Data Source:Laws and Regulations Retrieving System of the Banking Bureau

Title: Directions for Banks Conducting Financial Derivatives Businesses (Amended by Order Jin-Kuan-Yin-(5)-Zi-09650004130 dated November 6, 2007)
1 1. A bank conducting financial derivatives business shall comply with these Directions.
2 2. The term "financial derivatives" as used herein shall mean trading contracts the value of which derives from an interest rate, exchange rate, stock price, index, commodity, or other interest, and from a combination thereof.
3 3. A bank conducting financial derivative business shall submit the application documents regulated by the Financial Supervisory Commission, Executive Yuan (hereafter called the “Commission”) and apply to the Commission for approval. In the same way, it shall also conform to the following provisions:(1) A long-term credit rating shall meet one of the following standards: i. A rating from Taiwan Ratings Corp. of twBBB- or above.ii. A rating from Standard & Poor's of BBB- or above.iii. A rating from Fitch Ratings Limited, Taiwan Branch of BBB- (twn) or above.iv. A rating from Fitch, Inc. of BBB- or above.v. A rating from Moody's Taiwan Corporation of Baa3.tw or above.vi. A rating from Moody's Investors Service of Baa3 or above.(2) The ratio of the bank's equity capital to risk-weighted assets conforms to the level prescribed in the Banking Act of the Republic of China.(3) Without the situation that it has not set aside sufficient allowances for bad debt.(4) Its non-performing loan ratio for the last quarter of the date of the application is 3% or below. (5) In the last year from the date of the application, there are no occurrences that the bank is imposed with fines due to its violations of laws and regulations on banks, or the bank has specifically improved the illegal act and the Commission has recognized such an improvement. A bank which is approved to conduct financial derivatives business by the Commission can only start to operate the business after it makes entry of the business items into reporting system on the website of Banking Bureau of the Commission.
4 4. A bank conducting financial derivatives business shall formulate an operational strategy and operational guidelines as follows, and submit them to the board of directors for approval. Amendment of the strategy and the guidelines shall also require such approval. (1) An operational strategy for its engagement in the financial derivatives business.(2) Operational guidelines, which shall include the following items:i. Business principles and policies.ii. Operating procedures.iii. An internal control system.iv. Methods of periodic evaluation.v. Methods of accounting treatment.vi. An internal audit system.vii. Risk management measures. The board of directors shall, by depending on changes of products and of markets, timely review the operation strategy and the operational guidelines mentioned in the preceding Paragraph, and it shall assess whether results are consistent with the set operational strategy, and whether risks undertaken are within the scope of the bank’s tolerance. The review shall be performed at least once each year – this rule however does not apply to a foreign bank branch which periodically reviews an operational strategy and operation guidelines pursuant to the provisions of its head office.
5 5. A bank that has obtained approval to conduct financial derivatives business (approval must also be obtained in accordance with the Futures Trading Act if the business in question is futures trading business) may engage in any financial derivatives and combinations thereof, provided that within 15 days after commencement of business it shall submit a description of each product's characteristics, a declaration of legal compliance, and a risk disclosure statement to the Commission for recordation and reference. The only exceptions are the products listed below, which require prior approval:(1) Products involving, and subject to, the Act Governing Relations between Peoples of the Taiwan Area and the Mainland Area, as well as relevant laws and regulations enacted under this Act.(2) Products involving trading in contracts derived from either exchange-traded commodities or indexes related to domestic share prices or a domestic futures exchange.(3) Foreign exchange products that require approval from the Central Bank of the Republic of China (Taiwan).Once the Commission has granted prior approval for the first bank to offer a type of product falling under Subparagraphs 1 or 2 of the preceding Paragraph, another bank may submit application documents, a declaration of legal compliance, and a risk disclosure statement to the Commission and proceed directly to the offering of the same type of product so long as the Commission does not raise any objection within 15 days counting from the day next following the date of the said submission. However, such a bank may not conduct the business under application until that 15-day period has elapsed.Banks shall apply directly to the Central Bank of the Republic of China (Taiwan) for permission to offer the products referred to in Paragraph 1, Subparagraph 3.
6 6. To apply to offer the financial derivatives mentioned in the preceding Point, a bank shall apply to the Commission by submitting an application together with the following documents; it may not offer the product until after the granting of prior approval:(1) A declaration of legal compliance.(2) Documents evidencing that the ratio of equity capital to risk-weighted assets of the bank’s head office is not lower than the level prescribed in the Banking Act .(3) Document of authorization from the board of directors or an appropriate person(s).(4) Document that the personnel in charge of the business in question have relevant experience or professional training.(5) A business plan (which must cover the following):i. A product description.ii. Handling the division of labor of a department and of the internal organization.iii. Risk management measures.iv. Accounting treatment and statement disclosure methods.v. Internal auditing.
