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Title: Taiwan Futures Exchange OTC Derivative Clearing Enforcement Rules
Date: 2022.03.04 ( Announced )

Article Content

 
Chapter I General Principles
1.1     (Legal Basis)
    These Regulations are established in accordance with Article 21, Paragraphs 1 and 4 of the Regulations Governing Futures Clearing Houses and the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules.
1.2     (Competent Authority)
    The Competent Authority referred to in these Regulations shall be the Financial Supervisory Commission.
1.3     (Definition)
  1. Offshore Chinese and Foreign Nationals: means offshore Chinese and foreign nationals as defined by Article 3, Paragraph 2 of the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals.
  2. U.S. Person : U.S. person generally includes, but not be limited to definition under 17 CFR 23.23(a)(23).
  3. U.S. Futures Commission Merchant: Futures commission merchant registered under Commodity Futures Trading Commission (CFTC).
  4. Approved Compression Service Provider: means institutions which, according to TAIFEX's announcements, are permitted to execute compression of clearing transactions.
  5. Benchmark Interest Rate Tenor: means tenors quoted by valuation curves with relatively good liquidity for interest rate clearing transactions or common interest rate products with regular quotations (such as interest rate swaps) or by benchmark interest rates (such as TAIBOR).
  6. Base Currency: means clearing margins and clearing margins payable on clearing accounts converted to currencies specified by TAIFEX at exchange rates published by TAIFEX.
  7. Basis Point Value (PV01): means changes in net present value of a clearing transaction in response to one basis point (0.01%) interest rate change for different tenors according to the valuation curves constructed by TAIFEX for interest rate clearing transactions.
  8. Excess Margin: means any excess of the clearing margin balance over the required clearing margin.
Chapter II Clearing Members
Section I Eligibility of Membership
2.1.1     (Clearing members are limited to financial institutions)
    Financial institutions applying to TAIFEX for engaging in clearing operations of OTC derivatives (hereinafter referred to as clearing operations) shall be those which have been approved by the competent authority to engage in derivatives trading or handle derivatives operations, and have obtained TAIFEX clearing membership qualifications.
2.1.2     (Classification and business scope of clearing members)
    Based on the scope of business, clearing members of TAIFEX can be classified into:
  1. Individual Clearing Member: Handles clearing operations of proprietary OTC derivatives.
  2. General Clearing Member: Handles clearing operations of proprietary and client OTC derivatives.
    For a clearing member being a branch established within the territory of the R.O.C. by a foreign financial institution, if its clearing operations of proprietary derivatives involve trading by the head office or other branches, the head office shall issue a commitment letter stating its obligation of jointly performing clearing and settlement.
2.1.3     (Financial requirements of individual clearing members)
    Individual clearing members of TAIFEX shall meet the following criteria:
  1. Required minimum paid-in capital of NTD 2 billion. However, exception applies under any of the following circumstances:
    1. The clearing member is a subsidiary of a financial holding company prescribed in the "Financial Holding Company Act." The required minimum paid-in capital of such financial holding company or foreign financial holding company is NTD 2 billion or above, and it will issue a guarantee letter to TAIFEX to guarantee its performance of such clearing member's obligation and relevant responsibilities to handle clearing and settlement.
    2. The clearing member is a subordinate company as prescribed in the "Company Act." The required minimum paid-in capital of such controlling company is NTD 2 billion or above, and it will issue a guarantee letter to TAIFEX to guarantee its performance of such clearing member's obligation and relevant responsibilities to handle clearing and settlement.
    3. The clearing member is a branch established within the territory of the R.O.C. by a foreign financial institution according to the law. The required minimum paid-in capital of the head office is NTD 2 billion or above, and it will issue a commitment letter to TAIFEX stating its commitment to jointly perform such clearing member's obligation and relevant responsibilities to handle clearing and settlement
  2. Financial structure
    1. If the clearing member is a bank, its Capital Adequacy Ratio shall not be less than 10.5%.
    2. If the clearing member is an insurance enterprise, its Risk Based Capital Ratio shall equals or exceeds 200% and Net Worth Ratio shall not be less than 3%.
    3. If the clearing member is a securities firm, its Regulatory Capital Adequacy Ratio shall equals or exceeds 200%.
    4. If the clearing member is a bills finance company, its Capital Adequacy Ratio shall not be less than 8%.
    5. If the clearing member is a futures commission merchant that concurrently operates as a leverage transaction merchant, its adjusted net capital shall not be less than 30% of the total amount of customer margins required for the open positions of futures traders.
    6. If the clearing member is a subsidiary of a financial holding company prescribed in the "Financial Holding Company Act," the capital adequacy ratio of such a group capital adequacy ratio calculated and reported by a financial holding company or foreign financial holding company shall not be lower than 100%.
    7. If the clearing member is a subordinate company prescribed in the "Company Act," the financial structure of such controlling company shall meet the provisions of Items 1 to 5 of this subparagraph according to the type of business to which it is attributed.
    8. If the clearing member is a branch established within the territory of the R.O.C. by a foreign financial institution according to the law, the financial structure of the head office shall meet the provisions of Items 1 to 5 of this subparagraph according to the type of business to which it is attributed.
  3. OTC derivatives Default Fund
    1. Clearing members are required to contribute to TAIFEX the OTC derivatives Default Fund of NTD 20 million prior to engaging in clearing operations of OTC derivatives.
    2. Clearing members are required to contribute to the OTC derivatives Default Fund based on the amount computed by TAIFEX subsequent to engaging in clearing operations of OTC derivatives.
    The formats of the guarantee letter or commitment letter prescribed in items 1,2 and 3 of preceding sub-paragraph under paragraph 1. shall be announced by TAIFEX additionally.
2.1.4     (Financial requirements of general clearing members)
    General clearing members of TAIFEX shall meet the following criteria:
  1. Required minimum paid-in capital of NTD 8 billion.
  2. Financial structure
    1. If the clearing member is a bank, its Capital Adequacy Ratio shall not be less than 10.5%.
    2. If the clearing member is a securities firm, its Regulatory Capital Adequacy Ratio shall equals or exceeds 200%.
    3. If the clearing member is a futures commission merchant that concurrently operates as a leverage transaction merchant, its adjusted net capital shall not be less than 30% of the total amount of customer margins required for the open positions of futures traders.
  3. OTC derivatives Default Fund
    1. Clearing members are required to contribute to TAIFEX the OTC derivatives Default Fund of NTD 30 million prior to engaging in clearing operations of OTC derivatives.
    2. Clearing members are required to contribute to the Default Fund based on the amount computed by TAIFEX subsequent to engaging in clearing operations of OTC derivatives.
2.1.5     (Adequate personnel required for clearing operations)
    Clearing members shall appoint at least 1 Supervisor to manage the following matters:
  1. Personnel in an adequate number shall be appointed to handle clearing operations of OTC derivatives.
  2. Appoint competent specialists to conduct clearing operations.
  3. Personnel conducting the collection and payment of Margin and Settlement Amount, cashiers and accountants shall not concurrently serve one another's positions.
  4. The company applying to become a general clearing member must appoint competent specialists to engage in client clearing operations.
    Clearing members must compile a list of supervisors and specialists conducting clearing operations prescribed in the preceding paragraph to file a registration with TAIFEX prior to launching clearing operations. Any changes to the aforementioned list shall be filed with TAIFEX within 5 business days.
2.1.6     (Premises and equipment requirements of clearing members)
    The premises and equipment of clearing members engaging in clearing operations of OTC derivatives must meet the following criteria:
  1. Premises for handling clearing operations.
  2. Installation of information equipment for handling clearing operations.
  3. Completed connection with TAIFEX's OTC clearing system.
  4. Completed connection with TAIFEX-approved trade confirmation platform.
  5. Designation of specialists and installation of hotlines to contact TAIFEX.
2.1.7     (Clearing members are required to issue a negative qualifications statement for the applicant of the clearing member)
    A company intending to apply to become a clearing member shall issue a Declaration of non-violation of any disqualification to TAIFEX, and the content of the aforementioned statement will be announced by TAIFEX additionally.
2.1.8     (Clearing members are required to establish an internal control system)
    Clearing members shall establish an internal control system pursuant to the rules and regulations of clearing operations prescribed by the competent authority and TAIFEX.
2.1.9     (Reporting and corrections by clearing members failing to meet membership criteria constantly)
    A clearing member failing to meet the criteria prescribed from Articles 2.1.3 to 2.1.8 shall file a report with TAIFEX before the 10th day of the next month and make corrections before the set deadline.
    For a clearing member failing to meet membership criteria as mentioned in the preceding paragraph, TAIFEX may adopt the following measures:
  1. A letter to be sent to the clearing member requesting the reasons for the failure and a concrete improvement plan, and provision of the latest finance-related data.
  2. A letter to be sent to the competent authority.
  3. To conduct inspections when necessary to gain an understanding of the financial and business health of the clearing member, and follow up with further guidance.
2.1.10     (Disposal in cases where clearing members fail to meet financial criteria and shall improve within specified period)
    A clearing member failing to meet the criteria prescribed in Subparagraph 1 or 2 under paragraph 1 of Article 2.1.3 and Subparagraph 1 or 2 of Article 2.1.4 shall make corrections within 3 months.
2.1.11     (Disposal in cases where clearing members fail to contribute to the OTC derivatives settlement fund constantly according to the regulations)
    A clearing member failing to contribute to the OTC derivatives Default fund according to the Clause 2 under Subparagraph 3 under paragraph 1 of Article 2.1.3 and Clause 2 under Subparagraph 3 of Article 2.1.4 shall make corrections within 15 days.
2.1.12     (Disposal in cases where the premises and personnel of clearing members fail to meet membership criteria constantly)
    A clearing member failing to meet the criteria prescribed in Article 2.1.5 or Article 2.1.6 shall make corrections within 1 month.
2.1.13     (Disposal in cases where clearing members fail to meet financial criteria)
    Clearing member involved in conditions prescribed in Article 2.1.10, TAIFEX may impose an additional clearing margin or suspend a part or all of the OTC clearing operations.
    If the clearing member meets TAIFEX's criteria of clearing membership, TAIFEX may, depending on the condition, cancel its imposition of the additional clearing margin and suspension.
2.1.14     (An extension of the deadline by clearing members failing to make corrections before the deadline with justifiable cause)
    A clearing member failing to make corrections before deadline with justifiable cause may apply to TAIFEX for an extension before the deadline; such an extension shall not exceed the provisions of Articles 2.1.10 to 2.1.12, and shall be granted once only.
2.1.15     (Termination of clearing membership if a clearing member fails to meet criteria, fails to make corrections before the deadline, or still fails to meet criteria after corrections)
    Subsequent to the setting of a deadline for correction by TAIFEX, if a clearing member fails to make corrections or still fails to meet the criteria for clearing membership after it made corrections, TAIFEX will terminate its clearing membership immediately.
    A clearing member that fulfills either of the circumstances below shall be deemed as still failing to meet the criteria after it made corrections:
  1. After the clearing member made corrections to meet the criteria before the deadline, it fails to meet the same criteria for clearing membership again within a month.
  2. The clearing member has been required to make corrections following the setting of a deadline as many as three times in the past year.
2.1.16     (Reasons for TAIFEX's termination of a clearing membership)
    If any of the following circumstances exist with respect to the clearing member, TAIFEX may terminate its clearing membership, and handle the matter according to Article 54 of the Futures Trading Act:
  1. A relevant authority has revoked the clearing member's company registration or dissolved the clearing member.
  2. The competent authority has issued an instruction revoking the clearing member's operation license.
  3. The clearing member has been pronounced bankrupt by a final court ruling.
  4. The clearing member fails to perform clearing and settlement obligations.
  5. The clearing member violates a law or regulation or continues to fail to comply with administrative orders by the competent authority based on laws and regulations.
  6. The clearing member violates the Articles of Incorporation or OTC Operating Rules of the Taiwan Futures Exchange Corporation, or other rules or regulations, and the circumstances are serious.
  7. The clearing member's clearing or settlement practices violate good faith and integrity in a manner sufficient to harm others.
  8. The clearing member is unable to meet the criteria of TAIFEX's clearing membership and, following an inquiry by TAIFEX and the setting of a deadline for correction, the clearing member fails to make corrections or continues to fail to meet the criteria after making corrections.
Section II Application Procedures to Become a Clearing Member
2.2.1     (Documents required for an application to become a clearing member)
    An application to become a clearing member requires the following documents to be filed with TAIFEX:
  1. An application form.
  2. Company registration Certificate.
  3. Documents evidencing permission by the Competent Authority to engage in derivatives trading or handle derivatives operations.
  4. A business plan specifying: principles of business operation; risk management measures for head and branch offices; internal organization and internal division of labor within the organization.
  5. The company's internal control system.
  6. Declaration of non-violation of any disqualification.
  7. The financial report audited and attested by CPAs for the latest fiscal year or the most recent period.
  8. If the clearing member's application is subject to Paragraph 2 of Article 2.1.2 and Clause 1 to 3 under Subparagraph 1 under Paragraph 1 of Article 2.1.3, it shall provide a guarantee letter issued by the financial holding company, foreign financial holding company, or controlling company, or a commitment letter issued by the head office, and the financial report audited and attested by CPAs for the latest fiscal year or the most recent period.
  9. A list of directors and board of board meeting minutes, or a letter of consent signed by an officer authorized by the head office in the case of the branch of a foreign bank in Taiwan.
  10. A list of supervisors in charge of clearing operations of OTC derivatives and specialists conducting clearing operations.
  11. Declaration stating completeness of tests conducted with TAIFEX's OTC clearing system and the TAIFEX-approved trade confirmation platform.
  12. Other documents as required by TAIFEX.
2.2.2     (Modification procedures for applications and rejections of applications)
    If the application documents submitted by the clearing member according to this Chapter are incomplete or have insufficient information and so TAIFEX schedules a deadline for modification, but such company fails to complete the modification before the deadline, TAIFEX may reject such an application.
2.2.3     (All documents shall have Chinese versions)
    If the application documents submitted by the clearing member according to this Chapter are prepared in foreign language, a translated Chinese version shall be submitted as well; in case of discrepancies between the foreign language and Chinese versions, the Chinese version shall apply and prevail.
