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Title: Operating Rules for Securities Lending by Securities Firms
Date: 2008.03.05 ( Announced )
Date: 2017.03.28 ( Amended )

Article Content

 
Chapter 1 General Principles
Article 1     These Operating Rules are adopted pursuant to Article 40, paragraph 1 of the Regulations Governing Securities Lending by Securities Firms.
Article 2     A securities firm conducting securities lending business shall do so in compliance with securities trading laws and regulations, these Operating Rules, and the relevant bylaws, operating rules, public announcements, and circular letters of the Taiwan Stock Exchange Corporation (TWSE), GreTai Securities Market (GTSM), or Taiwan Depository & Clearing Corporation (TDCC).
Article 3     "Securities lending business" conducted by a securities firm means business activities in which the securities firm borrows securities from or lends securities to a customer, another securities firm or a securities finance enterprise under an agreement stipulating return of securities of the same type and quantity within a specified period.
    The "specified period" referred to in the preceding paragraph may not exceed 6 months. However, before that period expires and with the consent of the lending party, the borrowing party may apply twice only to extend that period, and may not change the lending terms and conditions.
    The subject of "securities lending" referred to in paragraph 1 means securities eligible for margin purchase and short sale, and other securities approved by the competent authority.
    Securities lending transactions of a subject security eligible for margin purchase and short sale under the preceding paragraph are not suspended during a halt to trading, provided the securities firm shall halt such transactions when the TWSE announces a halt to trading in such security pursuant to Article 14-1, paragraph 2 of its Securities Borrowing and Lending Rules.
Article 4     To apply to conduct securities lending business, a securities firm shall fill out an application form and submit it to the TWSE together with the relevant documentation. After the application materials are reviewed by the TWSE and the securities firm is found to be qualified and in conformance with the relevant provisions of these Operating Rules, the application shall be forwarded to the competent authority for approval.
    A securities firm approved by the competent authority to conduct securities lending business shall submit the following in document form to the TWSE for recordation and open a securities borrowing and lending account 2 days before commencing such business.
  1. Photocopies of the approval documents of the competent authority.
  2. List of supervisors and associated persons handling securities lending business and their certificates of qualification.
    The responsible persons and associated persons under the preceding paragraph shall register with the TWSE before they may conduct such business; for any change in those registered persons, a change of registration shall be carried out within 5 days.
    A securities firm in the first paragraph approved by the competent authority to conduct securities lending business shall amend the registration of its securities business items with the TWSE before commencing such business. In addition, the securities firm's business personnel that conduct such business shall possess the relevant qualifications prescribed by the competent authority in the Regulations Governing Responsible Persons and Associated Persons of Securities Firms.
    After a securities firm has been approved by the competent authority to conduct securities lending business, if its regulatory capital adequacy ratio is below 200 percent for 2 consecutive months, it shall suspend such business except the redelivery of securities, and may resume it only after the securities firm achieves compliance with regulations for 3 consecutive months and receives approval from the competent authority. If the securities firm has already been approved to conduct such lending but has not begun doing so, it shall suspend proceeding with such business.
Article 5     Securities collateral obtained by a securities firm from lending securities to customers shall be deposited in the dedicated account for securities lending collateral opened by that securities firm at the TDCC. If the customer issues a written statement of consent for collateral rehypothecation, the securities collateral may be utilized for the purposes listed below and no others:
  1. As collateral for securities borrowed through the TWSE securities lending system.
  2. As collateral for refinancing of securities by securities finance enterprises.
    If the securities collateral of the preceding paragraph are book-entry central government bonds, they shall be handled by transfer of registration at the clearing bank in accordance with the Directions for the Operation of Book-Entry Central Government Securities.
    A securities firm that utilizes any of its collateral securities obtained in the course of lending securities to customers shall return the same quantity and type of securities when the customer returns the securities it borrowed.
Chapter 2 Opening and Management of Securities Lending Accounts
Article 6     A securities firm shall complete the following procedure before it may begin to accept securities lending transaction-related business from a customer:
  1. open a customer brokerage account;
  2. enter into a securities lending agreement with a customer; and
  3. open a securities lending account.
    The Taiwan Securities Association shall draft a model securities lending agreement referred to in subparagraph 2 of the preceding paragraph and submit it to the TWSE for recordation.
Article 7     When applying to open a securities lending account, a customer that is an ROC citizen shall present in person their original national ID card and sign an account opening application and securities lending agreement on the spot.
    A customer organized and registered as a juristic person under ROC law shall conduct the account opening procedures of the preceding paragraph by having its authorized person submit originals of the power of attorney, national ID cards of its authorized person and representative, corporate registration (or registration amendment) card, and evidentiary documentation of corporate registration.
    When applying to open an account, a customer other than those specified in paragraphs 1 and 2 shall conduct the account opening procedures by presenting the relevant proof of identity documents in accordance with the TWSE Operating Rules or the relevant provisions regarding the opening of a brokerage account prescribed by the GTSM.
