The Committee appreciates the efforts of the National Development Council (NDC) in coordinating among regulators to address our suggestions from the 2017 Taiwan White Paper. We also appreciate the willingness of the regulators to listen to industry’s concerns on an ongoing basis. However, we would like once again to emphasize that the only way to strengthen Taiwan’s international competitiveness in capital markets is to adopt practices that are fully in line with international standards. We have been dismayed to see more and more Taiwanese talent leaving this country to pursue opportunities in other financial markets that are much more liberal and internationalized than Taiwan’s.
In this regard, we continue to present suggestions that support the growth of Taiwan’s capital markets and we remain ready to assist the Taiwan government to create a competitive financial-services environment in the interest of boosting Taiwan’s financial-industry development. The Committee urges the Taiwan authorities to harmonize the regulations governing Taiwan’s capital market with common international practice. Decisions on that harmonization should be under their sole discretion instead of deferring to others who may be less familiar with international practice and therefore reluctant to accept change.
Suggestion 1: Expand ADR programs to help Taiwan-listed companies enhance their visibility and liquidity.
As one of the laudable deregulation efforts undertaken by the Financial Supervisory Commission (FSC), since 2014 the FSC has permitted Taiwan-listed companies to issue sponsored non-capital-raising depositary receipts (known as sponsored Level 1 ADRs) on over-the-counter markets in the United States. Sponsored depositary receipts require the appointment of an exclusive depositary bank by a Taiwanese listed company and are issued pursuant to a formal agreement known as a deposit agreement.
To further encourage Taiwan-listed companies to take advantage of the benefits of Level 1 ADRs, the FSC should consider allowing certain exemptions for the establishment of unsponsored ADRs. Unsponsored depositary receipts are a simpler method to access the U.S. market, as no registration with the Securities and Exchange Commission (SEC) is required, no contractual obligations with the depositary bank, and an exemption from U.S. regulatory Sarbanes-Oxley requirements. Moreover, unsponsored ADRs have the same level of investor access as sponsored Level 1 ADRs, as both forms of depositary receipts trade in the over-the-counter U.S. market. Today, there are more than 1,600 unsponsored ADR programs from over 45 countries.
Considering the need of Taiwan-listed companies to reach a broader investor base, which would benefit the diversity and stability of the shareholder structure and permit better price discovery for fair stock-price valuations, the Committee recommends further amendment of the rules on overseas securities offerings and local securities transactions to offer further exemption of Level 1 ADRs and to allow the establishment of unsponsored ADRs.
Today, foreign investors that have gained Foreign Institutional Investor (FINI) qualification play an important role in the Taiwan stock market, on average accounting for about 25% of the daily trading volume. However, additional overseas investors who would like to access the Taiwan market are currently restricted from doing so due to their lack of FINI-qualification status. Included in this group are U.S. investment managers who have specific U.S. dollar mandates and can only hold and trade U.S. registered securities. Providing the necessary exemptions to permit unsponsored ADRs would provide another way for Taiwan-listed issuers to enhance their global visibility and access additional capital from overseas investors who lack FINI status.
For many years, the level of ADR issuances from Taiwan has been lower than in other Asian countries such as Hong Kong, Japan, and Singapore. Allowing for unsponsored ADRs would not only expand the number of ADR issuances from Taiwan but also permit Taiwanese companies to test the U.S. market prior to establishing a sponsored program. Furthermore, with no additional costs to the issuer, unsponsored ADRs provide enhanced visibility and broaden overall corporate liquidity. Since unsponsored ADRs are an investor-driven product, the enhancement in overall liquidity would also add benefits to the home market. The restrictions of ADR programs under Taiwanese regulation has limited the development of the local capital markets and has established a barrier for the growth of Taiwan-listed companies.
Allowing the creation of unsponsored ADRs for Taiwan securities – based on stock bought in the secondary market and kept with a local custodian bank – would help boost the momentum of the Taiwanese stock market through the deployment of capital flows from additional foreign investors. Taiwan brokers would benefit from the increased commission earnings, given the increased market liquidity and transaction volume. The Committee therefore strongly recommends amending the rules to allow the establishment of unsponsored ADRs.
