CONTENTS. Taiwan Securities Association. Foreword A Message from the Chairman. I. Introduction. II. TSA Organization

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3 Taiwan Securities Association CONTENTS Foreword A Message from the Chairman I. Introduction 1. Profile 2. Purpose and Mission II. TSA Organization 1. TSA Organization Chart III. Reduction of securities firms operating cost IV. Improving operational efficiency in the securities market V. Expanding business scope for securities firms VI. VII. VIII. Strengthening self-regulation within the securities industry Actively participate in international events Strengthen training of practitioners and investors 22 Appendix

4 A Message from the Chairman FOREWORD Towards a smooth and prosperous Taiwan stock market One: A difficult 2012 for Taiwan s securities marketit was a tough year for the securities market in Taiwan. The shockwaves of the ongoing eurozone debt crisis, the slowing down of economic growth in China and growing concerns over financial collapse in the US, have stalled overall economic growth in Taiwan and slashed profitability of listed companies. In addition, disputes over the capital gains tax and concerns over the bankruptcy of various pension funds have led to doubts over the effectiveness of the government, resulting in a lack of investor confidence, and an outflow of funds from the stock market including the rapid transfer of funds overseas. There were only 61 new listings on the securities market in 2012, compared to 92 new listings in 2011, a reduction of 31 new listings or 34%; this raised only NT$167.4 billion in capital, NT$121.7 billion less than in 2011, a 42% reduction. Total earnings before tax for the first three quarters of 2012 among all listed companies was a mere NT$689.8 billion, which compared to the NT$895.1 billion during the same period in 2011 is a reduction of 23%. Average daily transaction volume for the whole year shrunk to NT$92.8 billion, NT$29.4 billion less than volume of NT$122.2 billion in 2011, a 24% reduction. Although the index has risen from 7,072 points to 7,699 points this represents only an 8.9% increase, surpassing

5 >>>>>Taiwan Securities Association only Shanghai in all major markets in Asia, and far lower than the 22% increase seen in Tokyo and Hong Kong. Annual profit for all securities brokerages was NT$18.09 billion, and if extraordinary income of NT$3.66 billion from sale of properties is excluded, actual operational income was only NT$14.43 billion, equating to an EPS of NT$0.44, and an ROE of 3.04%. Compared to the NT$250 billion in profit achieved by all banking institutions, the securities brokering industry has been fighting an uphill battle, with income barely covering costs. In sum the securities market is at risk of being marginalized. Two: The securities industry is still at the mercy of the gods The Taiwan securities market is a shallow market; income from brokerage business and interest from credit transactions makes up 80% of the total income of securities brokerages. When there are issues threatening the market such as the capital gains tax, the confidence of investors is impacted, and funds are moved away, market transaction volumes plummet and operations of the securities industry become difficult. The securities industry is therefore still at the mercy of God. Even though securities brokers have been cautious in their operations, the industry is still facing a significant crisis with questions persisting over its overall sustainability. The authorities, associated institutions and the industry at large have all been trying to resolve the attendant structural issues. Since the impact of change is long lasting, changes cannot be effected through one revolutionary act, but rather must be instituted incrementally. These improvement measures are not unsound, but the fact that they are only having limited effect on the overall situation is somewhat regrettable. The association has endeavored to serve securities brokerages in recent years with solid results achieved (see attached). Three: Work on integration of c apital markets to be continued Since taking on the chairmanship of the association six years ago, I have led all directors and committee members to work on improving the competitiveness of the securities industry as the first priority of the association: lowering the operational costs of securities brokers, expanding the business scope of brokers, consolidating capital market regulations and promoting an effective supervisory mechanism, in order to help securities brokerages form a well-rounded financial investment industry. The association has worked with the authorities and associated institutions to jointly promote the drafting of Taiwan s own FISCMA in 2008, hoping to eliminate obstacles within the financial sector by integrating legislation and businesses among all industries within the capital markets, so as to

