Encouraging the adoption of international regulatory best practices to create greater market efficiencies.
The Committee would like to express its gratitude to the National Development Council (NDC) for its proactive efforts in coordinating among regulators to address our suggestions from the 2018 Taiwan White Paper. We particularly appreciate the regulators’ responsiveness to industry’s concerns by lifting the chaperoning requirement for offshore analysts’ visits to local investors, as well as cancelling Saturday trading. These positive responses send the encouraging message to the industry that the regulators recognize the importance of enhancing the international competitiveness of Taiwan’s capital markets by aligning its practices with international standards.
In the same spirit, we offer our suggestions aimed at boosting the development of Taiwan’s capital markets and financial industry. The Committee looks forward to working together with the Taiwan authorities to harmonize Taiwan’s regulations on capital markets with common international practice.
Suggestion 1: Maintain competitiveness in inbound securities investment for foreign institutional investors (FINIs).
1.1 Simplify the format of FINI’s monthly custody reports and eliminate the calculation of profit/loss figures to avoid redundant processes and allow timely submission by custodians.According to Article 22 of the “Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals,” the Taiwan custodian for a FINI investor is required to establish accounts in which information on the utilization of the funds and securities inventories of each offshore overseas Chinese or foreign national are to be recorded on a daily basis, with the previous day’s inward and outward remittances reported to the Central Bank. Within 10 days of the end of each month, the custodian must also produce a statement of trades, inward and outward remittances of funds, and securities inventories for the previous month. This information is reported to the Central Bank and is also provided to the Taiwan Stock Exchange for its records. However, the current reporting format includes more reporting items than those mentioned in Article 22, which causes additional costs for the custodian banks and puts parties at risk of sanction due to late reporting, especially when holidays fall in the first 10 days of a particular month. In order to focus on key custody services through an efficient and streamlined process that encourages FINI investment in Taiwan, we suggest that the FINI monthly report requirements be simplified.
1.2 Implement the designated TDCC platform of trade pre-matching and affirmation between brokers and custodians.According to Article 17 of the Regulations, a custodian must confirm trades for FINIs. Recently, FINIs have accounted for approximately 30% of the total transaction volume on the Taiwan Stock Exchange, with large trades executed and settled daily. To improve settlement efficiency and data protection, the Taiwan Depository & Clearing Corp. (TDCC) has developed a Virtual Matching Utility (VMU) system to facilitate trade pre-matching and affirmation for FINIs’ trade settlements between brokers and custodians (participants).
Most local TDCC participants already use VMU for pre-matching and affirmation on transactions by local investment trust funds. However, use of such system is not mandatory, and for transactions executed by FINIs, only a few parties are using the VMU system to transmit FINI trade data on a secure and private network. The majority are still using encrypted emails to transmit data, which is neither efficient nor secure, as no market consensus has been reached. Trade email communication between FINI custodian banks and execution brokers via the internet may trigger security concerns such as hacker interception risk. Given the large engagement by FINIs, this situation represents a huge potential risk for the securities market.
Thus, to develop a secure securities market with an efficient trade-settlement process for FINIs with reference to other major markets in the region, the Committee urgently recommends that the Taiwan authority issue a ruling designating TDCC’s VMU system as the market standard for adoption by brokers and custodians in the settlement process for FINIs.
1.3 Allow FINIs to designate additional custodian banks for equities eligible as collateral. Given the growing trend towards non-cash collateralized transactions, this change would benefit the position of global financial market participants and ultimately benefit the Taiwan market by attracting more investment flows from FINIs. We therefore suggest expansion of Article 17 of the Regulations to allow FINIs to designate custodian banks or securities firms to separately keep custody of the equities that are eligible as collateral, aside from the existing custodian bank or securities firm designated for handling normal custodianship matters.
1.4 Allow FINIs to invest in Exchange Traded Notes (ETNs).The Committee commends the Taiwan Stock Exchange for actively launching new financial products in recent years, allowing investors to diversify instruments for asset allocation and investment strategies. ETNs, which are expected to be listed in the second quarter of 2019, are a prime example. They allow investors to accurately track specific underlying indexes and to access new markets and strategies. According to Article 4 of the Regulations, newly initiated securities must be approved by the Financial Supervisory Commission (FSC) to be applicable for FINIs; without FSC approval, FINIs are unable to conduct ETN investments. The Committee recommends allowing ETNs to be included as one of the applicable financial instruments for FINIs’ domestic investment. The Committee believes that expanding the participation would help increase ETN’s liquidity and further enhance the momentum of the stock market.
Suggestion 2: Allow sales personnel with in-depth market knowledge to provide market commentary to professional investors.
Article 3 of “Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers” stipulates that securities firms may only make recommendations to clients regarding securities when those recommendations are based on research reports. But besides research reports issued by research departments, which analyze the long-term trend of a security, clients also expect to receive short-term trading strategies and market commentary from sales personnel based on the most up-to-date market information.
Sales personnel based in Taiwan are in a valuable position to provide their own insights on the local market, and can serve as a connecting bridge between international institutional investors and the Taiwan capital market. If sales personnel are not allowed to communicate the most updated market conditions to their professional investor clients, it could reduce the attractiveness of Taiwan’s capital markets for international investors covering multiple countries or regions.
In light of those circumstances, we propose allowing sales personnel to provide short-term trading strategies and market commentary to professional investors so that investors can benefit from such informed decision-making and gain a different perspective than that of the research reports.
