Newsletter No: 014
August 1, 2005
|I. News and Events |
(1) Restrictions lifted on short selling of securities underlying options for hedging purposes
(2) Public tender offer information disclosure rules strengthened
(3) "Strategic purposes" requirement abolished in securities lending and borrowing system
(4) Fund-related regulatory actions
II. Market Wrap-up
As of the end of June, 698 companies were listed on the Taiwan Stock Exchange, a decrease of two compared to the previous month. The total capital issued was NT$5,108.01 billion, an increase of NT$38.22 billion over the preceding month, and the market capitalization wasNT$14,455.31 billion, a increase of NT$583.74 billion over the preceding month.
As of the end of June, 490 companies were listed on the GreTai Securities Market, an increase of four against the previous month. The total capital issued was NT$655.81 billion, a increase of NT$8.73 billion against the preceding month, and the market capitalization was NT$1,296.74 billion, an increase of NT$96.26 billion against the previous month.
In June, the trading value of shares on the Taiwan Stock Exchange was NT$1,822.19 billion, an increase of NT$513.02 billion over the previous month, while the trading volume was 74.51 billion, an increase of 28.26 billion shares compared with the previous month.
As of the end of June, the accumulated net inward remittance of foreign investors was US$95.88 billion, an increase of US$4.85 billion over May. There are currently 145 securities firms, 24 futures commission merchants, 45 securities investment trust enterprises and 219 securities investment consulting enterprises.
III. Q&A for Foreign Investors
Part I：The Reform of Foreign Investment System
1. What are the main objectives and goals for the Taiwan authorities relaxing the restrictions for foreign investors?
To attract foreign funds into the local stock market and enhance the stability of a market that has so far been dominated by retail investors, the government is committed to implementing a series of reforms as well as speeding up the opening of the financial market to foreign investors.
2. Why do the Taiwan authorities believe that there continues to be a need for foreign investor registration ?
In order to treat all investors equally and for better understanding of foreign investment status in local markets, registration is still necessary. However, the filing procedures have been simplified further. Foreign investors can obtain an investment ID after filing a registration with the Taiwan Stock Exchange Co. (TSEC) prior to the commencement of trading in Taiwan.
3. What criteria will be used in the new qualification process? What categories of investors will be disqualified under the new scheme, and on what basis?
Foreign investors can invest in the securities market after simply registering with the Taiwan Stock Exchange Co. (TSEC) and obtain an investment ID. The registration process is on a once-for-all basis, which aims at preventing capitals from China and destabilizing Taiwan’s stock market as well as its economic and financial systems.
4. Is hedge fund permitted to invest in domestic securities?
The new registration process only require fund-type foreign institutional investors to indicate the investment strategies in our market. The documents for the fund type “hedging” is not required.
Part II：Current Regulations Governing Foreign Investment in Domestic Securities
1. What is the application procedure under the new regulations？
Instead of obtaining permission from the Securities and Futures Bureau, all foreign investors can invest in the securities market after simply registering with the TSEC and obtaining an investment ID. Foreign institutional investors are allowed to enjoy investment quotas without any limitation. The registration process is on a once-for-all basis and the remittance of capital will also be free from any duration limit.
2. How long will the application procedure take？
After a custodian unit registers on line with the TSEC, the TSEC will immediately issue “ Certificate of Registration Completion ”, with relative documents to be sent to TSEC for reference afterward. This process takes about one to two business days.
3. Is there any investment quota for foreign investors?
Under the new regulation, foreign investors are divided into two categories: foreign institutional investors (FINIs) and foreign individual investors (FIDIs). While FIDIs are subject to a US$5 million investment quota, FINIs can enjoy an investment quota without any upper limit.
4. What is the investment scope for foreign investors?
The investment scope for foreign investors is as follows:
A. Listed stocks, GTSM shares, emerging stocks, entitlement certificates, including, but not limited to, 1) stocks for IPO prior to becoming listed and stocks to be issued in rights offerings; 2) preferred stocks issued by listed/GTSM companies; 3) private placement of securities issued by listed/GTSM companies; 4) stocks of listed/GTSM companies for secondary public offering.
B. Taiwan depositary receipts
C. Securities investment trust funds (incl. ETFs)
D. Government bonds, financial and corporate bonds, convertible bonds, TWD bonds issued by international financial institutions.