6 >>>>>Taiwan Securities Association allow cross-industry operations by securities brokers and improve competitiveness. However due to the impact of the financial crisis towards the end of 2008, the authorities decided to pursue incremental measures in the improvement of capital markets, keeping the traditionally divided industry business structure, resulting in the termination of the legislative integration project. The authorities have subsequently referenced the change concept within the legislative integration project to make changes to the market step by step. For example: (1) regarding functional supervision, aligning regulatory requirements within the same business and products; (2) gradually classifying investors into general investors and professional investors, with stronger protection for general investors while providing more freedom for professional investors; and (3) taking the capability of securities brokerages in risk management and investor protection into consideration, and opening up the business scope of securities brokerages as much as possible. At the same time the association has defined the positioning and development strategy of securities brokers as follows: (1) Securities brokers to be developed into a one-stop service agency; (2) Securities dealers to be developed into professional investment institutions with capabilities in expanding markets; (3) Securities underwriters to be developed into investment banks providing complete services; (4) Securities reinvestment companies to be developed into internationalized financial services and international operations. This positioning and development strategy is very important to securities brokers, and requires continued concrete action plans to accomplish it. Four: Everyone join together to work towards a smooth and prosperous Taiwan stock market This year is a key year for the rebound of the securities industry, facing a slow recovery of the overall economy with various negative issues in the market gradually settling down, the securities market appears to be showing a silver lining behind dark clouds with a rebound in sight. The 8,500 mark in the Taiwan Index will not be an upper limit, but rather will be a solid foundation. The securities industry should grasp this opportunity and complete major changes. The Securities Association will endeavor to complete the six missions listed below: 1. Complete amendment of the Securities Transaction Tax Act: Reduce the applicable securities transaction tax rate of warrant issuers in trading of shares for hedging warrants due to legally required market creation, from 0.3% to 0.1%. 2. Push for amendment of the Offshore Banking Act:

7 Allow securities brokerages to establish Offshore Securities Units (OSU) similar to those in the banking industry, so securities brokerages can conduct investment and financial management related foreign exchange business to service domestic customers through OSUs. 3. Allow qualified practitioners to conduct securities transactions: Where there is no conflict of interest and no operational risk, as long as a practitioner is duly certified, he/she shall be allowed to practice without setting restrictions on every transaction. 4. Supervision shall be balanced between investor protection, operational costs of brokers and market development: Supervision shall be by principle, and shall be strict on financials and easy on business, be firm on the big topics and easy on the small topics. Thoroughly review the necessity and feasibility of each Act and regulations to proactively loosen regulations and revitalize the capital markets while ensuring proper investor protection and risk management. 5. Quickly implement the consensus reached in the cross-strait securities and futures supervision and cooperation platform meeting held on January 29 this year in order to expedite transactions between cross-strait securities businesses: Expand investment in both China and Taiwan markets with cross-strait funds, open up cross-strait securities brokerages, allow signatories from cross-strait securities associations to cross-certify protocols. 6. Allow more diverse financial products, expand business scope of securities brokerages: Encourage the TWSE and the GTSM to develop new financial products with more flexibility in product design, currencies and underlying investment objects to expand product range and depth of the market. After the re-election of the board of directors of the association on March 26, I have relinquished the chairmanship I held for the past six years. All directors and I as a team have worked hard to contribute to the securities industry with joy and without regret. We sincerely hope the securities industry, with the leadership of the new board of directors, together with the instructions of the authorities and assistance from associated institutions, will take up every challenge to create a rebirth of Taiwan s capital markets and hit new peaks. Finally, I wish everybody a healthy and prosperous year! Chairman

8 Passion.Professionalism.Efficiency.Innovation I Introduction 1. Profile (1) The Association was incorporated upon official approval of the Ministry of Interior on January 26, A total of three preparatory meetings have been held from February to March 1998, and the enrollment of members commenced officially from February 27, (2) The Association called the first general meeting of 1st term on April 4, 1998, in which the directors/supervisors of 1st term, and the Chairman and convener of supervisors' meeting, were elected. (3) The Association consolidated Taipei Securities Association and Kaohsiung Securities Association on July 31, 1999 and December 31, 1999 respectively, and became the only securities association throughout the nation. By December 31, 2011, the Association has enrolled a total of 151 securities dealer members and 1,050 subsidiaries thereof. 2. Purpose and Mission (1) Purpose 1. Protect all investors 2. Develop national economy 3. Coordinate relations with the same trade 4. Advance mutual interest (2) Mission 1. Exercise the functions to boost the securities market to cope with the national economic planning and development 2. Communication, investigation, statistic consultation, R&D and release of publications related to domestic and foreign securities businesses 3. Assist in implementing, researching and proposing motions about the government economical policies and the Securities and Exchange Act 4. Work together to improve, communicate and coordinate the issues about promotion of member self-discipline 5. Definition and preparation of the common rules and regulations in the same trade 6. Promote well-founded members' organization and the development thereof 7. Correct defects in members' operations 8. Organize the competency training and business seminar for employees in the same trade 9. Organize public service enterprises for members 10. Maintain members' legal interest and rights 11. Disciplines about members' nonconformance with rules 12. Meditation and arbitration of dispute between members, and members and investors 13. Enactment of the regulations or fair trade rules governing members' business 14. Request, change and re-issuance of membership certificates, and other services 15. Join international securities organizations and strengthen national diplomacy 16. Provide services commissioned by entities and groups 17. Participate in social movements 18. Maintain fairness of securities exchange and protect investors 19. Prevent fraudulent securities exchange, market manipulation, collection of illegal service charges and fees, and any other unjust enrichment 20. Handle securities specialists' qualification testing and registration 21. Perform any other deliverables required under laws or suggested by members 6 Taiwan Securities Association 2012 Annual Report