    Photocopies of the relevant proof of identity documents and the original power of attorney used to apply to open an account shall be retained; the following statement shall be stamped on the photocopied portion, "It has been verified that the account opening application has been made in person by the applicant or by the authorized person thereof and that the photocopies are true and faithful copies of the original."
    Where a client is to apply for opening a securities lending account in the capacity mentioned in the first or second paragraph, it may make its application to a securities firm by correspondence or electronic means that is sufficient to identify the client as the applicant itself or its indication of intent, if the client has opened a transaction account.
    A securities firm processing the opening of a securities lending account shall decide whether to open that account based on a detailed and faithful credit check in accordance with its internal control system. It shall record the detailed credit check method, information, and results on the account opening application, and record the account opening date. It shall transmit the account opening information that same day to the TWSE or GTSM computer database, and shall do likewise for account cancellation information. If the customer is a juristic person, it shall separately notify the customer in writing to confirm that the account is being opened with its authorization, provided that this requirement shall not apply if the customer has engaged a custodian institution to open the account on its behalf, or submits proof that settlement is to be handled on its behalf by a custodian institution.
    A securities firm shall approve a customer's authorized limit on loaned securities based on that customer's credit check results. If the customer, prior to opening the securities lending account, has already applied and received approval for a specific amount of credit in connection with other credit business handled by the securities firm, the customer's authorized limit on loaned securities shall be calculated in the aggregate with the already approved amount of credit, and the proof of financial capacity provided by the customer must equal at least 30 percent of the total amount of credit after calculation of the aggregate amount of the applications made by the customer. If the customer, after opening the securities lending account, applies to the securities firm for a specific amount of credit in connection with other credit business, that amount shall also be included as part of the aggregate.
    The securities firm shall provide the customer with a risk disclosure statement, disclosing the possible risks of securities lending transactions. A model template for the risk disclosure statement shall be drafted by the Taiwan Securities Association.
Article 7-1     The proof of financial capacity that a customer must provide with respect to the total amount of credit calculated in aggregate, pursuant to paragraph 6 of the preceding article, means provision by the customer of information on income and all types of assets for the preceding year.
    The proof of financial assets of the preceding paragraph shall consist of only the following vouchers and documents of the customer or the customer's spouse, parents, or adult children:
  1. A photocopy of the certificate of title to real property, a transcript of the registration for the real property, or a receipt for payment of property tax on it. The securities firm shall calculate the value of the property after inquiring about any other encumbrances on it.
  2. Documentary evidence of deposits at a financial institution (such as a certificate of deposit balance, bankbook, or certificate of deposit). The basis of calculation will be the average balance for the most recent month.
  3. Documentary evidence of securities holdings.
  4. A certificate of balance for a gold account issued by a financial institution (a gold account passbook, or a certificate of gold account passbook balance or certificate of gold account balance).
  5. Documentary evidence of trust assets in a trust of money, a securities trust, or a real estate trust (such as a reconciliation statement, list of trust assets, or certificate of trust assets). The beneficiary of the trust must be the same person as the trustor, and trust assets may only be real estate, deposits with a financial institution, securities, or the balance in a gold account at a financial institution.
     If the customer provides proof of financial assets not owned by the customer, the actual owner of the assets must be a joint and several guarantor of the customer.
Article 7-2 In conducting securities lending business, a securities firm may transfer its securities for loaning into a designated securities trading account according to the Guidelines for the Transfer of Securities from a Securities Borrowing and Lending Account to the Transfer Account of the Dealing and Futures Departments (Appendix 1), to make such securities available to said departments for meeting different business requirements.
Article 8     If for 3 consecutive years or longer there is no record of any lending transaction by the customer that opens a securities lending account, the securities firm shall promptly cancel the securities lending transaction account and notify the customer.
    If a customer must terminate a securities lending account that it opened, it shall fill out an application for termination of the securities lending account. When the securities firm has investigated and determined that all its lending transactions have been closed out and all relevant obligations settled, it shall promptly carry out account cancellation procedures. A securities firm may process an application for account cancellation by correspondence or electronic means that is sufficient to identify the customer as the applicant itself or its indication of intent.
Article 9     A securities firm shall set up a separate account ledger for each customer and record the matters listed below on a transaction-by-transaction basis each day:
  1. Matters regarding securities lending, borrowing and return.
  2. Collateral details, value, and collateral ratio.
  3. Matters regarding collateral calls, and withdrawal, exchange, and disposal of collateral.
  4. Matters regarding compensation for entitlements.
    A securities firm shall compile and deliver to the customer a monthly reconciliation statement based on the account ledger record of the preceding paragraph, provided that this requirement shall not apply where there is no record of any lending transaction in that month, and the customer has not submitted a written request for such statement.
    A securities firm shall obtain a letter of consent signed by the customer agreeing that the securities firm may provide information regarding its individual securities lending and borrowing to the TWSE, GTSM, and institutions designated by the competent authority as needed for collection, computer processing, and international transmission or use in accordance with acts and regulations.
