Taiwan Stock Exchange Corporation

Transcription

1 Taiwan Stock Exchange Corporation Introduction to Securities Borrowing and Lending Taiwan Stock Exchange Corporation Huang Bo-Li, Trading Dept January

2 Market Outlook TSEC announced the regulations governing the securities borrowing and lending on May 30, These regulations became effective from June 30 the same year, and have a history of 2.5 years. As of January , statistical figures indicated: 2,580 transactions Transaction volume: 5,783,268,000 shares Transaction value: NT$163,977,204,190 (based on the price at close on the trading day) For details, please refer to TSEC website: in the special zone of securities borrowing and lending The special zone of securities borrowing and lending in English was open for service on March 1, 2005: 2

3 (1000 shares) 500, , , , , , , , ,000 50,000 0 Jul 2003 Monthly Transaction Volume Oct Jan 2004 Apr Jul Oct Jan 2005 (by December 31, 2005 Apr July Oct 3

4 Monthly Transaction Value (by December 31, 2005) (NTD. millions) 12, , , , , , Jul 2003 Oct Jan 2004 Apr Jul Oct Jan 2005 Apr July Oct 4

5 Analysis of Transactions Types by December 31, 2005 Negotiated 27% Fixed-Rate 6% Competitive Auction 67% 5

6 Borrowers Analysis Securities Dealer 2% Futures Commission Merchants 2% by December 31, 2005 Foreign Investors 96% 6

7 Lenders Analysis by December Insurance Companies 35% Foreign Investors 1% Trust Companies 1% Four government funds 33% Investment Trust Funds 26% Banks 4% 7

8 Some Important Principles of SBL No overlapping with margin transaction market and the focus is on institutional investment market The restriction of short sale for covering position is in force with a few exceptions TSEC provides three modes of loaned securities which are fixed-rate, competitive auction and negotiated. TSEC shall assume full responsibility on trading under the modes of fixed-rate and competitive auction whilst the trading parties shall assume full responsibilities on trading under the negotiated mode. Trades conducted under the fixed-rate and competitive auction modes are required to present the loaned securities and collaterals before placing orders. Separate regulations will be instituted further to applicable legal rules in force. All participants in this market shall comply with TSEC regulations and related laws as well as the legal rules applicable to respective industries of the participants. 8

9 Regulations implemented on June 27, 2004 The requirement of strategic trade as the condition for the borrowing of securities for trading purpose was deregulated. Offshore collateral may be pledged by foreign investors for borrowing securities through negotiation. Total volume control over short selling 1. The total of short selling and margin account balance shall not exceed 25% of the outstanding shares of a particular stock. 2. The total of borrowed securities for selling shall not exceed 10% of the total outstanding shares of specific stock. 3. The total volume of borrowed securities for selling each day shall not exceed 3% of the total outstanding shares of specific stock. The limit of short sale each day at any point of time shall check with respective dealer-broker or through the MIS website of TSEC at 9

10 The lenders: Eligibility of players These shall be qualified financial institutions, including insurance companies, financial institutions, security investment trust companies (funds through public offering or private placement), futures merchants, other financial institutions permitted by competent authority for such operations, including FINIs, the four major funds of the government, shareholding trusts of the trust company employees and client securities in safekeeping. 10

11 Eligibility of players The borrower: Qualified financial institutions, including securities dealers, securities investment trusts (currently, only applied to ETF issuers and private placement funds), futures merchants and any other financial institutions permitted by competent authority in the business, including FINIs and banks. 11

12 Regulations governing securities dealers The following transactions are not subject to requirements of Article 32-1 of the Rules Governing Securities Dealers on securities dealers are not allowed to sell securities not under their holding For the speculation or hedging of certificates of investment trust fund on indexed stocks or of stock portfolios, and the exercise of rights over subscription warrants where the selling of loaned securities is necessary. For strategic purpose that dictates the selling of loaned securities on subscription rights over CB and related securities not underwritten by the participants, and subscription warrants and the target securities issued by other parties for hedging and speculation. As dictated by the issuance of warrants for hedging, securities dealers are bound to borrow securities for selling the object of transaction. 12

