The Committee thanks the Taiwan authorities for addressing our suggestions in the 2020 Taiwan White Paper. In particular, we were happy to learn that, starting from April 1, 2021, registration by foreign institutional investors (FINIs) to invest in Taiwan securities and futures may be conducted electronically. We are also grateful for the actions of the National Development Council, Financial Supervisory Commission (FSC), and Central Bank to permit FINIs to invest in Exchange Traded Notes (ETNs) starting from March 31, 2021. We also wish to express our appreciation for the Taiwan authorities’ ambitious efforts in preparing the Capital Market Roadmap as a guidepost for future advances.
The Committee looks forward to working together with the Taiwan authorities to stay abreast of best international practice as well as critical international developments arising from the current economic situation. It is also vital for Taiwan to continue to embrace trends toward an electronic and paperless transaction environment. In this spirit of public-private cooperation, we offer our participation in further efforts contributing to the development of Taiwan’s capital market and provide the following suggestions.
Suggestion 1: Ensure that FINI tax data can be accessed before the end of March.
The Committee greatly appreciates the online platform established by the Ministry of Finance (MOF) for custodian banks and tax guarantors to access FINI tax and earnings information. However, the previous year’s tax data is not being recorded on the platform until July of the following year, even in cases where tax payments by non-residents are reported to tax bureaus within 10 days of payment. This means that for purposes of tax audits performed by FINI tax guarantors and the timely filing of tax refund claims, such guarantors are unable to access the required information. To help alleviate the difficulties caused by these posting delays, we suggest that the MOF segregate non-residents’ tax data from residents’ data for quick storage on the platform so as to ensure that FINIs’ tax data for any given year is posted on the platform and available by the end of March of the following year.
Suggestion 2: Establish an e-platform and paperless environment.
The Committee thanks the Taiwan authorities for their support in digitizing the existing market environment. This effort is one of the most important initiatives undertaken by the Taiwan authorities in recent years and has been especially challenging given the current global pandemic and the consequent need for working remotely and utilizing digital platforms. The eSMART project conducted by the Taiwan Depository & Clearing Corp. (TDCC) is among the key initiatives undertaken to improve the market infrastructure.
This year the Committee wishes to highlight five specific proposals for promoting a digital environment in the financial market and encouraging market players to leverage available technology to improve operational efficiency and create a paperless environment.
2.1 Build e-platforms to facilitate information exchanges on transactions between ETF issuers and custodians. The Exchange Traded Fund (ETF) market has grown significantly over the past few years and new ETFs have continued to be issued in 2021. There are now over 200 ETFs listed on either the Taiwan Stock Exchange or the Taipei Exchange, and the total ETF assets under management (AUM) exceeded NT$1.7 trillion as of December 31, 2020 – five times higher than in 2018. FSC’s Capital Market Roadmap also includes development and promotion of the ETF market. However, back-office operations such as reconciliation of ETF dividend payments between the custodians and ETF issuers continue to be done manually – mostly through telephone calls. Such processing is prone to error; for example, an incorrect income tax withholding rate may be applied to foreign investors, causing such investors to receive a lesser amount than they should. The Committee requests that the Taiwan authorities support automation initiatives to help assure reliable accuracy of information and continuous growth of Taiwan’s ETF market.
2.2 Simplify the process for issuing companies to send e-notices to investors. The Taiwan Company Act does not require (i) that Taiwan companies wishing to use e-notices for shareholder notices obtain consent from all shareholders (only the consent of the receiving shareholders is required) or (ii) that all shareholders be notified by the same method. However, a June 3, 2014 explanation letter issued by the Ministry of Economic Affairs does require listed companies to obtain the consent of all shareholders. This is operationally burdensome and time-consuming for issuing companies. Also, mailing physical notices in Chinese to foreign institutional investors is both inefficient and environmentally unfriendly. Currently foreign institutional investors receive issuing companies’ proxy and corporate action events via the local custodians who retrieve the information from the Market Observation Post System, and then pass on the English or translated announcement to the investors via a pre-agreed method (e.g., SWIFT message or electronic banking system). Thus, the Committee recommends starting the digital initiative with foreign institutional investors by allowing e-notices to such shareholders with the receiving shareholder’s consent. Foreign institutional investors have custodians in Taiwan who, with due authorization, could give such consent on behalf of the foreign institutional investors to facilitate such notices.
