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Newsletter No034

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Newsletter No: 034

April 1, 2007

I. News and Events   (Chinese) 

1. Enhance flexibility of the block trading system and simplify registration procedures for foreign investors 

Over the past years, the FSC has continuously eased the restrictions on foreign investment in the domestic securities markets and rationalized the trading system. The FSC has adopted the following measures to promote the internationalization of local securities markets: 

(1) Consent to asset transfers in the following situations: 
i. The transfer of securities by a foreign investor from his current asset manager to another fund manager, who then issues non-transferable beneficial certificates (representing the original securities) to the foreign investor, is the same as creating a trust relationship. It therefore belongs to trust activity rather than trading activity, that is, the prohibition of off-exchange trades under Article 150 of the Securities and Exchange Act is not applicable. 

ii. The transfer of securities by a foreign investor from its current asset manager to another fund manager, who then issues certificates of beneficial interest of equivalent value to the foreign investor, is deemed the creation of an ETF (in-kind creation), and is therefore not a trading activity, so that the prohibition of off-exchange trades under Article 150 of the Securities and Exchange Act is not applicable. 

(2) Enhance flexibility of block trading system: 

i. The evening trading session for matched block trades will be extended: The evening trading session will be extended because of time lag. Matched block trades will be accepted on working days from 8:00pm to 5:00am of the following day. The transaction day will be the following business day. The new measure will allow investors outside of Asian time zones to find a trading counterpart and carry out the trading as soon as possible. 

ii. Increased flexibility of block trading system: The new block trading system will be implemented on 28 May 2007. Securities firms themselves can decide whether to require advance payments or deliveries, and investors may choose either T or T+2 day for settlement. The pre-funding problem about foreign investors trading on the T day, who used to pre-fund to custodian bank on T-1 day will be resolved. 

iii. Sale of loaned shares are allowed in block trades: To meet the various needs of investors and increase flexibility in the block trading system, sales of loaned securities in individual orders and matched trades are allowed, along with an exemption from the ban on shorting component stocks of the Taiwan Top 50 Tracker fund when stock prices below the previous day. 

(3) Simplify registration procedures: Registration procedures for foreign investors will be shortened by simplifying issuance of certificates of registration and tax withholder uniform numbers. 

2. Issue interpretive order pursuant to Article 30, paragraph 3, subparagraph 3 of the Regulations Governing Book-Entry Operations for Centrally Deposited Securities 

On 6 February 2007, the FSC issued an interpretive order pursuant to the authorization granted under Article 30, paragraph 3, subparagraph 3 of the Regulations Governing Book-Entry Operations for Centrally Deposited Securities. The order allows the customers of any participant of a central securities depository, when making an application to that participant pursuant to Article 99-1 of the Operating Rules of the Taiwan Depository & Clearing Corporation for transferring the balances of their accounts to withdraw securities, can be exempt from submitting their account passbook and transfer application to the other concerned participants, which would apply under Article 30, paragraph 1 of the Regulations Governing Book-Entry Operations for Centrally Deposited Securities. 

3. Amendment to selected provisions of the Regulations Governing the Conduct of Discretionary Investment Business by Securities Investment Trust Enterprises and Securities Investment Consulting Enterprises 

On 5 February 2007, amendments to selected provisions of the Regulations Governing the Conduct of Discretionary Investment Business by Securities Investment Trust Enterprises and Securities Investment Consulting Enterprises. The amendments aim to strengthen supervision on providers of discretionary investment services, to enhance flexibility in adjusting regulation of the use of discretionary investment assets for investment in foreign securities and in trading of securities-related products, and to enhance anti-money laundering operations. 

4. Issuance of provisions regarding the range of trading in securities-related products by securities investment trust enterprises (SITEs) and securities investment consulting enterprises (SICEs) using discretionary investment assets 

In accordance to the authorization granted by Article 16, paragraph 2 of the Regulations Governing the Conduct of Discretionary Investment Business by Securities Investment Trust Enterprises and Securities Investment Consulting Enterprises, the FSC has issued provisions regarding the range of trading in securities-related products by SITEs and SICEs and methods of calculating positions in those types of products. 

5. Implementing supervision of stock registration and transfer operations and related personnel 

The FSC on 14 February 2007 issued amendments to relevant provisions of the Regulations Governing Stock Registration and Transfer Operations of Public Companies to facilitate the dematerialized issuance of securities and to implement supervision of stock registration and transfer specialists. The amendments adjust the numbers of relevant personnel at companies that handle their own stock registration and transfer operations, such that one supervisor and five stock registration and transfer specialists are now required; of the latter, three of the specialists must be full-time while the rest may serve concurrently, and all of them are required to possess specific qualifications. In addition, employment and transfer of specialists and any subsequent changes shall be reported to an FSC-designated agency. 