    A securities firm borrowing securities from a customer and lodging a performance bond with the TWSE pursuant to Article 19, paragraph 1 and Article 38, paragraph 1 will record the lodgment of performance bond in lieu of the matters in subparagraphs 2 and 3 of the preceding paragraph.
Article 10     A customer shall promptly notify the securities firm in writing or by correspondence or electronic means that is sufficient to identify the customer as the principal itself and confirm its indication of intent if there is a change to the name or identification documents of the customer itself, its agent, or representative, or to the mailing address or contact phone number, recorded on its application to open a securities lending account.
    Where a customer fails to make the notice of the preceding paragraph the securities firm shall continue to process transactions based on the original registration information, and the customer shall be solely liable, without recourse, for any resulting legal issues.
Article 11     Required notice of matters by a securities firm pursuant to these Operating Rules shall be effected by mail with personal signature confirmation of receipt by the customer, or other mutually agreed-upon method.
    Where a securities firm's notice sent by mail cannot be delivered on time because the customer failed to make notice under the preceding Article, or due to other reason attributable to the customer, such notice shall be deemed effective on the date of the post office's first delivery attempt.
    Where the customer signs in person to acknowledge receipt of a securities firm's notice, the customer's signature or seal shall match the signature on the original securities lending agreement or the original seal/signature-of-record, and shall be accompanied by the date.
Chapter 3 Applications for the Borrowing and Return of Securities
Article 12     The business hours of a securities firm for securities lending business shall be 9 a.m. to 3:30 p.m.
Article 13     A customer that lends, borrows or returns securities to a securities firm shall fill out an application form marked with the word "Lend," "Borrow" or "Return", and after the securities lending transaction has been executed, the securities firm shall complete a lending report bearing that same word; the TWSE and the GTSM will make a joint public announcement of the matters that shall be recorded therein by the securities firm.
    The provisions of the preceding paragraph shall be subject mutatis mutandis to Article 75, subparagraphs 7 to 10 and Article 80, paragraphs 4 to 6 of the TWSE Operating Rules and to Articles 62 and 62-2 of the GreTai Securities Market Rules Governing Securities Trading on the GTSM.
Article 13-1     If the transfer date of securities that a customer borrows from a securities firm is the next business day after the borrowing is completed, and if before the borrowed securities are transferred into its securities borrowing and lending account, the customer needs to sell those borrowed securities, it may do so only through the securities firm that originally loaned the securities.
Article 14     Where a securities firm conducts securities lending and borrowing, the securities firm and the customer shall negotiate and fix the rate at which the transaction will be executed, at a rate not to exceed 20 percent per annum, and with a tick of 0.01 percent.
    The method for the calculation, collection and payment of the securities lending fee shall be negotiated between the securities firm and customer and recorded in the agreement.
    Any fee arising from refinancing under Article 8, paragraph 2 of the Regulations Governing Securities Lending by Securities Firms shall be borne by the securities firm.
Article 15     When a securities firm accepts a customer's application to borrow securities, it shall collect collateral from the customer with a value calculated at an initial collateral ratio of not less than 140 percent of the auction reference price at market opening or the base price for first trading of the security on the given day, unless the customer is a professional institutional investor as defined in Article 19-7, paragraph 2 of the Regulations Governing Securities Firms and has otherwise agreed to an initial collateral ratio with the securities firm.
    The "auction reference price at market opening" or the "base price for first trading" in the preceding paragraph shall be determined pursuant to Article 58-3, paragraph 2 of the TWSE Operating Rules, or Article 60-1 of the GreTai Securities Market Rules Governing Securities Trading on the GTSM.
    A securities firm shall notify the TWSE or GTSM regarding the delivery information of the loan securities and the collateral securities (except for book-entry central government bonds), and forward such notice to the TDCC to immediately conduct the securities transfer procedures. The TDCC shall annotate the securities borrowed by customers. Central government bonds shall be handled using the title transfer registration method pursuant to the Directions for the Operation of Book-Entry Central Government Bonds.
    No transfer or withdrawal of securities that have been annotated is allowed unless for purposes listed under Article 10 of the Regulations Governing Securities Lending by Securities Firms.
Article 15-1     When a securities firm accepts a customer's application for borrowing securities to repay refinancing, it may apply the collateral for short sales, margin deposited for short sales, and securities satisfied, that are to be returned to the customer for the transaction concerned, as the collateral for securities borrowing that is calculated according to the agreed initial collateral ratio in Article 15 and conforms to Article 19, paragraphs 2 and 6, and shall make up the shortfall, if any.
Article 16     When a securities firm wishes to use proprietary securities, collateral securities obtained in connection with customer margin purchases, securities borrowed from customers, and securities borrowed from another securities firm or securities finance enterprise conducting securities borrowing and lending business or securities margin purchase and short sale business, for purposes listed in Article 10 of the Regulations Governing Securities Lending by Securities Firms, it must remit them into a securities borrowing and lending account before doing so, except where otherwise provided by the TWSE or laws and regulations.