9 TSA Organization Taiwan Securities Association II TSA Organization 1. TSA Organization Chart Brokerage Business Committee Dealing Business Committee Discipline Committee R&D Committee Risk Management Committee Education & Training Committee Finance Committee International Affairs Committee Mainland Affairs Committee Financial Futures Committee Brokerage of Foreign Securities Committee New Financial Products Committee Foreign Brokers Committee Public Affairs Committee Underwriting Committee General Assembly of the Members Board of Directors Chairman Secretary General Deputy Secretary General Board of Supervisors Bond Market Committee Taxation and Accounting Committee E-Commerce Business Committee Wealth Management Committee Business Development Division Administrative Division Shareholder Service Committee Auditing Committee Investor Education Committee Overseas Management Strategy Committee Tendering Committee Business Service Dept. Education & Training Dept. International Affairs Dept. Kaohsiung Office Secretariat Finance Dept. Planning Dept. Information Management Dept. Taiwan Securities Association 2012 Annual Report 7

10 Passion.Professionalism.Efficiency.Innovation III Reduction of securities firms operating costs 1. Lowering the securities transaction tax on trading of target shares from warrant hedging accounts For the long term development of the domestic warrants market, and to expand overall tax revenue with rationalized taxation to avoid double taxation on a single transaction, this association recommends the reduction of the applicable securities transaction tax rate from 0.3% to 0.1% for share trading on warrant hedging transactions by securities firms. With the help of the competent authority, the Ministry of Finance has approved and is estimated to have reduced approximately NT$900 million in securities transaction tax charges for issuers of warrants, in order to stimulate the growth and vitality of the warrants market. 2. Reducing the scale of coaccountability clearing funds With the security of transactions within securities markets ensured, the TWSE, the GTSM and this association has, after numerous analyses, simulations and negotiations, jointly proposed an amendment on the co-accountability clearing and settlement fund system and scale, which was accepted by the authorities with the settlement fund adjusted to be: centralized market reduced from NT$8 billion to NT$6.4 billion (TWSE NT$3 billion, securities firms NT$3.4 billion). GTSM reduces from NT$2.8 billion to NT$2 billion (NT$400 million for GTSM and securities firms NT$1.6 billion). After adjustment, securities firms are expected to receive NT$2.4 billion in refunds in total (NT$1.6 billion from the centralized TSA Chairman, Dr. Min-Juh Hwang paid a visit to the Securities Association of China in Taiwan Securities Association 2012 Annual Report

11 Reduction of securities firms operating cost Taiwan Securities Association market and NT$800 million from the GTSM). Additionally, in conjunction with the reduction of the new clearing settlement fund system, the TWSE and GTSM has each amended the Rules for Administration of the Joint Responsibility System Clearing and Settlement Fund, Rules for Administration of Additional Deposits by Securities Firms to the Clearing and Settlement Fund on January 11, 2012, and January 13, 2012 respectively. The competent authority subsequently assessed the calculation ratio of the clearing settlement fund to be deposited by the securities firms in 2012 on February 3, Income from borrowing securities (settlement-driven securities borrowing) and income from securities borrowings in trust are excluded from insurance premium calculations This association recommends items such as interest income from financing of short positions, income from loaning securities (settlement-driven securities borrowings), income from securities borrowings in trust to be excluded from the scope of the second generation health insurance levy. The recommendation has been partially accepted by the Department of Health, Executive Yuan, with a written reply dated November 20, 2012, stating: After careful evaluation of the process and the number of occurrences, taking into consideration the feasibility and administrative cost of withholding at source by the responsible withholding party, interest income from financing of short positions shall be included in the calculation of insurance premiums, while income from loaning securities (settlementdriven securities borrowings) and income from securities borrowings in trust are excluded from the scope of withholding, and this will be further evaluated after second generation health insurance is implemented in the future. 4. New fee structure for online processing fees is implemented ahead of schedule To lower operating costs of securities brokerages, this association has proposed to the TWSE to implement a new fee structure for online processing fees (previously computer equipment usage fee ) prior to the implementation of individual settlements. The proposal was accepted by the TWSE and the competent authority, effective from February 1, 2013, and the TWSE has notified all securities brokerages in writing on January 28, Based on 2011 data from the TWSE, fees to be charged under the new fee structure will be about 80% of what securities brokerages paid before. 5. Reducing trading information user fees The competent authority made a request to the GTSM in December 2011 to contact this association regarding adjustment of the service scope and fee structure of the currently provided securities firms trading information process. After discussions between the GTSM and this association, both parties agreed to give a 5% discount on the fee standard of trading user fees, with an estimated NT$8 million per year saving expected. The GTSM subsequently announced and amended some clauses in the GreTai Securities Market Standards for Calculation of Trading Information User Fees on February 9, 2012, which became effective retroactively from January Taiwan Securities Association 2012 Annual Report 9

