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Chapter I General Principles
Article 1     These Regulations are adopted pursuant to Article 19, paragraph 3 of the Regulations Governing Securities Firms.
Article 2     A securities firm that engages in over-the-counter (OTC) trading of financial derivatives shall comply with these Regulations; any matters not provided for herein shall be governed by the bylaws of the Taipei Exchange (TPEx) and directives supplementary to these Regulations.
Article 3     "Competent authority," as used in these Regulations, means the Financial Supervisory Commission.
Article 4     A securities firm conducting financial derivatives business shall formulate a management strategy and operational guidelines as follows, and shall submit them, and any subsequent amendments thereto, to the board of directors for approval:
  1. The management strategy for conducting financial derivatives business.
  2. The operational guidelines shall include the following particulars:
    1. Business principles and policies.
    2. Operating procedures.
    3. Internal control system.
    4. Methods of periodic evaluation.
    5. Methods of accounting treatment.
    6. Internal audit system.
    7. Risk management measures.
    8. Measures for protecting customer rights and interests.
     In response to changes in products and market conditions, the board of directors shall review the management strategy and operational guidelines referred to in the preceding paragraph, and shall evaluate whether performance is consistent with established operational strategy and whether the risk assumed is within the securities firm's permitted scope of tolerance; such review shall be made at least once every year.
    When a foreign securities firm establishes a branch unit in the ROC to engage in financial derivatives business, the duties to be performed by the board of directors under the preceding paragraph may be performed by persons authorized by the securities firm's head office.
Chapter II Conditions for Application
Article 5     "Financial derivatives," as used in these Regulations, means trading contracts and structured instruments, whose value, in conformity with regulations or common practice on domestic or foreign OTC markets, is derived from an interest rate, exchange rate, equity, index, commodity, credit event, or other interest, or from a combination thereof.
    "Structured instruments" in the preceding paragraph means hybrid contracts, combining fixed-income products and financial derivatives, that a securities firm enters into as counterparty with a customer.
    Except where otherwise provided in these Regulations, the financial derivatives trading business operated by a securities firm may not be linked to any of the following underlying products:
  1. Securities privately placed domestically or abroad.
  2. Certificates of beneficial interest that are issued overseas by domestic securities investment trust enterprises and are not listed and traded on a securities market.
  3. Any Taiwan stock index compiled by a domestic or foreign institution and related financial commodities, provided that this restriction shall not apply to an index compiled by the TPEx or the Taiwan Stock Exchange Corporation, either singly or in cooperation.
    A securities firm that conducts financial derivative business that involves foreign exchange business shall apply to the Central Bank for permission for any portion of the business that involves an inward or outward remittance of funds.
Article 6     "Professional customer," as used in these Regulations, means a juristic person or natural person that meets any of the following conditions:
  1. Professional institutional investors: refers to a foreign or domestic bank, insurance company, bills finance company, securities firm, fund management company, government investment institution, government fund, pension fund, mutual fund, unit trust, securities investment trust company, securities investment consulting company, trust enterprise, futures commission merchant, futures service enterprise, or other institution approved by the competent authority.
  2. A juristic person or fund whose CPA-audited or reviewed financial report for the most recent period shows total assets in excess of NT$50 million.
  3. Natural persons that meet each of the three following conditions and have applied in writing with the securities firm for the status of professional customer:
    1. Proof of financial resources of NT$30 million or more; or, a single trade in excess of NT$3 million combined with total investment assets at the given securities firm in excess of NT$15 million, along with provision of a statement of financial resources showing total assets of NT$30 million or more.
    2. Possession of adequate professional knowledge or trading experience with respect to financial products.
    3. Complete awareness that the securities firm may be exempted from liability for financial derivatives trades undertaken with a professional customer, and consent to sign for trades as a professional customer.
  4. A trust enterprise entering into a trust agreement, the trustor of which meets the conditions of subparagraph 2 or 3.
    The securities firm shall carry out to the full its responsibility to make a reasonable investigation of the qualifications required of a professional customer under each subparagraph of the preceding paragraph, and shall obtain reasonable and reliable supporting evidence from the customer.
Article 7     "Ordinary customer," as used in these Regulations, means any customer other than those meeting the qualifications for professional customers under the preceding article.
    Any professional customer, with the exception of professional institutional investors, may make written application with the securities firm for a change of status from professional customer to ordinary customer.
Article 8     A securities firm that meets the qualification requirements set forth in Article 11 may submit an application and relevant documents to the TPEx to operate the business of OTC trading of financial derivatives. No OTC trading of financial derivatives may be undertaken without TPEx approval of such an application.
    When a securities firm applies to engage in the business of the preceding paragraph and the TPEx does not expressly reject the application within 15 days from the day after it receives the application, it means that approval is granted. The securities firm may not, however, engage in the business for which it is applying during the aforesaid 10-day period.
    The qualification of a securities firm engaging in financial derivatives business that has passed TPEx review will remain in effect and further yearly applications will not be required.
Article 9     A securities firm that has been approved as qualified to operate the business set out in the preceding article may commence the business of offering financial derivatives and combinations thereof, and within 15 days after commencement of business shall file registration documents with the TPEx for recordation. The only exceptions are the products set forth in Article 5, paragraphs 3 and 4, which require prior approval.
