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Chapter I General Principles
Article 1     These Directions are adopted pursuant to Article 19, paragraph 8, Article 25, paragraph 2, and Article 56 of the Taipei Exchange Regulations Governing Over-the-Counter Trading of Financial Derivatives by Securities Firms (the "Derivatives Trading Regulations").
Article 2     Unless otherwise provided by laws and regulations or the Derivatives Trading Regulations, securities firms shall comply with these Directions when offering financial derivative trading services.
Chapter II Controls Over the Structured Product Sales Process
Article 3     A securities firm that provides structured product trading services to customers other than professional institutional investors and high net worth juristic persons shall implement the following controls over the sales process:
  1. Providing a product prospectus.
  2. Providing a notice to customers.
  3. Reading aloud or using electronic equipment to explain to customers the important content of the notice to customers, and retaining a record by means of audio recording or using electronic equipment to retain a trail of the relevant procedures carried out. However, in the case of a professional customer, it may instead deliver the information in writing or by means of an audiovisual medium.
  4. A securities firm that provides structured instrument trading services to a natural person customer shall assign dedicated personnel to explain the products. If the products provided are non-principal-protected products, the securities firm shall use audio or video recording means to retain a record of the content of the explanatory procedures carried out by the designated personnel. Once it has done so, the securities firm will subsequently be exempted from assigning dedicated personnel to give explanations regarding trading of the same type of structured products.
  5. When providing structured product trading services to a professional customer, the securities firm shall inform the customer that, "Professional customers are not covered by the protections of the Financial Consumer Protection Act."
    A securities firm that provides structured product trading services to customers under the preceding paragraph shall fully disclose and explicitly inform the customer of relevant information, including all fees involved and the means of their collection, how the product is structured, and the possible risks associated with the product.
    The fees, the means of their collection, and the structure of the product that shall be disclosed to the customer under the preceding paragraph shall be detailed in the prospectus as provided in Articles 4 to 8 of these Directions.
    A securities firm that has implemented the controls over the sales process in accordance with paragraph 1 may, with the approval of the customer, be exempted from repeating the procedures in paragraph 1 when providing trading services for the same structured product to the same customer within 1 year subsequently.
Article 4     The prospectus of the preceding article shall be prepared according to the following provisions:
  1. The content shall be written in clear, understandable language and may not contain any false statement, non-disclosure, omission, or other misleading representation.
  2. The content shall be up to date. Any transaction or other event that occurs before the publishing of the prospectus and is sufficient to affect customers' judgments shall also be disclosed.
  3. The risks associated with the product shall be disclosed in simple, easily understandable language.
Article 5     The prospectus of Article 3 shall include at least the following details:
  1. A summary of important information.
  2. The terms and conditions of the product or transaction and a description of the maximum possible losses and the scenarios under which they could occur.
  3. A description of all charges and transaction procedures involved.
Article 6     The summary of important information under subparagraph 1 of the preceding article shall include the following:
  1. The product's Chinese name. The name shall properly convey the product's characteristics and be free of wording that might mislead customers. The product's foreign name should also be disclosed if available.
  2. The product's risk level, presented in clearly visible lettering.
  3. The risk profile of customers for which the product is intended and whether it is restricted to professional investors only, presented in clearly visible lettering.
  4. The review period applicable to the product. For a product for which a review period is not required, a note shall be added specifying this.
  5. The phrase, "Customers shall read the content of the prospectus carefully and take note of the risks associated with the product."
Article 7     The "terms and conditions of the product or transaction, and a description of the maximum losses possible and the scenario under which they would occur," as referred to in Article 5, subparagraph 2, shall set out the following details:
  1. The denomination currency, the transaction date/effective date/maturity date, and any other important dates according to the nature of the product.
  2. The principal protection rate at maturity in the denomination currency, accompanied by the note: "The pre-tax settlement amount at maturity is ___ percent of the principal in the original denomination currency, provided that no early termination event has occurred and that the Company is not in default at maturity. The principle protection rate of this product is the principal protection rate at maturity in the denomination currency. The denomination currency may be different from the currency of the original source of funds. In the case of structured products denominated in a foreign currency, the principal protection rate will not be calculated in New Taiwan dollars, even if the original source of funds was in New Taiwan dollars."
  3. The categories of underlyings or the assets to which the structured product is linked. Descriptions shall be given of the linked underlying assets and any related information, factors associated with investment performance, the weighting of linked assets, and the criteria and means for adjustment of the linked categories or assets.
  4. The methods by which investment income principal and interest is calculated and paid, including the currency or underlyings for settlement at maturity.