2.2.4     (Documents required for signing of clearing agreements)
    A clearing member intending to enter into a clearing agreement with TAIFEX shall prepare the following documents:
  1. Documents evidencing the deposit of Default Fund in accordance with the TAIFEX's clearing membership.
  2. Copy of the transaction for opening the "OTC derivatives proprietary clearing margin account" and "OTC derivatives client clearing margin account" with the settlement bank, and the reports of OTC derivatives clearing margin account (TWD account and multiple currencies account shall be filed separately, and the number of settlement bank shall not exceed two).
  3. Signature card.
  4. Documents evidencing payment of the registration fee.
  5. Other documents as required by TAIFEX.
2.2.5     (Entering into a succession agreement with another clearing member)
    If a clearing member has entered into a succession agreement with another clearing member, it shall file a report with TAIFEX within 5 business days after entering into the succession agreement.
Section III Conversion of Criteria of Clearing Membership, Merger, and Transfer of Business
2.3.1     (Information of conversion of membership criteria by a clearing member)
    The clearing member intending to apply to convert its membership criteria shall meet the membership criteria before conversion and conduct the following matters:
  1. Criteria of clearing membership
  2. An application by a clearing member requires the following documents to be submitted to TAIFEX:
    1. An application for conversion of criteria of clearing membership.
    2. Board meeting minutes, or a letter of consent signed by an officer authorized by the head office in the case of the branch of a foreign bank in Taiwan.
    3. Document or declaration evidencing completeness of handling client margin and position, and discharging any responsibilities and obligations between clients and clearing member.
    4. Document or declaration evidencing completeness of terminating client clearing agreement.
    5. Other documents as required by TAIFEX.
  3. Client margin and position
  4. If a general clearing member applies to convert into an individual clearing member, it shall notify its clients and handle clients' positions and margins, and terminate client clearing agreements prior to the effective date of membership conversion.
  5. OTC Derivatives Default Fund
    1. If an individual clearing member applies to convert into a general clearing member, it shall contribute to the OTC derivatives Default fund based on the criteria for general clearing members prior to the effective date of membership conversion.
    2. If a general clearing member applies to convert into an individual clearing member, it shall complete procedures in the preceding subparagraph first before it applies for a return of the OTC derivatives Default fund based on the criteria for individual clearing members subsequent to the effective date of membership conversion.
2.3.2     (Information in case of a merger of a clearing member)
    The clearing member must comply with the following provisions in case of a merger:c
  1. Criteria of clearing membership
    1. An application by a clearing member requires the following documents to be submitted to TAIFEX:
      1. Board meeting minutes, or a letter of consent signed by an officer authorized by the head office in the case of the branch of a foreign bank in Taiwan.
      2. Document or declaration evidencing completeness of handling client margin and position, and discharging any responsibilities and obligations between clients and Clearing member.
      3. Document or declaration evidencing completeness of terminating client clearing agreement.
      4. Other documents as required by TAIFEX.
    2. A surviving clearing member can maintain its clearing membership and shall continue to meet the criteria of clearing membership.
    3. A surviving company without clearing membership or a newly established financial institution intending to become a clearing member after merger shall file an application pursuant to Section II. Application Procedures to Become a Clearing Member.
    4. A dissolved clearing member shall apply to terminate the clearing membership according to Section IV prior to the reference date of the merger.
  2. Client margin and position
  3. A dissolved clearing member shall notify its clients and handle clients' positions and margins, and terminate clearing agreements prior to the reference date of the merger.
  4. Proprietary margin and position
  5. A dissolved clearing member shall handle proprietary positions, margins, and terminate clearing agreements prior to the reference date of the merger.
  6. OTC Derivatives Default Fund
    1. A surviving clearing member must contribute to TAIFEX the OTC derivatives Default fund based on the membership criteria prior to the date of the merger.
    2. For the OTC derivatives Default fund and interests accrued paid by the dissolved clearing member, TAIFEX will return such fund after such dissolved clearing member completes the procedures according to Section IV Application to terminate clearing operations and membership.
2.3.3     (Information in case of a transfer of business of a clearing member)
    A clearing member must comply with the following provisions when encountering a transfer of business involving clearing operations:
  1. Criteria of clearing membership
    1. An application by a clearing member requires the following documents to be submitted to TAIFEX:
      1. Board meeting minutes, or a letter of consent signed by an officer authorized by the head office in the case of the branch of a foreign bank in Taiwan.
      2. Document or declaration evidencing completeness of handling client margin and position, and discharging any responsibilities and obligations between clients and Clearing member.
      3. Document or declaration evidencing completeness of terminating client clearing agreement.
      4. Other documents as required by TAIFEX.
    2. An succeeding clearing member may maintain its clearing membership and shall continue to meet the criteria of clearing membership.
    3. An succeeding company without the clearing membership intending to become a clearing member shall file an application pursuant to Section II. Application Procedures to Become a Clearing Member.
    4. A transferring clearing member shall apply to cancel the membership according to provisions of membership cancellation in Section IV Application to terminate clearing operations and membership prior to the date fixed for the transfer of business.
  2. Client margin and position
  3. A transferring clearing member shall notify its clients and handle clients' positions, margins, and terminate client clearing agreements prior to the date fixed for the transfer of business.
  4. Proprietary margin and position
  5. A transferring clearing member shall handle proprietary clearing positions, margins, and terminate clearing agreements prior to the date fixed for the transfer of business.
  6. OTC Derivatives Default Fund
    1. An succeeding clearing member shall contribute to TAIFEX the OTC derivatives Default fund based on membership criteria prior to the date fixed for the transfer of business.
    2. For the OTC derivatives Default fund and interests accrued paid by the transferring clearing member, TAIFEX will return such fund after such member completes the procedures to terminate clearing operations and membership.
Section IV Application to terminate clearing operations and membership
2.4.1     (Information on termination of clearing operations and membership)
    Clearing members must comply with the following provisions when terminating clearing operations:
  1. Criteria of clearing membership
    1. A clearing member taking the initiative to apply to terminate clearing operations shall apply to TAIFEX 20 business days prior to the date of termination of clearing operations.
    2. A clearing member been ordered to terminate clearing operations shall return the clearing agreement and the clearing membership certificate before the deadline advised by TAIFEX; such a clearing member shall terminate its clearing agreements and cancel clearing accounts earlier before the date of termination of clearing operations designated by TAIFEX.
  2. Client margin and position
  3. Such clearing member shall notify its clients and handle clients' clearing account positions, margins, and client clearing agreements, terminating accounts prior to the date of termination of clearing operations.
  4. Proprietary margin and position
  5. Such clearing member shall handle proprietary clearing position and margins, terminating clearing agreements and accounts prior to date of termination of clearing operations.
  6. Collection of the OTC derivatives Default fund
    1. Such clearing member must fully fulfill its obligations of settlement and payment derived from OTC clearing operations at TAIFEX before it may apply return of its OTC derivatives Default fund.
    2. Such clearing member shall make an announcement that creditors of its clearing operations may claim rights according to the law within 30 days after the termination of clearing operations. If no disagreement arises after such period, Such clearing member may submit affidavits to TAIFEX to apply for the collection.
    In case of a default by other clearing members prior to the date of termination of clearing operations designated by TAIFEX, such clearing member shall still be subject to the shared default loss stipulated in Article 58 of TAIFEX OTC Operating Rules.
2.4.2     (An application to terminate the membership by a clearing member requires the following documents)
    A clearing member taking the initiative to apply to terminate clearing membership shall apply to TAIFEX 20 business days prior to the date of termination of clearing operations, membership withdrawal would be effective on the later day of:
  1. Designated date of termination of clearing operations by such clearing members.
  2. The business day when the clearing member has closed out all its proprietary and client positions and margins, and fulfil all clearing obligations.
    An application to terminate the clearing membership requires the following documents to be submitted to TAIFEX:
  1. An application for clearing membership cancellation.
  2. Board meeting minutes, or a letter of consent signed by an officer authorized by the head office in the case of the branch of a foreign bank in Taiwan.
  3. The clearing agreement.
  4. The clearing membership certificate.
2.4.3     (Announcement of cancellation of clearing membership)
    A clearing member applying to terminate its clearing membership shall, within 5 days after the receipt of a notification letter by TAIFEX, announce the date of termination of its clearing operations and enclose such announcement in the letter to be sent to TAIFEX. The same applies to the clearing member receiving TAIFEX's notification to terminate its clearing membership.
    In case of the termination of clearing operations by the clearing member prescribed in the preceding paragraph, TAIFEX shall announce it to the market immediately.
Chapter 3 Account segregation and client clearing operations
Section I Clearing Accounts
3.1.1     (Clearing accounts opened by TAIFEX)
    According to the account details and daily settlement type filed by the corresponding clearing member, TAIFEX will, by clearing member and by individual customers, open clearing accounts for proprietary and individual client accounts. Clearing members shall carefully check all details to avoid errors or missing data.
    The account will be effective on the next business day of the filing date or the designated date by the clearing member. However, if the clearing member has made an error or omission in the application, TAIFEX will postpone the effective date accordingly.
    When applying to TAIFEX to cancel clearing account, clearing member must fully fulfill its obligations of settlement, payment, etc., derived from clearing operations at TAIFEX before it may apply to TAIFEX for its clearing account to be canceled.
3.1.2     (Proprietary and Client accounts opened by clearing member)
    Clearing member must separately open proprietary and individual client account and record the positions, margins and other account details each day.
    When opening an account, clearing member shall file the clearing account information for the proprietary and individual client account with TAIFEX according to the rules in the preceding Article. The same applies to all subsequent change and cancellation.
    When the clearing member or its client is U.S. person or U.S. Futures Commission Merchant , the clearing member shall state on the account information filed the clearing member.
3.1.3     (Change of daily settlement type for clearing accounts)
    Clearing members applying to TAIFEX for changing the daily settlement type shall follow the instructions below:
  1. Applications are accepted between 8:30am to 5:00pm on TAIFEX business days.
  2. Clearing members shall specify the clearing accounts for which the daily settlement type is to be changed.
  3. Daily settlement type can only be changed from CTM to STM.
    Clearing members who have one of the following circumstances are not allowed to apply to change the daily settlement type:
  1. The clearing member is deemed to be in default as provided in Article 53 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules.
  2. When clearing account is a client account, the client has been reported to be in default by the clearing member.
    TAIFEX will execute the daily settlement type change operation from the deadline of application to daily closing, and calculate the amount of variation margin and mark-to-market difference that should be returned or received after the daily settlement type is changed.
Section II Margin Accounts
3.2.1     (Margin accounts opened by TAIFEX)
    For the deposit, payment, and disposal of funds and securities
    between TAIFEX and clearing member, TAIFEX may open margin accounts with settlement banks or other institutions, in order to segregate margins of clearing member and assets of TAIFEX.
3.2.2     (Agreement between TAIFEX and settlement bank)
    TAIFEX shall enter into agreements with the settlement bank and other institutions with which TAIFEX opens margin accounts to establish the following terms and conditions:
  1. Where TAIFEX freezes or transfers funds and securities in a clearing member's OTC derivatives clearing margin account in accordance with Article 54, Paragraph 3, Subparagraph 3 and Article 56, Paragraph 1, Subparagraph 2 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules, the settlement bank and other institutions shall proceed according to TAIFEX's instructions.
  2. Where the information is needed for it to conduct business, TAIFEX may require settlement banks or other institutions to provide details of clearing members' OTC derivatives clearing margin accounts, and the settlement banks or other institutions shall provide assistance as appropriate.
3.2.3     (OTC clearing margin accounts opened by clearing members)
    For the delivery of funds and securities with TAIFEX, clearing members shall open separate OTC derivatives proprietary clearing margin accounts and OTC derivatives client clearing margin accounts for NTD, multiple currency, and securities deposits at settlement banks or other institutions designated by TAIFEX. The number of such institutions to be named by each clearing member with TAIFEX shall not exceed two.
    The agreements entered into by clearing members to open the aforesaid OTC derivatives clearing margin accounts shall provide the following:
  1. Where TAIFEX freezes or transfers funds and securities in the clearing member's OTC derivatives clearing margin account in accordance with Article 54, Paragraph 3, Subparagraph 3 and Article 56, Paragraph 1, Subparagraph 2 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules, the clearing member agrees that the settlement bank and other institution will proceed according to TAIFEX's instructions.
  2. The clearing member agrees that the settlement bank or other institution may provide details of the clearing member's OTC derivatives clearing margin accounts with TAIFEX at TAIFEX's request.
  3. A copy of the agreement will be sent to TAIFEX for filing purposes.
    The aforesaid provisions to be included in an agreement may be provided in the form of commitment letter to TAIFEX if the OTC derivatives clearing margin account is opened by a clearing member, who is one of the settlement banks and other institutions designated by TAIFEX, at its own financial institution.
3.2.4     (Change of OTC clearing margin accounts designated by clearing members)
    To change details of OTC clearing margin account provided to TAIFEX, clearing member shall complete an Application Form for Change of OTC Derivatives Clearing Margin Account, and attach a copy of the agreement entered into with the new settlement bank or other institution in accordance with Section 3.2.3 and a copy of the OTC derivatives clearing margin account passbook or proof of account. The application package must be delivered to TAIFEX at least ten business days prior to the effective date of change of OTC derivatives clearing margin account.
    TAIFEX will review the application documents and, if no error is found, notify the clearing member of the official effective date. However, if clearing member has made an error or omission in the application, TAIFEX will postpone the effective date accordingly.
3.2.5     (OTC derivatives client margin accounts opened by clearing members)
    Clearing member shall open "OTC Derivatives Client Margin Account" with settlement banks designated by the Competent Authority for client margin deposits.
    The OTC derivatives client margin account agreement entered into between clearing members and financial institutions shall providing the following:
  1. Account shall be used for deposit, payment, and disposal of funds and securities with the corresponding clients according to Article 18, Paragraph 1 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules.
  2. Name (which shall state explicitly "XXX OTC derivatives client margin account"), account number (or code), account opening date, and deposit type.
  3. Clearing member may not overdraw, apply a guarantee, or exercise other rights over the deposits or securities in the OTC derivatives client margin account.