     If registration documents under the preceding paragraph are not submitted in full or are not supplemented within a required deadline, the TPEx may notify the securities firm to suspend the offering of such products until supplementation is completed.
Article 10     When a securities firm initiates a financial derivative trade with a professional institutional investor with any underlying listed under Article 5, paragraph 3, it shall first submit an application to the TPEx with the relevant documentation. The TPEx will forward the application to the competent authority, and trading of such a financial derivative product may only take place subsequent to the competent authority's first issuance of an approval to a securities firm for such a trade. An application must be submitted to the Central Bank for any financial derivative trade given under Article 5, paragraph 4.
    After the competent authority grants approval to the first securities firm, the provisions of Article 8, paragraph 2 shall apply mutatis mutandis to other securities firms applying to trade the same type of financial derivative.
Article 11     A securities firm applying for operating the business of OTC trading of financial derivatives shall meet the following requirements:
  1. It must be an integrated securities firm that concurrently engages in brokerage, underwriting, and dealership business.
  2. Its CPA audited or reviewed financial report for the most recent period shows no accumulated deficit, and its financial condition meets the provisions of Articles 13, 14, 16, 18, 18-1 and 19 of the Regulations Governing Securities Firms.
  3. It must have reported a regulatory capital adequacy ratio for each month of the preceding half year that meets the requirements of the competent authority.
  4. It must not have received of any of the following sanctions:
    1. Any sanction during the preceding 3 months equal to or greater than provided in Article 66, subparagraph 1 of the Securities and Exchange Act or Article 100, paragraph 1, subparagraph 1 of the Futures Exchange Act.
    2. Any sanction during the preceding 6 months equal to or greater than those under Article 66, paragraph 1, subparagraph 2 of the Securities and Exchange Act or Article 100, subparagraph 2 of the Futures Trading Act.
    3. Any sanction from the competent authority during the preceding year requiring a suspension of business.
    4. Any sanction from the competent authority during the preceding 2 years voiding approval for any part of its business.
    5. Any sanction during the preceding year whereby the TPEx, the Taiwan Stock Exchange Corporation, or the Taiwan Futures Exchange Corporation, acting pursuant to its operating Regulations or corporate bylaws, has suspended or restricted the firm's trading privileges.
    A securities firm that falls out of compliance with the conditions of subparagraph 4 of the preceding paragraph but that effects improvement and subsequently receives approval from the competent authority shall not be subject to the restrictions of that subparagraph.
Article 12     A foreign securities firm intending to apply for operating the business of OTC trading of financial derivatives shall furnish an approval letter or a performance undertaking from its board of directors, and shall then have an application submitted to the TPEx in the name of the foreign securities firm via a branch unit in the territory of the ROC, or via a branch unit established in the territory of the ROC by its directly or indirectly wholly-owned subsidiary. The foregoing branch unit in the territory of the ROC shall meet the qualification requirements set out in the preceding article, but for the regulatory capital adequacy ratio requirement, it may substitute the ratio of its head office, provided that the head office meets a standard similar to the requirement of paragraph 1, subparagraph 3 of the preceding article.
Article 13     A securities firm applying to engage in OTC trading of financial derivatives pursuant to Article 8 shall submit an NT$200,000 application review fee to the TPEx; the same fee shall be submitted with any re-application following a termination, pursuant to these Regulations, of a securities firm's qualification for OTC trading of financial derivatives.
Article 14     A securities firm applying or registering pursuant to Articles 8 through 10 shall submit the documents shown in Appendices 1and 2.
    The directions for the TPEx review and approval of securities firms' applications or registrations are as given in Appendices 3 and 4.
    A foreign securities firm trading financial derivatives shall issue an undertaking stating that the transaction prices it receives at the beginning of the transaction period will not be remitted out of Taiwan until after the transaction matures. This restriction, however, shall not apply to remittance of any transaction prices as required for instruments linked to foreign financial products.
Chapter III Trading Regulations
Article 15     A securities firm providing financial derivatives trading services to a professional institutional investor shall enter into an ISDA Master Agreement with the trading counterparty, or be subject to other standard agreements and market practices. If the financial derivative product contract that a securities firm enters into with a customer that is not a professional institutional investor, and the trading documents so furnished, including the master agreement (or ISDA Master Agreement), product prospectus, risk disclosure statement, and trade confirmation document, are in the English language, the securities firm shall provide a Chinese-language translation thereof.
    Except where these Regulations provide otherwise, a securities firm that enters into a financial derivatives trade with a counterparty shall execute a written contract with that counterparty stipulating the rights and obligations of both parties. The securities firm shall separately confirm the conditions applicable to each individual trade with the trading counterparty.
    When the trading counterparty of the preceding paragraph is a natural person, the written contract shall stipulate agreement that the competent authority and the TPEx may collect, process, and use the person's personal data.
    When a securities firm enters into a contract with a customer that is not a professional institutional investor, it may proceed only after meeting the requirement that an appropriate unit or personnel review the contract signing procedures and the completeness of the information provided by the customer.
    The financial derivative product contract that a securities firm enters into with the counterparty may stipulate the method for determining the amount payable for settlement in the event of early termination of a trade, which shall reflect and calculate the current market value of the trade, including the value that originally would be paid under the early-terminated trade upon expiration after the early termination date.
    The conditions for early termination of a trade and the method for determining the amount payable for settlement in the event of early termination, as referred to in the preceding paragraph, shall be clearly specified in relevant contracts or otherwise fully disclosed to the counterparty.