12 Passion.Professionalism.Efficiency.Innovation IV Improving operational efficiency in the securities market 1. Amending the Template for Borrowing or Lending Money in Connection with Securities Business by Securities Firms In response to the Financial Consumer Protection Act and its sub-regulations, together with the dedicated institution for processing financial consumer disputes - the Financial Ombudsman Institution - beginning official operations on January 2, 2012, this association has made an amendment to the Template for Borrowing or Lending Money in Connection with Securities Business by Securities Firms for submission to the competent authority on March 20, 2012, and provided to all member companies for reference on March 26, Setting rules for publication on websites by securities firms of research reports from securities investment consulting businesses To assist securities firms in publication of securities investment consulting business research reports on the web, this association has drafted related rules, and has requested securities firms to execute investment consultancy mandate agreements with securities investment consulting businesses, together with written approval from any third parties providing research reports prior to publishing of securities investment consulting business research reports in the name of the securities firms on the web. Any behavior forbidden by the Regulations Governing Securities Firms and Regulations Governing Responsible Persons and Associated Persons of Securities Firms is not allowed. The rules were provided to member companies for reference on February 21, Setting up discretionary investments for internal personnel For the benefit of securities firms, this association has requested clarification from the TWSE regarding whether internal personnel can set up discretionary investments using internal accounts with securities investment trust business or with securities investment consulting business. After careful study by the TWSE, it has been decided that internal personnel can execute discretionary investment contracts with securities investment trust business or securities investment consulting business to trade in securities with an account opened at a securities firms and clause 2 of the Regulations Governing Insiders of Securities Firms Opening Accounts at Their Securities Firms for Securities Brokerage Trading was amended accordingly for promulgation and execution from April 24, Investment trust funds engaging a single securities firm to trade in shares For overall combined operating benefit of securities firms, this association has requested the competent authority to clarify whether the definition of a single securities firm to be engaged by each trust fund does not cover subsidiaries established by securities firm overseas. The authority replied: The parent company and its overseas subsidiary company of the securities 10 Taiwan Securities Association 2012 Annual Report

13 Improving operational efficiency in the securities market Taiwan Securities Association TSA and ANMI had the MOU dinner on December 12 th firm are two independent companies, however, 30% of the limit on a securities investment trust fund engaging a single securities firm can be applied separately to the parent company and its overseas subsidiary. The Securities Investment Trust & Consulting Association and this association have forwarded the reply to each of our member companies on April 20 and April 23, 2012 respectively. 5. Easing of restrictions on utilization of own funds of a securities firm In order to revitalize the utilization of securities firms own funds, this association recommends to allow securities firms to purchase money market funds issued by reinvested securities investment trust businesses using their own funds. The recommendation is accepted by the competent authority and promulgated for execution from April 18, Easing the rules on collateral swaps Current regulations require the transfer of collateral securities collected by securities firms or securities financing enterprises to be completed four business days prior to settlement date. This has caused operational burdens on securities firms and securities financing companies for collateral swaps. This association recommends TWSE and TDCC work together to cancel the requirements to swap collateral prior to settlement date of the issuing company where the collateral securities are obtained by the securities firms and securities financing enterprises. The proposal was accepted by the TWSE, and the amendment to related regulations was promulgated and executed on November 15, 19 & 21, 2012, respectively; the TDCC also completed adjustments to the information system to compile a name list of securities owners according to the customer names provided by the securities firms or securities financing companies, and the adjustment is already in operation. Taiwan Securities Association 2012 Annual Report 11

14 Passion.Professionalism.Efficiency.Innovation V Expanding business scope for securities firms 1. Allowing securities firms to handle offshore securities business The offshore currency exchange and tax benefit policy supported in the banking industry is still lacking in the securities industry, making it difficult to develop overseas securities business. In order to increase international visibility of the Taiwan securities market, it is imperative to establish a national financial planning platform based on Taiwan. This association recommends to charter general securities firms to conduct Offshore Securities Units (OSU) similar to those in the banking industry. The Executive Yuan has subsequently passed amendments to some clauses of the Offshore Banking Act, drafted by the Financial Supervisory Commission and the Central Bank on January 24, 2013, and forwarded to the Legislative Yuan for review. 2. Allowing securities firms to reinvest To assist securities firms to develop into complete investment banks, and improve funds utilization, this association recommends to ease limits on securities firms investing in venture capital from the existing 5% of net worth to 10%, and to abolish the restriction on investments in venture capital to not exceed 25% of issued shares from the venture capital company by the securities firms, so that securities firms can obtain control of venture capital companies. The recommendation was accepted by the competent authority with new venture capital management consultant companies as allowed reinvestment targets in non-securities, non-futures and non-finance related business. Furthermore, reinvestment from securities firms will be controlled by the total amount without individually regulating the percentage of each investment on the net worth of the securities firm, instead a total 40% of net worth is the upper limit. Shareholding restrictions on venture capital business held by securities firms are also being abolished, and the new rule is promulgated for execution on March 15, Managing wealth management business via trusts by securities firms Following the amendments of Directions for the Conduct of Wealth Management Business by Securities Firms published by the competent authority, securities firms are allowed to manage cash trusts and securities trusts in wealth management business using trusts, under the three methods of Specific individual management application, Specific collective management application and Individual management application with principal specifying operational scope or method. By the end of December 2012, there were eight securities firms head offices with wealth management business approved by the competent authority to operate trusts, with 230 branches; since commencing in February 2011, till the end of December 2012, the asset value had already reached some NT$ billion. After the operation of this business, the scope of securities firms can be expanded, and overall operational effectiveness for securities firms will improve. 12 Taiwan Securities Association 2012 Annual Report

