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Title: Taiwan Stock Exchange Corporation Operation Guidelines Governing Liquidity Providers of Beneficial Certificates
Date: 2008.09.03 ( Announced )
Date: 2016.03.08 ( Amended )

Article Content

 
1     These Operation Guidelines are adopted pursuant to Article 11 of the TWSE Rules Governing Trading of Beneficial Certificates.
2     A securities investment trust enterprise (SITE), futures trust enterprise ("futures trust enterprise"), or offshore fund manager or an institution designated thereby ("offshore fund institution"), that offers offshore exchange-traded funds ("ETFs"), under the Regulations Governing Securities Investment Trust Funds, Regulations Governing Offshore Funds, or Regulations Governing Futures Trust Funds, shall select liquidity providers ("liquidity providers") respectively for exchange-traded fund beneficial certificates (hereinafter all referred to as "ETF beneficial certificates"). An offshore fund institution may engage a general agent to report by letter to the TWSE.
    An SITE shall appoint one of the liquidity providers of the beneficial certificates of an ETF securities investment trust fund as the liquidity provider of additional ETF beneficial certificates.
3     A liquidity provider shall meet the following requirements:
  1. A liquidity provider must be qualified as a participating securities firm that conducts the business of creation and redemption of ETF beneficial certificates, and also as a securities firm that conducts proprietary securities trading business.
  2. It must be approved by the TWSE to operate the business of an ETF beneficial certificates liquidity provider.
  3. It must have entered into a contract for provision of ETF beneficial certificates market liquidity ("liquidity contract") with a SITE, futures trust enterprise, or offshore fund institution that issues ETF beneficial certificates.
4     If a liquidity provider fails to meet any or all of the following requirements, the TWSE may deny approval for its operation of ETF beneficial certificates liquidity provision business. Those not meeting requirements in subparagraphs 2 to 6 need not be subject to this restriction, however, if there has been a concrete improvement in the circumstances, and it has been recognized by the competent authority:
  1. The most recent financial report audited and attested by the certified public accountant shows net worth per share of not less than par value, and financial status meeting the requirements under the Regulations Governing Securities Firms;
  2. Has not been issued a warning by the competent authority under subparagraph 1 of Article 66 of the Securities and Exchange Act within the most recent 3 months;
  3. Has not been subject to any sanction imposed by the competent authority during the most recent half year ordering the securities firm to remove from office any of its directors, supervisors, or managerial officers or to replace any of its responsible persons or other relevant personnel.
  4. Has not been subject to any sanction imposed by the competent authority during the most recent year involving suspension of business activities.
  5. Has not been subject to any sanction imposed by the competent authority during the most recent 2 years involving voidance of any part of its permission for business.
  6. Has not been subject during the most recent year to any measures taken by a securities exchange, an over-the-counter securities market, or the Taiwan Futures Exchange Corporation under the bylaws or rules of such exchange involving suspension of or restriction on the trading activities of the securities firm.
  7. Other requirements prescribed by the competent authority.
5     A liquidity provider must open a segregated ETF beneficial certificates account ("777777-7" under a securities dealer account) for the purpose of offering buy and sell quotes for liquidity provision.
    To meet hedging needs in connection with liquidity provision, a liquidity provider may open a segregated ETF beneficial certificates hedge account ("777777-8" under a securities dealer account) to offer sell quotes for borrowed securities. The quantities of such securities will not be subject to intraday limits on the amounts of sell orders for borrowed securities.
     The securities on which quotes are offered for the sale of borrowed securities through the segregated ETF beneficial certificates hedge account shall be limited to those transferred into it from a segregated ETF beneficial certificates account ("777777-7" under a securities dealer account), and any remaining balance may only be transferred back to the original segregated ETF beneficial certificates account.
6     The liquidity contract shall at least prescribe the following matters with respect to the responsibilities and obligations of a liquidity provider (the standards below shall all include the number of matches, trading price, and order price of unexecuted portions, as calculated for the 30 minutes prior to commencement of trading and a certain period of time prior to close of trading):
  1. The calculation formula for the best bid/ask spread of the ETF beneficial certificates as disclosed in the TWSE centralized securities exchange market is as follows:

  2. (the best bid/ask spread) = [(lowest unexecuted ask quote) - (highest unexecuted bid quote)]/( lowest unexecuted ask quote)