  4. All withdrawals from the account must be made by transfer. Cash withdrawal will not be allowed.
  5. Clearing member agrees that the financial institution may provide details of the account for auditing purpose by Competent Authority or TAIFEX.
  6. When Competent Authority orders in accordance with law for withdrawals from the account to be terminated and all funds and securities in the account to be transferred, the financial institution and the clearing member shall proceed accordingly.
  7. If the clearing member and a financial institution agree to make withdrawal transfers on the account by financial Electronic Data Interchange (EDI), online banking, automated teller machine (ATM), telephone banking or any other automated method of electronic fund transfer, a maximum single transaction withdrawal limit and a maximum single day withdrawal limit shall be specified.
  8. A copy of the transaction will be sent to TAIFEX for filing purposes.
    The aforesaid provisions to be included in an agreement may be provided in the form of commitment letter to TAIFEX if TC derivatives client margin account is opened by clearing member at its own financial institution.
3.2.6     (Filing of OTC derivatives client margin accounts by clearing members)
    Clearing member shall file, within five business days since the effective date of OTC derivatives client margin account open and change or termination, the following documents to TAIFEX:
  1. OTC derivatives client margin account registration form.
  2. Copy of OTC derivatives client margin account agreement.
  3. Proof of account closure, if filing for termination
Section III Client Clearing
3.3.1     (Clearing member shall obtain approval from clients before applying for client clearing operation)
    When applying for client clearing operation, clearing member shall proceed according to the client's instructions and the client clearing agreement.
    Clearing member shall keep the client clearing agreement entered into with the client in a safe place. The storage period shall be a minimum of five years starting on the day on which the business relationship is terminated.
3.3.2     (Clearing members shall obtain clients' written Letter of Pledge before proceeding with client clearing operations)
    When engaging in client clearing operations, clearing member shall obtain the client's signed Letter of Pledge in writing to indicate that the client fully understands the clearing process and agrees to adhere to the client clearing agreement and TAIFEX rules.
    Clearing member shall deliver the client's written Letter of Pledge to TAIFEX within three business days after signing the client clearing agreement with the client. TAIFEX will make a separate announcement on matters to be provided in the aforesaid written Letter of Pledge.
3.3.3     (Registration and filing of overseas Chinese and foreign nationals)
    When entering into client clearing agreements with overseas Chinese and foreign nationals to establish the rules for clearing operations, clearing members shall check first whether the client has followed the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals to complete registration, and the transactions shall comply with the existing trading guidelines.
    When margin payment/receipt for overseas Chinese and foreign nationals involve fund transfer and reporting of purpose of foreign remittance, clearing members shall follow the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals, the Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions, and the other foreign exchange competent authority's rules.
3.3.4     (Clients may designate backup clearing members)
    Client may designate other clearing member as backup clearing members. All rights and obligations derived from cleared transactions will be transferred to backup clearing members if the current clearing members default.
    When requested to be as a backup clearing member, such clearing member shall first enter into an agreement with the client to agree that the client will, if the current clearing member defaults, transfer the rights and obligations derived from cleared transactions in part or in whole to the backup clearing member, who will perform the clearing obligations to TAIFEX associated with these cleared transactions.
    When having designated different clearing member as backup clearing member, clients may complete the filing procedure through the backup clearing members to TAIFEX after establishing the agreement in the preceding paragraph. The backup clearing members designated by clients in the first paragraph should be general clearing members of TAIFEX without default.
    To terminate the relationship as a backup clearing member with a client, the clearing member shall negotiate termination with the client, and file the result with TAIFEX.
3.3.5     (Reasons for which clearing members shall or may refuse client's clearing requests)
    When a client is found in any of the following circumstances, a clearing member shall refuse to undertake the client's clearing requests on the client's transaction.
  1. Client margin deposited by the client is below the client margin payable by the clearing member.
  2. The client fails to perform clearing and settlement obligations.
    If given a client is found in any of the following circumstances, a clearing member may refuse to undertake the client's clearing requests on the client's trade transaction.
  1. The client's financial standing or the transaction's risk level is deemed inadequate to accept clearing requests.
  2. The transaction may disrupt market order or endanger public interest.
    When refusing a client's clearing requests pursuant to the two preceding paragraphs, clearing member shall promptly notify client and TAIFEX of the reason for refusal.
3.3.6     ( Effect of client's written Letter of Pledge upon termination of clearing agreement )
    When a clearing member and its client terminate a client clearing agreement pursuant to Article 21 and Article 22 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules, the client's Letter of Pledge under Section 3.3.2 will lose effect at the same time. However, the client's Letter of Pledge will remain effective if the client's clearing account has not fulfilled all settlement or payment obligations derived from clearing operations at TAIFEX.
3.3.7     (Clearing members filing client defaults)
    Clearing members shall deem a client to be in default where the client is found in any of the following circumstances; unless there are other stricter stipulations in the client clearing agreement, the stipulations shall be followed:
  1. The client is unable to fully fulfill its settlement or payment obligations derived from clearing operations at TAIFEX before the given deadline; and is unable to fulfill its obligations within three business days after given notice by the clearing member.
  2. Except for the circumstances in the preceding subparagraph, the client has violated other provisions in the client clearing agreement, and fails to improve within thirty business days after given notice by the clearing member.
    Under the above circumstances, the clearing member shall file the client as in default to TAIFEX on the same day, and notify the client at the same time. Clearing member filing client in default to TAFIEX shall meet the following requirements:
  1. Filing is accepted between 9:00 and 17:00 on TAIFEX business days.
  2. Clearing member file its client in default shall specify default date, client name, client clearing account code and default facts.
  3. To file client in default, clearing member shall submit the client clearing agreement and margin call or clearing notice.
    TAIFEX will disclose information filed by the clearing member to all clearing members after receiving default filing from such clearing member. Clearing member who file default shall be solely responsible for any damages to clients or other disputes.
Chapter 4 Submission for Clearing
Section I Approved Trade Affirmation Platforms
4.1.1     (Approved trade affirmation platforms)
    The counterparties in each transaction shall submit the transaction for clearing through an approved trade affirmation platform announced by TAIFEX and complete the affirmation procedure before submitting the transaction for clearing.
    The counterparties may appoint a third party to submit the transaction for clearing through an approved trade affirmation platform on their behalf.
    TAIFEX shall not discriminate against the submission of an eligible transaction executed bilaterally or on or subject to the rules of an unaffiliated electronic matching platform or trade execution facility without rational reasons during the clearing operation.
4.1.2     (Exemption scope for transaction transactions )
    TAIFEX will not be responsible for the accuracy, immediacy, integrity of transaction data transmission, delay, inability to transmit, completeness, any other damage, or other incidents that can be attributed to the trade affirmation platform arising from problems in the transaction transmission process.
Section II Transaction Submission Procedure
4.2.1     (Transaction submission procedure)
    Unless otherwise stipulated, transactions can be submitted for clearing between 9:00 and 17:00 on TAIFEX business days. Transactions submitted after 17:00 will be checked by TAIFEX at 9:00 on the following business day.
    Where the business day in the preceding paragraph is a make-up workday as announced by the Executive Yuan, TAIFEX will not be accepting transactions for clearing on the day, but may announce adjustments as needed.
    The submission procedure for transactions (including backload transactions) for clearing shall meet the following criteria:
  1. Transaction eligibility: Transactions must comply with the specifications in Chapter 5.
  2. Margin adequacy: The excess clearing margins in the transaction parties' clearing accounts must not be lower than the required clearing margin for the new transaction.
  3. The clearing member's agreement for client clearing transactions: For transactions made by clients of clearing members, TAIFEX will check with the clearing members to confirm their agreement to submission of these transactions within one hour.
    TAIFEX replying submission status for transaction parties:
  1. Where all criteria in the preceding paragraph are met: The status is replyed to "Accepted", and the number and date and time of transaction will be provided.
  2. Where any of the criteria in the preceding paragraph is not met: The status is replyed to "Rejected", and TAIFEX will give reason for rejection.
    For transactions made by client of clearing member, TAIFEX will send the transaction status to the client and its clearing member.
4.2.2     (Backloading process)
    When a backload transaction is submitted, TAIFEX will proceed immediately to check the transaction eligibility, and then check the required margin adequacy for the new backload transaction after daily closing.
    The excess clearing margins in the transaction parties' clearing accounts after daily closing must not be lower than the required clearing margin for the new transaction.
    TAIFEX provides what-if margin calculator for clearing members and their clients. The calculator generates the required margin for transactions for clearing as reference only. Actual clearing margins required will be those provided by daily closing calculation.
    TAIFEX replying submission status for backload transaction parties by 9:00 on the next business day following the submission date:
  1. Where the margin adequacy is met: The status is replyed to "Accepted", and the number and date and time of transaction will be provided.
  2. Where the margin adequacy is not met: The status is replyed to "Suspended", and a margin payment notice will be sent to the clearing member(s) associated with the party(ies) with an inadequate margin. Another check will be performed by 11:00 to determine whether margin adequacy is met.
    1. Where both parties have adequate margins: The status is replyed to "Accepted", and the number and date and time of transaction will be provided.
    2. Where either party have an inadequate margin: The status is replyed to "Rejected", and TAIFEX will give reason for rejection.
4.2.3     (Mandatory clearing submission deadline)
    For transactions within the scope of futures trading for which central clearing is required by Competent Authority, the transaction counterparties shall follow the rules for central clearing submission in this section and complete the procedure by the central clearing submission deadline on the next business day following the transaction date.
4.2.4     (Submission under the regulations required by the foreign competent authority)
    TAIFEX may, in accordance with the regulations required by the foreign competent authority, restrict the scope of the clearing business for certain persons. According to CFTC's rules on Exempt DCO, TAIFEX limits its Clearing Business for U.S. Persons and Futures Commissions Merchants to the following circumstances:
  1. A U.S. person that is a clearing member of TAIFEX may clear swaps for itself and those persons identified in the CFTC's definition of proprietary account;
  2. A non-U.S. person that is a clearing member of TAIFEX may clear swaps for any affiliated U.S. persons identified in the CFTC's definition of proprietary account; and
  3. An entity that is registered with the Commission as a futures commission merchant may be a clearing member of TAIFEX, or otherwise maintain an account with an affiliated broker that is a clearing member, for the purpose of clearing swaps only for itself and those persons identified in the CFTC's definition of proprietary account.
    The proprietary account in this rule refers to a proprietary account that complies with Article 1.3 of Title 17 of the United States Code of Federal Regulations (CFR).
    When a clearing member requests TAIFEX for clearing eligible transaction that was reported to the Swap Data Repository (SDR), TAIFEX shall report to the relevant SDR the information on the cleared transactions established as a result of the novation. In such cases, the clearing member does not make the duplicative report for the cleared transactions that have been reported to the SDR by TAIFEX.
    The foreign natural person or foreign juridical person submitting a contract to TAIFEX for centralized settlement shall comply with the regulations of the foreign competent authority. The company may announce relevant matters separately when it deems it necessary.
Chapter 5 Cleared Transactions
Section I TWD interest rate swap transaction specifications and pricing
5.1.1     (TWD interest rate swap transaction specifications)
    Specifications of TWD interest rate swap transactions to be cleared by TAIFEX will be announced separately.
5.1.2     (Time for building valuation curves)
    TAIFEX starts building the intraday valuation curves and the end-of-day valuation curves at 11:00 am and 4:00 pm, respectively, every business day.
    Notwithstanding preceding paragraph, TAIFEX may build valuation curves as needed to reflect market conditions.
5.1.3     (Methods for building valuation curves and pricing data for TWD interest rate swap cleared transactions)
    Valuation curves that TAIFEX builds to calculate net present value of TWD interest rate swap cleared transactions include forward interest rate curves and discount rate curves. The maturities and the pricing data for interest rate benchmarks are as follows:
  1. Maturities for interest rate benchmarks: one week, two weeks, one month, two months, three months, six months, nine months, one year, two years, three years, four years, five years, seven years, ten years, twelve years, and fifteen years.
  2. Pricing data: Regarding the pricing data for the maturities of preceding subparagraph for interest rate benchmarks, TAIFEX may use the Taipei Interbank Offered Rates (TAIBOR) or substitute rates published by the Bankers Association of the Republic of China and the market rates for TWD interest rate swaps.
  3. Where the pricing data of preceding subparagraph are not available, TAIFEX may supplement the data in the following methods:
    1. by interpolation.
    2. by the interest rate data that TAIFEX asks clearing members to provide.
  4. Where TAIFEX deems the interest rate data in the two preceding subparagraphs are unable to reflect market conditions or where necessary, TAIFEX may decide otherwise at its discretion.
    Regarding the interest rate data under Subparagraph 3, Item 2 of the preceding paragraph, clearing members are to provide the data within thirty minutes after being notified by TAIFEX.
    TAIFEX may adjust the maturities and pricing data for interest rate benchmarks in the first paragraph as needed to reflect market conditions.
5.1.4     (Net present value of TWD interest rate swaps)
    TAIFEX calculates net present value of TWD interest rate swaps by the following methods every business day.
  1. Present value of cleared transactions' cash flows based on the valuation curves:
    1. Present value of the fixed rate interest amount: The present value calculated by discounting all cash flows which are based on cleared transactions' notional and fixed rate from the next business day to the maturity date.
    2. Present value of the floating rate interest amount: The present value calculated by discounting all cash flows which are based on cleared transactions' notional, fixing rates and forward interest rates estimated by valuation curves from the next business day to the maturity date.
  2. Net present value is calculated based on preceding present value:
    1. If the party to the cleared transaction is a floating rate payer, the net present value of a cleared transaction is the present value of the fixed rate interest amount less the present value of the floating rate interest amount.
    2. If the party to the cleared transaction is a fixed rate payer, the net present value of a cleared transaction is the present value of the floating rate interest amount less the present value of the fixed rate interest amount.
    The net present value calculation above may be determined at TAIFEX's discretion when TAIFEX deems it necessary to reflect reasonable market value or facilitate market regulation.
Chapter 6 Margin
Section I Margin and Mark-To-Market Difference
6.1.1     (Initial margin)
    TAIFEX calculates the initial margins for the cleared transactions of clearing members' proprietary account and each client account respectively during the intraday and the end of each business day to cover the expected loss of net present value changes over the certain period at a 99.5% confidence interval based on the changes of interest and exchange rates in last five years and the expected loss given TAIFEX's chosen stress period.