13 Regulations of foreign institutional investors Any QFII meeting the requirements as specified in Financial Supervisory Committee Letter Jin-Guan-Zheng (8) No dated May 13, 2005 may borrow and lend marketable securities. Foreign institutional investors entitled as foreign banks, insurance companies, securities dealers, fund management agencies, pension funds, mutual funds, trust funds, investment trusts, trust companies and academic or charity organizations may borrow marketable securities needed for trading or performance of contracts. In so doing, they may pledge their domestic assets as collateral irrespective of the requirements of Article 21-1, 2 and 3 of the Regulations Governing Overseas Chinese and Foreigners in Securities Investments on restriction on selling of securities not in holding and pledge of collateral is not allowed. For using loaned securities for contractual performance, follows Article 82-2 of the implementation procedure of TSEC in operation defining the performance of derivative contracts including the options of individual stocks, and subscription warrants. If the lending of securities is made via negotiated and where specific FINIs is to borrow marketable securities, it may pledge collateral in the country or overseas. Where such collateral may be the securities listed in OTC or TSEC, the lender shall refer to the special custodian account of Taiwan Securities Central Depository. 13

14 Regulations of Futures Commission Merchants Futures Commission Merchants and institutions undertaking futures trade who at the same time act as market makers, for purpose of covering the positions of the stock option for hedging or for performance of contract, may set up separate transaction account for securities trade and sell the target loaned securities. The loaned securities account number for futures commission merchants is The loaned securities account number for institutions undertaking futures trade is For details, please refer to Letter Tai-Tsai-Cheng (VII) dated October

15 Regulations for Futures Commission Merchants Domestic futures commission merchants may lend the securities they invested in and hold (excluding the securities kept in the trading account opened pursuant to Securities and Futures Commission Letter Tai-Tsai-Cheng (VII) dated October ) Domestic futures commission merchants and institutions undertaking futures trade may borrow marketable securities with the pledge of collateral for hedging and performance of contract in delivery in futures trade. Related rules and regulations shall be referred to Securities and Futures Commission Letter Tai-Tsai-Cheng (VII) dated December The loaned securities account number for futures commission merchants is The loaned securities account number for institutions undertaking futures trade is

16 Regulations of Insurance Companies I. Insurance companies act as lenders in the fixed-rate,competitive auction and negotiated of loaned securities whereby they may lend the marketable securities or registered government bonds under their possession. In participating in the lending of securities through negotiation, respective borrower shall pledge cash, government bonds, stocks listed in TSEC (or OTC) or bank guarantee as collateral. The total value of securities lent to specific borrower may not exceed 5% of its equity capital. II. Caution should be taken in assessing the risks inherent in relevant securities or registered national government bonds. Relevant internal procedures shall be instituted and presented to the Board for approval. Such procedures shall be reported to competent authority for record before causing into effect. Case by case review is not required. The duties of the boards of the foreign insurance companies may be carried out by their respective authorized personnel. III. For institutions that lend out securities and registered national government bonds through fixed-rate,competitive auction and negotiation, they shall complete relevant internal procedure within three months from the date this document is issued if they have not instituted such procedure. For details, please refer to Letter Jin-Guan-Bao (I) No dated September

17 Regulations of banks and trust investment companies Pursuant to Article 74 and 74-1 of the Banking Act of the ROC, stocks invested by banks and trust investment companies may be lent Where banks may elect to lend out securities due to the strategic trading requirements of TSEC, they may do so through fixedrate,competitive auction and negotiation. Trust investment companies may lend out securities only through fixed-rate and competitive auction. Caution should be taken in assessing the risks inherent in the lending of securities as may be required by applicable legal rules. Transaction limits, stakeholder trade, type of collateral, ratio of surety, and maintenance balance and minimum balance and related operation procedure shall be instituted and reported to the Board for approval before causing into effect. For details, refer to Letter Jin Guan Yin (IV) No dated 17 November