6. Measures announced for 2007 to allow adjustment by securities and futures markets to the supplemental working days at government administrative agencies after the flexible holidays for Tomb-Sweeping Day, the Dragon Boat Festival, and the Mid-Autumn Festival 

Because of the flexible supplemental holidays at government administrative agencies for Tomb-Sweeping Day, the Dragon Boat Festival, and the Mid-Autumn Festival on April 6, June 18, and September 24 respectively. There will be extra trading days on April 14, June 23, and September 29 (each on Saturday) at Taiwan Stock Exchange, the Taiwan Futures Exchange, and the GreTai Securities Market for each of those corresponding holidays. Clearing and settlement operations on those trading days will proceed as usual according to regulations. For a schedule of trading days and holidays on Taiwan's centralized securities markets, please seehttp://www.sfb.gov.tw/e-sfb/Open-Close-2007.doc. 

7. Information on the prosecution of major securities crimes and related judgment 

Information on the prosecution of major securities crimes and related judgments is provided bilingually in Chinese and English on the website of the Securities and Futures Bureau: http://www.sfb.gov.tw/intro_index.asp. 



II. Market Wrap-up 

As of the end of February, 687 companies were listed on the Taiwan Stock Exchange, a decrease of 0 against the previous month. The total capital issued was NT$ 5,497.70 billion, a decrease of NT$1.73 billion over the preceding month, and the market capitalization was NT$19,540.69 billion, an increase of NT$502.27 billion over the preceding month. 

As of the end of February, 532 companies were listed on the GreTai Securities Market, a decrease of 0 against the previous month. The total capital issued was NT$ 736.91 billion, an increase of NT$2.29 billion against the preceding month, and the market capitalization was NT$1,975.52 billion, an increase of NT$75.07 billion against the previous month. 

In February, the trading value of shares on the Taiwan Stock Exchange was NT$1,107.87 billion, a decrease of NT$1,554.79 billion over the previous month, while the trading volume was 29.97billion shares, a decrease of 46.86 billion shares compared with the previous month. 

As of the end of February, the accumulated net inward remittance of foreign investors was US$133.56 billion, an increase of US$1.60 billion over January. There are currently 135 securities firms, 22 futures commission merchants, 41 securities investment trust enterprises and 164securities investment consulting enterprises. 



III. Measures related to futures trading, please refer to the website of Taiwan Future Exchange (http://www.taifex.com.tw/chinese/home.htm) 





IV.Q&A 

1. Investment quotas for foreign investors 

Under the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Investors, 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 are free of an upper limit on investment. However, in a few specific industries foreign investors are still subject to investment ceilings under relevant acts or regulations. 

2. Investment scope for offshore foreign investors 

The scope of investment in Taiwan securities markets open to offshore foreign investors is as follows: 
1. Stocks, bond conversion entitlement certificates, and Taiwan Depositary Receipts issue privately placed by listed, over-the-counter (“OTC”), or emerging-stock companies. 

2. Securities investment trust fund beneficiary certificates placed publicly or privately. 

3. Government bonds, financial bonds, ordinary corporate bonds, convertible corporate bonds, and corporate bonds with warrants. 

4. Beneficial securities placed publicly or privately by trustee institutions, or asset-backed securities placed publicly or privately by special-purpose companies. 

5. Call warrants and Put warrants. 

6. Other securities approved by the competent authority for the securities industry, such as underwritten call/put warrants in IPO prior to initial listing, real estate investment trust beneficial securities and real estate asset trust beneficial securities placed publicly or privately, listed/GTSM beneficiary certificates, open-ended beneficiary certificates, foreign-currency-denominated fund issued by SITEs, underwritten stocks in IPOs prior to initial GTSM listing and underwritten GTSM stocks in rights offerings, beneficiary certificates prior to initial listing, NT dollar bonds issued in Taiwan by international financial organizations, and preferred shares issued by listed/GTSM companies, securities trust fund privately-placed by SITEs, private securities trust funds placed by SITEs and foreign currency-denominated securities trust fund privately-placed by SITEs. 

Additionally, Funds that have been duly and timely remitted into Taiwan for the purchase of domestic securities and that have not yet been invested may be used as follows (with the total value of such use not to exceed 30 percent of the amount remitted in, except in the case of outright bond trading): 
1.Investment in government bonds, time deposits, and money market instruments; trading of NTD interest-rate derivatives on over-the-counter. 

