Search Result

Title: Taiwan Stock Exchange Corporation Guidelines for Creation and Redemption of Beneficial Certificates
Date: 2008.02.18 ( Announced )
Date: 2017.06.19 ( Amended )

Article Content

 
1     These Guidelines are adopted pursuant to Articles 12, 13 and 14 of the Taiwan Stock Exchange Corporation (TWSE) Rules Governing Trading of Beneficial Certificates.
2     Definitions:
  1. 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).
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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:
    1. The applicant is restricted by law from holding or transferring said specific security.
    2. The trading of said security has been stopped or suspended on the exchange.
    3. Said security may be substituted by cash as published on PCF by the SITE.
    4. 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.
    5. Situations in which the trust agreement of the securities investment ETF provides that cash in-lieu is permitted.
  12. 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.
  13. 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.
3     Operating principles for participating dealers carrying out in-kind creation (redemption) of securities investment ETFs with domestic component securities, or selling beneficial certificates (portfolio of securities) on the same day for its own account or on behalf of its customers:
  1. The participating dealer handles applications for in-kind creation (redemption) of ETF beneficial certificates or for selling beneficial certificates (portfolio of securities) on the same day, through computer linkup. The input time is 9:00 a.m. to 3:30 p.m. on the TWSE's centralized securities exchange market trading days. The deposit and transfer of relevant securities shall be handled via central depository and book-entry transfer service. However, an application for which the central securities depository (CSD) fails to complete the earmark operation may be corrected and input from 9:00 a.m. to 10:00 a.m. of the following business day.
  2. To carry out in-kind creation or redemption for its own account or on behalf of its customers, the participating dealer shall first produce an Application for In-kind Creation or Redemption of Exchange Traded Fund Beneficial Certificates, with the PCF of the day attached, and then require the applicant to sign up (in the case of an overseas Chinese, foreign national, or Mainland Area investor, the agent broker can act on his/her behalf). All the above documents shall be kept in file for reference.
  3. The aforesaid Application for In-kind Creation or Redemption of Exchange Traded Fund Beneficial Certificates (the "Application Form") shall contain the following particulars:
    1. Application number: The code of the head office of the participating dealer followed by a three-digit serial number.
    2. The account numbers of the applicants: there shall be no more than three applicants in the case of aggregate creation.
    3. Type of application: In-kind creation, in-kind redemption, aggregate creation, minimum in-kind creation, in-kind creation and sale of beneficial certificates, in-kind redemption and sale of portfolio of stocks, minimum in-kind creation and sale of beneficial certificates.
    4. Quantity of beneficial certificates for in-kind creation or redemption.
    5. Portfolios and quantity of the securities (beneficial certificates) for in-kind creation (redemption) to be delivered, and specifically identify the sources from which of the following: respectively, original holding, purchase on the day of application, purchase on the previous trading day, borrowing, or shortfall of securities, or in-kind redemption (creation) on the previous trading day.
    6. Kind and quantity of securities that adopt cash in lieu, and the reasons for cash in lieu.
    7. Amount of deposit required for shortfall.
    8. Description of why this application is allowed to adopt cash in lieu.
    9. Estimated cash payment based on PCF.
  4. When carrying out the in-kind creation (redemption) of ETF beneficial certificates, the participating dealer shall, based on the particulars stated in the Application Form, ascertain the holdings of securities (beneficial certificates) in the applicant's central depository account, plus the number of borrowed stocks (beneficial certificates), balance of securities (beneficial certificates) bought on the previous trading day and bought on the day of application in regular trading, and amount obtained through in-kind redemption (creation) on the previous trading day, to ensure the sum total is sufficient for the in-kind creation (redemption), before submitting the application to the TWSE.
  5. The portfolios (including beneficial certificates) of securities to be delivered by the applicant as described in the preceding paragraph may not be bought on margin and the portfolios (including beneficial certificates) of securities bought on the day of application may not be reported for trading errors or correction of account numbers.
    After the time for accepting the applications described in the first paragraph above ends, the TWSE will forward all application data to the CSD for handling of the earmark operation.
  6. If the applicant uses the balance of securities bought on the previous trading day and securities bought on the day of application for the portfolios (including beneficial certificates) of securities required for in-kind creation (redemption) of ETF beneficial certificates, the participating dealer should collect payment for such securities bought on the day of application.