Article 17     When securities are transferred from a securities firm's own securities account to a securities borrowing and lending account, the securities firm shall first return any securities of the same type that had been remitted from the securities borrowing and lending account into its own account, with the remaining balance transferred being taken as the amount of securities remitted from its own securities account into the securities borrowing and lending account; the same procedure shall govern the transfer of securities from a securities borrowing and lending account to a securities firm's own account.
    Borrowed securities in the securities firm's own securities account may not be loaned out.
Article 18     A securities firm that conducts securities lending shall notify the TWSE or GTSM of any transfer of securities into or out of its securities lending collateral account and forward such notice to the TDCC to conduct the securities transfer procedures.
    Securities in a securities firm's own securities account opened at another securities firm must be transferred into the securities firm's securities lending collateral account before they may be posted as collateral in the TWSE securities lending system.
Article 19     A securities firm borrowing securities from customers shall pay a performance bond to the TWSE pursuant to Article 38, paragraph 1.
    When lending securities to customers, a securities firm may accept the following types of assets as collateral, to be valued at the valuation percentages indicated:
  1. Cash.
  2. Book-entry central government bonds. Calculate at 90 percent of face value.
  3. Securities eligible for margin purchases and short sales. The collateral value of securities eligible for margin purchase and short sale transactions shall be 70 percent of the most recent closing price if they are TWSE or GTSM listed securities.
  4. Bank guarantee.
    The "most recent closing price" in subparagraph 3 of the preceding paragraph shall mean, prior to the close of market on the given day, the closing price for the preceding business day, and after the close of market on the given day, shall mean the closing price on the given day. The aforesaid closing price shall be set pursuant to Article 58-3, paragraph 3 of the TWSE Operating Rules or Article 35, paragraph 3 of the GreTai Securities Market Rules Governing Securities Trading on the GTSM .
    If no closing price is available for the preceding business day, the price determined by the principles under Article 58-3, paragraph 2, subparagraph 2 of the TWSE Operating Rules or Article 57, paragraph 1 of the GreTai Securities Market Rules Governing Securities Trading on the GTSM shall substitute for the closing price.
    If the closing price for a given day is not available, the most recent closing price shall be determined by one of the following principles:
  1. When, on the day the security is loaned, the highest bid price at market close is higher than the auction reference price at market opening or the base price for first trading, the highest bid price shall be used.
  2. When, on the day the security is loaned, the lowest ask price at market close is lower than the auction reference price at market opening or the base price for first trading, the lowest ask price shall be used.
  3. When neither of the above circumstances applies, the auction reference price at the opening of market or the base price for first trading shall be used.
    Securities collateral that a securities firm collects from a customer shall be limited to securities that the customer itself owns.
    The collateral valuation percentages in paragraph 2 may be adjusted by the TWSE in conjunction with the GTSM based on the condition of the collateral. The lender and borrower may separately agree to a collateral valuation percentage lower than the prescribed percentage.
    A securities firm may reject, or lower the valuation percentage for, any security that would otherwise be eligible collateral under paragraph 2, subparagraph 3 if the securities firm so deems appropriate having regard to the market liquidity and risk status of that collateral; if any such security has been accepted and received as collateral for a lending transaction, the securities firm may notify the borrowing party to replace the collateral.
    Where a security eligible for margin purchases and short sales under paragraph 2, subparagraph 3 is during a trading halt announced by the TWSE or GTSM, that security may not be the collateral for a lending transaction; if any such security has been accepted and received as collateral for a lending transaction, the securities firm may proceed with the collateral in accordance with the preceding paragraph.
Article 19-1      A dedicated account shall be established for management of the collateral under paragraph 2, subparagraph 1 of the preceding article. The collateral may only be New Taiwan Dollars. Offshore overseas Chinese and foreign nationals, however, may provide a collateral in foreign currency. The types of foreign currency are limited to US Dollar, Euro, Japanese Yen, British Pound, Australian Dollar and Hong Kong Dollar). Dedicated accounts for foreign currency collateral shall be established at banks that have been approved by the Central Bank to handle foreign exchange business ("designated banks").
    Securities firms shall abide by the following provisions when accepting foreign currency collateral:
  1. Foreign currency collateral may be returned to customers only in the original currency, and may not be converted to New Taiwan Dollars.
  2. Foreign currency collateral shall be only in the form of bank deposits and used only as a source of funds of securities business money lending by offshore securities branches and as needed for carrying out securities lending business, and only as collateral for securities lending through the TWSE securities lending system.
  3. The collateral value of foreign currency collateral will not be discounted.
  4. The exchange rate a securities firm uses for marking foreign currency collateral to market shall be the foreign currency rate posted by the designated bank at which the securities firm opened the dedicated foreign currency deposit account or the exchange rate for marking the foreign currency to market that is publicly announced through the TWSE securities lending system.
     If a securities firm uses foreign currency collateral when making interest rate swaps, then in addition to observing the self-regulatory rules of the Taiwan Securities Association, the securities firm shall also handle the swaps in accordance with the following provisions, and the following provisions shall be made part of the securities firm's internal control system:
  1. Swaps may only be carried out with designated banks, and any New Taiwan Dollars obtained must first be transferred into the dedicated New Taiwan Dollar cash collateral account before being otherwise utilized.
