A customer who is a natural person applying to open a margin account shall personally furnish the original of his or her national ID card, sign a Margin Account Application Form and a margin agreement then and there, and also provide a specimen seal or signature card, a certificate of income and property, and trading records.
    Where the customer is a juristic person, the account opening procedures under the preceding paragraph shall be carried out by an authorized person who shall present a power of attorney, the original national ID cards of the authorized person and the customer's representative, the original incorporation/amendment registration card, and the original certification of incorporation.
    A photocopy of each of the identity documents and incorporation/amendment registration card and the original power of attorney under the preceding paragraph shall be retained on record, and the following statement shall be stamped on the photocopies: "The account opening application is confirmed to have been made in person by the applicant or a person authorized thereby; this is a true and faithful copy of the original."
    Where the customer in the first or second paragraph has opened a transaction account, the securities firm may process its account opening application by correspondence or electronic means that is sufficient to identify the customer as the applicant itself or its indication of intent.
    When processing an application to open a margin account, a securities firm shall perform a detailed and accurate credit check to verify that the customer meets the account opening threshold requirements. It shall expressly state on the Margin Account Application Form the details of the credit check method, credit information, and credit check findings, and prepare an account opening card specifying the date of account opening and the assigned account number. It shall transmit the account opening information, or account cancellation information if such is the case, on the current day to the computer database of the TWSE or TPEx. Where the customer is a juristic person, the securities firm shall also send a written request to the customer confirming that the customer has authorized the opening of the account.
    If the customer empowers a custodian institution to open the account on its behalf, or submits proof that settlement is to be handled on its behalf by a custodian institution, it is not necessary to send a written request to confirm that authorization has been granted for the opening of account.
Article 12     Where a customer opens a margin account and subsequently has no record of margin purchases or short sales for a period of three consecutive years or more, the securities firm shall promptly cancel the margin account and notify the customer of such cancellation.
    A customer wishing to terminate an existing margin account shall fill out an Application for Termination of Margin Account. The securities firm shall cancel the account once it has confirmed that the customer has settled all outstanding obligations relating to margin purchases and short sales. A securities firm may process an application for account cancellation by correspondence or electronic means that is sufficient to identify the customer as the applicant itself or its indication of intent.
Article 13     (deleted)
Article 14     A securities firm shall set up a separate account ledger for each customer margin account, and record therein on a daily basis the following:
  1. Matters relating to margin purchases and short sales.
  2. Collateral.
  3. Any margin calls for, or disposal of, collateral.
    A securities firm shall, based on the account entry records under the preceding paragraph, prepare a reconciliation statement each month and deliver it to the customer, unless there is no record of margin trading for the given month and the customer moreover has not submitted a written request for a statement.
    Upon execution of a consent letter by the customer to allow collection, processing, use and international transmission of the customer's personal data by the TWSE, TPEx, or any institution designated by the competent authority in accordance with relevant laws and regulations, a securities firm shall promptly transmit the data concerning credit line, balance of margin purchases and short sales, and any changes therein, to the TWSE and TPEx computer database systems.
    When borrowing securities from other securities firms, securities finance enterprises and the TWSE securities lending system, a securities firm shall record the lendings, borrowings and returns of securities as well as the delivery of the performance bond.
Article 15     If a customer fails to promptly notify the securities firm in writing of any change to the information contained in the Margin Account Application Form with respect to the name, national ID number, or juristic person's uniform serial number, mailing address, or contact telephone number of the customer, agent, or representative, the securities firm may halt margin purchases and short sales by the customer.
Article 16     All notices that a securities firm is required to give to a customer under these Rules shall be delivered by mail, by e-mail subject to electronic signature requirements, or by personal delivery against a receipt signed by the customer.
    A securities firm must procure the written or electronic consent of the customer prior to giving notice by e-mail. Procedures concerning e-mails and electronic consents are governed mutatis mutandis by the requirements applicable to the delivery by a securities firm of securities trading reconciliation statements by e-mail.
    Deadlines notified by a securities firm to a customer by e-mail for actions to be taken are the same as those notified by mail.
    Where a notice mailed by a securities firm is not delivered in time as a result of failure by the customer to give notice of change as required under the preceding article or due to some other reason attributable to the customer, the notice shall be deemed effective from the day of the first delivery attempt by the post office.
    In the case of a notice given by personal delivery against a receipt signed by the customer, the customer's signature or seal impression on the receipt shall match the specimen signature or seal appearing on the margin agreement, and shall be dated personally by the customer.
    If the customer is a discretionary investment account, a securities firm shall give notice to the discretionary investment manager and the custodian institution of such account of matters required to be notified.
    Records of notification by a securities firm to its customers shall be retained for a minimum of one year or, in the evnt of a dispute, until the dispute is resolved.
Chapter III Margin Trading Applications and Settlements
Article 17     A customer giving an order for a margin purchase or short sale shall fill out an order ticket marked "MARGIN PURCHASE" or "SHORT SALE"; after execution of the trade, the securities firm shall prepare a trading report marked with the same words and have it signed/sealed by the customer.
Article 18     For executed margin purchases and short sales, a securities firm shall calculate the balance of long and short positions in a customer's margin account after close of market each day. The customer shall settle with cash or spot securities any portion that is beyond the long position limit or short position limit.
    After a customer places an order for a short sale, if a rise in the price of the security causes the customer's short balance to exceed the short position limit, the securities firm may lend the security to the customer for short selling within the extent of the daily price limit for the security on the given day, provided that if short sales of ETF beneficial certificates with foreign component securities, offshore ETF beneficial certificates, or futures ETF beneficial certificates are not subject to a price limit, the securities firm may accommodate short sale of the securities within the extent of the highest trade price on the given day.
    When the market price per trading unit of a security sold short exceeds the short position limit, a customer may sell one trading unit short if the customer's margin account is clear of any short balance.
Article 19     Upon execution of a margin purchase or short sale, the securities firm shall, by 10 a.m. on the second business day after the trade date, collect from the customer a margin for the margin purchase, based on the balance of the trade price of the margin purchase less the dollar amount of the margin loan, or in the case of a short sale, a margin for the short sale, based on the trade price of the short sale multiplied by a required percentage (any amount less than NT$100 shall be calculated as NT$100).