  7. When accepting customer's order to create or redeem securities investment ETF in-kind, the participating dealer may calculate cash payment, cash in lieu and other relevant charges or payments based on the PCF and ask the customer to pay in advance before applying for in-kind creation or redemption. After ascertaining the actual payment due and before delivering the payment to the custodian institution, the participating dealer should notify the applicant to make additional payment if the prepaid payment is insufficient or to receive a refund if the prepaid payment is excessive. The participating dealer may open another deposit account with its clearing bank specifically for the deposit and payment of cash payment, cash in lieu, and other relevant charges or payment in association with the in-kind creation or redemption service.
  8. The applicant for in-kind creation or redemption of ETF beneficial certificates may, before the deadline of application time for the day, prepare an Application for Canceling Creation or Redemption of ETF Beneficial Certificates (the "Cancellation Application") by himself or through the participating dealer, and the participating dealer will submit the Cancellation Application to the TWSE. Upon the receipt of such application, the TWSE will confirm the receipt and ask the participating dealer to notify the applicant for confirmation. The participating dealer should print out the receipt notice and save it with the Cancellation Application signed by the applicant (or the agent of applicant in the case of an overseas Chinese, foreign national, or Mainland Area investor), for future reference.
  9. The Cancellation Application shall state the following particulars: application number, account number of the applicant (no more than three applicants in case of aggregate creation), type of application, and signature of the applicant.
  10. Before submitting customer's application for buying portfolio of securities (beneficial certificates) and selling beneficial certificates (portfolio of securities) on the same day according to Article 14 of the TWSE Rules Governing Trading of Beneficial Certificates, the participating dealer should check the single-day trading ceiling of the applicant and ask the customer to produce or produce for the customer a Same-Day Buying and Selling Exchange-Traded Fund Beneficial Certificates and the Portfolio of Component Securities of the Underlying Index Application Statement (see attached for specimen), and save the statement after it has been signed by the customer. At the time of submitting the application, the participating dealer shall also input via computer link-up the applicant's account number, trading information on in-kind creation or redemption, as well as beneficial certificates (portfolio of securities) and quantities already sold on the day, and then proceed with the in-kind creation (redemption) operation according to the provisions specified above.
  11. If the sum of the portfolio of securities (beneficial certificates) holding of the participating dealer or its customer, in combination with balance of securities (beneficial certificates) bought on the previous business day, and on the application day in regular trading, and the borrowing quantity and quantity of in-kind redemption (creation) on the previous business day is insufficient to meet the requirements published in the PCF that in-kind creation (redemption) cannot be effected, the shares of securities or units of ETF bought shall be processed in accordance with the relevant rules and regulation of the TWSE, while the shares or units sold may be handled in the following manners:
    1. Changing the trading type of beneficial certificates sold from regular sale to short sale on the same day.
    2. Borrowing securities pursuant to Article 109 of the TWSE Operating Rules by 10 a.m. of the second trading day following the application day to cover the securities sold.
    3. Following other relevant rules and regulations.
    For the purpose of risk management, participating dealers may charge the applicant proper amount of deposit when accepting customer orders to buy or sell.
    Subsequent to the completion of settlement and in-kind creation or redemption operations, the participating dealer should deposit the remainder of beneficial certificates (securities) credited to the applicant into the applicant's central depository account.
  12. In the case of aggregate creation, all applicants must deliver with existing holding or borrowed securities, except for participating dealer who may for its own account deliver with balance of portfolio of securities bought on the previous day or on the same day. Applicants of aggregate creation must receive the beneficial certificates before a securities firm may place a sell order of said certificates.
  13. If an applicant cannot hold or transfer certain securities as restrained by law (e.g. Article 167 of the Company Act, Article 38 of the Financial Holding Company Act, and Article 28-2 of the Securities and Exchange Act), but may hold or sell such securities on a temporary basis for in-kind creation or redemption of ETF beneficial certificates with the consent of the relevant competent authority, the TWSE may, if deemed necessary for management purpose after the participating dealer has submitted the application for in-kind creation or redemption, notify the participating dealer to ask the applicant to take necessary actions to dispose the holding of such securities. In such event, the participating dealer shall relay the message to the applicant on the day of receiving the notice and record the actions taken and report to the TWSE.