  2. "Utilization" under the preceding paragraph shall be restricted to the uses set out Article 14, paragraph 1 of the Regulations Governing Securities Lending by Securities Firms.
  3. Interest rate swaps among foreign currencies shall be handled by offshore securities branches.
    A securities firm shall file information on its utilization of cash collateral for recordation with the TWSE during the following month, along with the filing of its monthly accounting summary.
Article 20     A securities firm that receives a customer's application to replace collateral shall effect such replacement by the second business day after the receipt thereof; the replacement method shall be stipulated between the two parties.
Article 21     A securities firm shall notify the customer in writing or other manner as agreed between the parties 10 days before the expiration of the loan period for any loaned securities, and shall return the collateral on the same day that the customer returns the securities upon expiration or the next business day.
     The return of subject securities and collateral securities by a securities firm (except book-entry central government bonds) is governed by Article 15, paragraph 3 mutatis mutandis.
    Cash collateral that is returned shall be deposited in the customer's bank deposit account. Return of book-entry central government bonds shall be handled in accordance with the Directions for the Operation of Book-Entry Central Government Securities.
Article 22     A securities firm may notify a customer of a recall of loaned securities as agreed by the two parties, and shall return the collateral on the day the customer returns the securities or the next business day.
    During the loan period, a customer may apply to return early all, or a portion of, the borrowed securities, and at the time of such application stipulate with the securities firm the method and deadline for transfer of the securities and the collateral. The securities firm shall return the collateral, at the latest, by the second business day after it receives the securities returned by the customer.
    Where public notice is given of either a suspension of trading of a subject security without prescribing the time for resumption or the termination of its TWSE or GTSM listing, or in the event of a merger, capital reduction or other circumstances prejudicing the lending party's exercise of its shareholder's rights that occur to an issuer, the borrowing party shall return the security and close out the transaction before the date of such suspension.
    Where the lending party is prevented by the overall trading condition in the market or of the subject security in question as a result of the aforementioned circumstances from buying up the security at the maximum price limit, the borrowing party may apply for return with third-person securities during the suspension period of the subject security.
Article 23     A securities firm shall on a daily basis transmit information regarding the authorized loan limits, loan transaction details, and outstanding balances of securities loans for each customer to the TWSE or the GTSM, which shall compile such information and publish the outstanding balance of securities loans before the next day's market opening.
Article 24     A securities firm shall produce detailed and accurate records and vouchers for all funds and securities receivable and payable that it processes in the course of securities borrowing and lending transactions, and shall compile the following statements on a daily basis:
  1. Daily statement of securities lending transactions.
  2. Summary statement and itemized statement of securities borrowing and lending position balances.
  3. Itemized statement of the receipt, payment, disposal, and utilization of collateral in connection with securities lending and borrowing.
  4. Itemized statement of collateral.
  5. Itemized statement of collateral margin calls and deposits.
  6. Itemized statement of compensation of entitlements.
  7. Itemized statement of applications for and repayment of refinancing in connection with securities lending.
  8. Itemized statement of refinancing balances in connection with securities lending.
  9. Itemized statement of refinancing collateral in connection with securities lending.
  10. Itemized statement of performance bond.
Chapter 4 Collateral Mark-to-Market and Collateral Calls
Article 25     A securities firm shall calculate on a daily basis, for each customer, the collateral ratio for the customer's securities borrowing and lending account as a whole and for each securities loan made through it, based on the closing prices published by the TWSE or the GTSM, according to the following formula:
    Collateral ratio = (total collateral value of the collateral - securities lending fees payable ) ÷ (market value of the loaned securities + market value of stock dividend shares to be returned + cash dividends to be returned) × 100%
    Except in the case of a cash capital increase, for the 6 business days prior to any ex-dividend or ex-rights date for a security that is provided as collateral, its collateral value shall be calculated at the valuation percentage specified in Article 19, based on the respective current day's closing price minus the value of the dividend or minus the value of the right determined based on the current day's closing price.
    The current day's closing price mentioned in the preceding paragraph is governed by Article 19, paragraph 5 mutatis mutandis.
    Where a customer's overall account collateral ratio is lower than the 120 percent collateral maintenance ratio, the loaning securities firm shall promptly give notice to request the customer to provide additional collateral within 2 business days from the day the notice is delivered to make up the collateral shortfall for each individual securities lending transaction that does not meet the required collateral maintenance ratio, so as to bring the individual collateral ratios thereof above the initial collateral ratio, provided where the customer is a professional institutional investor as defined in Article 19-7, paragraph 2 of the Regulations Governing Securities Firms and has otherwise agreed to a collateral maintenance ratio with the loaning securities firm, the aforementioned notice shall be given requesting that the shortfall be made up based on the agreed ratio.
    The collateral maintenance ratio in the preceding paragraph and the initial collateral ratio in Article 15 may be adjusted by the TWSE in consultation with the GTSM based on market circumstances.