    Notwithstanding the provisions of Article 31, where a TWSE or TPEx listed security is bought on margin and sold short on the same day in an account, if the customer has signed a consent letter with the securities firm, then a net settlement is allowed for offsetting a portion of the settlement obligation under the margin purchase against an equal amount of the settlement obligation under the short sale, in which case the securities firm shall prepare an Application to Settle Margin Purchases with Cash and an Application to Settle Short Sales with Spot Securities on behalf of the customer.
    If the customer having signed the consent letter under the preceding paragraph does not wish to have netting settlement thereunder carried out, the customer shall give a written instruction to the securities firm before close of market on the day on which the trades are executed.
    No interest may be accrued on the margin purchase and short sale with respect to the portions that are offset by netting under paragraph 2; nevertheless, the handling fee or short sale fee for that portion of the short sale shall still be calculated and collected/paid.
    The portions of the trades that are offset by netting under paragraph 2 shall be handled in accordance with the Directions for Settlement by the Offsetting of Margin Purchases and Short Sales in Margin Trading.
Article 20     A securities firm providing a margin loan to a customer shall do so and perform settlement on behalf of the customer based on the amount of the margin loan as calculated by multiplying the trade price of the margin purchase by a required percentage (with any amount less than NT$1,000 excluded from calculation); all securities bought on margin shall serve as collateral.
    A securities firm lending a security to a customer for short selling shall do so and perform settlement on behalf of the customer based on the type and quantity of the security sold short in that trade; the proceeds from the short sale conducted by the customer with securities provided by the securities firm acquired through margin purchase shall serve as collateral after deducting the securities transaction tax, the short sale handling fee, and the securities firm handling fee; proceeds from the short sale conducted by the customer with Borrowed Securities or Proprietary Securities shall serve as collateral after deducting the securities transaction tax and securities firm handling fee.
    A securities firm borrowing securities from a securities firm or securities finance enterprise conducting money lending in connection with securities business shall deposit a performance bond with the TWSE in accordance with the Regulations Governing the Performance Bond for the Lending of Securities by Securities Firms and Securities Finance Enterprises.
Article 21     A securities firm shall, for a margin purchase, collect from the customer the interest on the margin loan at the stated interest rate, and, for a short sale, pay interest at the stated interest rate on the short sale margin and on the remainder of the proceeds from the short sale under paragraph 2 of the preceding article.
    The interest under the preceding paragraph shall accrue for the number of days from the second business day after the day on which the margin purchase or short sale is executed to the day before the payment day.
Article 22     Where a securities firm charges a customer a short sale fee, expenses incurred from refinancing from a securities finance enterprise due to a shortfall in the security shall be borne by the securities firm.
    Where a securities firm charges a customer a short sale handling fee, the various fees and expenses required for any competitive bid loan, negotiated transaction, or purchase by tender offer conducted by a securities finance enterprise shall be borne by the customer. The securities firm shall further calculate pursuant to the following principles for short sellers the fees and expenses for each share of the security sold short based on the short balance for that security for which a short sale handling fee is charged, on the date the shortfall in the security occurs, and then collect payment from each short seller in the short sales in an amount determined by the number of shares it sells short:
  1. If the margin balance is larger than or equal to the short balance of the security for which a short sale handling fee is charged, and the balance of Borrowed Securities and Proprietary Securities is smaller than the balance of securities lent through securities lending, securities lent to secutities firms and securities finance enterprises conducting money lending in connection with securities business, and securities lent through the TWSE securities lending system ("Lending Balance") plus the short balance for which a short sale fee is charged, the short seller does not have to bear the fees.
  2. If the margin balance is smaller than the short balance for which a short sale handling fee is charged, and the balance of Borrowed Securities and Proprietary Securities is larger than or equal to the Lending Balance plus the short balance for which a short sale fee is charged, the short seller shall bear the fees in full.
  3. If the margin balance is smaller than the short balance for which a short sale handling fee is charged, and the balance of Borrowed Securities and Proprietary Securities is smaller than the Lending Balance plus the short balance for which a short sale fee is charged, the short seller shall bear a proportion of the fees as calculated pursuant to the following formula:

  4. (short balance for which a short sale handling fee is charged - margin balance)/[(short balance for which a short sale handling fee is charged - margin balance) + (Lending Balance + short balance for which a short sale fee is charged) - (balance of orrowed Securities and Proprietary Securities)]
    The securities firm may collect the fees and expenses receivable under the preceding paragraph by deducting the amount from the short sale collateral funds in the customer's margin account.
    For shares of securities obtained and distributable as a result of a securities finance enterprises conducting a purchase by tender offer, the securities firm shall distribute the shares to those short sellers who have a short balance for which a short sale handling fee is charged in the security, on the date the security falls short, in a quantity decided on a pro rata basis in accordance with the principles of paragraph 2 and rounded to an integral trading unit, for them to buy in to cover their short positions; any quantity remaining after the distribution shall further be distributed to these short sellers in the order of the size of the decimal portion of their respective distributable quantity, and if for a decimal number there are multiple short sellers, to one or more of them determined by drawing lots.
    Where two or more tender offer purchases are conducted [to cover securities shortfalls arising in the course of short sale operations], the dollar amounts of the purchases that are allocable to the short sellers shall be calculated by the weighted average method.
Article 23     A securities firm shall calculate, on a daily mark-to-market basis, the collateral maintenance ratio for each margin account as a whole and for each margin purchase and short sale in each margin account by the following formula:

collateral maintenance ratio = {market value of collateral securities for margin purchase(s) + initial collateral and short margin for short sale(s) + market value of securities deposited as collateral or other merchandise} ÷ {original margin purchase amount(s) + market value of underlying securities sold short} × 100 percent

    The market value of securities and other merchandise under the preceding paragraph shall be calculated based on the paragraph below , provided that for the six business days prior to an ex-rights or ex-dividend date for a TWSE or TPEx listed security pledged as collateral for a margin purchase, with the exception of in cases of a cash capital increase, the market value of the collateral security and the market value of TWSE or TPEx listed securities pledged as collateral shall be calculated based on the respective current day's closing price, minus the value of the cash dividend, or minus the value of the stock dividend calculated based on the current day's closing price.