Article 16     When entering into a financial derivatives trade with an ordinary customer, a securities firm shall fully specify in the written contract the important content of the trade and disclose the risks, and shall comply with the following requirements:
  1. It shall adhere to the principle of good faith, and shall use a method that the customer is capable of fully understanding.
  2. All information or data in all explanations or disclosures must be accurate. All statements or diagrams shall be fairly presented, and there may not be any falsehood, fraud, concealment, or anything that otherwise could be misleading. The aforesaid information or data shall be dated.
  3. The language used in sales documents shall be Chinese, and every effort shall be made to ensure that it is clear and easy to understand. When necessary, the original language text may be appended in notes.
  4. All sales documents must use printed page numbers or another appropriate method to enable customers to confirm whether they have received complete information.
    When a securities firm specifies important content and discloses risks to the customer pursuant to the preceding paragraph, it shall retain the relevant materials on file, and incorporate them into the securities firm's internal control and auditing systems for management.
Article 17     The "important content" in the preceding article is as follows:
  1. The method for and restrictions on the customer's exercise of rights, amendment, rescission, and termination with respect to the financial derivatives trade.
  2. The important rights, obligations, and duties of the securities firm with respect to the financial derivatives trade.
  3. The fees and financial penalties the customer is required to bear, including the times at which they are to be collected and the method of their calculation and collection.
  4. Whether the financial derivatives trade is protected by deposit insurance, an insurance stabilization fund, or other relevant safeguard mechanisms.
  5. Channels for resolution and complaints/appeals for disputes arising in connection with financial derivatives trades provided by the securities firm.
  6. Other matters required to be reported regularly or from time to time, and other matters required to be specified, in connection with any of the financial derivatives trades pursuant to laws and regulations.
    The important content of the preceding paragraph shall be expressed in the written contract by a conspicuous typeface or method.
Article 18     When entering into a financial derivatives trade with an ordinary customer, a securities firm shall specify in the written contract whether the dispute resolution procedures of the Financial Consumer Protection Act shall apply in the event of a financial consumer dispute.
Article 19     A securities firm that provides financial derivatives trading services to customers shall do so with the due care of a good administrator, in accordance with fiduciary obligations, and based on the principle of good faith.
    When a securities firm undertakes a financial derivatives trade with a customer other than a professional institutional investor, it shall not encourage or induce the customer to conduct trades through borrowing funds or debt financing, and shall establish a system for protection of customer rights and interests based on product suitability, notification and disclosure of product risks, and handling of trading disputes. Trades shall be carried out in accordance with the operating procedures set out under that system.
    A securities firm shall establish a product suitability system under the preceding paragraph, which shall at the least include a set of know-your-customer assessment procedures, customer characteristic assessments, and product characteristic assessments in order to clearly ascertain the customer's investment experience, the status of the customer's assets, the customer's trading objectives, the customer's understanding of the product, and the suitability of the product for trading by the customer.
     A securities firm may not provide an ordinary customer with financial derivatives trading services that exceed the level appropriate to the customer, nor may it sell to an ordinary customer any financial derivative product that is restricted to investment by professional customers or that is a complex high risk product. This restriction, however, does not apply to trades of financial derivatives other than structured instruments that an ordinary customer enters into with a securities firm for hedging purposes.
    A securities firm entering into trading of any complex high-risk product with a customer that is not a professional institutional investor shall inform the customer of the important parts of the transaction terms and conditions and associated risks, and shall retain records by audio recording.
    "Complex high-risk product" in these Regulations means a financial derivative that will expire early if the comparative price in any given period cumulatively reaches a certain threshold, and that contains an embedded put option.
    With respect to a securities firm conducting the business of financial derivatives trades, the compliance requirements, such as product suitability, product risk notification and disclosure, method of audio recording, and the types of financial derivatives that may be provided to an ordinary customer who is a natural person, will be prescribed by the TPEx, and will be publicly announced after submission to and approval by the competent authority.
Article 20     A securities firm shall handle customer complaint cases in a fair, reasonable, and effective manner, with the goal of protecting customer rights and interests.
    A securities firm that enters into financial derivatives trades with ordinary customers shall adopt procedures for the handling of customer complaints, which shall include the following:
  1. Establishment of a channel for customer opinions and customer complaints.
  2. Adoption of appropriate methods and procedures for investigation of complaints.
  3. Establishment of a unit or personnel with responsibility and authority for investigations.
  4. Establishment of methods and procedures for responding to complaints, and procedures for follow-up management. The methods and procedures must conform to the requirements of the Financial Consumer Protection Act.
    When there is a cumulative total of five unresolved customer complaints under the preceding paragraph, the general manager shall convene an internal meeting to propose methods of resolving the cases and produce a concrete plan for reducing the number of customer complaints. A record shall also be made at the meeting of related matters, the status of implementation, and an assessment of effectiveness, which shall be reported to the board of directors. Within 2 weeks after reporting to the board, the record shall be submitted by letter to the TPEx.
Article 21     Prior permission shall be obtained from the Central Bank when a securities firm's OTC financial derivatives trading and related hedging transactions involve foreign exchange Foreign exchange settlement matters shall be carried out in accordance with the Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions and related regulations.
    A securities firm may carry out hedging transactions in the capacity of a customer with designated banks and foreign financial institutions that have received Central Bank approval for derivatives and foreign exchange business.