  14. Participating dealers who hold other securities firms' shares temporarily in association with their own in-kind creation or redemption of ETF beneficial certificates for its own account, may be exempted from applying Article 45(3) of the Securities and Exchange Act. However, the daily holding of share position of every other securities firm in the specific account (the account number shall be 777777-7) shall not exceed 100 corresponding amount of the creation unit of each in-kind creation or redemption of ETFs.
  15. Participating dealers shall set up a designated trading account specifically for the deposit and transfer of securities in association with their own in-kind creation or redemption of the component securities of the underlying index for ETFs and other necessary transfers as well as buying and selling ETF beneficial certificates or the portfolio of the component securities of the underlying index for such funds, for its own account. (The account number of such specific account shall uniformly be 777777-7 under the dealer's account.) (Such specific account may hold the same securities as those underlying the put (call) warrants issued by the participating dealer for hedging purpose, and if deemed necessary, hold the alternate constituent securities.) The participating dealer shall neither use such specific account to purchase securities and then transfer them to other accounts of its dealer that is subject to restrictions on bid and ask prices, nor accept transfers of securities from other accounts of its dealer and then directly sell those securities.
  16. To open such specific account with the TWSE, the participating dealer shall submit a copy of the participant agreement, a copy of the approval letter for the issuance of ETFs and photocopies of documents evidencing the qualifications of the participating dealer.
    Where the component securities of the underlying index for an ETF contain over-the-counter (OTC) securities, participating dealers shall open designated trading accounts for OTC securities in accordance with the relevant rules prescribed by the GreTai Securities Market (GTSM); the provisions of the preceding paragraph regarding account opening shall apply mutatis mutandis where the component securities of the underlying index for an OTC ETF contain listed securities.
  17. Where the component securities of the underlying index contain OTC securities, only after participating dealers apply for in-kind creation (redemption) of the securities investment ETF beneficial certificates with the TWSE, will the TWSE forward the application information to the GTSM.
4     Operating principles for participating dealers carrying out cash creation and redemption of beneficial certificates of ETFs for its own account or on behalf of its customers
  1. Where a participating dealer carries out cash creation and redemption of ETF beneficial certificates through computer linkup on a TWSE centralized securities exchange market trading day, the deposit and transfer of relevant securities shall be handled via central depository and book-entry transfer service.
  2. A participating dealer carrying out cash creation and redemption of beneficial certificates for ETFs on behalf of customers shall comply with the following provisions:
    1. If the applicant uses the balance bought through a single account in ordinary trading on the previous trading day to meet the need for the beneficial certificates required for the redemption of beneficial certificates of ETFs, the participating dealer shall, on the day of application, collect in advance on the application date the price required to be paid for the balance of such ETFs bought by the applicant and other relevant charges.
    2. When accepting a customer's order to create ETFs in cash, the participating dealer may also collect in advance the creation price and other relevant charges as calculated according to the cash composition file published by the SITE or FTE, and will submit the application within the time limit prescribed by the TWSE. After ascertaining the actual payment due, the participating dealer should request the applicant, on the business day following the application, to make additional payment if the pre-collected payment of the creation price is insufficient or should refund the applicant if the pre-collected payment is excessive.
    3. The participating dealer shall open a separate segregated deposit account with its clearing bank specifically for the deposit and payment of amounts and other relevant charges collected in advance in association with the redemption operations under Point 4, paragraph 2, subparagraph 1, and of the creation price and other relevant charges in association with creation operations under Point 4, paragraph 2, subparagraph 2.
  3. A participating dealer carrying out cash redemption of ETF beneficial certificates for its own account or on behalf of its customers shall, according to the trust agreement of the ETF, calculate the holdings of beneficial certificates, number borrowed, balance of purchase on the previous trading day and amount obtained through creation on the previous trading day to ensure the sum total is sufficient for cash redemption, before submitting the application within the time limit prescribed by the TWSE. After the time for application ends, the TWSE will forward all application data to the CSD for handling of the earmark operation.
  4. Where the CSD fails to complete the earmark operation, the participating dealer may proceed with a correction and make an input from 9:00 a.m. to 10:00 a.m. of the following business day.
    The ETF beneficial certificates to be delivered by the applicant may not be bought on margin or reported for trading errors or correction of account numbers.
  5. The creation and redemption of ETF beneficial certificates by a participating dealer for its own account are governed by Point 3, paragraphs 10 of these Guidelines mutatis mutandis.