7 7. When a bank files information on its offering of financial derivatives for recordation by the Commission and the filing documents are not complete or are not supplemented within a specified period of time, the Commission may order the bank to suspend its offering of such products until supplementation is completed.
8 8. A bank conducting financial derivatives business shall refer to the Regulations Governing Risk Management of Banks’ Engagements in Financial Derivative Businesses which was drafted by the Bankers Association of the Republic of China and was submitted to the Commission for recordation . It shall also establish risk management mechanisms, and carry out the management of the procedures with respect to identification, measurement and reports of risks, and risk monitoring. In the same way, the bank shall process in accordance with the following provisions:(1) The bank's engagement in its financial derivatives business shall be subject to a review through appropriate procedures, and senior management shall work together with supervisors involved in the relevant business matters to refer to risk management systems and to formulate a risk management system. Risk tolerance and quotas of businesses to be engaged shall be regularly reviewed and submitted to the board of directors for review and approval.(2) Personnel shall not concurrently engage in both trading and settlement of financial derivatives transactions. A bank shall establish a risk management unit outside of and independent from its trading division to carry out such tasks as identifying, measuring, monitoring, and controlling risks. The risk management unit shall regularly report risks of position and valuations of gains and losses to senior management. (3) The frequencies of financial derivative position assessments shall be set individually by a bank in light of the nature of each type of position. In the case of trading positions, assessments shall in principle be carried out immediately or based on the evaluation of a daily market price. For hedging transactions conducted for the needs of a bank's own business, assessments shall be carried out at least once per month.(4) A bank must adopt administrative rules for internal review of new products, and before launching a new financial derivative, it shall perform a review in accordance with the aforementioned rules. A bank's rules for internal product review shall cover at least the following items:i. Review of the nature of the product.ii. Review of the operational strategy and business policies.iii. Review of risk management.iv. Review of internal controls.v. Review of accounting methods.vi. Review of relevant legal compliance matters and required legal documents.
9 9. If any of the following occurs to a bank that has obtained approval to conduct financial derivatives business, such a bank shall use financial derivatives transactions for hedging purposes only:(1) Its non-performing loan ratio for the most recent quarter is above 3%.(2) A domestic bank’s ratio of equity capital to risk-weighted assets is lower than the level prescribed in the Banking Act.(3) It has not set aside sufficient allowances for bad debt.(4) A long-term rating has not met the level provided in Point 3, Paragraph 1, Subparagraph 1.
10 10. A bank offering financial derivatives shall perform in accordance with generally accepted accounting principles and related laws and regulations, and any restrictions or provisions applying to the two parties in any given deal may not be eased or disregarded due to the combination of underlyings.
11 11. Any conversion of New Taiwan Dollars and foreign currencies connected with a bank's offering of financial derivatives shall be dealt with in accordance with the provisions of the Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions.
12 12. A bank offering financial derivatives shall establish management mechanisms to prevent conflict of interest and insider trading.
13 13. A bank may not use financial derivatives to embellish or manipulate financial statements by, for examples, deferring or concealing losses, falsely reporting earnings, or recording earnings early, or helping a customer to defer or conceal losses, falsely report earnings, or record earnings early. In options transactions, a bank shall take care to avoid using premiums (especially for long-term or extremely short-term options) to embellish financial statements and then lead to improper acts.
14 14. A bank shall not engage in business transactions related to Taiwan equity with the following interested parties: (1) The director, a supervisor or manager of the bank or the bank’s shareholder who directly or indirectly holds 10% or above of the total number of the bank’s shares. (2) The spouse or minor child of the person in the position mentioned in Subparagraph 1, and a person who holds shares in the name of another person.(3) Any of the persons in the positions respectively mentioned in the preceding two subparagraphs directly or indirectly holds 10% or above of the total number of shares of a re-invested company. (4) A stock issuing company for switching or linking objects, or for objects of financial equity derivatives and its persons in the positions mentioned in the preceding three subparagraphs.Before the bank and the trading counterpart engage in a transaction on financial derivatives mentioned in the preceding Paragraph, the trading counterpart shall sign a declaration, stating that he/she/it is not an interested party listed in Paragraph 1. Paragraph 1, Subparagraphs 1 – 3 do not apply to the situation that a bank may trade with an institutional investor, provided that it had drafted an internal operational regulation and the department of managers is to perform in accordance with the regulation under the blanket authorization passed by at least 3/4 of the attending directors at the board members’ meeting – and these attending directors are at least 2/3 of the entire number of directors. The situation also covers the fact that the trading conditions of the bank are not better than those of other entities being in the same line of business as the bank. Each subparagraph of Paragraph 1 does not apply to hedge transactions engaged by the bank. The institutional investor mentioned in the preceding Paragraph means a domestic bank, foreign bank, insurance company, bills company, securities firm, fund management company, government investment institution, government fund, pension fund, mutual fund, unit trust, securities investment trust company, securities investment consulting company, trust enterprise, futures commission merchant, or futures services enterprise.