15 Expanding business scope for securities firms Taiwan Securities Association TSA Chairman, Dr. Min-Juh Hwang, attended the 25 th ICSA AGM in Copenhagen in Raise overseas (including China) investment ratio for domestic securities firms Domestic securities firms have been operating with great diversity for a long time with reinvestments in securities related businesses almost reaching the maximum 40% of paid up capital under clause 18 of the Regulations Governing Securities Firms. Also, considering net worth can better reflect the reasonable value and capital nature of the securities firms, this association proposes to increase the overseas (including China) investment limit from 40% of paid up capital to 60% of capital net worth for securities firms. The authority has since amended the Regulations Governing Securities Firms on January 10, 2012, to divide self-funded capital investments from securities firms into financial investment and strategic reinvestment: with clause 18 amended stating where securities firms make financial investments with their own funds, the original acquisition cost can not exceed 30% of the capital net worth of the securities firms; and added Taiwan Securities Association 2012 Annual Report 13

16 Passion.Professionalism.Efficiency.Innovation clause 18-1, regulating where securities firms make strategic re-investments using their own funding, the total amount is not to exceed 40% of the securities firms net worth. 5. Allowed business scope for overseas subsidiaries of securities firms To improve the competitiveness and income source of Hong Kong subsidiaries of Taiwan originated securities firms, this association recommends that Hong Kong subsidiaries of domestic securities firms also be allowed to conduct insurance brokering business. The competent authority accepted the recommendation and promulgated it on September 26, 2012, stating that if overseas subsidiaries of a securities firm have acquired securities or futures license with registration at the IOSCO MMoU authority, the business scope is according to that approved by the local securities or futures authority, including securities/futures trading, financing related business and other non-securities/futures business. To change the business items of overseas subsidiaries of a securities firm, the domestic parent company shall attach the internal controls mechanisms within the operational management of the subsidiary, and report to the competent authority pursuant to clause 53 of the Regulations Governing Securities Firms. 6. Securities firms can accept orders and voluntarily trade securities with China originated capital To meet investor demands and to expand business scope of securities firms, this association recommends allowing securities firms to trade TSA Chairman, Dr. Min-Juh Hwang, attended the ASF AGM in Mumbai India in Taiwan Securities Association 2012 Annual Report

17 Expanding business scope for securities firms Taiwan Securities Association Hong Kong H-shares and securities of companies registered in China and listed in China, Hong Kong and other securities markets either by orders or voluntarily. The competent authority subsequently announced an amendment on March 14, 2012, allowing domestic securities firms to trade securities issued by government or companies from China in overseas markets. 7. Easing restrictions on professional investors investing in overseas securities In meeting investor demands and expanding the business scope of securities firms, this association recommends to loosen restrictions on overseas trading and credit rating restrictions on foreign bonds allowed to be invested in by professional investors. The competent authority has accepted the recommendation and announced on October 17, 2012, to loosen the restrictions on trading in overseas securities by professional investors: (1) the stock exchanges allowed to be traded in by professional investors are not restricted by the sovereign rating of the country, (2) securities credit rating barrier of overseas central government bonds, overseas bonds (including convertible company bonds and shares convertible bonds) and securities products is lowered from BBB to BB (S&P) 8. Easing on restrictions on trading of overseas securities by securities firms TSA and ANMI celebrated the signing of the MOU on December of the current net worth of securities firms to 30%, (2) delete the trading restriction in 11 countries and 18 exchanges, (3) allow investment of securities including company bonds issued by domestic enterprises in overseas markets, (4) relax the credit rating of debt securities to anything above BB rating, (5) agree that offshore ETF or overseas component securities ETF in the possession of securities firms can be included in the hedging amount. In expanding business scope, this association recommends relaxing the scope of trading of overseas securities and hedging transactions using overseas financial derivatives. The competent authority has accepted the recommendation and announced an amendment on October 17, 2012, to: (1) relax the investment restriction from 2-10% Taiwan Securities Association 2012 Annual Report 15