  5. Scenario analysis explaining the possible annualized rates of return or average annualized rates of return on the product, and the maximum losses possible. A note shall be added that the results of the scenario analysis do not guarantee future performance. The scenario analysis shall use an illustrative table or text to describe the rates of return on investment or amounts of income or losses that would be obtained under the terms and conditions of trading of the product based on various price comparison results. If the product does not require price comparison, a description shall be given of the possible rates of return or amounts of income at the date of payment of income or date of maturity. However, the use of historical back-testing of the linked underlyings to describe possible returns, in place of using the aforesaid scenario analysis, shall be avoided.
  6. If the terms and conditions of the transaction include a provision for early maturity, then the criteria for triggering early maturity shall be disclosed, or a description shall be given of the securities firm's right to declare early maturity and the amounts payable upon settlement at early maturity or the method of their calculation.
    When a securities firm provides structured product trading services to a natural person customer, it shall require the customer to affix his or her signature or seal of record by the principal protection rate product description referred to in subparagraph 2 of the preceding paragraph, or otherwise confirm it by another method agreed upon between the parties.
Article 8     The description of charges and transaction procedures involved as referred to in Article 5, subparagraph 3 shall set out the following details:
  1. For products with standardized terms and conditions of trading, the first date on which investments will be accepted, the date of settlement at early maturity, and the date at which customers may apply for early termination.
  2. When a securities firm provides a structured product, it shall state the minimum required investment amount and the method by which that amount is to be paid, provided that if there are other stipulations regarding payment method, those stipulations will apply. If under certain circumstances a transaction will not be executed, those circumstances shall be explained, and if the amount invested is to be collected in advance, the method and date on which the investment amount will be returned shall also be explained.
  3. Securities firms are required to disclose all fees borne by the customer (if applicable) and the method for collecting the fees, e.g. processing fees and handling charges for customers' applications for investment or early termination, and any other fees.
  4. If a customer has the option to request early termination, the securities firm shall disclose the method of calculation and method of payment of the amount that the customer may receive when the transaction is terminated.
  5. Channels for complaints regarding transaction disputes.
  6. Any other matters that, as provided by the competent authority, shall be disclosed, or shall be included in the product prospectus because they are deemed material to customer rights and interests.
    In these Directions, the term "products with standardized terms and conditions of trading" refers to the provision by a securities firm to an unspecified plurality of persons of products of which the transaction terms and conditions (e.g. duration, interest rate, exchange rate, conversion criteria, and linked underlyings) are fixed.
Article 9     When "informing the customer of the possible risks associated with the product" under Article 3, paragraph 2, the following shall be explained:
  1. The possibility of the loss of the principal or an amount greater than the initial principal invested in the given structured product, caused directly by changes in an interest rate, exchange rate, securities price, or relevant indicator associated with the given structured product.
  2. The possibility of the loss of the principal or an amount greater than the initial principal invested in the given structured product, caused directly by changes in the business performance or monetary assets of the securities firm or a third party.
  3. The possibility of the loss of the principal or an amount greater than the initial principal invested in the given structured product, caused directly by any other material matters sufficient to affect investors' judgments.
  4. The maximum monetary amount of losses possible with the given structured product.
    When a securities firm provides structured product trading services to customers other than professional institutional investor high net worth juristic persons, the securities firm shall provide a risk disclosure statement to the customer that contains warning language about the risks of investment and a product risk description. However, for a professional customer that is a juristic person, the content and delivery procedures for the risk disclosure statement may be handled in accordance with the securities firm's internal operating rules.
Article 10     The investment risk warning language included in the risk disclosure statement under paragraph 2 of the preceding article shall contain the following text:
  1. "Due to the complexity of this product, the investor shall be made aware of the associated risks by trained personnel before committing to the investment. Do not make an investment if you do not fully understand what the product entails."
  2. "This product is an investment, not a deposit, and hence is not protected by deposit insurance."
  3. "The customer shall carefully read the product prospectus and the risk disclosure statement prior to investing. The customer shall also exercise their own personal judgment and will be solely liable for any gains or losses."
  4. "This product is an investment product, and the market risks of the product and the credit risk of the securities firm shall be borne solely by the investor."
  5. "Investors are advised not to sign or place their seal on any related document until they have fully understood the product prospectus, the contract terms, and all details contained in the document."
  6. " Early termination by the customer may result in the customer receiving a sum that is less than their invested principal."
  7. "The largest possible loss is the entire invested principal."
Article 11     The product risk description referred to in Article 9, paragraph 2 shall include, but shall not be limited to, the following:
  1. Linked underlying risk: Includes risks such as the market price risk of the underlying asset.
  2. Other risks: Includes risks such as early termination risk, interest rate risk, liquidity risk, credit risk, foreign exchange risk, sovereign risk, taxation risk, legal risk, and reinvestment risk.