    The certain period of preceding paragraph refers to five business days for proprietary accounts of clearing members; and seven business days for client accounts of clearing members.
6.1.2     (Liquidity risk margin)
    TAIFEX may require additional liquidity risk margin for the cleared transactions of clearing members' proprietary account and each client account respectively when the change in net present value as a result of a basis point change in interest rates or exchange rates, in excess of the threshold that TAIFEX sets for the corresponding maturities.
    The threshold and the level of liquidity risk margin for the corresponding maturities of preceding paragraph will be determined by TAIFEX according to the bid/ask spreads and relevant information provided by clearing members as required by TAIFEX.
6.1.3     (Additional margins for holidays)
    TAIFEX may require addition margin for holidays for clearing members' proprietary account and each client account respectively to cover potential fluctuation risks in cleared transactions during long holidays. The corresponding methods will be announced by TAIFEX.
6.1.4     (Variation margin and mark-to-market difference)
    TAIFEX calculates the variation margins and mark-to-market difference for the cleared transactions of clearing members' proprietary account and each client account respectively during the intraday and the end of each business day as follows:
  1. Intraday variation margin or mark-to-market difference: The difference between the net present value of cleared transaction based on the intraday valuation less the net present value of cleared transaction based on the end of previous business day valuation and it is treated as the adjustment for the initial margin.
  2. End-of-day variation margin or mark-to-market difference: The difference between the net present value of cleared transaction based on the end-of-day valuation less the net present value of cleared transaction based on the end of previous business day valuation and it is treated as the the settlement amount for the following business day.
    When TAIFEX calculates net present value of cleared transactions at the end of day, if the following business day is the coupon payment date for the cleared transaction, the present value of coupon on the following business day discounted to the calculation date will be added or deducted from the net present value. For cleared transactions newly established on the day, the net present value on the previous business day is zero.
6.1.5     (Pre-margin)
    Before a clearing member submits a proprietary transaction or client transaction to TAIFEX for clearing, TAIFEX may require that the clearing member deposit margin in advance so that the excess margins of the clearing accounts are sufficient to pay required clearing margin of newly added cleared transactions.
6.1.6     (Price alignment interest and price alignment amount)
    TAIFEX calculates the price alignment interests and price alignment amounts for the cleared transactions of clearing members' proprietary account and each client account respectively at the end of each business day as follows:
  1. Price alignment interest (PAI): calculated as the end-of-day variation margin accumulated up to the previous business day multiplied by the interest rate designated by TAIFEX and multiplied by the number of interest counting days.
  2. Price alignment amount (PAA): calculated as the end-of-day mark-to-market difference accumulated up to the previous business day multiplied by the interest rate designated by TAIFEX and multiplied by the number of interest counting days.
    Where TAIFEX collects from or pays to clearing members end-of-day variation margins or end-of-day mark-to-market differences, TAIFEX pays or collects the price alignment interests and price alignment amounts of preceding paragraph. Where the interest rate in the preceding paragraph is negative, the direction of collection and payment of price alignment interest or price alignment amount will be reversed.
    Where the cleared transactions in the first paragraph are denominated in New Taiwan Dollars, the interbank offered rates published by the Central Bank of the Republic of China and the 365-day of a year will be adopted. The interest counting days will be the number of days counting from the calculation day to the end of the day before the next day.
6.1.7     (Calculation of return of variation margin and pay or receive of mark-to-market difference when a CTM transaction is changed to a STM transaction)
    When a clearing member changes the daily clearing type of a clearing account from CTM to STM, it shall comply with return of variation margin and pay or receive of mark-to-market difference as follows:
  1. Where the cumulative variation margin paid/received up to the change date is positive, the clearing member shall return the cumulative variation margin, and TAIFEX will pay the mark-to-market difference of the same amount.
  2. Where the cumulative variation margin paid/received up to the change date is negative, TAIFEX will return the cumulative variation margin, and the clearing member shall pay the mark-to-market difference of the same amount.
6.2.1     (Intraday margin deposit notifications)
    TAIFEX calculates initial margins, variation margins, and mark-to-market differences based on the intraday valuation for the cleared transactions of clearing members' proprietary account and each client account respectively at 12:00 pm on every business day.
    Where the clearing margin balance of a clearing account is lower than the required clearing margin after the calculation above, TAIFEX will issue an intraday margin deposit notification for the shortfall to the clearing member, and the clearing member shall meet TAIFEX's margin requirement by 3:30 pm on the same day.
6.2.2     (End-of-day margin deposit notifications)
    TAIFEX will calculate initial margins, variation margins, and mark-to-market differences based on the end-of-day valuation for the cleared transactions of clearing members' proprietary account and each client account respectively when performing daily settlement at the end of day, and issue the end-of-day margin deposit notifications below on the following business day.
  1. Where cash balance of the clearing margin is not sufficient to pay variation margin and mark-to-market difference of the account, TAIFEX will, on or after 8:30 am, notify the clearing member to make a deposit, and the clearing member shall make up the shortfall by 11:00 am.
  2. Where the clearing margin balance of a clearing account is lower than the required clearing margin, TAIFEX will, on or after 8:30 am, notify the clearing member to make a deposit, and the clearing member shall meet TAIFEX's margin requirement by 11:00 am.
6.2.3     (Ad hoc margin deposit notifications)
    TAIFEX may, depending on market conditions, calculate initial margins, variation margins, and mark-to-market differences based on ad hoc valuation for the cleared transactions of clearing members' proprietary account and each client account respectively.
    Where the clearing margin balance of a clearing account is lower than the required clearing margin, TAIFEX will issue a margin deposit notification for the shortfall to the clearing member after the calculation above. The clearing member shall meet TAIFEX's margin requirement within two hours after the notification is issued.
Section II Margin Deposit Notifications
6.2.4     (Clearing Member's own funds cover client's margin obligation)
    Where the clearing margin balance of a clearing member's client account is lower than the required clearing margin and the client is unable to make up the shortfall by the deadline given herein, the clearing member shall deposit the shortfall from its own funds to TAIFEX by the deadline.
    When making a deposit into a client's clearing account from its own fund, a clearing member shall complay with the rules below:
  1. Where the clearing member is making a deposit from its cash margin of proprietary account, the clearing member shall submit the appliciation to TAIFEX to transfer the amount from the clearing member's proprietary account to the client's clearing account.
  2. Where the clearing member is making a cash margin deposit from its own funds, the clearing member shall deposit the amount into TAIFEX's OTC derivatives clearing margin account, and notify TAIFEX to allocate the amount to the client's clearing account.
    For the amount deposited into the client's clearing account from the clearing member's own funds in preceding paragraph, the clearing member may request to withdraw the amount according to the margin withdrawal rules after the client makes up the shortfall .
Chapter 7 Clearing and settlement
Section I Calculation and Payment of Settlement Amount
7.1.1     (Calculation of settlement amount)
    At closing each business day, TAIFEX calculates settlement amounts for client accounts and proprietary accounts of clearing members as follows:
  1. Where the daily settlement type for a clearing account is STM, calculate the end-of-day mark-to-market difference and PAA for each cleared transaction.
  2. Where the daily settlement type for a clearing account is CTM, calculate the end-of-day variation margin and PAI for each cleared transaction.
  3. The payable or receivable amount of interest at fixed or floating rate on a cleared transaction on the following business day.
  4. Where a cleared transaction becomes effective at position transfer on the day, calculate the payable or receivable amount on the position transfer.
  5. The payable or receivable amount of compression on a cleared transaction on the following business day.
  6. Where a clearing account changes the daily settlement type on the day, calculate the variation margin to be returned and mark-to-market difference on each cleared transaction.
  7. For positions in a clearing account to be transferred into an auction portfolio on the day, calculate the amount of winning bids.
  8. Other payable or receivable amounts on a cleared transaction on the following business day as required.
  9. Other payable or receivable amounts on the following business day stipulated by TAIFEX.
7.1.2     (Payment of settlement amount)
    Regarding the aforesaid settlement amount, TAIFEX is to pay or receive the net cash amount in the same currency in the clearing account by 8:30 am on the following business day.
    Where the cash margin balance on a clearing member's clearing account is insufficient to pay the settlement amount, TAIFEX will notify the clearing member on 8:30 am on the payment date and clearing member shall deposit the shortfall in cash into TAIFEX by 11:00 am on the same day. Where the clearing account is a client account, the clearing member is to notify the client to make up the shortfall by the deadline.
7.1.3     (Change of settlement date for settlement amount)
    In the event of a natural disaster, riot or war or any other force majeure event that causes disruption to TAIFEX's clearing operation, the settlement date for the settlement amount may be postponed.
Section II Clearing Margin Payments
7.2.1     (Cash margin and eligible securities)
    When clearing members handle clearing margins for clearing operations and clients handle client's margins for clearing operations, the deposits may be made in TWD and foreign currency announced by TAIFEX, or Book-entry central government bonds and other securities announced by TAIFEX. If the client of the clearing member is an overseas Chinese or a foreign national, the clearing member and the client should deposit the required clearing margins and client's margins by foreign currency announced by TAIFEX. The settlement amount including variation margin and mark-to-market difference should be paid or received in the currency of the cleared transaction. Exchange settlement of the necessary funds should be handled by the custodian bank or agent in accordance with the relevant regulations.
    The scope and single deposit limit of the aforesaid other securities will be filed by TAIFEX with the competent authority for approval and then announced. The same applies to any subsequent amendments.
7.2.2     (Deposit of clearing margins)
    When depositing a clearing margin, the clearing member is to follow the rules below:
  1. The hours are 8:30 am to 5:30 pm on business days.
  2. When depositing cash and securities, clearing members are to follow the method designated by TAIFEX and deposit cash and securities into TAIFEX's clearing margin account.
  3. Clearing members are to follow the method designated by TAIFEX and inform TAIFEX of details of such cash and securities deposits based on their proprietary and individual client accounts.
    Where TAIFEX confirms, by 5:30 pm, a cash and securities deposit from a clearing member on the same day, the deposit will be included in the clearing margin balance for the day.
7.2.3     (Withdrawal of clearing margins)
    When withdrawing a clearing margin, the clearing member is to follow the rules below:
  1. The hours are 8:30 am to 2:00 pm on business days.
  2. Clearing members are to follow the method designated by TAIFEX and request to withdraw clearing margins from TAIFEX based on their proprietary and individual client accounts.
    Clearing members requesting to withdraw clearing margins shall not be in default as defined under Article 53, Paragraph 1 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules and should follow the rules below:
  1. Only when the total excess margin of the clearing account and the balance of the currency desired to be withdrawn are both positive in value, can an application be submitted to withdraw such currency; the withdrawable amount shall be limited to the total excess margin of the clearing account, or the balance of such currency, whichever is lower. If the clearing account is belong to an overseas Chinese or a foreign national, the withdrawable amount of New Taiwan Dollar is limited to the total excess margin of the clearing account, or the excess margin of New Taiwan Dollar, whichever is lower; the withdrawable amount of foreign currency is limited to the total excess margin of the clearing account, or the total excess margin of the foreign currency of the clearing account, or the balance of such currency, whichever is lower.
  2. Only when there is a balance of the securities desired to be withdrawn, can an application be made to withdraw such securities. After deducting the amount applied for withdrawal, the balance of the total clearing margin of the clearing account shall not be less than the required clearing margin.
    Where a clearing member requests to withdraw clearing margin by 11:00 am, TAIFEX will start processing the withdrawal requests at 12:00 pm on the same day, and transfer the funds to the OTC clearing margin account designated by the clearing member. Where a request is made by 2:00 pm, TAIFEX will start processing the withdrawal requests at 3:00 pm on the same day, and transfer the funds to the OTC clearing margin account designated by the clearing member.
7.2.4     (Foreign exchange settlement agent services for margin)
    If the clearing margin in the clearing account of the clearing member is insufficient, and in the event that the fund transfer cannot be completed within the time limit, or force majeure, or the clearing member fails to perform its clearing and settlement obligations, TAIFEX may handle the exchange settlement on behalf of the clearing member.
    Exchange settlement of the payment between clearing member and client should be handled by such client or its agent.
    Such foreign exchange transactions and reporting procedures are to be completed as required by the foreign exchange authority.
7.2.5     (Withdrawal of securities ineligible to be posted as margin collateral)
    For securities in clearing members' clearing accounts that are reclassified as ineligible to be posted as margin collateral as announced by TAIFEX, the clearing members are to request to withdrawal according to TAIFEX's rules within five business days after TAIFEX's announcement comes into effect. 
    Where a clearing member fails to withdraw the securities as required above and the clearing margin in the clearing account is not lower than the required clearing margin, TAIFEX may unilaterally return the securities to the clearing member's OTC clearing margin account.
Section III Margin Securities
7.3.1     (Collateral Ratio)
    The percentage of securities in a clearing member's clearing account that can be posted as margin collaterals out of the required clearing margin for the account ("collateral ratio") is 100%, unless otherwise stated by the competent authority or TAIFEX.
    TAIFEX may adjust the limit for the aforesaid collateral ratio according to a clearing member's financial standing and credit history.
7.3.2     (Haircut rate and net collateral value)
    When handling securities posted as margin collaterals, TAIFEX follows the haircut rates and net collateral values below:
  1. Haircut rate
    1. Based on securities prices, a haircut rate is the value at risk expected to be able to cover price volatility over a certain period of time.
    2. TAIFEX reviews and announced haircut rates regularly every quarter. TAIFEX may adjust haircut rates as needed in response to larger changes in market prices or exchange rates.
  2. Calculation of net collateral value
    1. Net collateral value of book-entry central government bonds are based on the weighted average prices per hundred dollars or theoretical prices in the electronic bond trading system disclosed by Taipei Exchange calculated at the haircut rate and converted to the corresponding base currency.
    2. Net collateral value of other securities are based on the latest market price of such securities, calculated at the haircut rate, and then converted to the corresponding base currency.
    3. Where the exchange rate for the base currency and the price of securities are not available, the value will be decided by TAIFEX.