5     A customer engaging a participating dealer for the first time to conduct the creation or redemption of beneficial certificates of leveraged or inverse securities investment ETFs, futures ETFs, ETFs traded in foreign currency, and high yield securities investment bonds ETFs, except the following funds and accounts, shall sign a risk disclosure statement: privately placed securities investment trust funds managed by professional institutional investors or SITEs, futures trust funds offered by futures trust enterprises to persons with prescribed qualifications, discretionary investment accounts managed by SITEs, securities investment consulting enterprises or securities brokers concurrently operating securities investment consulting enterprises, and discretionary investment accounts managed by managed futures enterprises. The particulars to be included in the risk disclosure statement shall be separately prescribed by the TWSE.
    A customer engaging a participating dealer for the first time to conduct the creation or redemption of beneficial certificates of leveraged or inverse securities investment ETFs and beneficial certificates of leveraged or inverse futures ETFs shall meet any of the following conditions:
  1. The customer has opened a margin account.
  2. The customer has had at least 10 trading orders for call (put) warrants executed within the most recent one year.
  3. The customer has had at least 10 trading orders of futures trading contracts listed on the Taiwan Futures Exchange executed within the most recent one year.
    Professional investors that conform to the Regulations Governing Offshore Structured Products, privately placed securities investment trust funds managed by professional institutional investors or SITEs, futures trust funds offered by futures trust enterprises to persons with prescribed qualifications, discretionary investment accounts managed by SITEs, securities investment consulting enterprises or securities brokers concurrently operating a securities investment consulting enterprise, or discretionary investment accounts managed by managed future enterprises are not governed by the preceding paragraph.
6     Operating principles for the in-kind creation and redemption of beneficial certificates of ETFs:
  1. After the TWSE accepts an application for in-kind creation or redemption which contains information on portfolios of securities or beneficial certificates that meets the requirements stated in the PCF published by the SITE, the TWSE will compile and forward the application information to the SITE for review. The review results will be made available on the TWSE computer system for participating dealers' inquiry, and the participating dealers will notify the applicants of application results for confirmation and save the results and the aforesaid application information for future reference.
  2. Regardless whether the SITE approves the in-kind creation or redemption applications forwarded by the TWSE or not, it shall notify the TWSE of its decision before the prescribed time ends on the date of application so such information may be available to participating dealers.
  3. The TWSE will forward the portfolio of securities or beneficial certificates in accepted applications to the CSD for handling the earmark operation. Upon receiving the notice of the CSD with respect to the earmark result, the TWSE will forward the information to SITE and make the same information available on the TWSE computer system for participating dealers.
  4. If an application for in-kind creation or redemption has been found to comply with the requirements and accepted by relevant institutions, the custodian institution shall complete the collection and payment of cash payment, cash in lieu, deposit and other relevant charges or payments on the next business day following the date of application, and the CSD shall complete the delivery transfer of beneficial certificates (portfolios of securities) created (redeemed) no later than the second business day following the date of application. If there is cash credit to the applicant after the completion of in-kind creation or redemption, the custodian institution shall transfer the funds to the applicant via the participating dealer after completing the related operations.
7     Operating principles for cash creation and redemption of beneficial certificates of ETFs:
  1. After the TWSE accepts an application for cash creation or redemption which contains information on cash creation or redemption that meets the requirements stated in the cash composition file published by the SITE or FTE, the TWSE will compile and forward the application information to the SITE or FTE for review. The review results will be made available on the TWSE computer system for participating dealers' inquiry, and the participating dealers will notify the applicants of application results for confirmation and save the results and the aforesaid application information for future reference.
  2. Regardless whether the SITE or FTE approves the cash creation or redemption applications forwarded by the TWSE or not, it shall notify the TWSE of its decision before the prescribed time ends on the date of application so such information may be available to participating dealers.
  3. The TWSE will forward the beneficial certificates in accepted redemption applications to the CSD for handling the earmark operation. Upon receiving the notice of the CSD with respect to the earmark result, the TWSE will forward the information to SITE or FTE and make the same information available on the TWSE computer system for participating dealers.
  4. If an application for cash creation has been found to comply with the requirements and accepted by relevant institutions, the custodian institution shall complete the collection and payment of cash payment and other relevant charges or payments, and the CSD shall then complete the delivery transfer of beneficial certificates. If an application for cash redemption has been found to comply with the requirements and accepted by relevant institutions, the custodian institution shall transfer the funds payable to the applicant via the participating dealer after completing the related operations.