    The disclosure regarding early termination risk shall also contain the following statement about early termination risk: "An application to terminate this product prior to its maturity will cause you to receive an amount lower than your initial investment (in the worst case scenario, the amount received may be zero). In addition, there may be circumstances in which early termination is not possible." In addition to the descriptions of each of the risks in the preceding paragraph, a securities firm in the transaction documents shall also remind customers of the important matters for attention below:
  1. Customers may be exposed to varying levels of risk, depending on the differing designs or terms and conditions of the structured product. For products that involve cash settlement, there may be full or partial impairment of the interest or principal, or the risk of other losses; when not settled in cash, there may be circumstances in which the customer's principal is converted into the underlying asset, and the customer may be required to bear the credit risk of the securities firm and the issuer of the underlying asset.
  2. The factors that affect price fluctuation in financial derivatives are extremely complex; the securities firm's risk disclosure lists only the major risks and may not be capable of describing in detail all the risks associated with the transaction or the factors that influence market prices. Therefore customers shall be reminded that they shall thoroughly understand the nature of the structured product, and any related financial, accounting, taxation, or legal matters before making the transaction, and to review their own financial status and risk tolerance before deciding whether to proceed with the investment.
Article 12     The notice to customers that a securities firm provides under Article 3, paragraph 1, subparagraph 2 shall be a Chinese language version, with no more than 4 pages of content, and the text therein shall be in no smaller than a 12-point font.
Article 13     The notice to customers shall contain at least the following:
  1. A product summary.
  2. A description of investment risks.
  3. A description of market valuation.
  4. Channels for complaints regarding transaction disputes.
Article 14     The notice to customers shall specify the name of the structured product and contain the warning language below, at a prominent and visible location and highlighted in a bold black or red font:
  1. This product is rated with a risk level of ______, and is intended for customers with a risk profile of ______.
  2. Due to the complexity of this product, the product must be explained by trained personnel before proceeding with the investment. The customer is advised not to invest if unable to fully understand the product.
  3. This product is an investment, not a deposit, and hence is not covered by deposit insurance.
  4. Prior to making an application for investment, the customer shall read the content of the prospectus and the risk disclosure statement carefully. The customer furthermore shall exercise personal judgment and will be solely liable for any gains or losses.
  5. The customer shall personally assume the market risk and the credit risk of the securities firm in connection with the product. The largest possible loss is the entire principal invested in the product.
  6. Investors are advised not to sign or place their seal on any related document until they have fully understood the product prospectus, the contract terms, and all details contained in the document.
  7. Early termination by the customer may result in the customer receiving a sum that is less than their invested principal.
  8. A description of the review period shall be provided or, for a product for which a review period is not required, a note shall be added specifying this.
Article 15     The notice to customers shall contain the following details regarding the structured product:
  1. Product summary: Shall include the name of product in Chinese, the denomination currency, the principal protection rate at maturity in the denomination currency, and the transaction date, effective date, and maturity date.
  2. The categories of underlyings or assets to which the product is linked.
  3. All fees borne by the customer (if applicable) and the method for collecting the fees, e.g. processing fees or handling charges for customers' applications for investment or early termination, and any other fees.
  4. The methods by which investment income principal and interest is calculated and paid, including the currency or underlyings for settlement at maturity.
  5. If the transaction terms include a provision for early maturity, then the criteria for triggering early maturity shall be disclosed as well as the amounts payable upon settlement at early maturity, or the method by which those amounts are calculated.
  6. For products with standardized terms and conditions of trading, the time at which early termination will subsequently be accepted, the minimum investment sum, the minimum increment of subsequent investments, a list of all fees (if any), and circumstances under which the transaction will not be executed.
Article 16     The notice to customers disclosing the various investment risks of structured products shall contain the following:
  1. Linked asset risk: Includes the market price risk of the underlying asset.
  2. Other risks: A list shall be used to provide notice of the various secondary risks, such as early termination risk, interest rate risk, liquidity risk, credit risk, exchange rate risk, sovereign risk, taxation risk, legal risk, and reinvestment risk.
    The disclosure regarding early termination risk shall also contain the following statement about early termination risk: "An application to terminate this product prior to its maturity will cause you to receive an amount lower than your initial investment (in the worst case scenario, the amount received may be zero). In addition, there may be circumstances under which early termination is not possible."
    In addition to each of the risk disclosures in the preceding paragraph, when there are other matters with material effect with respect to an investor, the securities firm shall also disclose any related investment risks.