  1. TWSE or TPEx listed book-entry central government bonds, local government bonds, corporate bonds, financial bonds: par value.
  2. TWSE or TPEx listed securities: the closing price of Taiwan Stock Exchange or Taipei Exchange ("the closing price").
  3. Gold that is registered for trading over the counter: the average price at closing based on the highest buying price quote and the lowest selling price quote ("the average closing price")
  4. An open-end type securities investment trust fund beneficiary certificate and futures trust fund beneficiary certificate: the net asset value per beneficiary unit of the prior business day ("the net asset value")
    If the security the customer purchases on margin is subject to a 20 percent or more share dividend rate in gratuitous distribution of shares, or the issuer of the securities conducts a demerger and capital reduction, and after the capital reduction, the stock resumes trading and is TWSE or TPEx listed on the same day as the stock of the assignee company of the demerger, then unless the competent authority has otherwise imposed trading restrictions on the security, the newly issued rights shares or the stock of the assignee company of the demerger shall all be pledged as collateral, with the option of income tax deferral to be waived, and shall be transferred through book-entry by the central securities depository into the securities firm's segregated account for margin purchases and short sales, notwithstanding the provisions of Article 33 of the Regulations Governing Handling of Shareholder Services by Public Companies.
    The securities firm may not use the newly issued rights shares or the stock of the assignee company of the demerger under the preceding paragraph as a source of securities for lending in its conduct of securities trading short sale operations or as collateral for refinancing.
    The provisions of paragraph 2 shall not apply to newly issued rights shares or the stock of the assignee company of the demerger used as collateral. After the security is traded ex-rights, the market value of the newly issued rights shares shall be calculated as 70 percent of the closing price if they are TWSE or TPEx listed securities for margin purchase and short sale, or 50 percent of the closing price if they are not qualified according to Article 2 or 3 of the Standards Governing Eligibility of Securities for Margin Purchase and Short Sale, or are suspended according to Article 4 or 5 of the same Standards. . After such shares have been transferred into the securities firm's segregated account for margin purchases and short sales, their market value is no longer required to be discounted.
    The market value of collateral securities for margin purchases and the original collateral and short margin for short sales, the market value of securities deposited as collateral or other merchandise referred to in paragraph 1 means the balance of the money, market value of securities and other merchandise in a customer margin account after deducting the short sale fee, competitive auction lending fee, negotiated lending fee, and fee for purchase of securities by tender offer [to meet a securities shortfall in short selling]; if there is any residual obligation after a settlement trade has been made or after the securities firm has disposed of the collateral, the residual obligation shall also be deducted.
    Where the overall collateral maintenance ratio of the customer margin account is lower than 130 percent, the securities firm shall issue a margin call to the customer demanding the deposit, within two business days from the day the margin call is received, of additional margin collateral for the margin purchase or short sale that falls below the collateral maintenance ratio, to cover the margin deficiency.
    Margin deficiencies that a customer is required to cover under the preceding paragraph shall be calculated by the following formulas:

deficiency in margin for margin purchase = original margin purchase amount - (closing price on the day of calculation × number of shares purchased on margin × margin purchase leverage ratio) - (par value, closing price and average closing price of the day of calculation or net asset value of the prior business day × unit number of shares of the stock under paragraph 3 and securities deposited as collateral or other merchandise under Article 26 × margin purchase leverage ratio)

deficiency in margin for short sale = (closing price on the day of calculation × number of shares sold short × margin percentage required for short sale - initial margin for short sale) + (closing price on the day of calculation × number of shares sold short - original short sale proceeds) - (par value, closing price and average closing price of the day of calculation or net asset value of the prior business day × unit number of shares of the securities deposited as collateral under Article 26 or other merchandise).

    In the formula for calculating the deficiency for margin purchase under the preceding paragraph, if the stock under paragraph 3 or the securities deposited as collateral or other merchandise under Article 26 are categorized as book-entry central government bonds, local government bonds, corporate bonds, financial bonds, gold that is registered for trading over the counter, an open-end type securities investment trust fund beneficiary certificate and futures trust fund beneficiary certificate, its financing ratio shall be calculated based on the maximum financing ratio of TWSE or TPEx listings announced by the competent authority; for others that are not eligible for margin purchase or short sale under Article 2 or 3 of the Standards Governing Eligibility of Securities for Margin Purchase and Short Sale or are temporarily suspended under Article 4 or 5 of the same Standards, then the margin purchase leverage ratio shall be set at zero.
    For purposes of this Article, if a closing price is not available for the given day, it shall be calculated as the price determined by the following principles:
  1. When the highest buy price quoted as of market close on the given day is higher than the auction reference price at market opening on the TWSE or the basis price for the opening of trading on the TPEx, the highest buy price quoted will be the price.
  2. When the lowest sell price quoted as of market close on the given day is lower than the auction reference price at market opening on the TWSE or the basis price for the opening of trading on the TPEx, the lowest sell price quoted will be the price.
  3. When the above circumstances are not met, the auction reference price at market opening on the TWSE or the basis price for the opening of trading on the TPEx will be the price.
Article 24     If, after a securities firm has issued a margin call demanding additional deposit to cover a margin deficiency in accordance with paragraph 7 of the preceding article, the customer fails to make the additional deposit, or makes deposit covering only part of it, within two business days from receipt of the margin call, unless agreed by both parties otherwise, the securities firm shall take the following measures:
  1. If the overall collateral maintenance ratio of the customer's margin account still falls below the required level on the given day, the securities firm shall dispose of the collateral by the mutatis mutandis application of Article 39, paragraph 3, starting from the next business day.