2. Investments in NT dollar time deposits shall be limited to duration of three months, with a one-time extension of three months allowed at expiration. 

3. Investments in money market instruments, limited to bills within 90 days of expiration. 

3. Requirements over the outward remittance of investment principal, capital gains and the other investment gains by foreign investors. 

1.After receiving permission to invest in Taiwan , foreign investors may apply to remit investment capital and investment earnings out of the ROC. However, outward remittances of capital gains and stock dividends may be made from realized earnings only. 

2. Applications for foreign exchange remittance for investment capital and earnings shall be handled in accordance with the Act for the Regulation of Foreign Exchange (under the purview of the Central Bank). 

3.When a foreign investor intends to repatriate investment earnings, the investor's agent or representative shall submit documents evidencing the filing of a tax return and payment of taxes by an agent/representative approved by the tax authorities and carry out exchange settlement in accordance with the Act for the Regulation of Foreign Exchange; however, during a period when assessment of ROC income tax on capital gains from securities transactions is suspended, the agent or representative may submit a tax clearance certificate from the tax authorities and carry out exchange settlement in accordance with the Act for the Regulation of Foreign Exchange. 


4.Exercising shareholder's rights for offshore foreign investors. 

1. The voting rights of a foreign institutional investor outside of Taiwan ( "offshore foreign institutional investor") holding shares in a public company in Taiwan may be exercised as follows:

(1) Exercise electronically or by means of a written form in accordance with Article 177-1 of the Company Act; 

(2) Exercise through appointment of a company conforming to Article 3, paragraph 2 of the Regulations Governing Handling of Stock Affairs by Public Companies; 

(3) Exercise through appointment of a domestic agent or representative to exercise voting rights at the shareholder meeting; 

(4) Exercise through an appointment by the domestic agent or representative, as authorized by the offshore foreign institutional investor, of a party other than the domestic agent or representative to exercise voting rights at the shareholder meeting; 


2.An offshore foreign institutional investor that appoints a company as indicated in point 2 of the preceding paragraph or a person as indicated in points 3 and 4 therein to exercise voting rights at a shareholder meeting shall in each case clearly indicate in the letter of appointment its instructions regarding the exercise of voting rights on each proposal. 

3. An offshore foreign institutional investor may not give a proxy form issued by the public company to a proxy solicitor or proxy agent. 


5.Restrictions on investment of money market instruments for offshore foreign investors 

The government's opening of Taiwan ’s securities market to offshore foreign investors is primarily oriented toward drawing investment into securities on the centralized exchange market. Investing in money market instruments is purely for short-term cash management needs. The cap of 30 percent should be sufficient for this purpose. Therefore, currently there are no plans to raise the ceiling. 

6.Prefunding Issues in Taiwan 

1.Domestic financial institutions in Taiwan since 4 May 2004 have been allowed to provide intraday credit to foreign investors to assist foreign investors who, due to time differences, are unable to make timely remittance of funds to complete settlement. 

2.Some Taiwan securities firms instituted their own requirement on foreign investors to provide settlement funds in advance (i.e., prefunding) when they place an order, causing inconvenience to foreign investors. A late settlement system has therefore been adopted for foreign investors to postpone settlement until 6 p.m. of the third business day after the date of the trade under certain circumstances, such as a discrepancy between holidays in different time zones, interruptions in telecommunications or natural disaster.The deadline for securities firms to report default by foreign investors shall be expended to the third business day after the date of the trade. 

3. The TSEC has amended Article 76 of the Operating Rules of the Taiwan Stock Exchange Corporation on August 1, 2005, repealing the provision that an investor may not open an account and engage in trading for a period of three years after a conclusive finding of settlement default. 

4.The FSC allowed Overseas Chinese and Foreign Nationals to borrow funds for settlement engaging in trading listed and GTSM securities from securities firms, securities finance enterprises and financial institutions on June 2, September 13 and December 15, 2006, respectively. 

7.Disclosure of the investment positions of foreign investors 

The FSC does not disclose investment information of individual foreign investors, but foreign investors are nevertheless obligated to comply with reporting requirements. 



8.Locking period of stocks 

The trading of stocks held by foreign investors is not subject to a "locking period". 