Article 17     The notice to customers shall state clearly that the securities firm will provide trade confirmations, reconciliation statements, or other documentation to the customer, while also explaining that the market valuation information is provided only as a reference and that the amount receivable after early termination by the customer will be based on the method of calculation at early termination given in the product prospectus or in other related transaction documents.
Article 18     The notice to customers shall contain methods that will further the protection of investors' rights and interests, including:
  1. Channels for complaints regarding disputes.
  2. Methods for the handling of disputes or litigation with the securities firm.
  3. That customers may file complaints with the Taiwan Securities Association and the Financial Supervisory Commission in the event of a dispute with the securities firm. In the case of a trading dispute between a general customer and the securities firm, if settlement cannot be successfully reached through the securities firm's internal complaint handling procedures, the customer may apply to the Financial Ombudsman Institution for ombudsman service or mediation.
Article 19     The important content of the notice to customers that the securities firm reads aloud or uses electronic equipment to explain under Article 3, paragraph 1, subparagraph 3, shall include at least that provided in Article 14, subparagraphs 1 and 2 of Article 15, and Article 16. However, a securities firm that provides a structured product of the same transaction type to the same customer on the same day may be exempted from redundant reading aloud or explaining of the content of Articles 14 and 16.
Article 19-1     When a securities firm that provides structured instrument trading services to a natural person customer assigns dedicated personnel to explain the products, it shall comply with the following provisions:
  1. The explanatory content shall include at least the important content of the notice to customers, and the calculation of investment income.
  2. A voice assisted method may be used to explain the important content of the notice to customers. If audio or video recording means are used to retain a record of the content of the explanatory procedures carried out by the designated personnel, such records may be kept together with those of the reading aloud of the important content of the notice to customers.
  3. If a customer is unwilling to listen to the explanatory content, the securities firm shall decline to handle investment by such customer.
  4. If a customer has questions or concerns about the explanatory content, the dedicated personnel should assist by providing further specific explanations, and should remind the customer not to make any investment before the customer has a clear understanding of the content.
Article 20     When a securities firm provides structured product trading services to customers other than professional institutional investors and high net worth juristic persons, it shall comply with the following provisions:
  1. Before providing the product prospectus or notice to customers, it shall confirm that there is no inappropriate content, misrepresentation, or anything in violation of applicable law or regulation therein.
  2. When providing non-principal-protected structured product trading services, where furthermore the amount of such products traded accounts for a relatively high percentage of the funds flowing through the customer's account, it shall voluntarily remind the customer of the risks of relevant products, to avoid the customer suffering heavy losses as a result of overconcentration of positions.
  3. When the securities firm performs assessment of customer characteristics, no personnel performing the assessment may be the same person as one who sells structured products to the customer. When performing the initial assessment of customer characteristics of a natural person customer, the securities firm shall maintain a record by means of audio or video recording or use electronic equipment to retain a trail of the relevant procedures carried out.
    The personnel performing assessments under subparagraph 3 of the preceding paragraph shall meet the requirements of Article 45, paragraph 2 or 3 of the Derivatives Trading Regulations. When risk profile scoring of a natural person customer is done using standardized form documents and furthermore no human judgment is involved, the aforesaid requirements shall be met by at least one out of the two personnel who respectively perform the assessment of the customer characteristics of an individual customer and perform the review of that assessment.
Chapter III Services Offered to General Customers
Article 21     The only financial derivatives that securities firms may offer to general customers who are natural persons, in addition to structured products, shall be plain vanilla forward foreign exchange contracts, purchase of plain vanilla currency options, purchase of Taiwan equity options and purchase of convertible/exchangeable corporate bond asset swaptions. In addition, securities firms shall formulate and implement credit risk assessment policies and operating procedures applicable to transactions with natural person counterparties. Products that involve foreign exchange shall also comply with Central Bank regulations relating to foreign exchange.
    The plain vanilla forward foreign exchange contracts and plain vanilla currency options may not involve New Taiwan dollar exchange rates or be denominated or settled in New Taiwan dollars, and furthermore shall be related to the securities business. When offering such products to such a customer, the securities firm shall do based on the transaction documents for the foreign currency securities business conducted between the securities firm and the same customer.
Article 21-1     A securities firm may not offer binary option trading services to general customers.
    When offering contracts for differences (CFD) trading services to general customers, a securities firm shall comply with the following provisions:
  1. It shall collect initial margin from the customer, and the ratio of the initial margin to the notional principal may not be lower than the following:
    1. 5%:
      1. Where the underlying asset is the FTSE 100, CAC 40, DAX 30, DJIA, S&P 500, NASDAQ, NASDAQ 100, Nikkei 225, S&P/ASX 200, EURO STOXX 50, TAIEX, Taiwan 50, TPEX, TPEx 50, TPEx 200.