The Committee considers this approach as a good start toward adopting e-notices more widely and believes that doing so would be both efficient and timely and in line with the Environmental, Social, and Governance (ESG) criteria that many issuing companies have adopted.
2.3 Relax current regulatory procedures so as to promote the adoption of e-signature platforms. COVID-19 has changed how institutions conduct business in many ways, including how institutions execute contracts and agreements. Due to quarantine requirements, remote working practices, and lockdown measures in other countries, there has been a prevailing trend internationally for the adoption of e-signature platforms. In Taiwan, however, challenges exist due to regulatory approval requirements.
First, international service providers utilizing digital signatures may not have the incentive to apply for regulatory approval in Taiwan. Rather, it is up to financial institutions conducting business globally to initiate adoption of these international platforms. Thus, instead of requesting foreign vendors to apply for a local license, the Committee suggests that Taiwan authorities set standards and then accept all international service providers meeting those standards. The Electronic Signatures Act already provides that under the principles of reciprocity and equivalent security requirements – and with approval from the competent authority – certificates issued by foreign certification service providers may be accepted. This provides the Taiwan authority with the flexibility to recognize international service providers it deems qualified and does not require the providers to submit individual applications.
Second, e-signature platforms often involve offsite cloud storage which may, under the current regulatory framework, require Taiwan financial institutions wishing to use such a platform to obtain outsourcing approval. The Committee recommends exempting Taiwan financial institutions from the cloud storage outsourcing approval requirement in the context of using electronic platforms to enter into contracts with foreign institutional counterparties.
2.4 Allow e-transfers of tax payments. FINIs’ withholding tax on depositary receipt (DR) re-issuance, securities lending fees, etc. is still paid by check. The Committee urges the Taiwan authorities to devise a means for the tax payment to be made to a collecting bank by wire transfer to reduce the amount of inefficient manual work in the withholding process.
2.5 Allow dividend tax statements to be sent to shareholders electronically. Currently, issuing companies send hard-copy tax statements to shareholders regarding dividend payments. This is both inefficient and costly. FINIs would prefer to receive e-statements to avoid redundant processing and to help protect the environment by reducing paper wastage. The Committee urges the Taiwan authorities to permit issuers or their company registrars to send e-tax statements to shareholders who request that service.
Suggestion 3: Revise the Draft Outsourcing Rules for the Securities Industry to meet the nature and needs of the industry.
The Taiwan Stock Exchange has produced draft “Regulations Governing Internal Operating Procedures for the Outsourcing of Securities Institution Operations” (Draft Outsourcing Rules). Unfortunately, such Draft Outsourcing Rules are closely based on the “Regulations Governing Internal Operating Systems and Procedures for the Outsourcing of Financial Institutions Operations (Bank Outsourcing Rules) and do not take into account the fundamental differences between the securities and banking industries. For example, because banking products such as deposits, loans, and credit cards are diversified with long tenors and are offered primarily to domestic retail customers, the Bank Outsourcing Rules focus on personal data protection and set strict requirements for banks to follow in order to better protect customers’ interests. In the securities industry, only the brokerage and underwriting businesses face retail customers, which makes the outsourcing operational risk for securities houses lower than for banks. We therefore recommend adoption of a risk-based approach for managing outsourcing within the securities industry and recommend the following revisions be made to the Draft Outsourcing Rules before adoption.
3.1 Limit the scope of application based on the actual risk level. Given that the scale and number of personnel in the securities industry is much smaller than the banking industry, the Committee believes that the Taiwan authorities should adopt a different supervision model for securities businesses – one based on actual risk levels either via a simplified overall supervision model or by expressly excluding the following from the application of the Draft Outsourcing Rules:
Outsourcing of activities to a centrally global group or financial holding company processing platform in accordance with internal policies and control standards;
Outsourcing related to serving FINI customers. FINIs are global customers whose trades are received via global execution platforms, and the trade results flow back to the global platform after the execution. Such data transmissions should be outside the scope of the Draft Outsourcing Rules;
Outsourcing of information system development and maintenance. After the vendor delivers a customized program to the securities firm, the user testing and program release will be performed by the securities firm itself, with system maintenance supported afterward by the vendor onsite. The customer database will not be accessible by the vendor throughout the process, so the risk of information leakage is low;
Outsourcing of services where any personal information is anonymized so as to eliminate the risk of personal information leakage;
Outsourcing to validated external cloud service providers such as Google Cloud, Azure, and AWS where the Taiwan Securities Association has conducted such validation of the information security controls to ensure the safety and reliance of the public cloud infrastructure offered by the cloud service provider; and private cloud infrastructure is not applicable to outsourcing rule as well; and
Outsourcing of activities that are of a general nature such as those related to general affairs management or those related to the purchase of online access to database management systems with reference to Questions 5 and 9 of the Q&As for the Outsourcing Rules for Banks as well as Question 3 of the Q&A for the outsourcing rules for insurance companies.