18 Passion.Professionalism.Efficiency.Innovation VI Strengthening self-regulation within the securities industry 1. Relax the audit frequency from head office on branch office to at least twice a year for securities firms with self-audit mechanism For consistency in financial supervision, this association has proactively advocated for securities firms with dedicated personnel performing audits on subsidiaries to have a similar audit frequency from the head office as the banking industry; meaning frequency for securities firms with dedicated audit systems changes from once a month to at least twice a year. In order for this proposal to work, the TSA has held numerous discussions and drafted five complementary measures before it was accepted. The competent authority has accepted after submission by the TWSE with amendments on the general requirements of the Regulation for Internal Controls System Standards of Securities Firms made on March 7, 2012, stating where securities firms have dedicated personnel performing selfaudit work on subsidiary companies, then the frequency of audit on the subsidiary company from head office, after taking the complementary measures, is adjusted to at least once every six months. 2. Set up internal controls system for financial consumer protection For ease of compliance by the securities firms, the TSA has drafted Internal controls system standard template for securities firms Management of financial consumer protection (including internal controls system, internal audit practice rules and audit detail list) in compliance with the requirements of the Financial Consumer Protection Act and its related sub-regulations. The competent authority has accepted for reference on March 3, 2012, and the TSA has forwarded to all member companies for reference on March 7, Relaxing the restriction on related parties within article 45 of the Financial Holding Companies Act In order not to influence the rights of securities firms, the TSA recommends where a securities subsidiary company of a financial holding company conducts independent trading business, involving trading of securities of an equity nature, and at the time of purchase, the target company is not a related party, but is in between two board meetings, the target becomes a related party, and the loss has reached the loss stopping standard in risk control of the company. In order to minimize losses, the securities can be sold off first according to the risk control rules with the resolution of the board of directors, and then report to the next directors meeting. The competent authority has accepted and adopted for implementation effective from February 10, Correcting the self-regulation rules for securities firms promoting wealth management business In response to the Financial Consumer Protection Act and its related sub-regulations, the TSA has amended some clauses in the Directions for the Conduct of Wealth Management Business 16 Taiwan Securities Association 2012 Annual Report

19 Strengthening self-regulation within the securities industry Taiwan Securities Association TSA assisted FSC in hosting the meeting for Taiwanese securities firms in Hong Kong in by Securities Firms. The competent authority has accepted for reference effective from September 21, Setting self-regulation standards for the conduct of wealth management business by securities firms In compliance with the Financial Consumer Protection Act and its related sub-regulations, securities firms shall fully understand the customers and the funds it is selling to ensure suitability with the financial customers, as well as to conduct onthe-job training for fund sales people, establish a commission payment system to fund sales channels, and to avoid bonus review system basing solely on sales of funds by the securities firms leading to inappropriate sales, the TSA has drafted Directors for the Conduct of Fund Sales Business by Securities Firms, and the competent authority has accepted on March 27, 2012 for reference, the TSA has subsequently announced for implementation on April 2nd, Correcting the self-regulation rule that members trading securities shall understand the principal, credit checking and limit management In compliance with the requirements of the Financial Consumer Protection Act, and the rules on purchasing (selling) warrants after the principal has opened an account from the authority, the notification method of single day trading limit adjustment by securities firms, the Self- Regulation rule that members trading securities shall understand the principal, credit checking and limit management was amended by the TSA. The competent authority has approved the amendment on April 3, 2012, and the TSA published it for execution on April 5, Taiwan Securities Association 2012 Annual Report 17

20 Passion.Professionalism.Efficiency.Innovation VII Actively participate in international events 1. Attendance at international meetings Duration Location Meeting Feb 3rd Taipei Co-organize CVM round table discussions Feb 8th 15th Tokyo, Japan Attended the 7th Training of ASF May 13th 17th Beijing, China Attended the 37th AGM of IOSCO May 20th 22th Seoul, Korea Attended International Investors Education by IOSCO&IFIE June 10th 15th Copenhagen, Denmark The 25th AGM of ICSA June 29th Taipei Hosted visit by the Indonesia Securities Association November 5th Istanbul, Turkey Attended 2012 ICSA Interim Meeting November 6th 9th Istanbul, Turkey The 5th IOSCO SROCC Training seminar & mid year meeting November 12th 13th Istanbul, Turkey Survey on Capital Market of Turkey November 23rd 30th Bombay, India The 17th ASF December 6th Hong Kong Hosted Taiwan Securities Firms in Hong Kong seminar December 12th New Delhi, India Overseas visits by the directors and supervisors signed MOU with the ANMI The TSA Board signed the MOU with ANMI (Association of National Exchanges Members of India) in New Delhi in India. 18 Taiwan Securities Association 2012 Annual Report