Suggestion 2: Lift the requirement that offshore analysts must be chaperoned by locally licensed securities personnel when visiting local professional investors.
Under current regulations (TWSE tai zheng fu 1030019085), when securities research reports are provided by offshore securities institutions, the offshore analysts providing the service to local clients must be chaperoned by locally qualified and licensed securities personnel. The scope of the service is limited to providing consultancy in respect to the content of the research report.
Given the trend in most securities firms of downsizing headcounts, it is difficult to allocate manpower on a flexible basis to provide such chaperons as required. Furthermore, the professional investors are extremely knowledgeable and able to make their own judgments on the research reports. Therefore, the Committee recommends lifting the requirement for offshore analysts to be chaperoned when visiting local professional investors, or else simplifying the chaperon mechanism in accordance with regulations in place elsewhere in the region such as those of the Hong Kong Securities and Futures Commission (HK SFC). The HK SFC’s itinerant rule governs professionals from overseas who need to repeatedly visit Hong Kong on business for a short period each time. Under the rule, such professionals who register with the HK SFC are exempt from having to be accompanied by a local chaperon when conducting business in Hong Kong.
Suggestion 3: Allow brokers to provide short-term trading strategies to professional investors.
Article 3 of the “Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers” stipulates that securities firms may make recommendations regarding securities only when those recommendations are based on research reports. We suggest allowing salespersons to provide short-term trading strategies to professional investors in accordance with the most updated market conditions and public market information without reference to research reports.
A research report analyses the long-term trend of a security, and the analyst’s view of the security also represents a long-term judgment. As stock market conditions fluctuate over time, it is highly possible for a disparity to arise between the long-term analysis and the short-term reality.
The institutional investor conferences held by listed companies are among the important factors influencing stock prices. Usually an obvious change in stock prices will occur right after the conference. Yet it takes time for a research report incorporating the content of the conference to be written and published, making it impossible for the research report to immediately reflect the changes in the market or promptly update the target price and trade recommendation. As a result, the stated trade recommendation for the stock may temporarily contradict the current market trend. In this situation, it would be meaningless to make a recommendation if it must still be based on the research report.
Moreover, the value of sales personnel is to serve clients. Providing timely trading strategies in light of current market conditions is a great opportunity for salespersons to offer extra value-added service to clients.
On the other hand, if salespersons are not allowed to communicate the most updated market conditions to their clients, it devalues their service and could lead to a less active stock market.
Suggestion 4: Remove restrictions on the underlying instruments of offshore derivatives business to legitimize products linked to Taiwan equities.
To boost the growth of the Taiwan capital market and provide seamless derivatives products to meet market demand, the Capital Markets Committee wishes to register its support for the position outlined by the Banking Committee in urging the removal of restrictions on the underlying instruments of offshore derivatives business to legitimize products linked to Taiwan equities. This Committee shares the points made by the Banking Committee in this regard.
Suggestion 5: Enhance market efficiencies and competitiveness in Taiwan’s capital markets.
5.1 Allow brokers to outsource certain operations.
Starting from the 2016 White Paper, the Committee has suggested that brokers be allowed to appoint Account Operators. The Committee appreciates that the Taiwan Stock Exchange (TWSE) has forwarded this proposal to the Taiwan Securities Association and has conducted several surveys through the Taiwan Securities Association since 2017, soliciting feedback from its members.
We would like to continue seeking support from the National Development Council for this initiative this year, to allow an alternative and optional operating model for international broker-dealers. A number of Asian markets have introduced new clearing and settlement options, including Third Party Clearing (TPC) and/or Account Operators (AO). Taiwan should also be able to provide a flexible operating structure that replaces fixed costs with variable costs, enhances liquidity and funding capability by leveraging support from the Account Operator bank, and lowers the cost of market entrance. Based on the proposal provided by the TWSE, the Committee recommends a number of points as follows:
License requirement. For brokers to be mandated as an AO service provider (the “AO Broker”), the Committee recommends that they not be required to obtain an additional custody license. Under existing rules and regulations, performing broker operations does not require a custody license.