E. Public-offering, and private-placement beneficiary certificates, asset-backed securities made in accordance with the ‘Financial Asset Securitization Law’ and the “Real-Estate Securities Law”
G. Futures/options listed on TAIFEX
H. The remitted-in amount not being invested in stocks shall be allowed to engage in the following categories:
• Bonds, time deposits and money market instruments (whose total value should not exceed 30% of remitted-in amount, yet the re-purchase and re-sell of bonds trading is excluded), and the transaction of futures contracts and TAIEX options contracts for the purpose of hedging.
• The longest period for time deposit is three months, with a one-time extension of three months allowed at expiration.
. The money market instrument is limited to bills within 90 days of expiration.
I. Other marketable securities approved by the Authority
5. For a foreign investor that engages in futures trading, can its futures position exceeds that of its stock holdings; or can the original margin amount exceed the cap of 30% of net remitted investment capital?
The purpose of opening up the futures market for foreign investors is purely for hedging. Therefore, control over the position of holdings and margin should be in place. On May 21, 2004, the FSC permits foreign investors to engage in hedge-based futures and options trading of long position as well as short position.
6. What are the requirements over the outward remittance of investment principal, capital gains and the other investment gains by foreign investors?
A. Foreign investors may apply to remit investment capital and earnings on investments out of the ROC; while outward remittances of capital gains and dividends on stocks shall be made from realized earnings only.
B. Applications for foreign exchange remittance shall be handled in accordance with the Statute for the Regulation of Foreign Exchange.
7. The Taiwan Stock Exchange launched the Stock Lending and Borrowing Program. However, it is limited to “strategic purposes”. Do you foresee any further liberalization to allow foreign investors to participate in SLB without restrictions?
The strategic purpose test and relevant verification measures were removed. The “market total volume limit”, “single day short-sale volume limit”, and “price restrictions” etc. are substitutes for the “strategic purpose test” and “onshore collateral requirement for negotiated transactions between foreign investors” so as to maintain market order and to promote development of the market.
8. Regarding the application documentation, is it possible to simplify the documentation by setting a unified template for use by all applicants to streamline the application procedure?
The documentation requirement for investment registration has already been simplified. Any unnecessary documents, such as a copy of the custodian agreement, will no longer be required. A template registration form is available on the TSEC website for easy reference and can be downloaded by both custodian banks and/or applicants. It will be updated whenever there are changes.
9. How does a foreign investor invest in non-listed Taiwanese companies?
Foreign investors may invest in non-listed Taiwanese companies by the permits of the Investment Commission of either the MOEA or Hsinchu Science Park.
Part III：Trading and Settlement Practices
1. Foreign investors are concerned with a number of features in the Taiwanese market. These include restrictions in penalties on failed trades and pre-funding requirements. Are there any plans to change any of these specific features and what additional improvements can be expected?
In order to resolve “pre-funding” situation, in May 2004, the SFB allowed local banks to offer foreign investors intra-day finance / credit advance to bridge the delay in settlement due to time zone differences. Moreover, to give a leeway to foreign investors, the TSEC has taken a flexible approach in case of late settlement.
A. The brokers are allowed to report error trades for their clients without regulatory sanction in 2002.
B. In case of late settlement by foreign investors in the specified events, the deadline for settlement may be extended to 6:00 p.m. of the third business day following the date of transaction.
2. Per current regulations, investment in futures, time deposits, and money market instruments cannot exceed 30% of the net remitted-in investment capital. Are there any plans to raise this cap?
The objective of introducing foreign capital into Taiwan’s securities market is primarily for investing in domestic securities. Investing in money market instruments is purely for cash management needs. The cap of 30% should be sufficient for this purpose.
3. Can the government allow foreign institutional investors not to pre-deliver cash or securities to brokers for the trading of disciplinary shares in order to reduce the associated costs and the risk of broker default to foreign investors?
For stocks labeled “disciplinary”, it is required for investors to pre-deliver cash or stocks to the broker, whereas for most stocks, there is no requirement to do so.
4. Currently, many U.S. and European markets are open for the whole day. Are there any plans for the government to extend the current trading hours to the whole day?