  2. If the overall collateral maintenance ratio of the customer's margin account is restored to 130 percent or higher on the given day, the securities firm may refrain for the time being from disposing of the collateral; provided that if the ratio again falls below the required level on any subsequent business day, and if the customer fails to make additional deposit on its own initiative to cover the deficiency that same afternoon, it shall dispose of the collateral by the mutatis mutandis application of Article 39, paragraph 3, starting from the next business day.
  3. If prior to disposal of collateral pursuant to the provisions of the preceding subparagraph, the customer makes successive deposits sufficient to cover the deficiency stated in the margin call, the securities firm shall expunge the record of the margin call.
  4. If the overall collateral maintenance ratio of the customer's margin account is restored to 166 percent or higher, the securities firm shall expunge the record of the margin call.
    The collateral disposed of under the preceding paragraph shall be the collateral for a given margin purchase or short sale in the customer's margin account for which a margin call has been issued demanding additional deposit of collateral to meet the collateral maintenance ratio. Any surplus amount after the disposal shall be returned. If the disposal proceeds are insufficient to satisfy the obligation, the deficiency shall be offset by other funds in the margin account. If there is still a deficiency remaining after such offsetting, the securities firm shall notify the customer to make up the remaining deficiency on the next business day.
    When a securities firm disposes of the collateral for margin purchases and/or short sales in customer margin accounts where a margin call has been issued demanding additional deposit of collateral to meet the collateral maintenance ratio, and where the customers concerned have failed to make the additional deposit within the specified time limit, the securities firm may take the newly issued rights shares or the stock of the assignee company of the demerger of those customers that are in amounts of less than one trading unit and combine them into trading units for the purpose of disposal.
Article 25     If a deficiency occurs with respect to the overall collateral maintenance ratio of a customer's margin account as a result of disposal of any part of the collateral, the securities firm shall retain as collateral all or part of the funds and/or securities payable within the extent necessary to maintain the 130 percent collateral maintenance ratio.
Article 26     A customer may deposit the following securities or other merchandise as additional collateral for the short sale margin and any deficiency the customer is required to cover under Article 23:
  1. TWSE or TPEx listed book-entry central government bonds, local government bonds, corporate bonds, financial bonds.
  2. TWSE or TPEx listed securities whose trading method has not altered or which are not managed stocks, excluding ETF beneficial certificates being traded in foreign currency.
  3. Gold that is registered for trading over the counter.
  4. If an open-end type securities investment trust fund beneficiary certificate and futures trust fund beneficiary certificate, it must be denominated in NT dollars and of a domestically offered and domestically invested securities investment or a domestically offered and domestically invested futures trust fund which is offered to the general public, including those purchased in the name of a securities firm as the customer.
    The aforesaid securities deposited or other merchandise eligible for margin purchase and short sale as additional collateral may not:
  1. be less than one trading unit if being TWSE or TPEx listed securities and gold;
  2. be less than one trading unit, if being an open-end type securities investment trust fund beneficiary certificate and futures trust fund beneficiary certificate.
  3. be any registered shares issued to and acquired by shareholders or capital contributors as a result of capital increase out of earnings, or capital increase through contribution by company employees out of their bonuses to the industry in which they are serving, or capital increase by a venture capital company out of undistributed earnings, as effected in accordance with Article 13 of the Statute (Act) for Encouragement of Investment or Article 16 or 17 of the Statute (Act) for Upgrading Industries, that have not been transferred and reported for tax purposes.
    Where the securities firm accepts the deposit by the customer of securities or other merchandise that are not owned by the customer as in the first paragraph, as additional collateral to offset against the margin requirement, it shall additionally submit the household registration record and consent letter obtained from the owner.
    If the securities deposited as collateral to offset against a margin requirement under the preceding paragraph are subject to a 20 percent or more share dividend rate in gratuitous distribution of shares, or the issuer of the securities conducts a demerger and capital reduction, and after the capital reduction, the stock resumes trading and is TWSE or TPEx listed on the same day as the stock of the assignee company of the demerger, the provisions of paragraphs 3, 4, and 5 of Article 23 shall apply to the newly issued rights shares or to the stock of the assignee company of the demerger for which the circumstances set forth in paragraph 2, subparagraph 3 do not exist, and the consent letter under the preceding paragraph shall specify the waiver of the option of income tax deferral.
    A securities firm that accepts a customer using open-end type securities investment trust fund beneficiary certificates for margin purchase and short sale as additional collateral under the name of the securities firm, shall keep a registration log for management purposes and inform relevant information to the Taiwan Depository and Clearing Corporation ("TDCC "); book-entry operations for centrally deposited securities do not apply.
    A securities firm that accepts a customer using book-entry central government bonds for margin purchase and short sale as additional collateral, shall open a collateral account at the Book-Entry Central Government Securities Clearing Bank for margin sale transfer.
Article 26-1     Where a customer applies by means other than in person to use securities, other merchandise, or securities investment trust fund beneficiary certificates purchased in the name of the securities firm in its central securities depository account established and maintained with a securities firm to deposit as additional collateral to offset against a short sale margin requirement or a deficiency it is required to cover under Article 23, the provisions of Article 26 shall still apply, and it is required that the customer sign a letter of consent for carrying out the operation of depositing securities or other merchandise as additional collateral by means other than in person and that the securities firm keep it on record after verification.
    When a customer who may submit an application by means other than in person under the preceding paragraph applies by telephone to use its securities, other merchandise, or securities investment trust fund beneficiary certificates purchased in the name of the securities firm, to deposit as additional collateral to offset against a short sale margin requirement or a deficiency it is required to cover under Article 23, the securities firm shall verify the identity of the customer and synchronously record the telephone call. The telephone recording shall be kept at its place of business and preserved for at least 1 year, or in the event of any dispute, until the dispute has been resolved.
Article 27     The securities deposited or other merchandise to offset against margin requirements under the preceding article shall be valued as follows:
  1. book-entry central government bonds : valued at 90 percent of their par value.
  2. local government bonds, corporate bonds, financial bonds: valued at 70 percent of their par value.
  3. TWSE or TPEx listed securities eligible for margin purchase or short sale: valued at 70 percent of the auction reference price at market opening on the day or the basis price at the commencement of trading of that day when they are deposited.