Article 22     When OTC trading of financial derivatives by a securities firm involves foreign exchange, matters relating to payment and receipt of settlement money and fees, and payment of funds upon early cancellation or expiration of contracts, shall be carried out as follows:
  1. For derivatives denominated in New Taiwan Dollars, all payments and receipts of settlement money and fees between the securities firm and the counterparty shall be in New Taiwan Dollars.
  2. For derivatives denominated in a foreign currency, all payments and receipts of settlement money and fees between the securities firm and the counterparty shall be in foreign currency. Payments by the counterparty may be made by account transfer from the counterparty's own foreign exchange deposit account; where foreign exchange settlement is required, it may be carried out by the counterparty at a designated foreign exchange bank in accordance with the Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions.
  3. Upon expiry of the contract or early cancellation by the counterparty, the securities firm shall deposit the funds receivable by the counterparty, in the denominating currency and on the settlement date stipulated by the contract, in the counterparty's New Taiwan Dollar or foreign exchange deposit account.
    A securities firm operating the business of the preceding paragraph shall submit a monthly operations statement to the foreign exchange authority and the TPEx within 5 business days after the end of each month.
Article 23     For structured instruments sold by a securities firm, the maximum potential loss shall be limited to the original transaction price and a distinction shall be made between principal-protected and non principle-protected products. However, when a structured instrument is sold under the name of a principal-protected product or claims principal protection benefits, it shall be stipulated that the customer may, at maturity or when early rescission made in accordance with the terms of the contract, recover the total amount of the original transaction price.
Article 24     A securities firm that provides structured instrument trading services to ordinary customers shall carry out the following assessments:
  1. The securities firm shall assess the customer's characteristics to ascertain whether the customer is a professional customer or an ordinary customer, and shall perform an overall assessment of the customer's degree of risk tolerance on the basis of factors including the customer's age, investing knowledge and experience, status of assets, trading objectives, and understanding of the product. At least three discrete levels of risk tolerance shall be distinguished, and the ordinary customer shall be required to sign a confirmation of the assessment.
  2. The securities firm shall undertake an assessment of the product's characteristics, and shall retain a written record for verification. The assessment shall include at least the following items:
    1. Assessment and confirmation of the legality of the given structured instrument, the related investment assumptions, the reasonableness of the risk/return profile, the appropriateness of the transaction, and whether there are any conflicts of interest.
    2. Overall assessment and confirmation of the degree of risk inherent in structured instruments, in which at least three discrete levels of risk are distinguished, with respect to factors such as their characteristics, the risk and probability of principal loss, liquidity, structural complexity, and the term of the instruments.
    3. Assessment and confirmation of the adequacy and accuracy of the disclosures made in the product information and marketing documents provided to the customer.
    4. Confirmation of whether only professional customers can invest in the given structured instrument.
Article 25     A securities firm that provides structured instrument trading services to ordinary customers shall impose the following controls on its marketing procedures:
  1. The securities firm shall indicate, in a prominent typeface in the notice to customers and in the prospectus, the degree of product risk for the given structured instrument, based on the assessment of the product's characteristics pursuant to Article 24, subparagraph 2.
  2. A securities firm that provides structured instrument trading services to ordinary customers shall fulfill its duty of disclosure. For products with identical terms and conditions of transaction but with durations in excess of 6 months, and sale of the product to 10 or more persons is planned, an ordinary customer shall be given a review period of not less than 7 days prior to the initial transaction for review of the contracts connected with the structured instrument. When such a period of review is not required for a given product, the fact that there is no review period for the given product shall be clearly stated in the product's prospectus.
  3. A securities firm that provides structured instrument trading services to ordinary customers shall read aloud to the customer the important content of the notice to customers and retain an audio recording as a record.
  4. When a securities firm undertakes a structured instrument trade with an ordinary customer that is a juristic person, then in subsequent trades with the same customer for the same type of structured instrument, the securities firm may be exempt from the requirement of the preceding subparagraph to read aloud the important content of the notice to customers and to retain an audio recording as a record in any transaction in which the customer signs a written consent to that effect. The "same type of structured instrument" as used above means that the product's structure, denominating currency, and linked underlying asset are all completely the same.
    The matters to be set out pursuant to the preceding paragraph in the notice to customers and the product prospectus, and the means by which a recording is to be made, will be formulated by the TPEx and publicly announced after submission to and approval by the competent authority.
Article 26     A securities firm shall adopt the content of Articles 24 and 25 as part of its internal control and internal auditing systems and carry out related audits and inspections.
Article 27     When a securities firm provides structured instruments trading services to a customer, the customer may request the securities firm to furnish the marking-to-market information and price quote information relating to early cancellation with respect to the customer's transaction; if a structured instrument is provided to an ordinary customer who is a natural person, the securities firm shall furnish the customer information on marking-to-market..
    When structured instruments with the same transaction terms and conditions are sold to ten or more parties, the securities firm shall disclose on its website relevant market price information or price quote information for early cancellation, and shall also disclose relevant information through the TPEx information system.
Article 28     When a securities firm engages in financial derivatives trading, the two parties in the transaction may stipulate that payment upon exercise will be by cash settlement or physical delivery.
    When a linked underlying for payment by physical delivery under the preceding paragraph is a TWSE listed or TPEx listed stock, the payment shall be made only by delivery of the linked underlying securities by the securities firm.