7.3.3     (Collateral margin amount)
    When handling securities posted as margin collaterals, TAIFEX will take the smaller of the following as the collateral margin amount:
  1. The net collateral value of securities in a clearing account.
  2. The amount required clearing margin for a clearing account based on the collateral ratio.
7.3.4     (Provisions on posting clients' securities as margin collaterals)
    When a clearing member posts a client's securities as margin collateral, the clearing member is to state the following explicitly in the settlement transaction or agreement with the client in advance:
  1. All interest, dividends or other benefits from the securities are the property of the client. All taxes and related expenses are to be paid by the client.
  2. It is agreed that the clearing member will deposit such securities with TAIFEX to pay the required clearing margin for the client's clearing account.
  3. The methods of securities deposit and withdrawal.
  4. The provisions on withdrawal where securities are changed to ineligible to be posted as margin collateral, expire, or have principal installment payments.
  5. The provisions on disposing securities where the client fails to perform its settlement obligations.
  6. The scope and single deposit limit of the securities.
  7. The percentage of margin securities.
  8. The calculation of haircut rate and net collateral value.
    Clearing members may adopt stricter standards and modify the rules under Items 6 to 8 above as needed to reflect volatility in exchange rates and securities prices and a client's credit history.
Section IV Principal and Interest Payments on Securities and Disposal
7.4.1     (Return of principal on bond)
    Where a clearing member deposits securities in the form of bonds, the clearing member is to complete a withdrawal starting on the fourth business day preceding a maturity date or installment date. The clearing member is not to post such bonds as margin collaterals. However, bonds that return the principal in installment and have not reached maturity may be posted as margin collaterals starting on the first business day following the current principal installment payment date.
    Where the clearing member does not withdraw bonds as required above, TAIFEX may proceed as follows:
  1. Not calculate the net collateral value of such bonds.
  2. Where the clearing margin in the clearing account holding such bonds is not below the required clearing margin, TAIFEX may unilaterally return the bonds to the clearing member's OTC clearing margin account.
  3. Where the clearing margin in the clearing account holding such bonds is below the required clearing margin, TAIFEX will treat the principal payments at maturity or installment payment dates as cash payments of clearing margin.
7.4.2     (Interests on bond)
    For clearing members posting securities in the form of bonds as margin collaterals, the rules on accrued interest and withholding tax are as follows:
  1. Where the bonds are deposited with TAIFEX, TAIFEX will handle accrued interest and withholding tax according to the rules, and allocate the net amount of interest after taxes to the clearing member's OTC clearing margin account. Where the bonds are the client's securities, the clearing member will handle accrued interest and withholding tax according to the rules.
  2. Where the client's securities are deposited with the clearing member, the clearing member will handle accrued interest and withholding tax according to the rules, and allocate the net amount of interest after taxes to the client's designated account.
7.4.3     (Disposal of clearing members' securities by TAIFEX)
    Where a clearing member is in default, TAIFEX may dispose the securities in the clearing member's clearing accounts. The proceeds received, after fees and taxes, will be added to the corresponding accounts' cash balance of clearing margin to make the necessary payments.
    Where principal and interest payments are due on the aforesaid securities before disposal, TAIFEX may treat the interest payments after taxes and principal deposits as cash payments of clearing margin.
7.4.4     (Disposal of clients' securities by clearing members)
    Where a client is in default, a clearing member may dispose the client's securities, and withhold taxes as required by law.
    Where the aforesaid client's securities are deposited with TAIFEX, the clearing member may not make a request to withdraw the securities from TAIFEX until the clearing member has reported the client's default.
Chapter 8 Position Management
Section I Position Transfer
8.1.1     (Scope of position transfer)
    When applying for position transfer in accordance with Article 29, Paragraph 2 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules, clearing members may apply to transfer all or part of their positions. Except for client default as described in Article 29, Paragraph 2, Subparagraph 4 of the rules, both the transferor and the transferee shall have adequate margins and clearing members may apply to transfer the margins at the same time.
    Clearing members applying to transfer defaulting client's positions to its proprietary account shall attach documents of defaulting client and its proprietary account shall have adequate margins.
    All positions in the first Paragraph 1 mean all cleared transactions in a clearing account after the deadline of transaction submission for clearing on the application date.
8.1.2     (Position transfer application)
    Clearing members shall apply position transfer in accordance with the terms set forth below:
  1. Application can be submitted between 9:00 and 17:00 on TAIFEX business days.
  2. Clearing member of transferor or transferee shall submit the application to TAIFEX, and the clearing member for the counterparties shall confirm within the application hours.
  3. For applications for transfer of all positions and margins, clearing member for the parties shall confirm the transfer details before daily closing on the same day, TAIFEX may accept the applications.
  4. For clearing members applying to transfer foreign currency denominated cleared transactions, the transferee clearing member shall open a foreign currency clearing margin account designated for trading with TAIFEX.
  5. For applications to transfer securities as margins, the application date must not have reached the securities scheduled repayment date or within four days prior to the repayment date, and the transferee clearing member should open a securities clearing margin account designated for trading with TAIFEX.
8.1.3     (Restrictions on position transfer application)
    Clearing members applying for position transfer shall not be in any of the following circumstances:
  1. The clearing member of either party is in default as defined under Article 53 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules.
  2. The cleared transactions in the transfer application expires on the application date.
8.1.4     (Procedure for effecting position transfer)
    TAIFEX executes position transfer between 17:00 and daily closing on the day when clearing member making the application.
    Once position transfer is effected, the rights and obligations between the transferor clearing member and TAIFEX regarding the cleared transaction will be extinguished immediately and the cleared transaction terminated. At the same time, the transferee clearing member will create a new cleared transaction with TAIFEX with the same rights and obligations as those associated with the original cleared transaction.
    If the original cleared transaction in the preceding paragraph is a client cleared transaction, the rights and obligations between the transferor clearing member and the client regarding the client cleared transaction will be extinguished immediately and the cleared transaction terminated. At the same time, the transferee clearing member will create a new client cleared transaction with the client with the same rights and obligations as those associated with the transferor's original client cleared transaction.
    The daily settlement type for the new cleared transaction created in Paragraph 2 and Paragraph 3 will be determined by the type specified by the transferee's clearing account.
    TAIFEX will perform daily closing on the position balances of the transferor's and the transferee's clearing accounts after the position transfer is effective. TAIFEX will also calculate the payments to be paid or received for the position transfer according to Section 8.1.5.
8.1.5     (Payments to be paid or received for position transfer)
    According to the daily settlement type for the transferor's and the transferee's clearing accounts, payment to be paid or received for position transfer will be calculated as follows:
  1. Transferor:
    1. Where the daily settlement type for a clearing account is CTM, calculate the amount of return of variation margin, early termination charge and PAI for the transferor's cleared transaction.
    2. Where the daily settlement type for a clearing account is STM, calculate the amount of PAA for the transferor's cleared transaction. There are no rights and obligations for the return of mark-to-market difference.
  2. Transferee:
    1. Where the daily settlement type for a clearing account is CTM, calculate the amount of end-of-day variation margin for the new cleared transaction and the position transfer charge which based on the net cumulative variation margin paid and received for the original cleared transaction up to the transfer date.
    2. Where the daily settlement type for a clearing account is STM, calculate the amount of end-of-day mark-to-market difference for the new cleared transaction and the position transfer charge which based on the cumulative mark-to-market difference paid and received for the original cleared transaction up to the transfer date.
    The return of variation margin and early termination charge for the transferor's cleared transaction in the Subparagraph 1 of the preceding Paragraph is based on the net cumulative variation margin paid and received for the cleared transaction up to the transfer date. If the amount is positive, the transferor will return the variation margin, and TAIFEX will pay early termination charge equal to the amount; and if the amount is negative, TAIFEX will return the variation margin, and the transferor will pay the early termination charge equal to the amount.
    If the amount of net cumulative variation margin or the mark-to-market difference paid and received for the original cleared transaction up to the transfer date in Paragarph 1, Subparagraph 2 is positive, the transferee will pay the position transfer charge equal to the amount; and if the amount is negative, TAIFEX will pay the position transfer charge equal to the amount.
    TAIFEX will settle the payments for position transfer on the next business day following the position transfer effective date.
Section II Netting
8.2.1     (Netting methods)
    TAIFEX adopts the following netting methods:
  1. Basic Netting: means that the cleared transaction in a netting application must, except for notional amount and trade direction which may vary, have identical designated terms of transaction as announced by TAIFEX.
  2. Blended-rate Netting: means that the interest rate swap cleared transaction in a netting application must, except for notional amount, trade direction, and fixed interest rate which may vary, have identical designated terms of transaction as announced by TAIFEX.
8.2.2     (Netting application)
    The netting application procedure for clearing members is as follows:
  1. Application shall be submitted between 9:00 and 17:00 on TAIFEX business days.
  2. Clearing members shall submit applications to TAIFEX, and specify the positions as well as the netting method, basic netting or blended-rate netting for each netting transaction.
  3. The netting application date and the following business day must not be a payment date for the cleared transactions.
  4. If a position transfer or compression is effected for the clearing account provided in a netting application on the netting application date, the netting application will be invalid.
8.2.3     (Procedure for effecting netting)
    TAIFEX executes netting between 17:00 and daily closing on the day when clearing member making the application.
    Once cleared transactions are netted, the rights and obligations between the clearing member and TAIFEX regarding the cleared transactions will be extinguished immediately and the cleared transactions terminated. Where a net cash flow remains after netting, the clearing member will create a new cleared transaction for the cash flow with TAIFEX at the same time.
    If the old cleared transaction in the preceding paragraph is a client cleared transaction, the rights and obligations between the clearing member and the client regarding the client cleared transaction will be extinguished immediately and the cleared transaction terminated. Where a net cash flow remains after netting, the clearing member will create a new client cleared transaction for the cash flow with the client at the same time.
    The new cleared transaction created under Paragraph 2 and Paragraph 3 must, except for notional amount, trade direction, and fixed interest rate which may differ from the netted old cleared transactions, have identical designated terms of transaction as announced by TAIFEX.
Section III Compression
8.3.1     (Compression schedules regularly or by request)
    TAIFEX announces compression schedules regularly or by request as follows:
  1. Regular: TAIFEX announces compression schedules regularly. These announcements will include the product type for compression, the schedule, and the compression service providers.
  2. By request: Clearing members may submit compression applications to TAIFEX. TAIFEX will announce compression schedules as needed based on the number of clearing accounts and total positions involved in an application. These announcements will include the product type for compression, the schedule, and the compression service providers.
8.3.2     (Compression via compression service providers )
    Clearing member participating in compression shall follow the procedure specified by the compression service provider and apply through compression service provider by the deadline announced by TAIFEX.
    Clearing member and client participating in compression shall enter into agreements with the compression service providers as appropriate, and must agree that TAIFEX may provide position details on the clearing accounts participating in compression to the compression service providers.
    For cleared transactions to be compressed and the expected new cleared transaction with identical future net cash flows, the clearing payment due date shall not be the compression effective date or the following business day.
8.3.3     (Procedure for effecting compression)
    Where TAIFEX, before compression is effected, follows the compression service provider's final execution advice and calculates and finds the clearing margin balance on the participating clearing accounts to be lower than the required clearing margin, TAIFEX may require that the clearing members pay a margin.
    TAIFEX procedure for effecting compression should meet the following requirements:
  1. Final execution advice and compression data provided by compression service providers on clearing accounts will require the consent of all participating clearing members and clients. Compression will be invalid if any of the parties is in disagreement.
  2. Where TAIFEX, between 17:00 and daily closing on the compression effective date, follows the compression service provider's final execution advice and checks the clearing margin balance on the participating clearing accounts to be higher than the required clearing margin, TAIFEX will proceed to effect compression. If the clearing margin balance on any of the participating clearing accounts is lower than the required clearing margin, compression will be invalid.
    TAIFEX performs the procedure for effecting compression as follows:
  1. Once cleared transactions are compressed, the rights and obligations between the clearing member and TAIFEX regarding the cleared transactions will be extinguished immediately and the cleared transactions terminated. Where new cleared transactions should be created after compression, the clearing member will create new cleared transactions with TAIFEX at the same time.
  2. If the old cleared transaction in the preceding subparagraph is a client transaction, the rights and obligations between the clearing member and the client regarding the client cleared transactions will be extinguished and the cleared transactions terminated. Where new cleared transactions should be created after compression, the clearing member will create new client cleared transactions with the client at the same time.
  3. The daily settlement type for the new clearing transactions will be determined by the type specified by the clearing accounts.
  4. If TAIFEX performs compression and encounters a position transfer application for a clearing transaction to be terminated due to compression on the same day, except where the clearing member or the client is in default, suspension or termination of business, or any other circumstances under which TAIFEX finds it necessary, the position transfer application will be invalid.
  5. Compression termination amount to be paid or received between TAIFEX and a clearing member should be made on two business days following the compression effective date.
8.3.4     (TAIFEX's disclaimer for compression service providers)
    TAIFEX is not responsible for the compression performance or
    efficiency or any other service provided by the compression service providers.
Chapter 9 Position Surveillance
9.1     (Calculation of Position Concentration for Clearing Members)
    In order to maintain market order and protect soundness of market development, TAIFEX may perform clearing member position surveillance based on position concentration.
    For TAIFEX clearing members, position concentration is based on the ratio of the sum of required margin requirement for all clearing accounts of a clearing member to the total required margin requirement for all clearing accounts of all clearing members.
9.2     (Standards for Position Concentration for Clearing Members)
    Based on position concentration of clearing members, TAIFEX sets out position concentration standards as follows:
  1. Warning standard: The position concentration of a clearing
  2. member reaches 15%, and the required margin requirement meets TAIFEX's standard.
  3. Disposition standard: The position concentration of a clearing
  4. member reaches 20%, and the required margin requirement meets TAIFEX's standard.
    TAIFEX may notify clearing members to monitor position concentration when the position concentration standard is reached;where the disposition standard is reached, in addition to notify clearing members to monitor position concentration, TAIFEX may take measures set forth below:
  1. Collect additional margin.
  2. Other necessary measures to maintain market integrity or protect the sound development of the OTC derivatives market.
    The margin requirement under Paragraph 1 and the method of calculation for additional margin under Paragraph 2 will be specified by TAIFEX in a separate announcement.
