The banking market in Taiwan has been volatile over the past two years due to unexpected “black swan” incidents such as the fluctuations in oil prices and post-Brexit uncertainties. These factors exemplify the influence of global economic developments on Taiwan’s financial institutions. The retreat of some international banks from Taiwan has also reflected the challenging nature of the banking market in Taiwan, but government efforts to liberalize Taiwan’s financial sector have helped to reduce the impact of uncertain global conditions. We look forward to continuous liberalization measures by the government to attract more foreign institutions to participate in the market and bring more business opportunities to Taiwan from neighboring financial hubs.
The Banking Committee commends the government for engaging in deregulation in a timely and concrete manner to improve the business environment for Taiwan’s banking industry. The Financial Supervisory Commission (FSC) deserves credit for current policies aimed at upgrading the competitiveness of Taiwan’s financial sector, such as its efforts for promoting fintech, developing green finance, and expanding the scale of the capital market.
We also highly appreciate the efforts of the government and specifically the FSC in supporting the offshore wind industry by allowing foreign bank branches in Taiwan to issue long-term NTD bonds for green projects. It is an important measure for enabling foreign banks with offshore wind capabilities to bring their expertise to Taiwan to work together with the local financial institutions. As responsible members of the financial community in Taiwan, we aim to contribute to the sustainable development of the banking industry and to help make Taiwan one of Asia’s financial hubs.
The Committee wishes to thank the Taiwan financial authorities for paying extra attention to our recommendations in last year’s White Paper and taking meaningful follow-up actions. In this year’s position paper, we have focused on three main issues, all of which we believe can be resolved in the coming year. In view of the FSC’s desire to expand Taiwan’s financial market and increase job opportunities, the first step in that effort should be to allow more products to be provided to different types of customers in Taiwan. In this way, Taiwan’s financial industry will become more competitive versus neighboring financial markets such as Hong Kong and Singapore, and its ability to retain talent and develop business opportunities in Taiwan will be enhanced.
Suggestion 1: Further broaden opportunities for offshore product development and distribution.
In recent years the relevant government agencies in Taiwan have taken positive steps with regard to broadening financial product offerings, in line with the theme of promoting the Taiwan market internationally. However, industry perceives that more could be done to help foster market growth by permitting an even greater variety of financial instruments so as to satisfy differentiated risk-return demands.
The Committee presents the following recommendations for liberalizing the scope of product offerings:
1.1 Lift restrictions on the underlying instruments of offshore derivatives transactions to legitimize products linked to Taiwan equities. The existing regulations governing banks’ distribution of Offshore Structured Products (OSPs) and provision of information advisory services have imposed prohibitive restrictions on derivatives’ underlying specifications. Chief among the constraints is the exclusion of Taiwan-listed securities, portfolios, and correlated equity indexes from the permissible scope of qualified underlying instruments, significantly suppressing the market potential.
The purpose of this restriction seems to be to segregate the offshore and onshore derivatives markets. But in practice, the exclusion of Taiwan equities makes it impossible to tailor products according to sector coverage and/or index portfolios in which Taiwan companies are internationally dominant and/or essential key components of the underlying instruments. Exclusion of Taiwan-listed equities actually erases the functionality of the derivative products. For instance, it is unimaginable that a well-synthesized derivative product linked to the global electronic sector could omit Taiwan names in the underlying asset.
Even for professional financial institutions, the absence of sectoral and index products makes it difficult to find alternative financial instruments to fulfil their hedging, trading, and investment needs, let alone spur the financial innovation that the regulators are promoting. We suggest lifting the restrictions on the underlying instruments of offshore derivatives so as to make up the “missing link” in Taiwan’s equity derivatives market. The move will also further facilitate the liquidity and trading volume of the domestic cash-equity market through intermarket and product correlations.
1.2 Expand the product scope available under the “bond-agency” platform. Despite the generally positive response from regulators to the industry’s longstanding appeal for a relaxation of restrictions on financial products, the continuing restrictions on the product scope for bond agencies prevent Taiwanese institutional investors from obtaining a full scope of services through onshore financial institutions. As a result, Eligible Investors need to engage offshore financial institutions for certain types of transactions, creating unnecessary obstacles for those investors’ portfolio management and stifling further growth in the bond-agency business.
Although existing regulations have laid a foundation for onshore bond-agency platforms to provide “plain vanilla” cash-bond products, certain other products that are of interest to Eligible Investors and allowed to be purchased by the respective competent authorities are excluded from the scope of bond agencies’ business. These include People’s Republic of China (PRC)-linked bonds, as well as overseas bonds issued by Taiwanese issuers. Unless that product scope is expanded, Eligible Investors will increasingly turn to offshore financial institutions in other markets (such as Hong Kong and Singapore) to purchase the relevant products, which obviously contradicts the policy objective of developing Taiwan into a regional asset management center.
Furthermore, “PRC-linked bonds” as defined in the existing regulations include bonds listed on the Hong Kong and Macau exchanges if the issuing enterprises are directly or indirectly owned by the government or corporates in the PRC. Under those regulations, these bonds are excluded from the scope of legitimate investments. The criteria as defined in the regulations increase the compliance and supervisory costs involved, given the difficulty of verifying the identity of the major shareholders for each issuer. In contrast, the “foreign securities brokerage” business available to professional individual investors is not restricted by similar constraints. The Committee suggests that the current regulatory restrictions on tradeable markets and the country of origination of issuers for the bond-agency business be abolished, thus expanding the scope of products that Eligible Investors are permitted to purchase.