  4. Securities not qualified according to Article 2 or 3 of the Standards Governing Eligibility of Securities for Margin Purchase and Short Sale, or suspended according to Article 4 or 5 of the same Standards: valued at 50 percent of the auction reference price at market opening or the basis price at the commencement of trading on the day they are deposited.
  5. Gold that is registered for trading over the counter: valued at 70 percent of the average market price on the business day prior to the margin purchase and short sale day.
  6. An open-end type securities investment trust fund beneficiary certificate and futures trust fund beneficiary certificate: valued at 70 percent of the net asset price on the business day prior to the margin purchase and short sale day.
    The terms "the auction reference price at market opening" and "the basis price for the opening of trading" in the preceding paragraph shall have the meaning specified in Article 58-3, paragraph 2 of the TWSE Operating Rules, or Article 60-1 of the TPEx Trading Rules.
    For the purpose of calculating the overall account collateral maintenance ratio for a customer's margin account, the securities firm is not required to discount the value of securities deposited or other merchandise to offset against margin requirements.
Article 28 If any of the following circumstances applies to any securities deposited or other merchandise by a customer to offset against its margin requirements, the securities firm shall deduct the value of such securities or other merchandise when calculating the collateral maintenance ratio under Article 23, and shall promptly notify the customer to replace such securities within three business days from receipt of the notice with cash of equivalent value or other securities eligible for use as additional collateral in offsetting against margin requirements:
  1. there is any defect in the rights or any other legal dispute.
  2. the provisions of Article 26 are not complied with.
    If any of the following circumstances applies to any securities deposited or other merchandise by a customer to offset against its margin requirements, upon notice by the securities firm, a customer shall replace the securities with equivalent cash or other securities or merchandise eligible for margin requirements within the following period:
  1. TWSE or TPEx listed securities, book-entry central government bearer bonds, local government bonds, corporate bonds, financial bonds, gold that is registered for trading over the counter: Upon the approval and public announcement by TWSE or TPEx of the termination of listing on the TWSE or TPEx, a securities firm shall give notice to a customer requesting it to make replacement 10 business days prior to the termination of listing. However, the aforesaid does not apply if (1) the proviso of Article 35-2 applies to the listed securities and (2) an open-end type fund beneficiary certificate for trading over the counter.
  2. Book-entry central government bearer bonds, local government bonds, corporate bonds, financial bonds: 10 business days prior to the date of partial redemption payment.
  3. For merger of an open-end type securities investment trust fund beneficiary certificate and futures trust fund beneficiary certificate: 10 business days prior to the termination of the trust contract or the expiration date of the extension period. However, if the surviving open-end type securities investment trust fund after merger is qualified under Article 26 requirements, the aforesaid is not applicable.
Article 29     If there is any change in price resulting in an increase in the net equity of the collateral value minus the obligations in the customer's margin account, the securities firm may not for that reason only deliver to the customer any cash, securities or other merchandise equivalent in amount to such increase, or use the amount to offset against the margin purchase margin or short sale margin.
Article 30     A customer giving an order to sell stock to settle (repay) a margin purchase or to buy stock to settle (repay) a short sale shall fill out an order ticket marked RETURN OF MONEY or RETURN OF STOCK, as the case may be; the securities firm receiving the order shall first check and verify that the type and quantity of shares under the settlement trade correspond to those on record for the original margin purchase or short sale before accepting the sell or buy order.
    Upon execution of the settlement trade under the preceding paragraph, the securities firm shall prepare a trade report marked RETURN OF MONEY or RETURN OF STOCK, as the case may be, and have it signed/sealed by the customer.
    If the execution of the settlement trade specified in the customer's order under paragraph 1 fails to fully satisfy the customer's obligation, the securities firm shall notify the customer to settle the remaining obligation by the second business day after the trade date, or directly use the money in the customer's margin account to offset against the remaining obligation.
Article 31     A customer applying to settle a margin purchase with cash or a short sale with spot securities shall deliver the money or securities by 12 noon of the current day, and shall fill out an Application to Settle a Margin Purchase with Cash or Application to Settle a Short Sale with Spot Securities and submit the application to the securities firm. Upon verification of the accuracy of the content, the securities firm shall deliver the short sale proceeds and short sale margin to the customer by the second following business day, or in the case of securities bought on margin or securities deposited or other merchandise as collateral, or securities investment trust fund beneficiary certificates purchased not in the name of a securities firm, where the customer has maintained a depository account or a book-entry central government securities account, transfer the securities to the account by the second following business day, or in the case of withdrawal of spot securities by the customer, deliver the securities by the third following business day.
    A customer applying to settle a short sale with spot securities which are borrowed from the same securities firm through securities lending business as the source of securities, the short sale collateral, short sale margin, or securities eligible to be deposited as collateral by securities firms for conducting securities lending business may, with the customer's consent, be pledged as collateral of the securities concerned and not be subject to the requirement for transfer through book-entry in the preceding paragraph. Any balance after the pledge as collateral shall be returned pursuant to the preceding paragraph unless the securities firm and customer agree otherwise.
    The matters mentioned in the preceding paragraph that are subject to the customer's consent and agreement with the customer shall be recorded by the securities firm.
    Except under any of the following circumstances, the customer may not apply to use third-party securities as spot securities to settle a short sale:
  1. during a period in which trading has been suspended or halted in the underlying securities of the short sale.
  2. where an order for margin purchase has been placed to cover the short sale at the maximum price of the auction reference price at market opening on the TWSE or the basis price for the opening of trading on the TPEx on the same day and cannot be executed before the start of the trading session of the sixth business day prior to the book closure date of the underlying securities.
Article 31-1     Where a customer applies to settle a margin purchase with cash or a short sale with spot securities by means other than in person, the provisions of Article 31 shall still apply, except that the customer's signature or seal is not required on the settlement application form if the customer has already submitted a signed Letter of Consent That Applications to Settle with Cash or Spot Securities Do Not Require a Signature/Seal, and if the securities firm has kept it on record after verification.