Chapter 10 Default Fund
Section I (Calculation of the OTC derivatives default fund and contribution)
10.1.1     (Establishment of total OTC derivatives default fund)
    The amount of additional OTC derivatives default funds to be deposited by clearing members as a whole after the carrying out of OTC derivative clearing and settlement operations shall be the amount by which the total OTC derivatives default fund exceeds the base OTC derivatives default fund.
    TAIFEX shall calculate and review the "total OTC derivatives default fund" referred to in the preceding paragraph at least once annually, depending on market scale, and after fixing an amount, shall report the amount to the competent authority for approval and recordation. However, exceptions apply where recalculation is required under Article 60 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules.
    The amount of the total OTC derivatives default fund shall be calculated as the sum of the first and second largest possible losses of clearing members estimated by using stress testing.
    The base OTC derivatives default fund referred to in paragraph 1 is OTC derivatives default funds contributed by clearing members prior to carrying out OTC derivatives clearing and settlement operations.
10.1.2     (Calculation of the amount of additional OTC derivatives default funds to be contributed by clearing members)
    The amount of additional OTC derivatives default funds to be contributed by clearing members as a whole shall be divided among the clearing members according to the ratio of the average daily required clearing margin of each clearing members to the average daily required clearing margin of all the clearing members in the last three months.
    Regarding the calculation of the amount of additional OTC derivatives default funds to be contributed by each clearing member in the preceding paragraph, TAIFEX may make adjustment as needed or in the event of a clearing member terminating the clearing service.
10.1.3     (Contribution to and withdrawal from the OTC derivatives default fund)
    Where the amount of additional OTC derivatives default fund required to be deposited by a clearing member as calculated under the preceding article is greater than the amount already deposited, the clearing member shall deposit the difference; where the amount of additional OTC derivatives default fund required to be deposited is smaller than the amount already deposited, the clearing member may withdraw the difference following notification by TAIFEX.
    Except for the cooling-off period in Article 58 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules, at the beginning of January, April, July, and October of each year, TAIFEX shall calculate the amount of additional OTC derivatives default funds required to be deposited by each clearing member pursuant to the preceding article. Each clearing member shall deposit or withdraw the amount to be deposited or withdrawn under the preceding paragraph within three business days counting inclusively from the date of notification by TAIFEX.
    TAIFEX may change the frequency of calculation of additional OTC derivatives default fund to be contributed by each clearing member in the preceding paragraph as needed to reflect market conditions.
Section II Disbursement and replenishment of the OTC derivatives default fund
10.2.1     (Disbursement of the OTC derivatives default fund)
    TAIFEX may use resources in the order provided in Article 58, Paragraph 1, Subparagraphs 1 to 3 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules to cover default losses when a clearing member fails to fulfill its clearing and settlement obligation. Any shortfall will be covered by non-defaulting clearing members' contributions to the OTC derivatives default fund in Subparagraph 4 of the same article and pro rata amount of additional contribution in Subparagraph 5 (hereinafter referred to " Member Assessment "). The utilization may be determined by the following factors.
  1. For each non-defaulting clearing member, the risk of transactions in such product category owned by such non-defaulting clearing member to the aggregation of risk of transactions in each product category owned by the same non-defaulting clearing member, on the business day preceding default.
  2. Each non-defaulting clearing member's participation in auction as provided in Article 11, Section 5(2):
    1. A compulsory auction participant who did not make a bid or whose bid was lower than the reserve price.
    2. A compulsory auction participant who made a bid higher than or equal to the reserve price but lower than the winning bid.
    3. A compulsory auction participant who made the winning bid or a bid higher than or equal to the winning bid.
    4. A non-compulsory auction participant.
    The cap that the non-defaulting clearing member contributes to the OTC derivatives default fund to compensate the default loss shall be the amount that is equivalent to the required OTC derivatives default fund contribution amount on the business day immediately preceding the first day of the cooling-off period. The cap of Member Assessment to compensate the default loss shall be referred to Article 58, Paragraph 3 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules.
10.2.2     (The required Member Assessment to be contributed by non-defaulting clearing members)
    When TAIFEX calculates that OTC derivatives default fund contributions by non-defaulting clearing members are insufficient to cover default losses, TAIFEX may notify non-defaulting clearing members to provide Member Assessment to cover the losses.
    The non-defaulting clearing members shall deposit the amounts in cash on the first business day counting inclusively from the date of notification by TAIFEX.
    Any balance of Member Assessment deposited by non-defaulting clearing members after covering the losses incurred by the default(s) during the relevant cooling-off period will be returned to each non-defaulting clearing member notified by TAIFEX.
10.2.3     (Replenishments of the OTC derivatives default fund)
    TAIFEX calculates the total required amount of the OTC derivatives default fund and contributions to be made by clearing members on the last day of the cooling-off period in order to compensate the losses incurred by a new default of clearing members following the last day of the cooling-off period.
    TAIFEX manages separately the contributions from clearing members in the preceding paragraph and the balance of OTC derivatives default fund on the last day of the cooling-off period.
    Following the completion of the default management process of default(s) relating to such cooling-off period, clearing members may reclaim the balance of the OTC derivatives default fund in the later sentence of preceding paragraph after covering default losses notified by TAIFEX.
    Contributions required of clearing members in Paragraph 1 shall be made within three business days counting inclusively from the date of notification by TAIFEX.
Chapter 11 Default Management
Section I Measures in Response to a Clearing Member's Default
11.1.1     (Default Management Process)
    Where a clearing member defaults for financial reasons, TAIFEX may initiate the following default management process:
  1. Suspend the defaulting clearing member's clearing operations and clearing margin withdrawals.
  2. Proceed to transfer positions and clearing margins of non-defaulting clients of the defaulting clearing member.
  3. On the date of occurrence of a default by a clearing member, to transfer cleared transactions from the defaulting clearing member's proprietary accounts and defaulting client accounts to TAIFEX's OTC default management account for disposal. Once the position transfer is complete, the cleared transactions of the defaulting clearing member's proprietary accounts and defaulting client accounts will immediately be terminated.
  4. After 17:00 on the second business day after the occurrence date of the clearing member default, cleared transactions of non-porting clients will be transferred into TAIFEX's OTC default management account, and the cleared contracts of non-porting clients will immediately be terminated.
  5. The Default Management Group (hereinafter referred to as the DMG) will be convened to propose hedging strategies and auction methods for the defaulting clearing member's positions and other default procedures.
  6. The defaulting clearing member's positions will be hedged.
  7. The defaulting clearing member's positions and hedging positions will be auctioned.
    TAIFEX prescribed in the preceding paragraph sets up separate TAIFEX's OTC default management accounts for individual defaulting clearing members. Separate accounts must be kept to distinguish the defaulting clearing member's proprietary and individual client accounts, and record whether the clearing member and its client agree to deposit all margin to TAIFEX.
    The non-porting clients in the first paragraph refer to the defaulting clearing member's non-defaulting clients whose cleared contracts and clearing margins have not been transferred to any clearing member with whom the defaulting clearing member has entered into a succeeding arrangement(hereinafter referred to as a succeeding clearing member) or other clearing members designated by the clients.
    The defaulting clearing member's positions in the first paragraph refer to the defaulting clearing member's proprietary positions, defaulting client positions, and non-porting client positions that have already been transferred to the OTC default management account.
11.1.2     (The convene and advice of DMG)
    In the event of a clearing default for financial reasons, TAIFEX will convene the DMG to consult on the matters relating to the disposal of the positions and clearing margins of the defaulting clearing member.
    The DMG shall give advices regarding the following:
  1. Hedging strategies for a defaulting clearing member's positions, selection of hedging counterparties, and terms and execution of transactions.
  2. Position composition of an auction portfolio, and auction rules, date, and time.
  3. Matters relating to default management and loss control procedures.
    TAIFEX may convene the DMG at any time during the period of default management process.
11.1.3     (Clearing members' duty of confidentiality)
    Clearing members shall keep confidential all information obtained from their participation in TAIFEX's default management process. Clearing members shall not disclose such information to any third party, except in response to queries made according to the law.
11.1.4     (Conditions for clearing members to resume clearing operations)
    Clearing members who have been suspended from clearing operations by TAIFEX due to a default may submit an application to resume clearing operation and a Statement to TAIFEX after the cause for suspension no longer exists.
    Clearing members whose applications to resume clearing operations have been approved by TAIFEX may resume their clearing operations, and have TAIFEX make the announcement to the market.
11.1.5     (Default Fire Drills)
    TAIFEX will notify the timetable and scope for each default fire drill prescribed in the preceding paragraph to the clearing members and the DMG.
    Upon receiving such notification, the clearing members shall dispatch their representatives to participate in the default fire drill.
    The DMG shall participate in regular default fire drills conducted by TAIFEX on an annual basis.
Section II Protection of Non-defaulting Clients of the Defaulting Clearing Member
11.2.1     (Protection of non-defaulting clients' positions and clearing margins)
    Clearing members who have been suspended from clearing operations by TAIFEX for financial reasons shall transfer cleared transactions and clearing margins of non-defaulting clients who have agreed to transferring to the succeeding clearing member and have the succeeding clearing members to perform the clearing obligations to TAIFEX.
    Where non-defaulting clients of defaulting clearing members instruct to transfer their cleared transactions and clearing margins to other clearing members designated by the non-defaulting clients, the defaulting members shall follow the instructions.
11.2.2     (Porting of non-defaulting clients' positions and clearing margins)
    Clearing members, following the rules above, shall enter into client clearing agreements with the clients before applying to TAIFEX for the porting of the clearing contracts and clearing margins of the clients. In addition, such clearing members shall follow the rules below and submit a porting application to TAIFEX by 17:00 on the second business day after the default.
  1. Application can be submitted between 9:00 and 17:00 on TAIFEX business days.
  2. Where an application requests whole positions and clearing margins to be transferred, the receiving clearing member shall confirm the porting details before the end of daily clearing process.
  3. The receiving clearing member shall have a sufficient clearing margin in the client's clearing account.
  4. Client accounts applying for porting that have received a margin call notice from TAIFEX shall make up the shortfall before submitting an application.
    Where the receiving clearing member accepts a porting application from the client, the receiving clearing member may apply to TAIFEX to review a detailed statement on the positions and clearing margins of the client in the defaulting clearing member's account.
    TAIFEX will execute porting of non-defaulting clients' positions and clearing margins between 17:00 and the end of daily clearing process on the same day of a receiving clearing member's application. The end-of-day clearing process will be performed according to the position balance after porting, and the amount payables/receivables by the clearing members for position porting will be calculated accordingly.
11.2.3     (Handling of non-porting client positions)
    Where a non-defaulting client of a defaulting clearing member is found in any of the following circumstances, TAIFEX may transfer such client's positions into the OTC default management account for disposal:
  1. The client fails to transfer positions and clearing margins by the porting deadline.
  2. TAIFEX determines that the client's positions poses too great a risk to TAIFEX or the client involves any other material event which may cause a default deemed by TAIFEX.
Section III Hedging Transactions
11.3.1     (Hedging of defaulting clearing members' positions)
    TAIFEX may consult DMG for hedging the risks from defaulting clearing member's positions.
    The counterparty for hedging transaction must not be a defaulting clearing member.
    Where the hedging transactions in the first paragraph are interest rate swaps, such interest rate swap transactions are limited to those that can be submitted to TAIFEX for central clearing.
11.3.2     (Execution of hedging transactions)
    For execution of hedging transactions, TAIFEX may consult the DMG on the following matters, TAIFEX may in its discretion enter into hedging transactions:
  1. Formulation of hedging strategies
  2. Selection of hedging counterparties
  3. Specifications of transaction agreement
  4. Range of transaction price
  5. Execution of transaction
  6. Other necessary matters.
    For formulation of hedging strategies in the first item above, the DMG needs to consider the following factors:
  1. Composition and size of a hedged position and the risks
  2. Potential effects of execution of hedging transactions on the market
  3. Completion of hedging transactions at better prices
11.3.3     (All necessary fees for hedging transactions and losses are to be borne by defaulting clearing members)
    All necessary fees for hedging transactions and resulting losses/gains are to be borne by defaulting clearing members.
Section IV Auctions
11.4.1     (Composition of auction portfolios)
    TAIFEX may consult DMG, constructs separate auction portfolios in respect of a defaulting clearing member's positions and relevant hedging positions of same products, same currencies, and same risk attributes.
11.4.2     (Auction participants)
    Non-defaulting clearing members who, within sixty business days preceding the date of default, hold products identical with those in an auction portfolio announced by TAIFEX are to participate in the auction ("compulsory auction participants").
    Clearing members who are non-compulsory auction participants may apply to TAIFEX to participate in an auction on a voluntary basis.
    Clients of non-defaulting clearing members may, after having the respective clearing members' consent, submit auction applications to TAIFEX. Matters that clients shall comply will be stipulated by TAIFEX.
    Defaulting clearing member may not participate in auctions.
11.4.3     (Auction notification)
    Before conducting an auction, TAIFEX will notify auction participants of the following:
  1. The date and time of an auction. (auction hours)
  2. The composition of an auction portfolio.
  3. Auction currency .
  4. The method of an auction.
  5. The date and time of auction result announcement.
  6. The date and time of settlement.
  7. Other necessary matters.
    TAIFEX may change or cancel an auction before such auction closes, and notify the auction participants accordingly.
11.4.4     (Auction bids)
    Auction participants are to provide bids during the auction hours as informed by TAIFEX. In addition, auction participants are allowed to amend their bids within the auction hours. TAIFEX will treat each participant's last bid before the auction deadline as the final bid.
    TAIFEX may consult DMG the bids it receives in the first paragraph, provides the bidders' identity has been kept anonymous from the DMG.
    When an auction participant wins a bid, if the bid is positive, the winning bidder is to pay this amount to TAIFEX; and if the bid is negative, TAIFEX is to pay the absolute amount of this bid to the winning bidder.
    None of the members of the DMG is to participate directly or indirectly for any of the auction participant in auction bidding.
11.4.5     (Determination of winning bidder and winning bid in an auction)
    TAIFEX may determine winning bidder and winning bid in the following methods:
  1. The highest bid above the reserve price will be the winning bid, and the bidder will be the winning bidder.
  2. Where multiple bidders submitted the same highest bid, the first bid received by TAIFEX will be the winning bid.
    In the event that a winning bidder may be unable to perform its settlement obligations or has a material impact on the normal clearing operation, TAIFEX may take the other auction participants' bids and determine another winning bidder and winning bid by the method described above.