Article 26     If a securities firm notifies a customer to cover a shortfall pursuant to paragraph 4 of the preceding article and the customer fails to do so, or does so only partially, within 2 business days from service of that notice, the securities firm shall proceed as follows:
  1. If a customer's overall account collateral ratio on a given day is still lower than the collateral maintenance ratio, dispose of its collateral beginning from the next business day under the mutatis mutandis application of Article 32, paragraph 1.
  2. If the customer's overall account collateral ratio rises and meets or exceeds the collateral maintenance ratio, the securities firm may temporarily refrain from disposing of its collateral. However, if the collateral ratio subsequently falls short again on any given business day, and the customer fails to take the initiative to pay additional collateral on that same day, dispose of its collateral beginning on the next business day under the mutatis mutandis application of Article 32, paragraph 1.
  3. If before the collateral has been disposed of under the preceding subparagraph, the sum of any successive collateral deposits made by the customer covers the shortfall of which it was notified, expunge the collateral call record.
  4. If a customer's overall account collateral ratio rises and meets or exceeds the initial collateral maintenance ratio, expunge the collateral call record.
Article 27     When a customer closes out a portion of its securities borrowing positions, if the overall account collateral ratio for positions still open in the borrowing and lending account is lower than the collateral maintenance ratio, the securities firm shall retain the collateral returnable to the customer, to the extent necessary so as not to fall below the required collateral maintenance ratio.
Article 28     A customer shall warrant that the securities it provides as collateral are free and clear of all liens, claims, and encumbrances of any nature whatsoever. If there is any defect in rights, legal dispute, loss of eligibility for margin transactions, suspension of trading, or other cause that disqualifies any of the securities collateral, the securities firm shall subtract that type of security when calculating the collateral ratio under Article 25 herein, and promptly notify the customer to replace it with eligible collateral of equivalent collateral value within 3 business days after receiving such notice.
Article 29     If the overall collateral ratio of a customer's securities borrowing and lending account exceeds the initial collateral ratio as a result of a change in price, the customer may, as stipulated between the two parties, request that the securities firm return the collateral for those transactions in which the collateral ratio exceeds the initial collateral ratio or apply it toward other securities borrowing transactions, provided that subsequent to such return of collateral, the collateral ratio of the overall account may not be lower than the initial collateral ratio.
Chapter 5 Handling of the Ex-rights/Dividends of Loaned Securities and Securities Collateral Title Transfer
Article 30     Where a securities firm and customer stipulate compensation of rights and dividend entitlements of loaned securities, the securities firm shall give notice to the customer to make compensation for such entitlements according to the agreed-upon deadlines and method.
    When the borrowing party provides securities as compensation to the lending party pursuant to the preceding paragraph, the securities firm shall notify the TWSE or GTSM and forward such notice to the TDCC to immediately conduct the securities transfer procedures.
    When the securities loaned by the lending party carry subscription rights to new shares and the lending party intends to subscribe, the lending party shall deliver the subscription price to the borrowing party before the expiration of the subscription period as stipulated, and the borrowing party shall make the transfer of the subject securities subscribed to the lending party before the expiration of the prescribed subscription period.
    When the lending party wishes to exercise the voting rights of securities during the period in which they are loaned, it must, by the stipulated deadline, notify the borrowing party to return the securities before the last date of record for the shareholders meeting.
Article 31     On the business day preceding book closure of the issuing company, the securities firm shall prepare a customer-by-customer title transfer list and electronic data file of the securities collateral provided by each customer (with the exception of book-entry central government bonds), and send it to the TDCC to effect title transfer with the issuer or the issuer's stock registrar and transfer agent on the customer's behalf.
Chapter 6 Default and Dispositive Measures
Article 32     Under any of the following circumstances, the securities firm shall, beginning from the next business day, dispose of the collateral from the lending transactions at issue, and also take any necessary measures pursuant to the provisions of the agreement, unless the parties agree otherwise:
  1. The loan period has expired, or early return is agreed between the parties or required by Article 22, paragraph 3, and the customer is unable to return the securities within the stipulated time limit.
  2. The payment date for compensation for entitlements has arrived, and the customer fails to make such compensation.
  3. The customer fails to make up a collateral shortfall or to provide eligible replacement collateral within the required time period.
  4. The customer fails to pay any applicable fee as stipulated.
    When a securities firm disposes of securities collateral or makes necessary repurchases pursuant to the preceding paragraph, it shall do so, through the Securities Lending Default Handling Account it has opened with another securities broker, on the TWSE central securities market or through the GTSM trading system. If such an order is not executed, it shall continue to be quoted from the next business day, and the relevant processing fees and tax shall be borne by the customer.
    After a securities firm disposes of that collateral, if the settlement proceeds are insufficient to offset the debt, it may, within the scope necessary to settle the obligation, liquidate outstanding securities borrowing and lending transactions of the customer and use the funds obtained thereby to offset its debt. If a positive balance remains, it shall be returned to the customer; if the funds obtained are still insufficient, the securities firm shall notify the customer to make up the shortfall within a specified period.