Suggestion 2: Exempt banks’ sales and trading activities from the Regulations Governing the Acquisition and Disposal of Assets by Public Companies.
Banks incorporated under the laws of the Republic of China, including Taiwan subsidiaries of foreign banks, are treated as public companies. As such, a bank (including a foreign bank’s local subsidiary) is currently subject to various rules and regulations that apply to public companies, including the Regulations Governing the Acquisition and Disposal of Assets by Public Companies. These Regulations set forth several requirements on the acquisition and disposal of assets (including securities) as they pertain to a core banking business (i.e., the trading and sales of securities):
A. Any securities transaction engaged in by a public company with its related parties and having a notional amount greater than NT$300 million requires:
1) Pre-trade approval from the public company’s board and audit committee;
2) Pre-trade CPA fairness opinion; and
3) Post-trade public disclosure on the public website designated by the regulator.
B. Any securities transaction engaged in by a public company with a non-related party and having a notional amount greater than NT$300 million requires post-trade public disclosure on the public website designated by the regulator.
In addition, a bank conducting the trading of offshore securities should be deemed as concurrently engaging in the securities business, making it subject to Article 31-3 of the Regulations Governing Securities Firms. Under the restrictions set forth in that Article, a bank is prohibited from trading offshore securities with its offshore affiliates.
Applying these requirements has impeded banks from engaging in their normal day-to-day sales and trading activities, and from entering into arm’s-length transactions with related parties. It has also imposed unreasonable operational burdens. Due to the restrictions imposed under the Regulations Governing the Acquisition and Disposal of Assets by Public Companies, as well as those under Article 31-3 of the Regulations Governing Securities Firms, banks and securities firms are hindered from entering into arm’s length transactions with their offshore affiliates.
The banking industry is highly regulated and subject to stringent scrutiny by the FSC. The sales and trading of securities fall under banks’ routine licensed activities governed by the related rules and regulations promulgated by the FSC, which set higher standards in all respects than those imposed on non-bank public companies. In addition, banks have well-established internal control procedures for inter-affiliate transactions. Thus banks should be exempted from the generic safeguard measures under the Regulations Governing the Acquisition and Disposal of Assets by Public Companies, which are designed for general corporates but are not appropriate for professional financial institutions. At the same time, the FSC should consider loosening the restriction imposed on banks under Article 31-3 of the Regulations Governing Securities Firms.
Suggestion 3: Further relaxing client qualifications for foreign branches.
This issue was proposed in the 2016 Taiwan White Paper. In 2014, the FSC agreed that five Taiwanese subsidiaries of foreign banks could retain their Taiwanese branch licenses to conduct lending, foreign exchange, and derivatives businesses and to participate in the money market. However, the FSC also imposed a restriction that these retained branches could only serve domestic or foreign corporate clients for which the single legal-entity annual turnover is above NT$35 billion. Later, on October 1, 2015, the FSC issued circular no.10400218620, which relaxed the restriction by saying that the NT$35 billion annual turnover requirement would not apply to a newly established company or a company that has not yet started operations, although such a company would be required to meet the NT$35 billion annual turnover level within two years of being granted a bank loan. If the entity is a holding company that has not yet started operations, the annual turnover of its wholly owned subsidiaries can be included in calculating the NT$35 billion requirement.
We recommend that the FSC further extend the applicability of circular no. 10400218620 to existing holding/parent company clients and allow them to include the annual turnover of their wholly owned subsidiaries/affiliate companies when calculating the NT$35 billion requirement. Our suggestion is based on the following factors:
Fairness principle. In the interest of fair and consistent treatment, the ability to include the annual turnover of wholly owned subsidiaries/affiliated enterprises should also be extended to existing holding/parent companies.
Accounting principle. The change would reflect current accounting principles requiring the holding/parent company and its wholly owned subsidiaries/affiliated enterprises to issue a consolidated financial report, which includes an annual turnover calculation covering both the holding/parent company and wholly owned subsidiaries/affiliated enterprises.
Reasons of internal structure and business diversification. A holding/parent company will often set up different subsidiaries /affiliated enterprises for different business sectors, and the holding /parent company will draw up financial plans and use appropriate financial services or products, including bank loans, according to the different business needs. These clients should not be restricted in their choice of financial services based only on the overall business and financial planning needs of the group.
In fact, in order to support the government policy of helping to develop green energy industries by providing such industries with a greater variety of financial services, the FSC issued circular no.10600234430 on November 21, 2017, which relaxed the restriction by saying that the NT$35 billion annual turnover requirement would not apply to renewable-energy-based electricity-generating enterprises as defined in the Regulations Governing the Establishment and Management of Renewable-Energy-Based Electricity Generating Enterprises. In line with the fairness principle, we recommend that the FSC adopt a similar liberalization policy, extending the applicability of circular no.10400218620 so as to enable a wider choice of financial services to be provided.