    The linked underlying security for delivery by the securities firm under the preceding paragraph shall be transferred from the hedging account of the securities firm, and the transfer shall be processed in accordance with the Operating Regulations of the Taiwan Depository & Clearing Corporation.
Article 29     When a securities firm operating the business of financial derivatives related to Taiwan equities needs to trade TWSE listed and TPEx listed stocks and convertible (exchangeable) corporate bonds for hedging purposes, it shall open a hedging account at the TWSE and the TPEx.
    The hedging accounts of the preceding paragraph shall uniformly be "888888-1" accounts under the securities dealers' accounts. However, a foreign securities firm that applies to open a hedging account through a branch unit established within the territory of the ROC by a directly or indirectly wholly-owned subsidiary shall establish a dedicated hedging account under the offshore foreign institutional investor account it opened in the ROC.
    No securities in the hedging account of paragraph 1 may be made the subject of a pledge, loan, or withdrawal.
Article 30     As required for hedging purposes, a securities firm that operates the business of trading financial derivatives related to Taiwan equities may borrow or sell short the underlying security without being subject to the restriction that the price of the securities borrowed or sold short may not be lower than the closing price of the previous business day.
Article 31     When the securities firm elects to sell shares of the underlying security by borrowing from security holders in a securities borrowing and lending transaction, if the security is a TWSE listed or TPEx listed stock, it shall first establish a contract for the securities loan in accordance with Article 32-1, paragraph 2 of the Regulations Governing Securities Firms. The lender shall then apply, through its securities firm, to the Taiwan Securities Central Depository Co., Ltd. for a transfer of all loaned shares into the hedge account of the securities firm, or shall first earmark the loaned shares and then, as required for hedging purposes, transfer the shares into the hedge account in separate lots upon application by the securities firm.
    When the securities firm elects to short-sell shares in a TWSE or TPEx listed stock, it shall open a margin account with another securities firm or with a non-affiliate securities finance company, and report information relating to such account by letter to the TPEx and the TWSE.
    The opening of the aforementioned margin account shall be carried out in accordance with the Operating Regulations for Securities Firms Handling Margin Purchases and Short Sales of Securities, the Terms for Establishment of Margin Accounts With Securities Firms for Margin and Stock Loans, and the provisions of the various securities finance companies related to the aforesaid Regulations and Terms.
    The securities broker at which the aforementioned margin account is opened may only accept short sale orders or buy-to-cover orders from securities firms seeking to hedge financial derivatives and applications to cover short sales with spot securities. When the securities firm uses the margin account to engage in short sales or buy-to-cover transactions for the purpose of hedging, reports of out-trades and account number corrections may not be filed for this account, except in cases where the appointed securities broker has committed an error.
    The holders of the underlying security referred to in paragraph 1 may not be any person regulated under Article 22-2, paragraph 1 or 3 of the Securities and Exchange Act.
Article 32     For the purpose of stabilizing the price of an underlying security, after closing out the related transaction, a securities firm may make a transfer of the linked underlying stock in the hedge account to its proprietary trading account.
Article 33     A securities firm shall draft a set of criteria for utilization of funds, to govern utilization of transaction prices received through structured instrument transactions. Those criteria, and any amendments thereto, shall first be passed by a resolution of the board of directors and then submitted by letter to the TPEx for recordation.
    The content of the criteria for utilization of funds under the preceding paragraph shall include principles and instruments for fund utilization, scope of utilization, operating procedures, liquidity control measures, and the department in charge of execution and its authorities.
    The securities firm shall adopt rigorous standards for internal control and enhanced internal auditing based on the standards for utilization of funds of the preceding paragraph. It shall undertake regular review and analysis, and produce records for future audit or inspection.
Article 34     A securities firm undertaking structured instrument transactions shall allocate 3 percent of the total outstanding balance of its structured instrument contracts each month and pay that sum to the TPEx as a performance bond. A securities firm whose regulatory capital adequacy ratio is below 250 percent, however, shall pay 5 percent of the above balance to the TPEx as a performance bond.
    A securities firm may pay the performance bond of the preceding paragraph in cash, bank certificates of deposit, or central government bonds, and shall supplement the bond amount or obtain a refund from the TPEx on or before the tenth of each month in accordance with monthly changes in the outstanding balance of the structured instrument and its regulatory capital adequacy ratio.
Article 35      When a securities firm engages in the trading of financial derivatives related to Taiwan equities with counterparties, the scope of eligible linked underlying assets shall be limited to the following:
  1. TWSE listed or TPEx listed stocks eligible to be the underlying in the issuance of TWSE listed or TPEx listed call (or put) warrants.
  2. Exchange traded funds (ETFs) or offshore ETFs.
  3. Taiwan depositary receipts (TDRs).
  4. Stock indexes published by the TWSE or the TPEx.
  5. Convertible (or exchangeable) corporate bonds.
  6. Publicly offered beneficial certificates of securities investment trust funds.
  7. Futures or options contracts of the Taiwan Futures Exchange Corporation.
  8. Combinations of the foregoing eligible linked underlyings.
Article 36     A securities firm that trades equity derivatives linked to Taiwan stocks with offshore overseas Chinese or foreign nationals shall first confirm that the trading counterparty has completed registration in accordance with the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals.