    A securities firm that borrows securities from customers shall discontinue operations regarding additional securities borrowing and extension of its securities lending and borrowing business if the circumstance in paragraph 1, subparagraph 1, 2 or 4 applies to it or if it fails to pay the performance bond in full pursuant to Article 38, paragraph 1.
Article 33     A customer that fails to make up a shortfall pursuant to a notice under paragraph 3 of the preceding article is in default. The securities firm shall cancel its securities lending account and file a default report with the TWSE or GTSM. The TWSE or GTSM shall promptly forward notice to all securities finance enterprises and securities firms.
    A securities firm may, from the date of default until the date of settlement by the customer, collect a default penalty of 10 percent of the stipulated lending rate on the shortfall portion.
Article 34     If during the term of a securities loan any of the following circumstances applies to a customer, the securities firm shall notify the customer to close out its securities borrowing and lending transactions on the following business day, and then cancel that customer's securities borrowing and lending account. the positions have not been closed out by the deadline, the securities firm shall begin on the following business day to close out the securities lending transactions through the mutatis mutandis application of Article 32, paragraph 2 herein:
  1. Failure to perform settlement obligations on time as specified in Article 91 of the Operating Rules of the TWSE, Article 87 of the GTSM Rules Governing Securities Trading on the GTSM, or Article 58 of the Operating Rules of the Taiwan Futures Exchange Corporation.
  2. Any default or violation specified in Article 81 of the Operating Rules for Securities Firms Handling Margin Purchases and Short Sales of Securities or Article 28 of the Operating Rules for Securities Business Money Lending by Securities Firms.
    If during the term of a securities loan any of the following circumstances applies to a customer at another securities firm, futures commission merchant, or securities finance enterprise, the securities firm shall halt the customer' adding of any new securities borrowing and lending transaction:
  1. Any breach specified in Article 76, paragraph 3, subparagraph 1 or 3 of the Operating Rules of the TWSE or Article 47, paragraph 2, subparagraph 1 or 3 of the GTSM Rules Governing Securities Trading on the GTSM.
  2. Any default or in violation specified in Article 81 of the Operating Rules for Securities Firms Handling Margin Purchases and Short Sales of Securities, Article 28 of the Operating Rules for Securities Business Money Lending by Securities Firms, or Article 33 of these Operating Rules.
  3. Any default, or violation of the type referred to in the preceding subparagraph, as specified in the securities finance enterprise's operating rules for handling margin purchases and short sales, securities settlement financing rules, or rules of operation for securities lending.
    Before a case of a default or violation under the preceding paragraph has been closed, after the securities the customer provided as collateral have been sold through the Securities Lending Default Handling Account opened by another securities broker retained by the securities firm, the customer may buy back the securities from the market to return those securities.
Article 35     If a customer is in default under Article 33 herein or its securities lending account is cancelled by the securities firm pursuant to paragraph 1 of the preceding article, the securities firm may again accept and process the opening of a securities lending account by that customer only after it has settled its obligations, made payment in full, or the case has been closed.
Article 35-1     If a customer's participation in securities lending transactions is halted or terminated by the TWSE pursuant to Article 42, 45, or 49 of the TWSE Securities Borrowing and Lending Rules, the securities firm shall halt the customer's adding of any new securities lending transaction.
    If a customer's participation in securities lending transactions has been terminated pursuant to the preceding paragraph, the securities firm may again accept and process an application by that customer for securities lending transactions only after one full year has passed after the customer has settled its obligations, made payment in full, or made corrections.
Article 35-2     Where the registration of an overseas Chinese or a foreign national has been cancelled by the TWSE or the TAIFEX, the securities firm, after receiving notice of such cancellation, may not accept such customer’s request for new securities lending transactions, and shall notify such customer to close out any securities lending transactions, and cancel the securities lending account after the closeout.
Chapter 7 Risk Management
Article 36     A securities firm may not enter into a securities lending transaction with any party having any of the following relationships with it:
  1. A director, supervisor, representative of a juristic-person director or supervisor, employee, or shareholder holding more than ten percent of the shares, of the securities firm.
  2. A juristic-person shareholder of the securities firm that, through a representative, is elected as a director or supervisor of the securities firm under Article 27, paragraph 2, of the Company Act.
  3. A spouse of a director or supervisor, or of a representative of a juristic-person director or supervisor, of the securities firm.
  4. A minor child of a person of a status specified in subparagraph 1.
    The securities firm shall incorporate the provisions of the preceding paragraph into its internal control system.
Article 37     The maximum limit on the amount of securities loaned to each customer by a securities firm conducting securities lending business
     shall be regulated by the securities firm. The securities firm shall further adopt internal procedures for credit extension operations and risk control, which shall at least incorporate the following:
  1. Means of assessment of the maximum amount of securities loaned to individual customers. The assessment shall take the loan amounts extended to approved customers in other loan businesses into consideration. The percentage by which the total value of funds or securities loaned to individual customers in the overall loan business may not exceed the net worth shall be prescribed. Approval of the board of directors is required if the amount of securities to be loaned to individual natural persons reaches the higher of NT$300 million and 1% of the securities firm's net worth or if the amount of securities to be loaned to individual juristic persons accounts for at least 5% of the securities firm's net worth.
