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Title: Guidelines for Derivatives Trading by Public Companies
Date: 2002.12.12 ( Announced )
Date: 2002.12.12 ( Amended )

Article Content

 
1     These Key Points are enacted for the purpose of protecting investors, fulfilling information disclosure, and enhancing public companies to establish the risk management system for derivative products transaction.
2     These Key Points are handled in accordance with Article 36 and 38 of Securities & Exchange Law.
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  1. The term "Derivative Products" as used in these Key Points means any trading contracts with worth derived from assets, interest rates, foreign exchange rates, indexes or other interests (such as forward contracts, options, futures, swaps, and the hybrid products consisted by them).
  2. The term "Forward Contracts" as used in these Key Points does not include insurance contracts, fulfillment contracts, aftersales service contracts, long-term lease contracts and long-term purchase (sale) contracts.
  3. A public company engaging in deposit trading of bonds shall comply with these Key Points.
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  1. Enact Handling Procedure
    If a public company plans to engage in the transaction of derivative products, the "Handling Procedure to Engage in the Transaction of Derivative Products" shall be enacted, filed to the Securities and Exchange Commission of the Ministry of Finance (SEC) and reported to the shareholders meeting after resolution of the board of directors; the same Procedure shall apply with any amendment. The Handling Procedure shall include the following contents:
    1. Trading principles and policies (including the types of derivative product transactions that can be made, operation or hedge strategies, responsibility division, main points for evaluating performance, total amount of contracts which can be engaged in the transaction of derivative products and the upper limit of loss for all and individual contracts).
    2. Operation procedure (including authorized amount, management level and implementing department).
    3. Procedure of placing a public announcement and reporting to the competent authority.
    4. Methods of handling accounting.
    5. Internal control system (including risk management measures, method of periodic evaluation, etc.)
    6. Internal auditing system.
    7. Other affairs.
  2. Information Disclosure
    1. Listed or OTC listed companies shall place related contents of the transaction of derivative products (whether for trading purpose or not) engaged by them or their subsidiaries up to the end of the previous month and monthly operational situation into a public announcement and report to the SEC (See Attachment: the form of a public announcement).
    2. The particulars required to be disclosed in the financial reports for public companies engaging in the transaction of derivative products shall be prescribed by the SEC.
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  1. A public company shall adopt the risk management system and the accounting system of the transaction of derivative products into the written internal control system and internal auditing implementing rules.
  2. Internal control
    1. A public company engaging in the transaction of derivative products shall at a minimum adopt the following risk management measures:
      1. Risk management shall include the risk management of credit, market, liquidity, operation and law.
      2. The personnel that deal with the transaction of derivative products, make confirmation of these transactions and make settlements of these transactions shall not be the same. The evaluation, supervision and control of risk-related matters also shall be reported by persons from a different department to the board of directors or to the high-level managers who are not responsible for setting policies for transactions or positions to be engaged.
      3. The position held in the trading of derivative products shall be evaluated at least once a week, but the hedging transaction made for business purposes shall be evaluated at least twice a month, and the evaluation reports shall be given to high-level managers authorized by the board of directors.
    2. The board of directors shall observe following principles to supervise and manage matters.
      1. Assign high-level managers to oversee the supervision and the control of the risk of derivative transactions at all times.
      2. Periodically evaluate whether the results of the derivative transactions conform to the formulated operational policies and whether the attendant risk of these transactions is within the capability of the company.
    3. The high-level manager authorized by board of directors shall observe the following principles to manage the transaction of derivative products:
      1. Periodically evaluate whether the risk management procedures currently being used are suitable and whether it conforms with the "Handling Procedure to Engage in the Transaction of Derivative Products" formulated by the company.
      2. If there are any abnormal situations in the market price evaluation reports (such as the held position has exceeded the loss limit), the high-level manager shall report to the board of directors immediately and take necessary measures to deal with the situation.
  3. Internal Audit
    1. Internal auditors shall check the suitability of internal control of derivative transactions periodically and inspect monthly the compliance of the trading departments with the "Handling Procedure to Engage in the Transaction of Derivative Products" and analyze the trading cycle in order to make the auditing report.
    2. Listed or OTC listed companies shall file the auditing report of the preceding Paragraph and the implementing status of annual auditing plans of internal audits to the SEC before the end of February of next year and also shall report the improvement situation for any abnormal affairs to the SEC before the end of May of next year.