      2. Where the underlying asset is gold.
    2. 10%: Where the underlying asset is other than those listed above.
  2. If the account value of CFDs traded by a single customer falls below 50% of the initial margin, the securities firm shall carry out customer account stop loss measures by a method agreed upon in advance.
Article 22     When a securities firm provides structured product trading services to general customers, the customers targeted for sale thereof shall have trading experience in financial derivatives or structured products, or professional experience in a related field such as finance, securities, insurance, or futures.
    The "trading experience" in the preceding paragraph means that the customer, or the person authorized by a juristic person customer to handle trading, has experience in trading or investment of instruments such as financial derivatives with values derived from a single underlying asset or a basket of assets, futures, margin trading, call (put) warrants, convertible (exchangeable) corporate bonds, securities with warrants, stock warrants, structured products, offshore structured products, leverage contracts, domestic or foreign securities with financial derivative characteristics, or investment-linked insurance policies.
    When making a determination of the trading experience or professional experience of a customer targeted for sale under the preceding paragraph, the securities firm shall obtain reasonable and reliable supporting evidence. However, for a customer engaging in principal-protected structured product trading, the securities firm may make the determination of the customer's trading experience or professional experience based on a statement by the customer or based on internal operational procedures of the securities firm.
Article 22-1     When a securities firm provides structured product trading services to a general customer, it shall establish transaction control mechanisms, which furthermore shall include the following:
  1. When it intends to sell structured products to a customer, the securities firm shall obtain a written statement of consent from the customer in advance, and this furthermore may not be done by means of incorporating it within another agreement. The customer furthermore may terminate the act of sale at any time.
  2. In the case of a customer that has engaged in less than 5 trades of products listed in Article 22, paragraph 2 during the preceding year, that is 70 years of age or older, has an educational level of junior high school graduate or lower, or is a holder of a National Health Insurance Major Illness/Injury Certificate, the securities firm may not at its own initiative engage in sales of products by means of discussion in person, by telephone or e-mail contact, or by mailing product prospectuses.
  3. Before the securities firm conducts structured product trading for a customer that falls under a condition listed in the preceding paragraph, it shall have a suitable unit or executive re-examine and confirm that the trading of the products is suitable for the customer before the trading may be conducted.
Article 23     A securities firm shall comply with the following provisions when providing principal-protected structured product services to a general customer:
  1. The product shall be denominated in a currency accepted by banks.
  2. The product prospectus and all promotional materials shall enclose the following in parentheses as a subheading, following the principal heading of the product's name or below it: "This (name of linked asset) (name of option or other financial derivative product) is an investment product that is not protected by deposit insurance."
Article 24     A securities firm shall comply with the following provisions when providing non-principal-protected structured product services to a general customer who is a natural person:
  1. The product shall be denominated in a currency accepted by banks.
  2. The scope of underlyings to which the product may be linked shall be limited to a single asset class, and furthermore limited to the two types of products listed below:
  3. Structured products linked to gold options:
    1. Product duration may not exceed 6 months, and the threshold for a transaction at the time it is undertaken shall be US$10,000 or more.
    2. The settlement amount of the structured product at maturity, or its settlement amount when early maturity occurs in accordance with contracual conditions, shall be 70 percent or more of the initial principal in the original denomination currency (or an equivalent value).
    3. The product prospectus and all promotional materials shall enclose the following in parentheses as a subheading, following the principal heading of the product's name or below it: "This gold option investment product is not covered by deposit insurance, and losses up to ____percent of the initial investment principal may occur."
  4. Structured products linked to equities or exchange-traded funds:
    1. The linked underlyings shall be limited to Taiwan equities or indexes thereof, foreign stocks, foreign stock indexes, or domestic or foreign exchange-traded funds.
    2. Product duration may not exceed 12 months, and the threshold for a transaction at the time it is undertaken shall be US$10,000 or more.
    3. For products with durations exceeding 2 months, the settlement amount of the structured product at maturity, or the settlement amount when early maturity occurs in accordance with contractual conditions, shall be 70 percent or more of the initial principal in the original denomination currency (or an equivalent value).
    4. The product prospectus and all promotional materials shall enclose the following in parentheses as a subheading, following the principal heading of the product's name or below it: "This equity or exchange-traded fund (option or other financial derivative product name) investment product is not covered by deposit insurance, and losses up to ____percent of the initial investment principal may occur."