  3. The minimum number of participations by a liquidity provider in matching of the ETF beneficial certificates. The number of participations in matching means the designated minimum number of participations in matches in the TWSE's trading system in a buy or sell order in which the price is within a specified range above the previous lowest unexecuted ask quote, within a specified range below the previous highest unexecuted bid quote, or within a specified range above and below the execution price. Minimum numbers shall be set for participations in matches of bid and ask quotes calculated as specified above.
  4. The minimum amount of buy/sell quotes that a liquidity provider shall make during a suspension of matching when there occurs a circumstance specified in paragraphs 4 and 5 of Article 58-3 of the TWSE Operating Rules with respect to the ETF beneficial certificates beneficial certificates during the trading session.
  5. Except when the price of the ETF beneficial certificates goes limit-up or limit-down, the disclosure of market trading prices is limited only by the duration of time of bid or ask prices; however, the aforesaid calculation of time may be excluded when matching time must be postponed due to a circumstance specified in paragraphs 4 and 5 of Article 58-3 of the TWSE Operating Rules.
  6. Agreement that the TWSE provide to the SITE, the futures trust enterprise, or the general agent for offshore funds all the buy/sell quotes and itemized statements of trading of the ETF beneficial certificates done through the liquidity provider's segregated ETF account.
6-1     If any of the following circumstances in the disclosure of market trading prices has existed in respect of any ETF beneficial certificates for 3 consecutive months, the TWSE will notify the SITE or futures trust enterprise issuing the ETF beneficial certificates to take corrective measures within 2 months commencing from the following month after the notification is made. The TWSE will issue a warning letter if the SITE or futures trust enterprise fails to take corrective measures within the time limit, and continued failure to take corrective measures within 2 months from the following month shall be deemed a breach of the listing contract, and the TWSE will impose a breach penalty in the amount of NT$30,000 on the SITE or futures trust enterprise, with further investigation conducted once every 3 months and consecutive penalties imposed until such time as correction is made.
    With respect to the beneficial certificates of domestic component securities ETFs, beneficial certificates of leveraged or inverse ETFs where the underlying index component securities are all domestic securities, and the beneficial certificates of the underlying ETFs of such ETFs, each of the following circumstances may not occur more than twice per month in the disclosure of market trading prices during 30 minutes prior to commencement of trading to close of trading (including the disclosed trading prices as calculated within a certain period of time before commencement of trading and close of trading):
  1. With the exception of the disclosure of limit-up or limit-down prices, in the disclosure of market trading prices, only either a posted bid price or a posted ask price is available, and the circumstance has continued for more than 3 minutes.
  2. The best bid-ask spread is higher than 1 percent, and the circumstance has continued for more than 10 minutes.
  3. When the TWSE encounters any circumstance under paragraphs 4 and 5 of Article 58-3 of the TWSE Operating Rules and has to postpone matching for a period of time, such postponement may be excluded from the calculation of the time periods set out above.
     With respect to the beneficial certificates of a foreign component securities ETF and beneficial certificates of an underlying ETF of such ETF, beneficial certificates of a futures ETF, beneficial certificates of a leveraged or inverse ETF where the underlying index component securities include one ore more foreign securities and beneficial certificates of an underlying ETF of such ETF, each of the following circumstances may not occur more than six times in total per month in the disclosure of market trading prices 30 minutes prior to commencement of trading to close of trading (including the disclosed trading prices as calculated within a certain period of time before commencement of trading and close of trading:
  1. With the exception of the disclosure of limit-up or limit-down prices, in the disclosure of market trading prices, only either a posted bid price or a posted ask price is available, and the circumstance has continued for more than 10 minutes.
  2. The best bid-ask spread is higher than 3 percent, and the circumstance has continued for more than 10 minutes.
  3. When the TWSE encounters any circumstance under paragraphs 4 and 5 of Article 58-3 of the TWSE Operating Rules and has to postpone the matching for a period of time, such postponement may be excluded from the counting of the number of occurrences set forth above.
  4. In the case of the underlying index component securities of a foreign component securities ETF, if the foreign securities market is closed on a given day, the disclosure of market trading prices of the beneficial certificates of such ETF and the beneficial certificates of its underlying EFT for that given day shall be excluded from the counting of the number of occurrences set forth above.
  5. In the case of the underlying index component of a futures ETF, if the exchange market of the foreign futures contracts concerned is closed on a given day, the disclosure of market trading prices for that given day shall be excluded from the counting of the number of occurrences set forth above.
  6. In the case of the underlying index component securities of a leveraged or inverse ETF, if the foreign securities market is closed on a given day, the disclosure of market trading prices of the beneficial certificates of such ETF and the beneficial certificates of its underlying EFT for that given day shall be excluded from the counting of the number of occurrences set forth above.
7     If a SITE, a futures trust enterprise, or an offshore fund institution adds a liquidity provider, it shall, by 3 p.m. on the day 3 days before the effective day of the contract, notify the TWSE by letter, annexing the certificates and documents proving the qualifications specified in Point III of these Operation Guidelines; in the case of termination of a liquidity provider, notification shall be made by letter to the TWSE by 3 p.m. on the day 3 days before the termination day of the contract. An offshore fund institution may engage a general agent to report by letter to the TWSE.
8     Preferential treatment for liquidity providers
  1. A liquidity provider may, during the same settlement period, use netting when settling block trades, regular trades, after-hours fixed-price trades, and odd-lot trades, and spot trades on the same day, of ETF beneficial certificates. If there remains a balance of sell trades of the ETF beneficial certificates after netting, the liquidity provider may, within the same day, borrow those ETF beneficial certificates through the TWSE's securities lending system or from a securities firm pursuant to regulations and, no later than the second business day following the transaction day, apply to borrow securities to perform settlement pursuant to Article 109 of the TWSE Operating Rules.
  2. A liquidity provider that applies to borrow securities for settlement pursuant to Article 109 of the TWSE Operating Rules may be exempted from the relevant sanctions on its general manager, managerial officer, and responsible staff member.
  3. The TWSE provides a discount on transaction charges for liquidity providers that achieve a certain performance level. Relevant requirements and criteria shall be separately prescribed by the TWSE.
  4. If the amount of securities borrowed to perform settlement pursuant to Article 109 of the TWSE Operating Rules as aforementioned exceeds the number of beneficial units per unit of such ETF beneficial certificates, the liquidity provider's eligibility for discounts or exemption of transaction charges for the current month shall be cancelled.
9     If any of the following circumstances applies to the liquidity provider, the TWSE may cancel its qualification as a liquidity provider, or may, depending on the severity of circumstance, temporarily suspend the preferential treatment as mentioned in Point VII of these Operation Guidelines.
  1. Violation of relevant regulations prescribed by the competent authority or the TWSE.
  2. Termination of the liquidity contract with a SITE, a futures trust enterprise, or an offshore fund institution.
10     These Operation Guidelines shall take effect after having been submitted to and approved by the competent authority. Subsequent amendments thereto shall be effected in the same manner.