1. Date of disciplinary action: April 30, 2020

2. Objects of disciplinary action: Hua Nan Securities Co., Ltd. (hereinafter referred to as Hua Nan Securities) and XX Chen, former President, XX Chang, Head of Financial Commodities Department, XX Chen, trader, and XX Shih, Head of Risk Management Department.

3. Legal basis for the disciplinary action: Article 56, paragraphs 1 and 5, Article 66, and sub-paragraph 4, paragraph 1, Article 178-1 of the Securities and Exchange Act; paragraphs 1 and 3, Article 18 of the Regulations Governing Responsible Persons and Associated Persons of Securities Firms; paragraph 2, Article 2 of the Regulations Governing Securities Firms; Article 33 of the Regulations Governing the Establishment of Internal Control Systems by Service Enterprises in Securities and Futures Markets.

4. Fact of law violation:

(1) Hua Nan Securities did not establish a sound and effective issuance and risk management system for its warrant issuance business and neglected the risk management of index call warrants. It failed to pay attention to the fact that the risk value had exceeded the limit on consecutive days and the possible consequences; instead, XX Chen, the President at that time, repeatedly approved the trader to trade beyond the authorized trading limit and extended the adjustment deadline.

(2) The Financial Commodities Department failed to take appropriate risk management measures to improve in accordance with the company''s risk management policy and failed to operate in accordance with the risk avoidance strategy at the time of wide market fluctuations, thus resulting in the market risk exceeding the set limit. Although the Risk Management Department notified the Financial Commodities Department of the risk value and that the loss limit had been exceeded for consecutively days, it did not comply with the relevant strategies and requirements of relevant laws and regulations when monitoring the risk avoidance operation of the Financial Commodities Department.

(3) The company did not clearly formulate the procedures for the handling and reporting of loss overrun and major risks, so it failed to report to the board of directors in time and take the necessary measures. The company''s internal control system is obviously deficient and this has violated the provisions of paragraph 2, Article 2 of the Regulations Governing Securities Firms.

5. Disciplinary action imposed: 

(1) On the company:

A. A fine of NT$1.44 million is imposed on Hua Nan Securities in accordance with subparagraph 4, paragraph 1, Article 178-1 of the Securities and Exchange Act.

B. In accordance with paragraph 1, Article 66 of the Securities and Exchange Act, a warning is given to Hua Nan Securities, and in accordance with Article 33 of the Regulations Governing the Establishment of Internal Control Systems by Service Enterprises in Securities and Futures Markets and paragraph 5, Article 66 of the Securities and Exchange Act, Hua Nan Securities is ordered to propose an improvement plan and commission a certified public accountant other than its independent auditor to issue a special audit report on the internal control system concerning the company''s operations for issuance of call (put) warrants, the content of which shall include strengthening the supervision function of the board of directors over the warrant business and enhancing the quality of internal audit. The company shall not issue any new call (put) warrant until the Commission agrees on the audit opinion of the certified public accountant on the effectiveness of the design and implementation of the internal control system.

(2) On the company personnel:

In accordance with Article 56 of the Securities and Exchange Act, Hua Nan Securities is ordered to stop the business execution for one year by XX Chen, President at the time of the law violation, XX Chang, Head of Financial Commodities Department, and XX Chen, trader and for two months by XX Shih, Head of Risk Management Department.

 

As of the end of March, 2020, the net value of Hua Nan Securities was about NT$8 billion and the capital adequacy ratio was 279%, which still met the minimum self-owned capital adequacy ratio (150%). However, Hua Nan Securities is subject to a warning as in paragraph 1, Article 66 of the Securities and Exchange Act and its related financial business will be restricted, including no application for additional business types or business items, no application for additional branches, no application for re-investment in related enterprises, no application for cash injection or corporate bonds offering, not being eligible as an ETF liquidity provider, no ETN issuance, etc. in the next three months.

In addition, the Commission has requested the Taiwan Stock Exchange to strengthen the supervision of the risk management of warrant issuers and conduct stress tests to ensure the robustness of the risk tolerance and capital adequacy ratio of securities firms in the event of drastic changes in the financial market.

 

 

Contact unit: Securities Firm Management Group, Securities and Futures Bureau

Tel: 02-2774-7476

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