18 Regulations of Trust Companies in Lending Securities Trust companies may lend their trust assets of employees and clients where the trustee contract is client does not reserve the discretionary right. When lending out securities, trust companies shall specify in the trust contract that the client agrees for the trustee to lend out the securities, and may only engage in lending through fixed-rate and competitive auction. Letter Jin-Guan-Cheng (III) No dated March , and Letter Jin-Guan-Cheng (III) No dated April

19 Regulations of Securities Investment Trust Funds in Lending Securities Managers of securities investment trust funds may, under specific conditions, lend the securities under their holding. The upper limit of securities availed as loan shall not exceed 50% of the holding of such securities by amount. The term of lending shall not exceed six months from the day of lending. Where the loaned securities may be used for transactions in strategic trade and the lending is made through negotiation, the following conditions shall be satisfied: Only cash may be pledged by borrowers of securities. The ratio of collateral, lower limit of collateral, maintenance balance, supplementary collateral requirement and the conditions for breach of contract and the disposition (confiscation) of collateral (cash) shall be referred to the rules governing lending of securities through fixed-rate and competitive auction. For details, refer to Executive Yuan Financial Supervisory Commission Letter Jin-Guan-Cheng (IV) No dated October and titled Regulations Governing Securities Investment Trust Funds, and Letter Tai-Tsai-Cheng (IV) No dated June

20 Regulations of Private Placement Funds in Lending/Borrowing Securities The upper limit of margin trade (including loaned security) of funds from private placement shall not exceed 50% of the net asset value of respective fund. Where securities investment trust funds from private placement and managed by securities investment trust companies may open margin accounts for using loaned securities, follow the requirements for trading account with 848 as the first three codes of the account numbers plus three serial numbers and one control number. Refer to Executive Yuan Financial Supervisory Commission Letters Jin-Guan-Cheng (IV) No dated April and Jin-Guan-Cheng (IV) dated July

21 Regulations governing the use of loaned securities for covering short position As required by applicable legal rules on lending/borrowing of securities, specific institutions may used loaned securities in short selling the price of which shall not fall below the price at close of the previous day of trade. However, the selling of loaned securities in the form of rights on indexed stock investment trust funds for hedging or speculation, or for the selling of the Taiex 50 indexed futures for hedging or speculations, and the selling of subscription warrants by relevant issuers for purpose of hedging shall be exempted from such requirements. For stock option market makers, they may sell the options of loaned securities on the targeted securities for hedging irrespective of the requirement of minimum price at the price of the securities at close on the previous day of trade. Ministry of Finance Securities and Futures Commission Letter Tai- Tsai-Cheng- (III) No dated May , Letter Tai- Tsai-Cheng (III) No dated June , and Letter Tai- Tsai-Cheng (VII) No dated October

22 Scope of ETF related borrowing of securities The borrower shall be qualified institutions: securities dealers, FINIs, ETF issuers. Securities dealers may engaged in the following forms of trade: borrow a basket of stocks from ETF or ETF conducts trade for purpose of hedging or speculation between the two. This could be done by one basket of ETF stocks or ETF spot orders or repurchase. For borrowing ETF, use the account and transfer to the accounts involved in trading. Foreign investors may borrow securities irrespective of the mode of trade. ETF issuers may borrow securities only specified in the trust contract and may lend out the securities under its management. ETF short sale is exempted from the lower limit for offsetting. Once the trade is completed, the loaned securities will be drawn into the account of the borrowers. The same applies to the return of loaned securities. 22