Article 37     When a securities firm enters into a contract for an equity derivatives transaction in TWSE listed or TPEx listed stocks, the number of the underlying shares that could potentially be exchanged upon exercise of the derivatives contract, plus the number of underlying shares that would be exchanged upon exercise of the previous business day's outstanding and unexpired call (put) warrants and contract-based call (put) warrants of all securities firms, leverage transaction merchants, and banks, may not exceed 15 percent of the total number of the underlying shares issued by the issuer after deduction of the shares set out in each of the following items:
  1. The total percentage of shares held by directors and supervisors under statutory shareholding ratio requirements.
  2. Pledged shares.
  3. The number of shares that newly TWSE listed or TPEx listed companies are required to place in compulsory central custody.
  4. Shares repurchased under the Regulations Governing Share Repurchase by TWSE Listed and TPEx Listed Companies, but not yet retired.
  5. Shares on which the competent authority has imposed restrictions for exchange or TPEx listing and trading.
Article 38     When a securities firm engages in the business of trading financial derivatives linked to credit events and its trading counterparty is an assumer of credit risk, the securities firm shall assess the capacity and the appropriateness of the trading counterparty for the credit derivative transaction, and at minimum shall inform the counterparty of the following matters:
  1. The trading counterparty shall itself assess and monitor the credit risk of the credit entity under the management contract and the credit risk of the securities firm.
  2. Returns on the given product derive primarily from bearing credit risk associated with the credit entity under the contract; losses may be incurred if a stipulated credit event occurs.
  3. The securities firm shall provide a complete explanation defining the stipulated credit default event, the method of settlement to be used after the occurrence of a credit default event, the scope of debt obligations deliverable in the case of physical settlement, and the method of calculation for settlement of the spread in cash.
  4. The given product typically lacks market liquidity, and if such a contract contains a stipulation for early cancellation, an explanation must be provided of the costs and the maximum possible loss that will be borne by the trading counterparty should the trading counterparty demand early cancellation.
Article 39     A securities firm engaging in financial derivatives business may not damage fair market price formation or investor rights and interests when conducting hedging operations or when calculating product gains or carrying out settlement upon cancellation or expiration. The securities firm shall formulate and implement an effective internal control system addressing the aforementioned considerations.
Article 40     A securities firm that operates OTC financial derivatives transactions may not use any such transaction, on its own behalf or on behalf of a customer, for the purpose of merger or acquisition, or to otherwise engage in an unlawful transaction, and it may not use any such transaction to embellish or manipulate financial statements by, for example, deferring or concealing losses, falsely reporting earnings, or recognizing earnings early. In options transactions, the securities firm shall take care to avoid using premiums (especially for long-term or extremely short-term options) to embellish financial statements.
    A securities firm shall stipulate with the customer that the customer may not refuse a request from the competent authority for review of relevant data (including data on the ultimate beneficial owner) for the purpose of market regulation.
Article 41     A securities firm may not engage in financial derivatives trades related to Taiwan equities with any of the following parties:
  1. A director, supervisor, or officer of the securities firm, or a shareholder that directly or indirectly holds 10 percent or more of its total shares.
  2. A spouse, minor child, or nominee of any of the persons referred to in subparagraph 1.
  3. Any investee company in which 10 percent or more of total shares are directly or indirectly held by any person referred to in the preceding two subparagraphs.
  4. The issuer of the conversion securities, linked securities, or underlying securities, or any person related to the issuer as set out in the preceding 3 subparagraphs.
    Calculation of the total shareholdings of the shareholders under subparagraph 1 above shall include shareholdings of spouses, minor children, and nominees of the persons under subparagraph 1.
    Before a securities firm engages in a financial derivatives trade referred to in the preceding paragraph with a trading counterparty, the counterparty shall sign an undertaking stating whether or not it is a related party as set out in paragraph 1; when the trading counterparty is a professional institutional investor, the securities firm may use available information to make an effective confirmation, by means of its own internal operating procedures, that the trading counterparty is not a related party under paragraph 1. When the securities firm is unable to undertake verification of a trading counterparty, however, and when the trading counterparty is unable to produce an undertaking, the securities firm may not engage in a trade with that counterparty.
    A securities firm may enter into trades with the professional institutional investors of paragraph 1, subparagraphs 1 through 3, provided that the terms it accords those persons may not be more favorable than those accorded others in the same class of counterparties, and that the trades may be undertaken only after passage of a resolution by three-fourths or more of the company directors in attendance at a director's meeting with a two-thirds quorum, or after a resolution granting authorization to the relevant department.
    The restrictions of paragraph 1, subparagraphs 1 through 3 do not apply when the price of a trade by a securities firm, with one individual non-institutional investor, is less than NT$1 million, or when the cumulative price of unexpired trades is less than NT$5 million.
     Without regard for the restriction in paragraph 1, subparagraph 4, a securities firm may engage, with an issuer of stock appreciation rights, in trading of financial derivatives linked to the Taiwan stock equity of the issuer, and shall comply with the following requirements:
  1. The securities firm shall ensure that the issuer engages in such trades due to a hedging need arising from the issuance of stock appreciation rights, and shall obtain reasonable and credible supporting evidence from the issuer before engaging in the trades.