Article 24-1     A securities firm shall comply with the following provisions when providing non-principal-protected structured product services to a general customer that is a juristic person:
  1. The denomination currency shall be limited to currencies accepted by banks.
  2. The linked underlying may not be a credit event.
  3. For products with durations exceeding 2 years, the settlement amount of the structured product at maturity, or its settlement amount when early maturity occurs in accordance with contractual conditions, shall be 70 percent or more of the initial principal in the original denomination currency (or an equivalent value).
Chapter IV Product Suitability, Risk Notification and Disclosures, and Advertising and Marketing
Article 25     When a securities firm sells structured products to customers other than professional institutional investors and high net worth juristic persons or provides trading services for financial derivatives other than purchase of options, it shall comply with the following provisions:
  1. Establish a product risk rating system. The rating method furthermore shall consider multiple risk factors, such as volatility, types of linked assets, and product duration. Complex high-risk products shall be assigned the highest risk rating.
  2. When approving or renewing financial derivative credit limits for a customer, the securities firm shall ask the customer to provide information on the credit limits assigned to the customer by other financial institutions.
  3. It shall assign credit limits to customers for financial derivatives transactions, with reference to the information obtained under the preceding subparagraph, based on due consideration of the customer's risk-bearing capacity, risk appetite, and credit limits assigned to the customer by other financial institutions, to avoid exposing the customer to overall risks beyond the customer's risk-bearing capacity, and shall establish margin requirements or margin call mechanisms.
  4. It shall exercise reasonable control over the overall credit risk of a customer, to avoid exposing the customer to overall risks beyond the customer's risk-bearing capacity, and shall assess the mark-to-market values of products on a daily basis to effectively implement the margin requirements and margin call mechanisms.
  5. It shall provide customers with information on the mark-to-market value of their trading positions on a regular monthly basis.
    The margin requirements or margin call mechanisms referred to in subparagraph 3 of the preceding paragraph shall comply with the following provisions:
  1. The margin collected from customers shall be limited to cash, bank deposits, and high-liquidity securities.
  2. It shall adopt an internal operating system and procedures that regulate the scope of securities that may be posted as collateral to meet margin requirements, and adopt haircut rates and valuation methods for all types of securities that may be posted as collateral.
  3. It shall periodically assess and reevaluate the suitability and reasonableness of the scope of securities that may be posted as collateral to meet margin requirements and the valuation methods and haircut rates thereof. Such assessment and reevaluation shall be performed at least once per year.
  4. Margin and collateral deposited by the customer to meet margin requirements and margin calls shall be deemed customer assets. The customer furthermore may not further create any pledge or by any means create any encumbrance on any initial margin or collateral that it has posted to meet margins requirement or margin calls.
Article 25-1     When a securities firm provides trading of any complex high-risk product or any exchange rate derivative transaction with an embedded short option to a customer other than a professional institutional investor or high net worth juristic person, it shall require the customer to post initial margin, and shall comply with the following provisions:
  1. Complex high-risk products: the amount of initial margin per transaction may not be lower than 2 percent of the contract's total notional principal (weighted by the leverage ratio and the price fixing periods).
  2. Exchange rate derivatives with embedded short options:
    1. Products with a duration of 1 year or less: the amount of initial margin per transaction may not be less than 2 percent of the contract's total notional principal (weighted by the leverage ratio and the price fixing periods).
    2. Products with a duration exceeding 1 year: the amount of initial margin per transaction may not be less than 5 percent of the contract's total notional principal (weighted by the leverage ratio and the price fixing periods).
  3. Exchange rate derivatives under the preceding subparagraph do not include plain vanilla forward foreign exchange contracts, foreign exchange swaps, cross-currency swaps, or combination type exchange rate option products where the customer bears no payment obligation except for the payment of the premium.
Article 25-2     When a securities firm provides trading of any complex high-risk product to a customer other than a professional institutional investor or high net worth juristic person, it shall comply with the following provisions:
  1. When a customer engages in a hedging transaction, the securities firm shall ensure that the customer knows and confirms that the transaction is done for hedging purposes, and the securities firm shall have a suitable control system in place to confirm that the customer's hedging positions are commensurate with its positions that require hedging. It furthermore shall require the customer to provide clear and specific documentation substantiating the hedging transaction.
  2. The customer may not be a natural person customer, nor may it be a general juristic person customer entering into the transaction for any non-hedging purpose.
  3. The product shall meet the following terms and conditions:
    1. In the case of complex high-risk exchange rate products:
      1. The contract's duration may not exceed 1 year.
      2. The number of price fixing or settlement periods of the contract may not exceed 12 periods.
      3. The maximum loss per non-hedging-purposes transaction may not exceed 3.6 times the average notional principal per fixing or settlement period.