23 Trading Procedure under Fixed-rate and Competitive auction Lender Institutions approved by TSEC Reply Application Reply Registration Trading TSEC Confirm, entry and matching Reply Input of Reply Dealer -present the of lending loaned pledges loaned securities qualified securities collaterals Securities Brokers Notice on transfer of loaned securities and deposit of collaterals TSCD Notice on book entry Securities Brokers Borrower Institutions approved by TSEC 23

24 TSCD N o tice o n tran sfer o f lo an ed secu rities to borrow ers on matching TSCD N o tice o n tran sfer o f loaned secu rities to borrow ers on matching TSEC TSEC Declare Declare Declare Broker Broker Broker Apply Apply Apply Apply Transfer by TSCD Transfer by TSCD Lender C ollateral Borrower Lender C ollateral Borrower D eclare by the sam e broker D eclare via different brokers Procedure of Trade through negotiation 24

25 Duties performed by relevant parties in fixed-rate and competitive auction TSEC: Institute the whole framework and regulations governing the lending/borrowing of securities, provide and maintain the trading system of loaned securities, running the transaction in lending and borrowing of securities, risk management and related guarantee. Provide the lending of and return of loaned securities. TSCD: conduct the drawing of securities upon notice by TSEC on the lending and return of loaned securities. Take custody of, transfer, replace and claim back of collateral on securities and related bookkeeping. Securities Brokers: Act as intermediaries for the lenders and the borrowers on loaned securities. 25

26 The role of securities brokers 1. Enter into Master Contract of Securities Borrowing and Lending Transaction with TSEC on the trading of loaned securities before launching for business. 2. Present the account information of the participants to TSEC for approval. 3. Provide an online system with TSEC and enter the application in favor of the lenders/borrowers. 4. Receive relevant form from the TSEC system and notify the participants (including additional collateral and compensation of rights and privileges), and collect relevant fees from the lenders and borrowers. 26

27 Lending/Borrowing Procedure for the lenders/borrowers 1. Enter into Letter of Entrustment for Securities Borrowing and Lending Transaction with securities brokers on transactions of loaned securities, open related margin accounts, account transfer and report to TSEC for approval of transactions. 2. Application for transaction through lending/borrowing of securities via online system between the securities brokers and TSEC. 3. Upon matching, TSEC replies to the securities broker. 4. TSEC notifies TSCD to draw relevant securities to the borrowers. 5. TSCD effects the drawing of securities immediately. 27

28 Borrowing through negotiated In the process of negotiated transaction, the lender and the borrower will be the concerned parties and the application is still to be submitted in the care of specific securities brokers. TSEC will consider the terms and conditions of the transactions. If matched, TSEC will notify TSCD to draw the securities. The parties concerned shall be responsible for any breach of contract thereof. 28

29 Basic rules for securities borrowing and lending (I) Office hours 9:00 to 14:30, Monday through Friday. The return of securities and pick up of collateral can be made until 15:00. (II) Loanable securities Only securities listed in TSEC or OTC and recognized and announced by TSEC. As a matter of principle, this is a resource for the supply of derivatives in strategic trade, and for margin trade of securities listed in TSEC or OTC an ETF. For details, visit the website (Chinese) (English) (III) Units of lending/borrowing units for lending: at least 10 trading units of the loanable securities Units of borrowing: as dictated by trading strategic needs and one unit of the loanable security for trading may be borrowed. 29

30 Basic rules for securities borrowing and lending (continued) (IV) Mode of trade and transaction fees 1. fixed rate : fixed rate is adopted (annual interest rate) and such rate is set and announced by TSEC. Currently, the rate is adjusted to 3.5%. 2. Competitive auction: the rate is to be declared by the lender and the borrower with upper limit at annual interest rate of 20% and 0.1% is the unit of adjustment, subject to the final decision of TSEC on the rate for matching the transaction by the system. 3. negotiated: the lender and the borrower determine all conditions of the transaction through consultation, including the target securities, quantity, transaction fee, ratio of collateral, due date for return. Upon the confirmation of consistency of the conditions, TSEC will notify TSCD for drawing the securities. The lender and borrower of the transaction shall be the contracting parties and the right over the collateral shall rest with the lender. The conditions and ratio of the collateral shall be determined by the contracting parties through consultation and affect the transfer of collateral, the pay out of dividends and the exercise of equity rights. If there is a breach of contract by the borrower, the lender shall assume all risks. Under no circumstance will TSEC be held responsible. If the lender does not have sufficient securities in holding, the declaration of transaction through negotiation will be cancelled and the lender shall return the collateral to the borrower. 30