  2. The trades shall be limited to the sale of call options linked to the stock of the issuer.
  3. The exercise method shall be limited to cash settlement.
Article 42     A securities firm undertaking a financial derivatives transaction with a customer that is not a professional institutional investor shall in the risk disclosure statement or individual trade confirmation indicate by a conspicuous typeface or other method the maximum possible loss or principal protection percentage, along with a description of the major risks involved, such as liquidity risk, foreign exchange risk, interest rate risk, tax risk, and cancellation risk.
    If the "maximum possible loss" and the foreign exchange risk involved in the product under the preceding paragraph cannot be expressed in numerical quantities, they may be expressed in words.
Article 43     A securities firm undertaking any financial derivatives transaction shall comply with the competent authority's Regulations Governing the Acquisition and Disposal of Assets by Public Companies. In addition, it shall either adopt procedures for handling transactions in the given derivative product or incorporate procedures for the given product into its existing procedures for handling of financial derivatives trading, carrying out necessary risk management and information disclosures while also providing for management and control of transactions by incorporating those procedures into its existing internal control and auditing systems or implementation Regulations.
    A securities firm shall complete the amendments to its internal control and auditing systems prior to any application to engage in the business of OTC trading of financial derivatives. The relevant control and auditing measures will be separately prescribed by the TPEx.
Article 44     When a securities firm operates the business of OTC trading of financial derivatives, it shall establish its risk management system pursuant to the Risk Management Best-Practice Principles for Securities Firms announced and implemented by the TPEx together with the TWSE and the Taiwan Securities Association (TSA) to implement and manage the procedures for identifying, measuring, monitoring, and reporting transaction risks, and shall also comply with the following provisions:
  1. The securities firm conducting financial derivatives business shall follow appropriate review and approval procedures, and its senior management shall work together with the managerial officers involved in the relevant business to study and adopt a risk management system. Limits on risk tolerance and the use of derivatives shall be regularly reviewed and submitted to the board of directors for examination and approval.
  2. Financial derivatives business trading operations and settlement operations shall not be concurrently handled by the same personnel. The securities firm shall establish a risk management unit outside of and independent from its trading division to carry out such tasks as identifying, measuring, and monitoring risks. The risk management unit shall regularly report position risks and valuations of gains and losses to the senior management.
  3. The securities firm shall set the frequency of valuation of financial derivatives positions individually according to the nature of each type of position. In the case of trading positions, valuation shall in principle be carried out in real time or daily marking-to-market. For hedging transactions conducted for the purposes of the securities firm's own business requirements, valuation shall be carried out at least once per month.
  4. The securities firm shall adopt operational rules for the internal review of new products, with the authority and duties of each relevant department specified therein, and a product review panel shall be formed and consist of managerial officers in charge of finance and accounting, legal compliance, risk control, products, or business units. Before its launching, a new financial derivative shall be subject to review by the product review panel in accordance with the aforementioned rules. When the new product is a complex and high-risk one, it shall be examined by the product review panel and then submitted to the board of directors or the board of managing directors for approval. The securities firm's rules for internal product review shall cover at least the following items:
    1. Review of the nature of products.
    2. Review of the operational strategy and business policy.
    3. Review of risk management.
    4. Review of internal controls.
    5. Review of accounting methods.
    6. Review of safeguards of customer rights and interests.
    7. Review of compliance with laws and regulations and required legal documents.
  5. The securities firm shall adopt a remuneration and reward system as well as assessment principles for associated persons conducting the financial derivatives business. The system and principles shall avoid a direct connection with the sales performance of specific financial derivatives, and shall incorporate non-financial criteria that include items such as whether there is any violation of applicable laws and regulations, self-regulatory rules, or operating directions, deficiency discovered in an audit, customer dispute, and faithful implementation of know-your-customer (KYC) procedures; the system and principles shall be approved by the board of directors.
  6. When formulating its pricing policy for financial derivatives, the securities firm shall take factors such as the position valuation, risk cost, and operating cost of the financial derivatives into consideration, and shall establish internal operating procedures to carefully review the reasonableness of the prices at which the securities firm conducts financial derivative transactions with customers.
    The branch unit established within the territory of the ROC by a foreign securities firm may implement the risk management system in accordance with the provisions of the head office, provided that it shall still comply with the provisions of the preceding paragraph.
     The TPEx may carry out special audits on the state of risk management implementation at securities firms or request explanations from securities firms, and when necessary may demand that securities firms take corrective action.
Article 45      Securities firm personnel that handle financial derivatives business shall have professional ability, and the securities firm shall adopt professional qualification requirements as well as a system for training and performance evaluation.
    Sales and related managerial personnel engaged in financial derivatives business shall be qualified as securities firm associated persons, and shall also possess one of the following qualifications:
  1. Graduation from a finance or finance-related department at the university level or higher, along with completion of six credit hours in courses in financial derivatives and risk management or participation in 20 or more hours of course work in financial derivatives and risk management at a foreign or domestic financial training institute.
  2. The qualifications required for senior agent of a securities firm under Article 5 of the Regulations Governing Responsible Persons and Associated Persons of Securities Firms.
  3. Participation in 30 hours or more of courses in financial derivatives and risk management offered by a foreign or domestic financial training institute.
  4. Holding a financial derivatives-related license.
  5. A half year or more of actual experience in financial derivatives business at a foreign or domestic financial institution.