    Where there is no bid received by TAIFEX in such auction or TAIFEX is unable to determine a winning bidder by the method above, TAIFEX may declare auction failure. TAIFEX may adjust positions in such auction portfolio and relaunch the auction after consulting the DMG.
    Once TAIFEX announces the result of an auction, the winning bidder will have the obligation to perform settlement with TAIFEX. In the event that a bid winner is the client of a non-defaulting clearing member, such clearing member shall have the obligation to perform settlement with TAIFEX.
11.4.6     (Auction portfolio porting and bid payment settlement)
    TAIFEX will transfer positions in an auction portfolio from TAIFEX's OTC default management account to the winning bidder's clearing account between 17:00 and daily closing. TAIFEX will also calculate the auction payable/receivable amount due for transferring positions in the auction portfolio to the winning bidder's clearing account.
    Regarding the aforesaid winning bid, TAIFEX will pay/receive the net cash amount in the auction currency to/from the winning bidder's clearing account currency by 8:30 on the following business day without notice.
    Where the net clearing margin balance on a winning bidder's clearing account is insufficient to pay the aforesaid winning bid, TAIFEX will, on or after 8:30 on the payment date, notify the bid winner to deposit the shortfall in cash into TAIFEX by 11:00 on the same day. Where the winning bidder clearing account is a client account, the clearing member shall notify the client to make up the shortfall by the deadline.
11.4.7     (Partial Tear-Up process)
    Where a defaulting clearing member's cleared transactions failed to be auctioned multiple times; or TAIFEX determines that those transactions cannot be transferred via auction; or an agreement on sharing default losses on cleared transactions cannot be reached, TAIFEX will consult the DMG, and may initiate the Partial Tear-Up process and notify the clearing member to terminate prematurely the following cleared transactions ("Tear-Up Cleared transactions"):
  1. Cleared transactions of defaulting clearing member that failed to be auctioned.
  2. Cleared transactions held by the non-defaulting clearing member which have equal but opposite terms to the cleared transactions in the preceding subparagraph.
  3. Cleared transactions executed between the non-defaulting clearing member and TAIFEX for the purpose of hedging the cleared transactions in subparagraph 1.
    When performing end of day clearing process on Partial Tear-Up process date, TAIFEX calculates the amount payable/receivable on each Tear-Up cleared transaction based on the net present value of such Tear-Up cleared transaction at the end of the Partial Tear-Up process date.
    Regarding the aforesaid amount payable/receivable, TAIFEX will pay/receive the net cash amount in the same currency by 8:30 on the first business day after the Partial Tear-Up process date without notice. Where the clearing margin balance on a clearing member's clearing account is insufficient to pay the amount, TAIFEX will, on or after 8:30 on the payment date, notify the clearing member to deposit the shortfall in cash into TAIFEX by 11:00 on the same day. Where the clearing account is a client account, the clearing member shall notify the client to make up the shortfall by the deadline.
    Once the clearing member settles the amount payables/receivables on Tear-Up cleared transactions, all rights and obligations between the clearing member and TAIFEX regarding these cleared transactions will be immediately extinguished.
Section V Default Waterfall
11.5.1     (Calculations of net settlement amount of the positions of the Defaulting Clearing Member)
    TAIFEX will perform calculations of net settlement amounts by setting off the amount receivables and the amount payables for the defaulting clearing member's positions and hedging positions in each OTC default management account.
    In accordance with Article 49 of the Futures Trading Act, TAIFEX shall first apply the defaulting clearing member's clearing margin to cover the loss from the net settlement of the defaulting clearing member in the preceding paragraph. If that is insufficient, TAIFEX shall apply, in the order, the Defaulting Clearing Member's OTC derivatives default fund, TAIFEX's OTC Derivatives Compensation Reserve Fund, the other clearing members' contributions to the OTC derivatives default fund, and the Member Assessment.
11.5.2     (The utilization order and attributed method of financial resources from non-defaulting clearing members)
    Where losses on the defaulting clearing member's positions and relevant hedging positions are covered by the OTC clearing fund for non-defaulting clearing members, the order and attributed method are as follows:
  1. The attributable amounts are firstly calculated by the risk ratio of each product:
  2. In respect of a non-defaulting clearing member and a product category identical to the defaulting member's position, the attributed amounts to cover the losses relating to each product position based on the ratio of the end-of-day required clearing margin at the business day preceding to the relevant default date for such product category positions held by such a non-defaulting clearing member to the aggregate end-of-day required clearing margin at the business day preceding to the relevant default for each product positions held by such a non-defaulting clearing member (i.e. risk ratio by product).
  3. The attributable amounts are then calculated by the risk ratio among each auction portfolio belonging to the same product category:
  4. In respect of a non-defaulting clearing member and auction portfolios belonging to the same product category, the attributed amount to cover the losses relating to each auction portfolio based on the ratio of the end-of-day required clearing margin at the business day preceding to the auction date for such an auction portfolio to the aggregate end-of-day required clearing margin at the business day preceding to the auction date for each auction portfolio belongs to the same product category. (i.e. risk ratio by auction portfolio)
  5. Losses from each auction portfolio will be covered in the following order based on the result of auction participation:
    1. Compulsory auction participants who do not make a bid or whose bid was lower than the reserve price.
    2. Compulsory auction participants who made a bid higher than or equal to the reserve price but lower than the winning bid.
    3. Compulsory auction participants who made the winning bid or a bid higher than or equal to the winning bid.
  6. Non-defaulting clearing members' attributable amount of the same order in the same auction portfolio in the preceding item are applied by the ratio of the attributable amount of such a non-defaulting clearing member to the total attributable amount for all clearing members of the same order.
  7. In cases where it is not possible to fully compensate the loss pursuant to the previous paragraphs, remaining OTC derivative default funds from other auction portfolios belonging to the same product category will be applied.
  8. In cases where it is not possible to fully compensate the loss pursuant to the previous paragraph, remaining OTC derivatives default funds from non-defaulting clearing members will be applied based on the ratio of such non-defaulting clearing member's remaining OTC derivatives default fund to the total of each non-defaulting clearing member's remaining OTC derivatives default fund.
    In cases where it is not possible to fully compensate the loss pursuant to the previous paragraph, the article shall apply to the case of utilizing Member Assessment.
11.5.3     (Default losses to be covered by using Variation Margin Gains Haircut amounts)
    Where the Member Assessment from non-defaulting clearing members is insufficient to cover the default loss incurred by TAIFEX, the amount of the remaining default loss shall be allotted to each account of non-defaulting clearing members according to the ratio of the net receivables of clearing amounts by each account during the period from the cooling-off period to the date on which all auctions portfolios have either been successfully auctioned or been terminated.
    The total amount (so called Variation Margin Gains Haircut amount) allotted to each account of non-defaulting clearing member shall not exceed the net receivables of clearing amounts during the cooling-off period.
    When a clearing member is notified by TAIFEX of the Variation Margin Gains Haircut amount prescribed in the first paragraph, the clearing member shall deposit such amount in cash to TAIFEX before 11:00 of the next business day following the date of notification.
Section VI Close-out Netting
11.6.1     (Close-out Netting)
    Where TAIFEX terminates all cleared transactions of all clearing members and performs calculations of net settlement amounts payables/receivables by each clearing member (hereinafter referred to as "Close-out Netting") in accordance with Paragraph 1 of Article 65 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules, all cleared transactions on all accounts of all clearing members shall be terminated on the date of Close-Out Netting.
    The termination value of each cleared transaction shall be the end-of-day net present value of the cleared transaction.
    The end-of-day clearing process will be performed according to the termination value of all cleared transactions on all account of all clearing members, and the amount payables/receivables by the clearing members for Close-Out Netting will be calculated accordingly.
    In respect of the amount payables/receivables by each clearing member prescribed in the preceding paragraph, TAIFEX shall pay or receive the net cash amount in the same currency in the clearing account before 8:30 am on the business day following the date of Close-Out Netting.
    Where the cash margin balance on a clearing member's clearing account is insufficient to pay the settlement amount, TAIFEX will notify the clearing member on 8:30 am on the payment date and clearing member shall deposit the shortfall in cash into TAIFEX by 11:00 am on the same day. Where the clearing account is a client account, the clearing member is to notify the client to make up the shortfall by the deadline.
    Once the Close-Out Netting process is completed and the amount payables/receivables are paid/received by the clearing member, all rights and obligations between the clearing member and TAIFEX regarding this cleared transactions shall cease to be existed.
Chapter 12 Clearing Service Fees and Connection Fee Schedule
Section I Clearing Service Fees
12.1.1     (Registration fees for clearing members)
    When an applicant becomes a clearing member of the TAIFEX, the applicant shall pay a registration fee according to the following provisions:
  1. Fee: NT$300,000. If the applicant is a shareholder of the TAIFEX when it enters the clearing and settlement transaction, the registration fee shall be NT$200,000.
  2. The registration fee shall be paid before the applicant enters the clearing and settlement transaction. After it begins operations, the clearing member may not request a refund.
12.1.2     (Clearing Fees)
    Except where otherwise provided, clearing members engaging in clearing and settlement business shall remit clearing fees according to the following provisions:
  1. Clearing fees
    1. Registration fee: The registration fee is charged according to the terms of cleared transactions submitted by a clearing member on the day. The rates will be announced separately by TAIFEX.
    2. Maintenance fee: The maintenance fee is charged according to the nominal principal balance of surviving cleared transactions at daily closing. The rates will be announced separately by TAIFEX.
  2. Netting fees:
    1. When a clearing member requests a basic netting, NT$300 will be charged for each terminated cleared transaction.
    2. When a clearing member requests a blended-rate netting, NT$500 will be charged for each terminated cleared transaction.
  3. Compression fee: When a clearing member requests a compression, NT$300 will be charged for each terminated cleared transaction.
  4. Position transfer fee: When a clearing member makes a position transfer request, the transferee is to pay NT$500 for each cleared transaction transferred to it. However, the fee is exempted for position transfers made for non-defaulting clients of a defaulting clearing member.
  5. Foreign exchange fee: Where TAIFEX makes foreign exchange for clearing members, TAIFEX will charge a foreign exchange fee of NT$200 per transaction.
12.1.3     (Securities As Administrative Fee Payments)
    Where a clearing member performs clearing and posts book-entry central government bonds as margin collaterals, unless otherwise stated, the clearing member is to pay the fees below for posting securities as margin collaterals:
  1. Account management fee: 0.05% p.a. calculated daily as collateral used to cover margin in individual client account and proprietary account of the clearing member.
  2. Account maintenance fee: 0.007% p.a. calculated daily as the balance of book-entry central government bonds in individual client account and proprietary account of the clearing member.
  3. Interbank transfer fee: as stated in the fee schedules of individual settlement banks.
12.1.4     (Clearing Fee Payment Method)
    TAIFEX calculates the fees under the two sections above due for the month from client accounts and proprietary accounts of each clearing member at the end of each month, and sends the invoices. Clearing members are to deposit the payments into TAIFEX's designated account by the 15th day of the following month.
12.1.5     (Late Penalty On Clearing Fees)
    All fees payable under the provisions of this Fee Schedule shall be remitted by the relevant due date. TAIFEX may add a one percent delinquency charge to late payments for each day past the due date. For fees that remain unpaid one month after the due date, TAIFEX may impose a penalty of NT$500,000 or terminate the transaction.
Section II Connection Fee Schedule
12.2.1     (System usage fee )
    When a clearing member and TAIFEX enter into an OTC Derivatives Clearing Connection Agreement, the clearing member is to pay the following System Usage fee:
  1. Fee: Clearing members who make a connection request are to pay NT$2,000 per system account per month.
  2. The System Usage fee is to be calculated on a monthly basis. Odd days will be rounded up to one month.
  3. Clearing members will be required to pay the System Usage fee for the first month before signing the OTC Derivatives Clearing Connection Agreement.
  4. TAIFEX will send the invoice for the following month to each clearing members at the end of each month. Clearing members are to make the payments before the 10th day of the following month.
12.2.2     (Penalty for late payment )
    Where a clearing member fails to make payment as required above, TAIFEX may charge a penalty at 1% of the amount for each day after the deadline. TAIFEX may impose a penalty of NT$500,000 or terminate the OTC Derivatives Clearing Connection Agreement if a late payment remains outstanding after a month.
Chapter 13 Business Filing and Record Keeping
Section I Business Filing
13.1.1     (Items that Clearing Member Shall File)
    Clearing members are to report the following to TAIFEX:
  1. Basic information
    1. A clearing member's profile information is to be reported before start of operation or within three business days after a change.
    2. Changes in the list of a clearing member's directors, supervisors, managers, and shareholders with a more than 10% stake in the clearing member and changes in shareholding are to be reported by the fifteenth day of the following month.
    3. Any succession agreement with another clearing member is to be reported to TAIFEX within five business days after the agreement is entered into.
    4. Basic clearing account information is to be reported before the business day preceding the effective date for account opening or change.
    5. A list of clearing supervisors and staff is to be reported within five business days after the change date.
  2. Material business changes
    1. Where a clearing member is in any of the circumstances that renders it unable to continue to meet the criteria for clearing members, such circumstance is to be reported by the tenth day of the following month.
    2. Where a clearing member or its head office conducts a capital decrease that changes the capital by 10% or more of the initial paid-in capital, the capital decrease is to be reported to TAIFEX within five business days after the shareholders meeting passes the resolution.
    3. Where a clearing member is in any of the circumstances listed in Article 11, Paragraphs 1, Subparagraphs 4 to 7 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules, such circumstance is to be reported within five business days after the fact becomes known or occurs.
    4. Suspension, resumption, and termination of a clearing member's business; or launch, addition, change, or termination of a clearing operation are to be reported in advance.
    5. Revocation of a clearing member's or its head office's license to make derivatives transactions or conduct derivatives operations is to be promptly reported.
    6. Suspension, revocation, or termination of a clearing member's or its head office's clearing membership by reasons of defaulting on a foreign exchange or clearing institution is to be promptly reported.