  2. Means of assessment of the amount of a single security loaned to individual customers. The assessment shall take the loan amounts extended to approved customers in other loan businesses into consideration.
  3. Means of identification of securities or customers with a high risk. Special monitoring and approval procedures shall be established in regard to the amount of high-risk securities loaned or the amount of securities loaned to high-risk customers.
  4. The amount of securities loaned to customers shall be determined according to principles that are both fair and reasonable. Lending of such whole amount to a single customer shall be avoided.
  5. If the assessment of the maximum amount of securities loaned to individual customers indicates certain individual customers are known or can be determined to be related accounts, which means the credit risks of such customers are related (for example, the risk of providing trading service to such customers), the lines of credit of all such related customers shall be regulated, in consideration of the credit risks.
  6. The regulation of the lines of credit extended to related accounts as mentioned in the preceding paragraph applies to renewals and adjustments of credit lines by customers which have opened an account and to new accounts, provided in the event of a change in respect of a related account of a customer, such as credit line adjustment or addition of related accounts, the lines of credit of the customer and its related accounts are still subject to combined regulation.
Article 37-1     No director, supervisor, officer, or shareholder with more than 10% shares of an issuer of the subject securities may engage in borrowing and lending transactions or sale of borrowed securities involving such subject securities, whether in its own name or in the name of a domestic or offshore company directly or indirectly incorporated.
    With the exception of natural persons and the designated institutional investors mentioned in Article 12-1, paragraph 2 of the TWSE Securities Borrowing and Lending Rules, an SBL participant shall advise the securities firm of the names and nationalities of the top three shareholders in terms of shareholding, each holding up to 30% or more of shares. Juristic-person shareholders shall also advise the names and nationalities of the top three natural-person shareholders in terms of shareholding, each holding up to 30% or more of shares. The government uniform invoice number of a profit-seeking enterprise or national ID number shall further be provided in the event of an R.O.C. shareholder; the national ID number and government uniform invoice number of a tax withholding agent shall be provided in the event of an offshore overseas Chinese or foreigner that has completed registration.
    The shares held by a shareholder as mentioned in the preceding paragraph shall include those held by its spouse and minors and in others' name.
Article 38     A securities firm borrowing securities from a customer shall pay a performance bond to the TWSE in accordance with the Regulations Governing Performance Bonds of Securities Firms and Securities Finance Enterprises Engaging in Securities Lending.
    The sum of the total monetary value of securities loaned by a securities firm in conducting securities lending business and the total monetary value of securities loaned by it to customers for short sales in conducting securities margin purchase and short sale business may not exceed 400 percent of its net worth.
    The monetary value of the loaned securities mentioned in the preceding paragraph is based on the closing price of the date of the loan.
    The total amount of foreign currency collateral accepted by a securities firm when engaging in securities lending business may not exceed 30 percent of its net worth. The exchange rate used in calculating the total amount of foreign currency collateral shall be as set out in Article 19-1, paragraph 2, subparagraph 4.
Article 39     The combined total monetary value of loans and provision for short sale of any given type of security by a securities firm conducting securities lending business and securities margin purchase and short sale businesses may not exceed 5 percent of the securities firm's net worth.
    A securities firm conducting securities lending business shall immediately cease lending any given type of security when the sum total of the outstanding balance of shares in that security on loan to customers plus the outstanding balance of shares of that security sold short in margin purchase and short sale business reaches the sum total specified in any of the subparagraphs of Article 8, paragraph 1 of the Regulations Governing Securities Borrowing and Lending by Securities Firms.
Chapter 8 Supplementary Provisions
Article 40     The borrowing and lending of securities between a securities firm and other securities firms or securities finance enterprises that engage in securities lending or securities margin purchase and short sale business are governed by the provisions of these Operating Rules mutatis mutandis except Article 5; Article 6, paragraph 1, subparagraph 1; Article 3; Article 7; Article 7-1; Article 8; Article 9; paragraph 3; Article 10; Article 11, paragraphs 2 and 3; Article 13-1; Article 15, paragraphs 1 and 2; Article 18; Article 19, paragraphs 2 to 8; Article 19-1; Article 20; Article 21, paragraphs 1 and 3; Article 22, paragraphs 1 and 2; each article of Chapter 4; Article 31; Article 32, paragraphs 1, 2 and 3; Article 33; Article 34; Article 35, and Article 35-2.
Article 41     The TWSE or GTSM may handle violation of any provision of these Operating Rules by a securities firm, its responsible person, or employee, in accordance with its applicable bylaws, rules, and regulations.
Article 42     These Operating Rules shall be drafted by the TWSE in conjunction with the GTSM and take effect after having been submitted to and approved by the competent authority. Subsequent amendments thereto shall be effected in the same manner.