31 Basic Rules for Securities Borrowing and Lending (continued) V Terms of borrowing Transaction by fixed-rate, competitive auction and negotiated has term of up to six months and is renewable for another term of up to six months The borrower may return the loaned securities before the due date. Similarly, the lender may also demand for the return of loaned securities before due. For transactions through fixed-rate or competitive auction, the lender shall give advance notice to the borrower 3 business days or 10 business days before due, so that the borrower can have sufficient time to resort to other lenders to return the loaned securities. For transactions through negotiation, transaction detail shall be jointly determined by the contracting parties. 31

32 Basic Rules for Securities Borrowing and Lending (continued) (VI) Qualified collateral For transaction through fixed-rate and competitive auction, the borrower shall pledge collateral to TSEC for guarantee of the return of loaned securities. Qualified collateral include: 1. Cash. 2. Securities listed in TSEC or OTC as recognized by TSEC: Borrower. Securities pledged as collateral must be qualified for margin trade. The value shall be based on the reference price at opening of the same day of trade. Stocks listed in TSEC will be discounted by 30% while stocks listed in OTC will be discounted by 40%. 3. Bank Guarantee 4. Registered national government bonds shall be discounted by 10% off face value. For transaction through negotiation,the lender reserves the right over the collateral, the conditions and ratio of which shall be jointly determined by the contracting parties. Transfer shall be made by the contracting parties. 32

33 Basic Rules for Securities Borrowing and Lending (continued) (VII) Maintenance Balance Transaction through fixed-rate and competitive auction : Every time the borrower borrows (additional) securities, it shall pledge specific collateral equivalent to specific ratio (required ratio of collateral) of the market value of the target securities to TSEC (the market value of securities shall be based on the price at close of the previous day of trade). The minimum maintenance will be updated everyday. If the value of the collateral falls below the minimum maintenance, TSEC will notify the borrower on each lot of securities requiring additional collateral for maintaining the required ratio. The required ratio and lower limit of collateral shall be announced by TSEC depending on the market situation. Currently, the former is 140% whilst the latter is 120%. When each count of trade falls below 120%, margin call will come to maintain the level at 140%. The borrower can claim back the portion of collaterals exceeding 140%. The refunded security deposit may be directly remitted to the account designated by the borrower. 33

34 The Control of TSEC over collateral for transaction through fixed-rate and competitive auction Collateral: in cash, bank guarantee or securities recognized by TSEC (currently, it should be the securities listed in TSEC or OTC in margin trade), and deposited in the TSEC transaction account. Price update: contrast the position of the loaned securities and the collateral with price at close every day. Margin call: if the required level of collateral falls below 120%, response to margin call is required. Disposition of collateral: If the participants fail to respond to margin call, TSEC may immediately dispose the collateral and take compulsory to offset the position for settlement (the margin call notice will be released to the securities broker on T day, and the borrower will be notified by securities broker the same day. The borrower shall respond to the call on T+1 day. If not, it shall be deemed a breach of contract by the borrower and the collateral will be disposed of on T+2 day). 34

35 Compensation The rights and privileges of securities in economic terms is disbursed by the borrower through the TSEC payment system in favor of the lender in the care of the securities broker. Cash dividend return of cash Stock dividend return of cash or stocks (at the choice of the lender) Stock subscription TSEC notifies the lender of the intent to subscribe and the subscription payment shall be disbursed to the borrower for subscription (or after the borrower has covered the position from market) and returned to the lender. Please refer to Article 35 of the Regulations Governing Lending and Borrowing of Securities 35