Capital requirement. The Committee recommends not establishing a standard capital adequacy ratio requirement for the AO service providers, as the broker who outsources the service bears the ultimate responsibility for the client’s clearing and settlement liability. Instead, depending on whether the AO service provider is a securities firm or bank, they should follow the existing regulatory capital ratio of their own industry.
Bilateral commercial agreement for service scope. The detailed service scope should be determined bilaterally between the broker and its AO service provider. As long as the outsourcing operations do not involve discretionary judgment, which is the responsibility of the broker or broker’s customers, the Committee believes the regulator should allow brokers to independently reach agreement with their chosen AO service provider. The services offered by the AO service provider may also vary depending on each company’s own internal product design.
5.2 Develop electronic tax statements on FINI income.
The Committee appreciates the efforts of the Ministry of Finance (MOF) to build an efficient tax-filing environment so that a withholding party may e-file statements with the tax authority for cleared withholding tax. However, the withholding parties must still issue paper-based tax statements on FINIs’ income, requiring excessive time and effort by the local tax guarantors and custodians for reconciliation, maintenance, and audit purposes, as well as causing delay in the ability of FINIs to repatriate earnings.
In last year’s White Paper, the Committee suggested that the MOF instruct all withholding parties to issue e-tax statements to FINIs. But no progress has occurred in this regard, and FINIs’ custodians and appointed tax guarantors are still spending excessive time to processing this paperwork.
In the interest of market efficiency and to establish a paperless environment, the Committee suggests that the MOF create a platform for FINIs’ custodians and appointed tax guarantors to access records of cleared withholding tax filed by withholding parties. The advantages would include a reduced workload for issuers and company registrars in handling paper-based tax statements, environmental benefits through decreased paper usage, and simplified and shortened processing and auditing time for local tax guarantors and agents, as well as better data maintenance. This change would also eventually facilitate FINIs’ repatriation needs and enable a data pool to be built up without physical filing.
5.3 Implement market standard practice in trade pre-matching and affirmation between brokers and custodians.
Currently, FINIs account for an approximately 40% market capitalization in the stock market, with large trades executed and settled daily. Although the Taiwan government is paying attention to cybersecurity and information protection, most brokers and custodians are still using emails for trade pre-matching and affirmation, which is neither efficient nor secure. The Committee urges the regulators to adopt an efficient central platform for trade pre-matching and affirmation between brokers and custodians for FINIs. The Taiwan Depository & Clearing Corp. (TDCC) has already developed a Virtual Matching Utility (VMU) system to achieve automation in trade pre-matching and affirmation for FINIs’ trade settlement between brokers and custodians. Unfortunately, it has not been fully implemented in the market. Since VMU has not been made compulsory, most brokers and custodians are still using emails for trade pre-matching and affirmation. To develop a friendly and secure securities market with an efficient trade-settlement process for FINIs, the Committee urges the regulator to issue a ruling designating the TDCC’s VMU system as the market standard for adoption by brokers and custodians.
5.4 Forgo Saturday trading to align with international practice and reduce settlement risk.
Taiwan has been in a unique position globally in offering Saturday trading and settlement in the securities and futures markets when Saturday is a working day according to the government schedule. This occasional Saturday trading mechanism creates inconvenience for international investors who have been seeking to automate the settlement process as much as possible. Accommodating such occasional Saturday trading creates exceptions to the straight-through-process, creating additional costs as well as operational risks. More importantly, the impact is felt for more than one trading day. The effect of Saturday trading starts from Thursday, in line with the stock market’s Taiwan T+2 settlement cycle. It is especially difficult for international investors to arrange funding when the Saturday is in the middle of a long international holiday such as Easter or Christmas, when foreign currency trading may be suspended before and/or after the weekend. Based on our observation, in these circumstances international investors become less active trading on Thursday and Friday to avoid the complication of manually amending settlement instructions. Due to the increasingly high participation of foreign institutional investors, we suggest that the regulators eliminate the occasional Saturday trading and settlement, and in particular avoid overlapping with long international holidays, in order to be in line with global practice.