    A securities firm's staff members (including product sales personnel) who handle foreign exchange derivatives business, and related managerial personnel, shall possess the qualifications set forth in Article 12 of the Regulations Governing the Foreign Exchange Business of Banking Enterprises.
Article 46     A securities firm operating the business of OTC trading of financial derivatives shall comply with the competent authority's Regulations Governing the Preparation of Financial Reports by Securities Firms, the TSA's Model Accounting System for Securities Firms, and the relevant directives of the competent authority regarding accounting disclosures in relation to financial derivatives.
Article 47      A securities firm operating the business of OTC trading of financial derivatives shall handle the disclosure of information in accordance with the Regulations Governing the Acquisition and Disposal of Assets by Public Companies.
Article 48     A securities firm conducting the financial derivatives business shall enter the required information into the TPEx information system at the time and in the format prescribed by the TPEx.
Article 49     A securities firm that undertakes OTC financial derivatives trading shall calculate the market risk equivalent and counterparty risk equivalent for its trading positions as prescribed in the Regulations Governing Securities Firms in order to reflect those components in the calculation of its regulatory capital adequacy ratio.
Article 50     When the regulatory capital adequacy ratio of a securities firm that has obtained qualification to engage in OTC trading of financial derivatives falls below 200 percent, with the exception of hedging transactions relating to financial derivatives, it may not undertake any new trades; new trades may be undertaken only when its regulatory capital adequacy ratio reaches 200 percent.
Article 51     The TPEx may make periodic announcements of information on financial derivatives trading.
Chapter IV Handling of Violations
Article 52     When any of the following circumstances applies to a securities firm, the TPEx may notify it to take supplementary or corrective action within a prescribed time period:
  1. Violation of Article 6, Article 7, Articles 15 to 28, Article 31, Articles 33 to 36, Article 38, Article 41, Article 42, or Article 44.
  2. Execution of financial derivatives trades not in conformance with the relevant portions of the securities firm's application or filing.
  3. A regulatory capital adequacy ratio less than 200 percent.
  4. Execution of trades not in conformance with the securities firm's "procedures for handling financial derivatives transactions" or its internal control or auditing systems.
  5. Violation of the applicable provisions of other TPEx Regulations, regulations, operating procedures, guidelines, directions, supplementary Regulations, public announcements, or circulars.
Article 53     When any of the following circumstances applies to a securities firm, the TPEx may issue a warning and notify it to take supplementary or corrective action within a prescribed time period:
  1. Violation of Article 4, Article 14, paragraph 3, Article 29, Article 30, Article 37, Article 39, Article 40, Article 43, and Articles 45 to 50.
  2. Failure to take supplementary or corrective action within the time period prescribed in the preceding article.
  3. A violation of these Regulations or of related TPEx Regulations such as to affect the rights and interests of investors or orderly trading in the market.
Article 54     When any of the following circumstances applies to a securities firm, the TPEx may impose a penalty of not less than NT$50,000 and not more than NT$3 million.
  1. Violation of Article 5, Articles 8 to 10, Article 39, or Article 40.
  2. Failure to take supplementary or corrective action within the time period prescribed in the preceding article.
  3. A violation of these Regulations or of related TPEx Regulations that has a material effect on the rights and interests of investors or orderly trading in the market.
Article 55     When any of the following circumstances applies to a securities firm, the TPEx may suspend or terminate its financial derivatives trading, provided that such action shall not affect the validity of an already-transacted derivative product:
  1. Imposition of a penalty pursuant to subparagraph 2 of the preceding article three or more times during the preceding half-year.
  2. Failure to pay a penalty imposed pursuant to subparagraph 2 of the preceding article.
  3. Noncompliance with the conditions of Article 11, paragraph 1, subparagraph 1 or 2.
  4. Noncompliance with Article 12 by a foreign securities firm.
  5. The regulatory capital adequacy ratio of the securities firm has remained below 200 percent for 3 consecutive months.
  6. Receipt of a sanction from the competent authority under Article 66, subparagraph 2 of the Securities and Exchange Act due to financial derivatives business.
  7. Violation of Article 39 or Article 40.
  8. A violation of these Regulations or of related TPEx Regulations that has a material effect on the rights and interests of investors or orderly trading in the market.
  9. A material instance of inability to perform on a financial derivatives trade.
  10. Assessment, in accordance with the Directions for Risk Management Assessment Systems of Securities Firms, finding that the securities firm was Grade 5 during the most recent period or Grade 4 during the two most recent periods, or failure to conduct an assessment.
  11. The securities firm has failed to engage in financial derivative product trading business for 1 year after becoming qualified to engage in such business.
    When a securities firm's qualification for trading of financial derivatives has been suspended or terminated due to circumstances under any subparagraph of the preceding paragraph, upon the extinguishment of the cause and in the absence of a cause under any other subparagraph of that paragraph, the securities firm may apply for restoration of its qualification by submitting relevant evidentiary documentation. The TPEx may restore the firm's qualification after performing a verification review and reporting to and receiving the consent of the competent authority.
Chapter V Supplementary Provisions
Article 56     The TPEx may separately adopt guidelines or other supplementary regulations with respect to these Regulations or to individual financial derivatives specified herein.
Article 57     These Regulations, and any amendments hereto, shall enter into force upon approval and public announcement by the competent authority after passage by the board of directors of the TPEx.
    Any addition, deletion, or amendment to the Appendices of these Regulations shall enter into force following approval by the president of the TPEx.