36 Return of loaned securities traded under fixed-rate and competitive auction Return upon due Return before due 1.The borrower may return the loaned securities in whole or in part before due date. 2.The lender may also demand for the return of loaned securities before due but advance notice 3 business days or 10 business days before the desired day of return. 3.Even though the loaned securities may be returned, the contractual liabilities of the borrower may be discharged only after the rights over all derivatives from the loaned securities are returned. 36

37 Return of loaned securities traded under negotiated The return of loaned securities before due date may be determined by the contracting parties. Where the lender of loaned securities traded under negotiated may demand for the return of securities before due and sell the securities at the same time, the securities broker of the lender may use the settlement mechanism with loaned securities current in effect to complete the settlement if the lender does not receive the returned securities. The charge on loaned securities for one day can be waived. 37

38 Breach of contract on transaction made under fixed-rate and competitive auction on loaned securities The borrower failed to return the loaned securities by due date. The borrower failed to make compensation to the lender as of the payment due date. The borrower failed to respond to the margin call on due time. Failure to effect relevant payment on due day. 38

39 Handling breach of contract on transaction under fixed-rate and competitive auction 1. TSEC will dispose of the collateral of respective borrower upon the confirmation of breach of contract and enter the market to recover the securities for returning to the lender. 2. TSEC will set aside specific percentage from the service charges paid by the lender and the borrower as reserve. 3. If liquidity is not adequate to the extent that the loaned securities cannot be covered, the lender shall be compensated in cash. In other words, this is the situation where TSEC cannot repurchase or borrow sufficient securities for return within 3 business days (D+2: D is the day deemed as breach of contract). If the price of specific loaned security at close on the third business day is taken as the price for cash compensation to the lender. 39

40 Management of transaction under negotiated The conditions of negotiation shall be declared to TSEC/TSEC notifies TSCD for drawing of securities. The term of lending/borrowing through negotiation is limited to six months. The information from TSEC or TSCD can show any record on return of securities on due date. If there is any violation of applicable rules discovered, trading will be suspended and maximum punishment will be the termination of the right in participating in the trading of loaned securities. 40

41 Control over selling loaned securities The securities broker shall confirm the completion of the transaction of loaned securities before selling out and this has to be done by the same broker. As a matter of principle,each party may open only one SBL account with one securities dealer. Selling loaned securities is not allowed if the price is lower than the price at close of the previous day of trade. When loaned securities are sold, select the type of trading (code 5- limitation on price for selling, or code 6- no limitation on price for selling ). The computer of TSEC has the mechanism for checking the price and the type of orders may be changed. 41

42 Limitation on the transfer of loaned securities As a matter of principle, loaned securities cannot be assigned, transferred or claimed back except under the following situations: Return of securities Request for trade, performance of contracts Transfer to the account in TSCD of the borrower opened at a custodian bank. Transfer between different securities borrowing and lending accounts opened by the same investor at the same business place of the same securities firm. Any other matters approved by TSEC. Loaned securities cannot be picked up in kind. This position of the loaned securities in TSCD shall be differentiated from the long position. The selling of loaned securities may be delivered with borrowed securities. 42

43 Service charges on the transactions of loaned securities (I) SBL fee Fixed rate at 3.5%. For competitive auction and negotiated, the charge may be up to 20% per annum. (II) TSEC service fee TSEC charges on each transaction made through fixed-rate and competitive auction at 80% of 2% of the SBL fee applicable to both contracting parties. For negotiated, TSEC will charge 50% of 0.04% of the transaction value on both sides for the services rendered. (III) Commissions for Brokers (reference only) The broker may charge 20% of 2% of the SBL fee on both parties on trading through fixed-rate and competitive auction, and 50% of 0.04% of the transaction value on both sides on trading through negotiation. 43

44 End of Presentation Your comments are welcome 44