Suggestion 3: Expand ADR programs to assist Taiwan-listed companies enhance their visibility and liquidity.
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 U.S. 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 companies do not need to register with the Securities and Exchange Commission (SEC), do not have a contractual obligation with a depositary bank, and are exempt from U.S. regulatory Sarbanes-Oxley requirements. Instead, the depositary banks are responsible for filing Form F-6 with the SEC to register shares represented by ADRs. Unsponsored ADRs have the same level of investor access as sponsored Level 1 ADRs as both forms trade in the over-the-counter U.S. market.
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 for Level 1 ADRs and to allow the establishment of unsponsored ADRs. We believe this suggestion is further supported by the regulatory and policy rationale for the permission of unsponsored Taiwan depositary receipts (TDR) program in the Taiwan Stock Exchange under Article 36 of the “Regulations Governing the Offering and Issuance of Securities by Foreign Issuers.”
Today, FINI investors play an important role in the Taiwan stock market, accounting for about 25% of the daily trading volume on average. However, additional overseas investors interested in the Taiwan market are currently restricted from doing so due to their lack of FINI-qualification status. Included 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 other Asian countries such as Hong Kong, Japan and Singapore. The restrictions of ADR programs under Taiwanese regulations have limited the development of the local capital markets and 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 liquidity and transaction volume. The Committee therefore strongly recommends amending the rules to allow the establishment of unsponsored ADRs.
Suggestion 4: Provide greater flexibility on trade amendment processes to enhance the efficiency of trade confirmations.
Certain types of authorized traders invest on behalf of multiple principals (for example, fund managers investing on behalf of multiple funds) by placing single combined omnibus orders for all investors and then, on a post-trade basis, allocate the trade among the various principals. When there is a change to the principals listed in the Omnibus Statement, securities firms may renew the investors’ omnibus trading list based on the trade confirmation/pre-match process with investors’ Taiwan custodian bank.
4.1 Revise the “Operational Guidelines for Omnibus Trading Accounts for Professional Institutional Investors.” Pursuant to the Guidelines and Article 3, paragraph 1(b) of the “Taipei Exchange Operational Directions for Omnibus Trading Accounts,” when there is a change in the statement of the principals served by an authorized trader through an omnibus trading account, the statement of principals shall be delivered to the securities firm within five business days after the securities firm submits the post-allocation statement of detailed transactions. Alternatively, a list of changes in principals shall be transmitted to the securities firm within three business days after the securities firm submits the post-allocation transaction statement, using a form of notification (fax or electronic transmission) agreed upon between the securities firm and the authorized trader.
As the order-placing process implemented by authorized traders using custodian banks is rigorous and well-controlled, in practice it is ineffective and redundant to request amendment documentation from the traders. This is especially true when the transactions are confirmed and settled per the settlement instructions sent by the trader, which means the securities firm still needs to keep chasing for the new omnibus account update confirmation.
The manner in which brokers are permitted to give commission rate notices establishes a precedent for this proposed change. Under Article 94, paragraph 2 of the “Operating Rules of the Taiwan Stock Exchange Corporation,” if the commission adopted by a securities firm exceeds 0.1425% of the transaction amount, the securities firm is required to notify the customer of this fact using an appropriate method before accepting the order and is also required to retain a record of that notification. However, Foreign Professional Institutional Investors may be notified of the commission amount charge just before the settlement. When such investors send the matched settlement instruction to their local custodian bank (to complete the T+1 pre-match process) one day prior to the settlement date, confirming the trades and the commission rate, that instruction constitutes proof of notification.
The Committee proposes that a simplified method for handling commission notifications similarly be adopted for the amendment of omnibus trading lists for foreign investors with local custodian banks, allowing securities firms to update the omnibus trading list by adding new accounts based on the confirmation of the settlement process with the local custodian bank on a T+1 pre-match basis. We believe the proposed process will operate more efficiently and enable the administrative processes to be streamlined substantially.
This streamlined process will not affect compliance with anti-money laundering requirements, as the investors will have already completed the Know Your Customer process when opening their accounts with the securities firms.
4.2 Relax the restrictions on amending block paired trade. Block paired trades are trades in which the investor deals with a specific counterparty with agreed trading information, such as the stock, quantity, price, account ID, and source of the stock, prior to the execution. The agreed trading information is input by the broker and sent to the Taiwan Stock Exchange/Taipei Exchange for reporting.
Inevitably, however, the wrong trading information is sometimes input by traders since the process is 100% manual. Compared to normal trades, the restrictions on amendments to block trades are more stringent. Most of the time, the only way to correct the trade is to report it as an error trade and replace the order.
Since block paired trades are agreed upon between the seller and the buyer, and the change of the trading terms would not cause any impact to the market, we propose the following measures to relax the restrictions for executed block paired trades:
As with normal trades, allow changes in the trade category to be made for executed block paired trades.
As with normal trades, allow OTA-related account corrections to be reported for executed block paired trades.
Relax the restrictions on amending trade information, such as price or quantity, for executed block paired trades.
Relax the rules on withdrawal or cancellation of executed block paired trade orders.
Suggestion 5: Expand the product scope available under the bond agency platform.
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 expansion of the product scope available under the bond agency platform. This Committee shares the points made by the Banking Committee in this regard.