Such exclusions would not diminish the intended purpose of regulating outsourcing and would significantly reduce the compliance burden on securities houses using outsourced service providers.
3.2 Enlarge the scope of permitted outsourcing to enhance operational flexibility in the securities business. The Committee recommends the following specific revisions be made to the Draft Outsourcing Rules to expand the services permitted to be outsourced:
Add “collection of debts” to paragraph 1, Article 2 of the Draft Rules as subparagraph 4, with reference to subparagraph 12, paragraph 1, Article 3 of the Bank Outsourcing Rules, and
Add “the identification and verification of customers’ identities” to paragraph 1, Article 2 of the Outsourcing Rules as subparagraph 5 in accordance with Article 5 of the “Template for Guidelines Governing Anti-Money Laundering and Countering Terrorism Financing of Securities Firms,” which provides that “where permitted by applicable laws and regulations, a securities firm may rely on a third party to perform the identification and verification of the identities of customers, agents, and beneficial owners or the purpose and intended nature of the business relationship; the securities firm relying on the third party shall bear the ultimate responsibility for the confirmation of customers’ identities.”
Suggestion 4: Further improve the efficiency of the investment environment for FINIs.
The Committee recommends the following to improve the environment for FINI investors.
4.1 Abolish the pre-delivery/pre-funding requirement on FINI’s securities trading in so-called “warning stocks.” The Taiwan authorities have a system for designating certain stocks as warning stocks, thus triggering a requirement that all investors trading in those stocks pre-deliver/pre-fund so as to protect the market. Although this requirement applies to all investors, the burden falls more heavily on FINI investors because FINIs’ assets are kept with a custodian bank, which transfers the funds for pre-delivery/pre-funding to the execution broker. The process takes additional time when compared to local investors. Thus, the Committee urges the authorities to abolish the pre-delivery/pre-funding requirement for FINI trading of warning stocks.
4.2 Adopt a reasonable procedure for FINIs holding illiquid or delisted securities to exit the Taiwan securities market. Currently many issuing companies, for various reasons, do not have a custody account at the TDCC for the abandonment of shares by shareholders. As a result, FINIs holding illiquid or delisted shares are often unable to abandon such shares to facilitate account closure. This causes operational issues and creates a reconciliation problem. As Taiwan is a scripless market, the Committee believes that all issuing companies should be required to maintain a TDCC account, among other things, to enable shareholders to abandon their shares.
The Committee also suggests that the Taiwan authorities remove the requirement for FINIs holding delisted shares for over one year after delisting to apply for and obtain Ministry of Economic Affairs approval under the Statute for Investment by Foreign Nationals (FIA Approval). The FIA Approval regime was created in 1954 for purposes of encouraging foreign direct investment (FDI) in non-listed Taiwan companies. The relevant delisted shares would all have been originally purchased on exchange via the FINI regime and have no relationship to promoting FDI. Thus, requiring FIA approval to continue holding delisted shares creates market inefficiencies, costs, and inconvenience for FINIs and serves no real policy purpose. Rather, investors should simply be permitted to hold such shares under their FINI status.
4.3 Abolish the tenor limit for securities borrowing and lending (SBL). The tenor of SBL transactions should be decided commercially by the borrower and lender, not by regulation. Current regulations setting a six-month tenor limit result in additional unnecessary processing costs because the contract tenor agreed upon by the lender and borrower often exceeds six months, which requires the parties to roll over trades upon expiry of the regulatory tenor limit. Thus, the Committee proposes elimination of such regulatory tenor limits.