15 15. Bank personnel engaged in conducting financial derivatives business shall have professional ability, and the bank shall formulate professional qualification requirements as well as a system for training and performance evaluation.
16 16. A bank conducting financial derivatives business shall comply with the following matters pertaining to rights and interests of customers:(1) In conducting financial derivatives business, a bank shall use promotional materials that are clear and fair, and do not misguide customers –guiding customers to appropriately and accurately understandrisks associated with products, and the bank shall formulate operational procedures governing the provision of product prospectuses and risk disclosure statements to customers. Where the buyer is not an institutional investor, the customer shall make a declaration that the bank has dispatched a specific individual to explain the product, and shall sign each prospectus and risk disclosure statement as confirmation.(2) The risk disclosure statements referred to in the preceding Paragraph shall fully disclose each type of risk in a conspicuous place, and shall indicate the greatest risk or loss in bold black letters. However, the bank need not provide any risk disclosure statement to an entity which is a financial institution because it can be expected to have considerable professional financial expertise.(3) A bank conducting financial derivatives business shall formulate a "Know Your Customer" system, and shall exactly understand the customer's financial status, investment experience, investment needs, ability to assume potential losses, as well as the suitability of a transaction involving the financial derivatives in question.(4) Where a bank and customer have stipulated a breach penalty for cancellation of contract, such a stipulation shall be made on a fair and reasonable basis, without setting an excessively high breach penalty.(5) A bank conducting financial derivatives business not only specifies complaint channels for transaction disputes in a trading agreement and on its website, but it shall also, in accordance with the procedures for internal handling of complaints, deal with a dispute that indeed occurs.
17 17. A structured product is a blend of a fixed-income product(s) (examples, time deposits or bonds) and a financial derivative(s) (example, options), and can be linked to a wide range of instruments, including trading contracts deriving from an interest rate, exchange rate, stock price, index, commodity, credit event or other interest, and from a combination thereof.
18 18. The content of trading contracts of risk disclosure, and related documents provided to a customer by a bank offering structured products shall include at least the following:(1) Transaction terms and conditions.(2) The nature and the content of the product's key risks, such as liquidity risk, exchange risk, interest rate risk, tax risk, and advanced cancellation risk.(3) An explanation of how the yield ratio undertaken by the bank will be achieved, and where the yield will come from.(4) An explanation of the greatest possible loss on the product and a table showing possible losses and gains under different conditions, with all figures expressed in terms of annual rate of return.(5) The guaranteed-principal ratio shall be shown in conspicuously bold black letters beneath the name of the contract.(6) The channel via which a customer may lodge a complaint in the event of a transaction dispute.
19 19. When a bank undertakes a transaction, involving structured products, with a customer, the customer may, with respect to the transaction in question, ask the bank to provide a mark to market and quotation information for early cancellation of the agreement. If the structured products are mass standardized and sold primarily to individuals, the bank shall disclose quotation information on its website and provide customers with a mark to market and quotation information for early cancellation of the agreement.
20 20. Articles 27, 28, 31, 31-1 and 31-2 of the GreTai Securities Market Rules Governing Over-the-Counter Trading of Financial Derivatives by Securities Firms shall apply mutatis mutandis to a bank offering Taiwan equity structured products.Articles 34 through 36 and Article 38 of the Rules mentioned in the preceding Paragraph shall apply mutatis mutandis to a bank offering Taiwan equity derivatives.A bank that offers products mentioned in the preceding two paragraphs shall report related information on the reporting system of the GreTai Securities Market’s website.
21 21. A bank undertaking transactions on equity-related derivatives shall not, for itself or by cooperating with the customer, engage in merger and/or acquisition or illegal trades through the transaction.
22 22. A bank conducting financial derivatives shall report the products and important contents thereof by entering the information into the reporting system on the website of Banking Bureau of the Commission, and by filing it with the agency designated by the Commission.
23 23. When a foreign bank branch in Taiwan engages in financial derivative business, the obligations of the board of directors provided in these Directions shall be performed by the person(s) authorized by the bank’s head office.
24 24. If a bank violates any provision of these Directions in the course of engaging in financial derivatives business, the Commission may, in accordance with Article 61-1 of the Banking Act, make appropriate dispositions or suspend the bank from offering certain products or conducting financial derivatives business according to the seriousness of the violation.