    When a customer who may submit an application by means other than in person under the preceding paragraph applies by telephone to use cash or spot securities to settle a margin purchase or short sale, the securities firm shall verify the identity of the customer and synchronously record the telephone call. The telephone recording shall be kept at its place of business and preserved for at least 1 year, or in the event of any dispute, until the dispute has been resolved.
    Where a customer has submitted a signed Letter of Consent That Applications to Settle with Cash or Spot Securities Do Not Require a Signature/Seal under paragraph 1, except in the circumstance mentioned in paragraph 2 of the preceding article, the short sale collateral price and short sale margin returnable by the securities firm to the customer shall be deposited into the same bank deposit account used for book-entry settlement of the customer's trading orders, and the securities bought on margin and/or the securities deposited or other merchandise as collateral returnable by the securities firm to the customer shall be transferred into the customer's book-entry custody account or a book-entry central government securities account. Securities or other merchandise deposited as collateral that are not owned by the customer shall be returned through book-entry transfer.
    Securities firms that accept a customer using securities investment fund beneficiary certificates purchased in the name of the securities firm to settle a margin sale, shall operate according to Article 26(5). The return transfer in the preceding paragraph is not applicable.
Article 32     During the period when a securities finance enterprise is engaging in a competitive bid borrowing, negotiated borrowing, or purchase by tender offer to cover a security that falls short of short sale needs, a securities firm may temporarily suspend the short selling of that security, and may also refrain from processing cash settlement of any margin purchase of that security, except in the case of settling a margin purchase at maturity, or where a customer is applying to settle a margin purchase with cash and will use the receivable securities to settle a short sale.
    Where a securities firm conducts securities margin purchase and short sale business, and the combined total balance of short sales of any given type of securities plus the balance of loans of that type of securities extended in securities lending business and the Lending Balance in Article 7, paragraph 2, subpararaphs 5 to 7 reaches the combined total balance of margin purchases and the sum of Borrowed Securities and Proprietary Securities, the securities firm, during the resulting period of cessation of provision of short sales, may not withdraw the Proprietary Securities that have been used as a source of securities for short sale business.
    A securities firm that has provided Borrowed Securities or Proprietary Securities to a customer for short selling may not request the customer to close out the short sale upon the lender's request for early repayment.
Article 33     A securities firm may seek refinancing from a securities finance enterprise of any funds and securities that it needs in conducting securities trading margin purchase and short sale business.
    The securities firm is still required to fulfill its clearing and settlement obligations with the TWSE or the TPEx with respect to the funds or securities refinanced under the preceding paragraph.
    The securities firm shall prepare daily statements of margin purchases and short sales executed, broken down by trades executed on behalf of securities finance enterprises, trades executed with its own funds, and trades executed with refinanced funds or securities, and carry out clearing and settlement operations in accordance with the provisions of the TWSE Operating Rules, the TPEx Trading Rules, the Rules Governing Payment and Settlement Operations for Securities Traded on the TPEx, and the operating rules of the central securities depository.
  1. For margin purchases and short sales executed on behalf of securities finance enterprises, the securities firm shall prepare a separate Table of Applications for Margin Purchases and Short Sales by Securities Finance Enterprises, and reconcile the information therein with the records of the securities finance enterprises.
  2. For margin purchases and short sales executed with its own funds, the securities firm shall prepare a separate Itemized Table of Margin Purchases and Short Sales by Securities Firm.
  3. For trades executed with the refinancing from securities finance enterprises, the securities firm shall prepare a separate Table of Applications by Securities Firm for Refinancing in Margin Purchases and Short Sales, and reconcile the information therein with the records of the securities finance enterprises.
    Upon entering the information respectively under the subparagraphs of the preceding paragraph into the mainframe computer of the central securities depository by the specified time limit and upon entering the prepared summary statements into the mainframe computer of the TWSE or TPEx, the securities firm shall print out a Delivery List or Payment and Settlement List containing the information entered.
Article 34     A securities firm shall maintain accurate and detailed records of and receipt/payment vouchers for funds and securities received and paid in conducting the business of securities trading margin purchase and short sale and refinancing from securities finance enterprises, and shall prepare the following statements on a daily basis:
  1. Daily operations statement of margin purchases and short sales.
  2. Summary statement and itemized statement of increments, settlement, and balances of margin purchases and short sales.
  3. Itemized statement of receipts, deliveries, disposals, and uses of collateral for margin purchases and short sales.
  4. Statement of settlement with cash and spot securities.
  5. Summary statement of margin calls and deposits.
  6. Itemized statement of deposits of securities or other merchandise as collateral.
  7. Itemized statement of refinancing applications and settlements.
  8. Itemized statement of refinancing balance.
  9. Itemized statement of collateral for refinancing.
  10. Summary statement and itemized statement of increments, settlement, and balances of margin purchases and short sales.
  11. Itemized statement of performance bond.
Chapter IV Handling of Share Transfers in Margin Purchases and Short Sales
Article 35     Securities eligible for margin purchases and short sales shall be suspended from being sold short for four days commencing from the sixth business day prior to such book closure; if a short sale has already been made, it shall be covered and closed out by the sixth business day (inclusive) prior to the book closure of the issuing company; where the security has been lent, the securities firm may request early repayment and shall reclaim the security before the last day for assignment (inclusive). A customer applying to settle a short sale with spot securities which are borrowed from the same securities firm through securities lending business as the source of securities shall file its application no later than the seventh business day (inclusive) prior to book closure; the application may be rejected where the securities firm has no source of securities. Provided, this shall not apply where the issuing company closes its books for a reason as follows:
  1. convening of a special shareholders' meeting.
  2. a reason that will not affect the exercise of shareholders' rights.
    Where a business day under the preceding paragraph is a trading day, but the commencement date of book closure of the issuing company is scheduled to fall on a date from (and inclusive of) the second settlement day after the last trading day before the Lunar New Year Holidays to (and inclusive of) the second trading day following the Lunar New Year Holidays, the following provisions shall apply.