21 Actively participate in international events Taiwan Securities Association Photo of the TSA Chairman, Dr. Min-Juh Hwang, and ANMI President, Mr. Rakesh Somani at the MOU signing. TSA Chairman, Dr. Min-Juh Hwang, attended the ASF AGM in Mumbai India in Cross-strait interchanges Duration Location Conference April 11th 14th Hangzhou, Shanghai 2012 cross-strait financial development and cooperation summit forum and visit of Zhejiang April 19th Taipei Hosted visit by the China Securities Co., Ltd. June 7th Taipei Hosted visit by the Hong Kong Economic trade and cultural office. August 13th Taipei Hosted visit by the BHL Taipei Limited September 24th Taipei Hosted visit by the Xiamen JinYuan investment Group October 9th November 26th Taipei Taipei Hosted visit by the Chongqing city small to medium enterprise financial service facilitators Hosted visit by the China Securities Depository and Clearing Corporation Limited 3. This association is now an official member of the ICSA, ASF, IFIE, IOSCO and AFIE, and is a member of the working committee of AFIE. 4. Since September 26, 2007, this association has already executed memorandums of understanding with the securities self-regulation organizations in Japan, Korea, Thailand, Vietnam, Mongolia, Germany, Poland, Australia, Indonesia, Malaysia, the UK, Hong Kong, Italy and India. This association will try to bring collaboration opportunities between Taiwan securities industry and other nations through frequent regional or bilateral interactions. Taiwan Securities Association 2012 Annual Report 19

22 Passion.Professionalism.Efficiency.Innovation VIII Strengthen training of practitioners and investors 2. Strengthen training of practitioners (1) Organize training for practitioners with a total of 331 sessions held, and 29,091 people trained: 3. Investor Education (1) Subsidize general personal investment financial management seminars held by nonfinance faculties in universities There were applications from 46 teachers in the year 2012 with 21 cases approved after review (the TWSE also funded 4 cases, the GTSM and the TDCC also funded 2 cases each). In the end, 20 cases completed the seminars with 1,306 students participated in the general introduction sessions. (2) Assign suitable lecturers to provide correct investment and financial management concepts to high school students. Continue to receive applications from high schools for assigning suitable lecturers in providing correct investment and financial management concepts to high school students. During September to December 2012, lecturers were sent to 8 schools with 3,549 students benefited from the program. (3) Co-organized the 2012 Second National Wealth Management Competition To increase awareness of citizens on investment and financial management knowledge, the Economics Daily and the Taiwan Wealth Planning Development Association jointly hosted the 2012 Second National Wealth Management Competition. This association, together with banks, insurance associations and others co-organized an event where more than 300 teams from the public participated in the group competition, and 30 teams were awarded with excellence. (4) Publish investment and financial planning promotion e-book The Securities and Me publication aimed at general investors and the Exploring the Securities Market publication aimed at students (high school students, non-financial related undergraduates) previously published by this association and publishers were digitalized into an e-book and placed on the website of our association for download at anytime by general investors and students to understand securities market related knowledge and investor protection. (5) Participate in international investment & financial planning related conference a. [Investor Education Conference(IFIE)]: Chairman Hwang Min-Juh of the association lead a team to Seoul Korea to attend the Investor Education Conference held by the IFIE and IOSCO held on May 20th b. [AFIE working committee phone conference]: Our association is a member of the AFIE working committee, participated in the AFIE working committee phone conference on December 17th Taiwan Securities Association 2012 Annual Report

23 Strengthen training of practitioners and investors Taiwan Securities Association 4. Promotion (1) Warrants In order to make operators within securities firms aware of warrants, and in hoping to expand the scale of the warrants market, this association has held 20 sessions of securities operators warrants training seminars in Taipei, Taoyuan, Hsinchu, Taichung, Tainan, Chiayi, Changhua and Kaohsiung between July 12 and August 21, The sessions introduced the basic concepts of warrants, warrants investment strategy and warrants investment risks, as well as bull & bear warrants related product characters and trading methods. With strong participation by securities industry practitioners, 1,600 people successfully went through the program. (2) Personal Information Protection Act Due to implementation of the Personal Information Protection Act, there will be impact on the business conducted by securities firms and its practitioners in the future. Hence this association has held 5 free special topic seminars on Introduction and Response to the Personal Information Protection Act in Taipei, Taichung and Kaohsiung since December 5, 2012, with the District Attorney speaking at the seminar and 480 plus people attending the event, accomplishing the promotion result anticipated; to further strengthen the understanding of this Act and its subsidiary regulations by securities firms and practitioners, the association will not only plan more training sessions on the topic, it will also cohost the Securities firms personal information protection act management system training with the Lotus International Law Office to further assist securities firms in establishing personal information protection measures in compliance with the Act, and to transform the requirements in the Personal Information Protection Act into actual practice within a company. TSA Chairman, Dr. Min-Juh Hwang, attended the 37 th IOSCO AGM in Beijing in Taiwan Securities Association 2012 Annual Report 21