9.Off-exchange transactions 

1.Article 150 of the Securities and Exchange Act provides that trading of listed securities shall be conducted on a centralized securities trading market operated by a stock exchange. However, paragraph 4 of the same Article empowers the Competent Authority to make provisions for permitting off-exchange transactions in exceptional situations. For example, a foreign investor who has received approval from the Investment Commission of the Ministry of Economic Affairs under the Act Governing Investment by Foreign Nationals to transfer assets to another foreign investor may do so through off-exchange trading. Many foreign investors have invested in Taiwan stocks through such off-exchange channels over the years. 

2.Under current law, securities listed on the GreTai Securities Market (GTSM) can be traded off-market. But, in those cases of securities for which the relevant authorities have duly set a foreign investment ceiling in accordance with law, foreign investors (who must have obtained approval or registration in accordance with the Regulations Governing Securities Investment by Overseas Chinese and Foreign Investors) are required to trade such securities through the GTSM trading system. However, only a very few OTC stocks are subject to this requirement. Most GTSM stocks can also be traded by foreign investors via price negotiation at the business places of securities firms. 

3.After each market close, the TSEC also provides auction and tender offer systems in which securities prices are negotiable to satisfy various investors’ demands. 

10.The latest reforms on block trading system in Taiwan 

In order to encourage large-volume traders to undertake block trades so as to reduce the impact on the pricing of ordinary trades, the FSC will implement two-stage adjustments of the current block trading system. The first stage, set for implementation on 29 January 2007, the current intraday trading timeframes will be extended to 20 minutes and the trade price flexibility will be widened from 2 percent to 3.5 percent. Besides, the other measures which including mechanism of matching block trade, T+2 settlements, and elimination of pre-funding system are subject to implement on 28 May 2007. 



11.Foreign ownership restrictions 

Taiwan lifted limits on total/individual foreign shareholding in public companies from 30 December 2000. Applicable acts and regulations may in a few instances limit the percentage of equity holdings by foreign nationals in companies in certain industries (such as postal industry, telecommunications, and shipment) to meet policy needs related to national interests in the economic, social, or cultural spheres. Most developed countries have similar policies, and the practice in Taiwan is in line with developed-market standards. 

12.Odd-lot trading 

In the past, offshore foreign investors were permitted to sell stocks in odd lots, but not to buy them. To meet the varied trading and investment demands of foreign investors, the FSC announced on 22 July 2005 that offshore foreign investors are also permitted to buy odd lots. 



13.Permission for asset transfers between offshore foreign investors with different ID numbers but where the final beneficiary is the same person 

1.A foreign investor may open multiple depositary accounts in Taiwan, as long as each account bears the same investor registration number. Assets may be transferred freely between such accounts, without the need for a buy-sell process. 

2.The FSC further announced that transferring of assets accounts involved belonging to the same final beneficiary legal entity and there is no violation of off-exchange trading rules. Moreover, the FSC has eased rules relating to signing documents by a great number of final beneficiaries. 


14.Evaluation of the MSCI revision of the Limited Investability Factor 

Morgan Stanley Capital International (MSCI) raised the Limited Investability Factor (LIF) applied to the MSCI Taiwan Index to 1 from the former 0.75 effective after market close on 31 May. This adjustment has raised the international standing of Taiwan 's securities market and pushed Taiwan into the top spot in the MSCI Emerging Markets (EM) Index, and has helped to boost investor interest in Taiwan stocks, attract a stronger influx of foreign capital, and enliven and expand Taiwan's securities markets. 

15.Reformation for FTSE 

1.In its list of country classifications announced in September 2004, the FTSE Group upgraded Taiwan and South Korea from its Provisional Watch List for Developed Markets to its Watch List for Developed Markets. In response, the FSC formed a special working group in December 2004 to study and launch further market reforms in Taiwan, and held overseas roadshows actively. 

2.To support an upgrade of Taiwan 's securities market to Developed Market status, the FSC has launched a series of improvements aimed at further deregulating and internationalizing the market. For example: introducing a settlement grace period mechanism for foreign investors, easing requirements for foreign investor participation in the securities borrowing and lending system, streamlining the foreign investor registration system, simplifying asset transfers between foreign investors with different ID numbers, relaxing off-exchange trading systems, as well as completely opening foreign investors to engage in futures transactions for hedging and non-hedging purposes, allowing to trade through individual accounts or omnibus accounts, allowing to borrow money from securities firms and securities financing enterprises and allowing to borrow money in NT dollar from banks. In addition, there will be adjustments to the block trading system and an adjustment or easing of the system for regulating securities firm reporting of out-trades. The aforesaid policies will facilitate the internationalization of our securities market.
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