    2. In the case of complex high-risk non-exchange rate products:
      1. For non-hedging-purposes transaction contracts, if the contract has 12 or less price fixing or settlement periods, the maximum loss per transaction may not exceed 6 times the average notional principal per fixing or settlement period.
      2. For non-hedging-purposes transaction contracts, if the contract has more than 12 price fixing or settlement periods, the maximum loss per transaction may not exceed 9.6 times the average notional principal per fixing or settlement period.
    3. The term "average notional principal per fixing or settlement period" in the preceding two subparagraphs is the amount of unleveraged total notional principal divided by the number of periods.
    The term "hedging purposes" under paragraph 1, subparagraph 1 means the transaction is undertaken by the customer for the purpose of mitigating the position exposure of the customer itself or of its business group or of meeting operational demands.
Article 25-3     When a securities firm provides trading of any complex high-risk product to a customer other than a professional institutional investor or high net worth juristic person, it shall comply with the following provisions:
  1. The customer shall have experience engaging in trading of complex high-risk products, or shall at least meet each of the following conditions with respect to trading experience:
    1. Have at least 1 year of experience engaging in trading of financial derivatives.
    2. Have, within the past 1 year, engaged in financial derivatives trading involving non-structured products with embedded short options.
  2. The securities firm shall obtain from the customer reasonable and reliable supporting evidence of its trading experience.
  3. Before the customer engages in any trading for non-hedging-purposes of a complex high-risk financial derivative product, the securities firm shall make and keep a record, by means such as in writing or by audio recording, to document the customer's confirmation of its suitability to invest in that product.
  4. The securities firm shall establish a customer risk concentration control mechanism for any trading of complex high-risk products for non-hedging-purposes and, with respect to a customer's investment in any complex high-risk product, set an explicit cap on the ratio between the sum total of the maximum likely increase in value (MLIV) plus the mark-to-market (MTM) and the customer's derivative product exposure limit, and adopt control mechanisms for when that cap is exceeded.
  5. For a customer that intends to engage in trading of any complex high-risk product, the securities firm shall notify the customer of the important content of the transaction terms and conditions and the associated risks. Furthermore, the first time that a customer trades a particular type of complex high-risk product of a certain construction, the securities firm shall explain the product to the customer in detail. The content of the explanation shall at least include the product structure, risks, and scenario analysis.
  6. Unless the transaction is made in an automated manner not through counter service or the customer disagrees, a record of the above notification or explanation procedures shall be retained by audio or video recording.
  7. The securities firm shall strictly implement the know-your-customer and product suitability system. When providing any complex high-risk product for a non-hedging customer, it shall use reasonable grounds of consideration to set the maximum loss limit for individual contracts.
  8. The transaction documents provided to the customer shall specify and disclose the maximum monetary amount of losses possible for the trading contract and the transaction terms and conditions including the method of calculation of the amount payable in the event of early termination by the customer, and the customer shall be required to sign their name or affix their seal of record by the place where the maximum monetary amount of losses possible and the transaction terms and conditions are specified, to raise the customer's risk awareness, and shall provide the customer with channels for complaints regarding transaction disputes.
  9. When a securities firm engages with a customer in complex high-risk financial derivatives operations, for example by means of back-to-back coverage transactions, the upper limit on transaction profit margin shall be disclosed in the documents for that transaction.
    The transaction profit margin mentioned in the preceding paragraph may be disclosed to the customer as the percentage ratio of transaction profit to total notional principal (weighted by the leverage ratio and the price fixing periods) or equivalent monetary amount.
    The important content of the transaction terms and conditions and the associated risks mentioned in subparagraph 5 mean the following:
  1. Transaction terms and conditions and important content
    1. Denomination currency.
    2. Transaction date/effective date/maturity date and other dates as set according to the nature of the product.
    3. The categories of underlyings or the assets to which the structured product is linked.
    4. Calculation and payment of income and the method by which it is calculated.
    5. If the transaction has an acceleration of maturity clause, an explanation of the conditions for acceleration, and the monetary amount payable or method of calculation of the amount payable upon settlement in the event of accelerated maturity.
  2. The associated risks shall include those in Article 26, subparagraphs 1 to 6.
Article 25-4     A securities firm shall manage the conduct of financial derivatives sales personnel, and see to it that they exercise their duties in accordance with the principles of good faith and prudence. It furthermore shall adopt rules governing conduct and ethics, which shall cover at least the following:
  1. Prohibition of breaching duties, damaging the interests of the securities firm, or unlawfully seeking profit for oneself or a third party.