  1. When the commencement date of book closure is scheduled to fall on the second settlement day after the last trading day before the Lunar New Year Holidays, then the first settlement day after the last trading day is included in the calculation of "business days."
  2. When the commencement date of book closure is scheduled to fall during the Lunar New Year Holidays or on the first trading day following the Lunar New Year Holidays, then the two settlement days after the last trading day are both included in the calculation of "business days."
  3. When the commencement date of book closure is scheduled to fall on a weekend or other regular holiday after the first trading day following, or on the second trading day following, the Lunar New Year Holidays, then the first settlement day after the last trading day is included in the calculation of "business days."
Article 35-1     For any beneficial interest certificates that are eligible for margin purchases and short sales, if, after a general meeting of beneficial owners has been duly convened under the securities investment trust contract, any of the following circumstances consequently applies, margin purchases and short sales of those beneficial interest certificates shall be temporarily suspended from the second business day following the public announcement by the TWSE; provided, this restriction shall not apply to close-out trades. If a margin purchase or short sale has already been made, the trade shall be covered and closed out by repaying the margin loan or returning the borrowed securities by the first business day before delisting.
  1. where the general meeting of beneficial owners resolves to change to an open-end fund.
  2. where the beneficial interest certificates are open for redemption, and as a result the size of the fund reaches the standard for delisting.
    If a customer fails to liquidate a margin purchase or short sale within the deadline under the preceding paragraph, the securities firm may dispose of its collateral beginning from the next business day by the mutatis mutandis application of Article 39, paragraph 3. However, this shall not apply if the customer has, by the deadline under the preceding paragraph, completed a mandate contract requesting the securities firm to perform redemption on its behalf after delisting.
Article 35-2     When the TWSE or TPEx has ratified and publicly announced the delisting from the stock exchange or termination of TPEx trading of a security eligible for margin purchase and short sale transactions, a securities firm shall notify customers to cover and close out any margin purchases or short sales of such security by repaying the margin loans or returning the borrowed securities by the tenth business day before the delisting or the termination of TPEx trading. If a customer fails to cover and close out any margin purchase or short sale by repaying the margin loan or returning the borrowed security within the deadline, unless agreed by both parties otherwise, the securities firm may, within the scope of satisfying the obligation, apply the provisions of Article 39, paragraph 3 to dispose of the balance in the customer's margin account beginning from the next business day. However, these provisions shall not apply under any of the following circumstances:
  1. The issuing company has applied for conversion of its TPEx listed securities to TWSE listed securities.
  2. The securities of a TWSE or TPEx listed company are delisted due to the company's merger, and the surviving company uses the securities which are eligible for margin purchase and short sale transactions for payment of all or part of the consideration to shareholders of the non-surviving company.
  3. The securities of a TWSE or TPEx listed company are delisted due to a share conversion, and the shares after conversion are still eligible for margin purchase and short sale transactions or where securities of both the surviving and non-surviving TWSE or TPEx listed companies in a merger are eligible for margin purchase and short sale transactions.
Article 36     On the business day preceding book closure of an issuing company or the interest payment date of open-end fund beneficiary certificates, a securities firm shall prepare a share transfer list with respect to the security of the issuing company held in customer margin accounts, specifying those shares that are purchased on margin and those that are deposited as collateral to offset against margin collateral requirements, and send the share transfer and interest claim list, together with the data file, to the central securities depository to carry out share transfer procedures with the issuing company or its shareholder services agent on behalf of the customers. Provided, where the issuing company closes its books because of a special shareholders meeting, the number of shares of the issuing company's stock held in customer margin accounts that are purchased on margin shall, for the purposes of share transfers, be calculated by the securities firm in accordance with the provisions of the Rules Governing the Calculation of Number of Shares of Margin Buyers for the Purposes of Share Transfers Upon Special Shareholders Meetings as prescribed by the TWSE in consultation with the TPEx.
    A customer using book-entry central government bonds to settle a margin sale may engage a securities firm to collect interest payment via the Book-Entry Central Government Securities Clearing Bank, and transfer the interest payment less any withholding tax deducted as agreed by both parties back to the customer prior to the business day following the interest payment date.
Article 37     (deleted)
Chapter V Default Procedures
Article 38     Failure by a customer to make timely deposit of margin purchase margin or short sale margin under Article 19 constitutes an event of default, in which case the securities firm shall immediately proceed by the mutatis mutandis application of Article 19 of the Taiwan Stock Exchange Corporation Rules Governing Brokerage Contracts of Securities Brokers and Article 7 of the Account Opening Contract for Trading of Securities on the TPEx; also, on the basis of the securities firm's report, the TWSE or TPEx will forward notice to all securities finance enterprises and securities firms.
    In the event of any default by the customer as specified under the preceding paragraph, and a balance remains in the customer's margin account, the securities firm shall, at the latest on the following business day, proceed by the mutatis mutandis application of the handling method under Article 39, paragraph 3 hereof to settle the account, and shall cancel the margin account; if there is no balance, the margin account shall be cancelled.
    If any of the following circumstances applies to a customer, and a balance remains in the customer's margin account, the securities firm shall immediately notify the customer to close out all margin purchase and short sale trades on the next business day, after which it shall cancel the customer's margin account; if the customer fails to close out all margin trades within this time limit, the securities firm shall, by the mutatis mutandis application of Article 39, paragraph 3, close out the trades for the customer starting from the next business day:
  1. Failure to perform a settlement obligation on time under Article 91 of the TWSE Operating Rules or Article 87 of the TPEx Trading Rules; provided that this does not apply to an event of default under paragraph 1.
  2. Default under Article 58 of the Operating Rules of the Taiwan Futures Exchange Corporation.
  3. Default under Article 33 of the Operating Rules for Securities Lending by Securities Firms.
  4. Violation under Article 28 of the Operating Rules for Securities Business Money Lending by Securities Firms.
    If an event of default under paragraph 1 or 3 occurs to a discretionary investment account, the preceding three paragraphs shall apply, unless the cause is unauthorized trading, in which case the provisions of Article 91-1 of the TWSE Operating Rules or Article 87-5 of the TPEx Trading Rules shall be followed.