    7. Clearing member who is unable to pay debts or are in danger of default due to significant deterioration in business or financial conditions, should report immediately.
    8. Where a clearing member or its head office is required by foreign regulations to report financial ratio changes or other circumstances with a material impact on its financial structure, such requirement is to be promptly reported.
    9. Where a clearing member or its head office conducts dissolution, liquidation, bankruptcy, restructuring, relief or other similar legal proceedings, such proceedings are to be reported in advance.
    10. Interruption or failure of a clearing member's power supply, computer systems, or communication equipment; natural disasters, riots, or war; or other force majeure events that affect normal operation or cause material losses is to be promptly reported.
    11. For clearing members whose applications are subject to the conditions in paragraph 2 of Article 2.1.2 and Clause 1 to 3 under subparagraph 1 under paragraph 1 of Article 2.1.3, their financial holding company, foreign financial holding company, controlling company or head office who has Clause 2, 4 to 9, shall report to TAIFEX in accordance with regulations.
  3. Client clearing data
    1. Client clearing and settlement contracts are to be reported within three business days after they are entered into between a clearing member and a client or amended.
    2. Written statements made by clients are to be reported within three business days after a client clearing and settlement contract is entered into between a clearing member and a client.
    3. Opening, change, or termination of an OTC client margin account is to be reported within five business days after the effective date.
    4. Data on client default are to be reported on the respective default date.
    5. Termination of a client clearing and settlement contract by a clearing member is to be reported ten or more business days prior to the termination date.
    6. Where a clearing member terminates a relationship as a backup clearing member for a client, such termination is to be reported within three business days after the termination date.
  4. Financial reporting
    1. Monthly statements: to be filed by the fifteenth day of the following month.
    2. Semiannual statements: to be filed within two months after the end of the second quarter of each fiscal year.
    3. Annual statements: to be filed within three months after the end of each fiscal year.
    4. Where Section 2.1.2, Paragraph 2 and Section 2.1.3, Paragraph 1, Subparagraph 1, Items 1 to 3 apply to a clearing member's application, the clearing member's financial holding company, foreign financial holding company, controlling company, or head office is to file semiannual financial statements and annual financial statements according to Items 3 and 4. If the competent authority in the place where the foreign head office is located has otherwise stipulated the deadline for filing, such stipulation shall prevail.
  5. Financial structure reporting is to be completed according to the respective sector and within three months after the end of the second quarter of each fiscal year and the end of each fiscal year.
    1. Where the clearing member is a bank, the Capital Adequacy Ratio is to be reported.
    2. Where the clearing member is an insurance enterprise, the Risk Based Capital Ratio and Net Worth Ratio is to be reported.
    3. Where the clearing member is a securities firm, the Regulatory Capital Adequacy Ratio is to be reported.
    4. Where the clearing member is a bills finance company, the Capital Adequacy Ratio is to be reported.
    5. Where the clearing member is a futures commission merchant that concurrently operates as a leverage transaction merchant, the percentage of adjusted net capital out of the total amount of customer margins required for the open positions of futures traders is to be reported.
    6. Where the clearing member is a subsidiary of a financial holding company prescribed in the "Financial Holding Company Act", the capital adequacy ratio of the financial holding company or foreign financial holding company on a consolidated basis is to be reported.
    7. Where the clearing member is a subordinate company prescribed in the"Company Act", the controlling company's financial structure information listed under Items 1 to 5 for the respective sector is to be reported.
    8. Where the clearing member is a branch established within the territory of the R.O.C. by a foreign financial institution according to the law, the head office's financial structure information listed under Items 1 to 5 for the respective sector is to be reported. If the competent authority in the place where the foreign head office is located has otherwise stipulated the deadline for filing, such stipulation shall prevail.
    Where a clearing member is notified by TAIFEX to provide in a specific amount of time financial or business information on TAIFEX clearing operations that it conducts, the clearing member is to report by the given deadline.
13.1.2     (Reporting Method for Clearing Members)
    Clearing members are to report the information above by media. However, TAIFEX may notify clearing members to provide information separately in writing as needed.
13.1.3     (Disposition of False Filing)
    Where clearing members make false or untrue statements in reporting information, or fails to duly report information, TAIFEX may take measures under applicable provisions of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules .
Section II Record Keeping
13.2.1     (Title of Statements, Vouchers and Certificates and Preservation Periods)
    Clearing members are to keep records according to the length of time provided in the table attached.
13.2.2     (Preservatiion Periods and Legal Compliance)
    The storage periods herein begin at the end of the year-end closing process (meaning the shareholders meeting passing the final accounts) for the respective year. Furthermore, where a longer storage period than that provided by Section 13.2.1 is provided by other applicable regulations, such regulations shall apply.
13.2.3     ( Handling Procedure for Certificate Damage or Lost)
    In the event that a clearing member's account certificates are damaged or destroyed by accident or disaster beyond control, the clearing member is to file a detailed list with TAIFEX within fifteen days after the incident, and TAIFEX may send representatives to perform an onsite inspection as needed.
13.2.4     (Account certificates stored on electronic media)
    Where a clearing member processes accounting data electronically according to Article 40 of the Business Entity Accounting Act and the Regulations on Businesses Electronically Processing the Accounting Data, all accounting data and business certificates for the clearing member's business activities may be stored by media, provided they are printed in the appropriate format and meet the requirements. Where a clearing member does not process accounting data electronically according to Article 40 of the Business Entity Accounting Act and the Regulations on Businesses Electronically Processing the Accounting Data, the clearing member may store accounting data and business certificates for its business activities by media, provided they are printed in the appropriate format and meet the requirements. The storage period for media is to follow those provided by Section 13.2.1 for different account certificates. Media storage is to comply with the following:
  1. Using storage media where stored data can not be altered or deleted, provided that records are made on the day the deals are made.
  2. The records are fully indexed, and management procedures are in place.
  3. A specific person(s) is responsible for records management, and it is possible at any time to convert the electronically stored data to hardcopy format.
Chapter 14 Auditing
Section I Routine Audit and Selective Audit
14.1.1     (Legal Compliance)
    TAIFEX is to follow the provisions in this section when auditing financial, business, and internal audit operations conducted by clearing members handling clearing transactions. Matters not specified herein are to be governed by the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules and other applicable rules.
14.1.2     (Audit Category and Scope)
    General audits performed by TAIFEX on clearing members' clearing transactions are divided into routine audits and selective audits.
  1. Routine audit: means an audit of financial, business, and internal audit activities.
  2. Selective audit: means an audit of reported clearing violations, TAIFEX inter-department communications, and tasks assigned by the competent authority that are not special inspection tasks.
14.1.3     (Method of Auditing)
    Audits performed by TAIFEX on clearing members' clearing transactions are conducted as onsite audits and paper based audits. Such audit are performed generally on a randomly selected sample, but may be performed on the entire population if necessary.
14.1.4     (Audit Document)
    TAIFEX may, on a business day, send representatives to inspect or make inquiries about a clearing member's audit reports and all certificates, invoices, accounting books, books of forms, records, transactions, and related documentary proof related to clearing transactions.
14.1.5     (Penal Provisions of Evade or Refuse Auditing by Clearing Member and its Employees)
    Clearing members may not evade or refuse TAIFEX audits. According to Article 79 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules, TAIFEX may, depending on the seriousness, suspend all or part of a clearing member's clearing operation for evading or refusing a TAIFEX audit, and report the clearing member to the competent authority in writing.
    Clearing members' employees are to be cooperate with the areas of an audit related to their roles and responsibilities. In the event that a clearing member evades or refuses an audit, according to Article 82 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules, TAIFEX may, depending on the seriousness, unilaterally give the clearing member a warning and suspend its operations.
    Evasion or refusal in the two preceding paragraph means one of the following:
  1. A clearing member deliberately creates one or more incidents during an onsite audit; while not deliberately creating such incidents, allows such one or more foreseeable incidents to occur; or neglects to eliminate incidents that should have been eliminated during the process, thereby hindering the audit process.
  2. TAIFEX sends a request by mail to a clearing member during an onsite audit for account books, bills and data, but the clearing member fails to present the documents by the deadline.
14.1.6     (Obligation of Auditor)
    When visiting a unit to perform an audit, an auditor is to present the appropriate proof of audit issued by TAIFEX.
    When performing his/her duties, an auditor is to strive to be impartial and objective and uphold work ethics. In addition, auditors have a duty of confidentiality.
14.1.7     (Auditing Report)
    Auditors performing an audit are to issue an audit report on the audit items and audit results and propose recommendations or improvements.
14.1.8     (Handling Procedure of Deficiency)
    Regarding deficiencies identified in a TAIFEX audit, TAIFEX may follow the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules and related rules to take action against the clearing member or its personnel as appropriate. Any violation of the Futures Trading Act or other applicable regulations is to be reported to the competent authority.
14.1.9     (Special Auditing)
    Where TAIFEX finds in a general audit of a clearing member's clearing transactions that the clearing member is mismanaged, incurring losses jeopardizing its credit standing, facing an unexpected event, or found with material errors in its internal audit procedures, TAIFEX will immediately initiate a special inspection and give assistance. The rules are to be established in a separate document.
14.1.10     (Summary of Audit Results)
    TAIFEX is to summarize audits of clearing members' financial and business performance and present reports to the competent authority every month.
Section II Regulations Governing Procedures for Special Audits and Provision of Guidance
14.2.1     (Legal Compliance)
    Unless otherwise provided by law, TAIFEX is to follow the provisions in this section regarding the assistance and procedure for handling special audits on clearing members' clearing operations. Matters not specified herein are to be governed by the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules and other applicable rules.
14.2.2     (Special Audit and Guidance)
    Where a clearing member is found in any of the following circumstances, TAIFEX may send representatives to perform a special audit and provide assistance.
  1. Material errors are identified in the internal audit process.
  2. The clearing member is unable to fulfill its clearing and settlement obligations.
  3. Violation of the law, the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules, and other rules and regulations is not improved after given notice by the competent authority or TAIFEX.
  4. Other unanticipated major events or tasks assigned by the competent authority.
14.2.3     (Obligation of Auditor)
    When visiting a unit to perform a special audit, a TAIFEX auditor is to present the appropriate proof issued by TAIFEX.
    When performing his/her duties, an auditor is to strive to be impartial and objective and uphold integrity. In addition, auditors have a duty of confidentiality.
14.2.4     (Review Report)
    When conducting a special audit, TAIFEX may require that the clearing member present a review report to provide the following details and related documents and forms:
  1. Reason for an incident under 14.2.2 and its impact.
  2. Any violation of the law or responsibilities by the personnel.
  3. Keepers of financial conditions, account books and documents, and valuables and their residence.
  4. Proposal for improvement
  5. Other tasks designated by the competent authority or TAIFEX.
    Clearing members devising improvements and solutions according to Subparagraph 4 of the preceding paragraph are to follow the schedule given by TAIFEX and deliver regular status reports. TAIFEX may require clearing members to perform reviews and make improvements depending on performance.
14.2.5     (Penal Provisions of Evade or Refuse Auditing by Clearing Member and its Employees)
    Clearing members may not evade or refuse TAIFEX audits. According to Article 79 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules, TAIFEX may, depending on the seriousness, suspend all or part of a clearing member's clearing operation for evading or refusing a TAIFEX audit, and report the clearing member to the competent authority in writing.
    Clearing members' employees are to be cooperate with the areas of an audit related to their roles and responsibilities. In the event that a clearing member evades or refuses an audit, according to Article 82 of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules, TAIFEX may, depending on the seriousness, unilaterally give the clearing member a warning and suspend its operations.
    Evasion or refusal in the two preceding paragraph means one of the following:
  1. A clearing member deliberately creates one or more incidents during an onsite audit; while not deliberately creating such incidents, allows such one or more foreseeable incidents to occur; or neglects to eliminate incidents that should have been eliminated during the process, thereby hindering the audit process.
  2. TAIFEX sends a request by mail to a clearing member for account books, bills and data, but the clearing member fails to present the documents by the deadline.
14.2.6     (The Procedure of Selecting Third Party)
    When performing a special audit and providing assistance for a clearing member, TAIFEX may select at-arms-length lawyers, accountants, or other parties familiar with clearing operations to assist with audits, assistance, and other necessary actions.
    All expenses arising from the aforesaid audits and assistance are to be borne by the clearing member.
14.2.7     (Procedure of Disposition)
    After performing a special audit on a clearing member, TAIFEX may take the following actions:
  1. Provide assistance and advice for improvement of clearing operations.
  2. Violation of the Taiwan Futures Exchange OTC Derivative Clearing Operating Rules and other rules and regulations is to be handled according to the appropriate rules.
  3. Any violation of the law is to be reported promptly to the competent authority.
  4. other necessary measures.
    Clearing members who find TAIFEX's instructions hard to follow may give detailed reasons and file an appeal with TAIFEX.
14.2.8     (Handlinng Procedure of Violation of Rules by Clearing Member and Its Employees)
    TAIFEX may take action as provided by the applicable rules against clearing members, their persons in charge, or employees who violate these Regulations.
Chapter 15 Emergency response measures
15.1     (Response to interruption or malfunctioning of TAIFEX clearing system)
    In the event of malfunction or interruption of the TAIFEX OTC Derivatives Clearing System ("the clearing system") that affects TAIFEX's normal clearing and settlement operation, TAIFEX may change the times in the clearing process and notify clearing members.
    Under such circumstances, if TAIFEX remains unable to resolve the malfunction or interruption before the scheduled clearing and settlement date, the clearing process will be deferred, and clearing members will be notified.
15.2     (Response to missing data of TAIFEX clearing system)
    After the malfunction is eliminated, if the data in the computer memory of the TAIFEX is fully intact, transaction submitted for clearing shall remain valid in the current business hour. If data in the computer memory of the TAIFEX is lost in part or in whole, transaction that the submission is incommplete for clearing shall be void and shall notify clearing memmbers to resubmit transaction for clearing.
Chapter 16 Supplementary Provisions
16.1     (Format)
    These provisions provide the formats in which documents and electronic media are to be transmitted, which are to be announced by TAIFEX in a different document.
16.2     (Supplement Provisions)
    The Regulations shall come into force upon the competent authority's approval. The same applies to all subsequent amendments.