24 Passion.Professionalism.Efficiency.Innovation Appendix Securities Firms' Income Statement (January to December 2012) Unit: Million NTD number Security firms Income this period Expenditure this period Profit Paid-up capital 81 Total 342, ,965 18, , General 336, ,776 16, , Professional brokerage 5,373 4,190 1,183 11, Local securities firms 324, ,499 15, , General 321, ,332 15, , Professional brokerage 2,339 2, , Foreign securities firms 17,966 15,466 2,499 21, General 14,931 13,444 1,487 19,621 3 Professional brokerage 3,034 2,022 1,012 1, Top 20 securities firms 315, ,082 14, ,100 One. Background on the analysis report: (1) At the end of 2012, there were 147 member companies in this association. This securities firms operational profitability analysis report only includes the 81 chartered securities firms that submit monthly financial reports to the TWSE to calculate the annual operational profitability of (2) In 2012, the US economy was slowly recovering, the European debt crisis continues to spread, the consumer market in Europe and the US were down, leading to a slow down in the growth of the China economy; The US has released 2 QE s in September and December, while Japan announced economic rescue and quantitative easing plans in December. Global funding is still expected to be abundant in 2013, resulting in partial substitution of exports with domestic demands in China. Two. Taiwan index increased by 8.9% in 2012, under performing: (3) In 2012, the TAIEX rise from 7,072 to 7,699, representing an 8.9% rise; Total market value (including OTC) rose from NT$20.6 trillion to 23.1 trillion, or a 12.1% increase; Daily average volume (TSE 81 billion / OTD:11.8 billion). is less than the daily average for the same period in 2011 (TSE: billion / OTC 16.2 billion NTD). The Taiwan stock market was disrupted by the global economy downturn and the capital gains tax and underperformed other major markets in Taiwan Securities Association 2012 Annual Report

25 Attachment Taiwan Securities Association Equity Profit this period (%) EPS (NTD) ROE (%) % of income (%) Net worth per share 475, , , , , , , , , , (4) The average EPS for the 81 securities firms was NT$0.556 (Comparing to 2011, the average among securities firms were NT$0.505), with 55 firms making money and 26 firms losing money. Composite securities firms averaged EPS of NT$0.538, which is lower than the average EPS of NT$1.051 among chartered securities firms; Average EPS among foreign funded securities firms is NT$1.163, outperforming the NT$0.513 EPS among all domestic securities firms. The top 20 capitalized domestic securities firms averaged EPS of NT$0.536, which is slightly lower than the industry average. Three. Economic Growth target is 3.59% in Taiwan for 2013: published the domestic economy situation outlook. Economic growth in 2012 is estimated to be 1.26% and economic growth in 2013 is forecasted to be 3.59%, and the quarterly forecasts are 3.26%, 3.92%, 3.82% & 3.34% respectively with the growth rate peaking in the second quarter; in 2012, the monitoring indicators were blue from January to August, and in September to December, the indicators were Yellow-Blue indicating slow recovery of the economy; The export volume has finally turned into positive growth in the 4th quarter of Looking ahead into 2013, the improvement in the economy domestically and overseas will help a prosperous stock market. (5) The statistics bureau of the Executive Yuan Taiwan Securities Association 2012 Annual Report 23

26 Passion.Professionalism.Efficiency.Innovation Securities Firms Income Statements for the Most Recent Two Years Comparison of Securities Firms Accumulated Operating Revenues Million 500, , , , , , , , , , , , , , , , , , , , ,940 69, , ,483 39, ,638 79,313 37,570 61,734 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Entire securities firms operating revenues: NT$ billion in 2012, and NT$ billion in 2011 Since April 2012, Taiex transaction volume dropped sharply amid domestic and international influences, suppressing brokerage income. Comparison of Securities Firms Accumulated Operating Profit/Loss Million 40,000 30,000 20,000 10, ,000 34, 年 99 年 29,849 24,993 26,580 22,018 23,972 19,678 20,123 10,542 17,985 18,344 20,267 7,239 4,301 4,623 14,407 17,884 17,153 4,794 7,778 7,029 8, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Entire securities firms operating incomes: NT$ billion in 2012, and NT$ billion in 2011 In 2012, excluding extraordinary income, actual earnings was only NT$ billion, with EPS of NT$ Comparison of Securities Firms Accumulated Return on Shareholders Equity (ROE) % Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Entire securities dealers ROE: 3.81% in 2012, and 3.63% in 2011 Performance by securities firms in recent years is not ideal; overall ROE peak was 11.22% in Comparison of Securities Firms Net Value Per Share Dollar Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Entire securities firms net value per share: NT$14.60 in 2012, and NT$13.92 in 2011 The paid-up capital of all securities firms decreased with shareholder s equity remaining unchanged in 2012, pushing net worth per share higher. 24 Taiwan Securities Association 2012 Annual Report