To face the competition among stock exchanges worldwide, we have extended daily the daily trading hours of the Taiwan securities market from 3 hours to 4.5 hours since January 2, 2001. We will consider and evaluate certain factors, such as reconciliation and settlement operation by securities companies, operating hours of banks, trading hours of futures markets as well as the impact on the market, in this regard.
Part IV：The Others
1. Can the government allow foreign institutional investors off-market trading？
The TSEC has launched a new block trading system since April 2005.
A. Any order whose transaction value is more than NT$ 1.5 million is eligible for block trading;
B. Investors can choose to do block trading in a single security or a basket of securities;
C. The block trading can be conducted during or after the regular trading session; and
D. The executed price can fluctuate within 2% of reference price
For the case where foreign investors sign up multiple fund managers to manage investment activities in Taiwan’s market, the assets in these fund managers’ accounts can be transferred freely without actual transactions in the market, as long as the ultimate beneficial owners of these accounts can be proved to be identical.
2. What’s the foreign ownership restrictions？
On Dec. 30, 2000, the foreign ownership restrictions were cancelled. Currently, there are only 18 listed companies on Taiwan Stock Exchange, subject to foreign ownership limits, whose restricted capitalization accounts for only approximately 3﹪of the total market. Many developed markets such as UK, USA, France, Australia, etc, also have similar restrictions on industries such as Airline transport, Telecom and Broadcasting. Relatively speaking, enforcing foreign ownership restrictions in Taiwan is not improper.
3. Will the investment positions of foreign investors be disclosed? How can we obtain updated information on the relevant regulation?
A. The SFB is not allowed to disclose individual investment information.
B. The relevant regulations can be achieved via the SFB website at www.sfb.gov.tw.
4. Will foreign investment in Taiwan stocks be restrained by the requirement of a locking period?
The trading of stocks held by foreign investors is not subject to the requirement of "locking period"
5. Why is managing the volatility of the Taiwan stock market part of the scope of the Taiwanese authorities? (E.g., Establishment of the National Stabilization Fund)
In general, Taiwan’s government believes a free market mechanism works well with proper enforcement of securities market regulations. Since our local securities market is small compared to advanced economies in terms of market capitalization, and is mainly composed of retail investors, the government has striven to make efforts to guard against erratic price movements resulting from over-reacting trades performed by ill-informed and irrational investors.
6. Could you update the current state of the fund management industry in Taiwan? We have seen an increasing number of foreign investment firms setting up operations in Taiwan by joint venture or acquisition of existing fund management firms. Is this a strategically important development and is the FSC facilitating this?
By the end of Jan. 2005, 45 securities investment trust enterprises had been established in Taiwan, by which a total of 470 funds had been raised, with a total net asset value of USD82 billion. Entering into alliances with good foreign entities, is a good way for local companies to infuse new concepts and know-how and explore new business opportunities. For foreign investment companies setting up operations in Taiwan by joint venture or with acquisition of existing fund management firms mainly based on their own strategic considerations, the FSC holds a favorable view toward this development with a view to enhancing the soundness of the local fund industry.
7. Do the Taiwan authorities believe that the introduction of ETF’s based on various Taiwan indices compiled by different index providers could suit different investor needs?
Yes. This will definitely help to spur the growth of the ETF market.
8. Would you also expect corporations, insurance companies and other institutions to provide discretionary mandates to fund managers, including international mandates?
Since securities investment consulting enterprises (SICEs) and securities investment trust enterprises (SITEs) were allowed to provide discretionary investment services, both SICEs and SITEs have received consigned investment assets from pension funds, insurance companies and other institutions. With a broader investment scope, which will be permitted step by step in the near future, we expect the size of the discretionary assets, both from domestic and international sources, under management by local fund managers, to be of great potential.
9. We understand that the government passed legislation allowing for discretionary asset management in 2000 that allows state-owned pension funds to invest in the domestic and foreign markets. Although domestic investments have increased, we have not seen foreign equity investments from these pension funds. Could you update us on the strategic plans for investing internationally and issues that this presents?
The Management Board of the Public Service Pension Fund is currently working on plans to promote foreign equity investments by the Civil Service Pension Fund. To increase profit and effectively manage portfolio risk, the Board is considering contracting outside managers to manage foreign equity investment.
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