Article 39     Where any of the following circumstances applies to a customer, the securities firm may, within the extent required to satisfy the obligation, dispose of the balance in the customer's margin account in accordance with the provisions of paragraph 3. If there is any surplus remaining after the obligation is satisfied, unless agreed otherwise by both parties, it shall be returned to the customer. If the proceeds of the disposal are insufficient to fully satisfy the obligation, the securities firm shall notify the customer to satisfy the remaining obligation within a specified time limit and, if the customer fails to the remaining obligation within such specified time limit, the securities firms shall report the case to the TWSE or the TPEx as an event of default and cancel the customer's margin account accordingly. The TWSE [or the TPEx] shall promptly forward the message to securities finance enterprises and to all securities firms engaged in margin purchase and short sale business.
  1. Failure to make up a deficiency in accordance with Article 24, paragraph 2.
  2. Failure to settle an obligation in accordance with Article 30, paragraph 3.
    Where any of the following circumstances applies to a customer on a margin purchase or short sale, unless agreed otherwise by both parties according to paragraphs 2 and 3, and where the obligation is not fully satisfied after disposal of the collateral for that margin purchase or short sale, the securities firm shall use other funds in that customer's margin account to offset against the obligation. If there is still a deficiency remaining after such offsetting, the securities firm shall notify the customer to make up the deficiency on the next business day. If the deficiency is not fully made up, the securities firm may, within the extent required to satisfy the obligation, dispose of the balance in the customer's margin account in accordance with the provisions of paragraph 3. If there is any surplus remaining after the obligation is satisfied, it shall be returned to the customer. If the proceeds of the disposal are insufficient to fully satisfy the obligation, the securities firm shall notify the customer to satisfy the remaining obligation within a specified time limit, and shall report the case to the TWSE or the TPEx as an event of default and cancel the customer's margin account accordingly. The TWSE [or the TPEx] shall promptly forward the message to securities finance enterprises and to all securities firms engaged in margin purchase and short sale business.
  1. Failure to settle a short sale in accordance with Article 35.
  2. Failure to settle a margin purchase or short sale at maturity.
  3. Failure to replace securities or other merchandise deposited as additional collateral against margin requirements as required under Article 28.
    Where any circumstances under paragraphs 1 and 2 apply to a customer, the securities firm shall, on the next business day and on the TWSE centralized exchange market or through the TPEx trade system, place an order with another securities broker to dispose of the customer's collateral and securities or other merchandise deposited through a Margin Trading Default Processing Account opened by it; if the order quote is not executed, it shall continue to be quoted from the next business day. If a customer uses book-entry central government bearer bonds, local government bonds, corporate bonds, financial bonds to settle a margin sale , a securities firm may negotiate the price and dispose the aforesaid with a bonds dealer; if a customer uses open-end fund beneficiary certificates to settle a margin sale, a securities firm may dispose the aforesaid by buying back from a securities investment trust enterprise.
Article 40     Based on the event of default, a securities firm may, for a period starting from the day of default to the day of payment by a customer, charge the customer a margin purchase default penalty in the amount of the shortfall to be made up multiplied by 10 percent of the stated interest rate on the margin loan, or a short sale default penalty in the amount of the shortfall to be made up multiplied by 10 percent of the short sale fee rate or equivalent to a one-time handling fee based on the stated amount of the short sale handling fee.
Article 41     A securities firm to which the TWSE or TPEx has forwarded a message that a customer is in default with a securities finance enterprise, another securities firm, or a futures commission merchant shall take the following measures as the circumstances merit:
  1. Where a customer is in default under Article 38, paragraph 1 hereof, Article 76, paragraph 3, subparagraph 1 or 3 of the TWSE Operating Rules, or Article 47, paragraph 2, subparagraph 1 or 3 of the TPEx Trading Rules, the securities firm shall immediately notify the customer (provided that if the default information is forwarded by the TWSE or the TPEx at 11:30 a.m. on the given morning, the securities firm shall notify the customer on the next business day) to close out all outstanding margin purchases and short sales on the next business day and thereafter cancel the margin account. Where the customer fails to close out all outstanding margin trades within the time limit, the securities firm shall, by the mutatis mutandis application of Article 39, paragraph 3, close out the trades for the customer starting the next business day.
  2. Where a customer is in default under Article 39, paragraph 1 or 2 hereof, or in any of the circumstances listed below, the securities firm may not accept any order from the customer to carry out a margin purchase or short sale, and shall cancel the customer's margin account promptly after the customer has closed out all outstanding margin purchases and short sales:
    1. Default under Article 33 of the Operating Rules for Securities Lending by Securities Firms.
    2. Violation under Article 28 of the Operating Rules for Securities Business Money Lending by Securities Firms.
    3. Default or violation under the securities finance enterprise's operating rules for margin purchases and short sales, operating rules for securities settlement financing, or operating rules for securities lending.
    If a customer's participation in securities borrowing and lending transactions is halted or terminated due to any event under Article 42, 45, or 49 of the Taiwan Stock Exchange Corporation Securities Borrowing and Lending Rules, the securities firm shall handle the matter pursuant, mutatis mutandis, to subparagraph 2 of the preceding paragraph.
    Unless the cause is unauthorized trading and handling measures are not required to be taken, if any event of default under the preceding two paragraphs occurs to a discretionary investment account or to a customer's own account, the provisions of the preceding two paragraphs shall apply to the customer' own account and any other discretionary investment account of the customer.
Chapter VI Supplementary Provisions
Article 42     A violation of any provision hereof by a securities firm or its responsible person or employee may be dealt with by the TWSE or the TPEx under its applicable rules and regulations.
    When a responsible or associated person charged with the operations of securities trading margin purchases and short sales violates any provision hereof or any other relevant provision, such person may not engage in those operations during the period in which the violation is subject to a disposition.
Article 43     These Rules are drafted by the TWSE in conjunction with the TPEx and shall take effect after having been submitted to and approved by the competent authority. Subsequent amendments thereto shall be effected in the same manner.