  2. Prohibition of making any agreement with or commitment to a customer to share the income, or share the losses, on an investment.
  3. Prohibition of using non-public information of a customer learned in the course of duties to seek unlawful profit for oneself or any related personnel.
  4. Prohibition of using untruthful promotional means directed at customers to seek profit for oneself.
  5. Prohibition of accepting or offering improper compensation or gifts.
Article 26     When a securities firm provides trading of any financial derivative that is not a structured product to a customer other than a professional institutional investor or high net worth juristic person, the securities firm's risk notification and disclosure for the product shall include at least the following, and it shall appropriately retain records proving that it has informed the customer of the associated risks:
  1. The maximum possible amount of monetary loss, in the case of a financial derivative that is not for hedging purposes. If it is a combination type transaction that has a multiplier clause, when the market price is unfavorable to the customer's transaction, the transaction loss may increase due to the multiplying effect.
  2. The mark-to-market profit/loss of the financial derivative will vary because of the impact of factors such as market price factors linked to the underlying. When the market price is unfavorable to the customer's transaction, the mark-to-market transaction loss may be far greater than anticipated by the customer.
  3. In the event of any early termination of a transaction before maturity, if the market price is unfavorable to the customer's transaction, the customer may suffer a large transaction loss.
  4. A financial derivative with a relatively longer duration will entail higher risks. If the market price is unfavorable to the customer's transaction, the customer may suffer a relatively higher transaction loss due to early termination.
  5. If the customer is obligated to provide collateral based on the calculation of the mark-to-market value, when the market price is unfavorable to the customer's transaction such that a mark-to-market loss occurs, the customer shall perform the obligation to provide collateral. When the amount of collateral required to be provided by the customer is far greater than anticipated, it may result in funding liquidity risk. If the customer fails to perform the obligation to provide collateral, with the result that the securities firm terminates the transaction early, the customer may suffer a large loss.
  6. In the case of a financial derivative for hedging purposes, if the contract amount is greater than the actual required amount, the portion in excess is subject to the risk of not being covered by an actual position.
Article 27     Promotional materials and information regarding financial derivative trading that a securities firm provides to a customer other than a professional institutional investor or high net worth juristic person shall be clear, fair, and not misleading to customers. The disclosure of possible returns and risks of a product shall be equitably and prominently presented, and the securities firm may not use the fact of approval, acceptance, or recordation by the competent authority or a related institution of its financial derivative business to imply or cause the principal to believe that the government has provided any guarantee with respect to the financial derivatives.
Article 28     When a securities firm engages in the sale of a structured product or provides related information and marketing materials, it may not do any of the following:
  1. Use the fact that a financial product has received approval, acceptance, or recordation by the competent authority as substantiation of any matter in connection with the application or in a statement or recommendation guaranteeing the value of the structured product.
  2. Cause others to erroneously believe that the security of the principal is guaranteed or that profitability is guaranteed.
  3. Use a name for the structured product that might mislead customers.
  4. Offer gifts or other benefits as an inducement to solicit the purchase of a structured product.
  5. Make any statement that exaggerates past performance or attacks a competitor.
  6. Engage in any false or deceptive conduct or other conduct obviously inconsistent with facts or intended to mislead others.
  7. Include content that is contrary to any law or regulation, the contract, or the information contained in the product prospectus.
  8. Make any prediction of future performance of the structured product.
  9. Violate the self-regulatory code for advertising and promotional activities set by the Taiwan Securities Association.
  10. Any other conduct prejudicial to the rights or interests of investors.
    No general advertising or public solicitation is allowed for structured products that are permitted for investment by professional customers only.
Article 29     Where a securities firm is required under these directions to retain records by means of audio or video recording, the retention period may not be less than the duration of the product plus 3 months. If the period so calculated is less than 5 years, the records shall be retained for at least 5 years. However, in the event of a transaction involving any dispute, the records shall be retained until the dispute is concluded.
    Where a securities firm is required under these Directions to use electronic equipment to retain a trail of relevant procedures carried out, it may retain it by means of audiovisual media or electronic documents, and the preceding paragraph shall apply mutatis mutandis to the retention period.
    During the period of retention of personal data that is retained in audio or video recordings or by electronic equipment under the preceding two paragraphs, the data subject may apply to the securities firm to review such records retained under these Directions. Unless the provision of such data is prejudicial to a material interest of the securities firm or a third party, the securities firm shall cooperate in providing it, and may charge the data subject a fee to cover necessary costs.
Chapter V Supplementary Provisions
Article 30     These Directions, and any amendments hereto, shall be publicly announced and enter into force after submission to and approval by the competent authority.