Some Important Principles of SBL Targeted at qualified institutional investors. Most short sales have to follow the up-tick rules, only some exemptions. Provides three kinds of transactions: fixed-rate transaction competitive auction transaction negotiated transaction Set ceiling for total short selling volume
Roles of the TSE in the SBL Market Acts as an intermediary in the SBL system. For fixed-rate transactions and competitive auction transactions, TSE acts as a guarantor to assume the risk from lenders. TSE requires collateral and handles collateral management. Sets SBL regulations and maintains the SBL system.
Roles of SBL Brokers Act as agents for borrowers and lenders. Sign a contract with the TSE and take the TSE’s training course before conducting business. Relay the TSE’s information,e.g. margin call or manufactured dividends, and inform their clients. Handle settlements with TSE.
Fixed Rate Transactions and Competitive Auction Transactions
Acceptable Collateral from FINIs Transaction Types Fee RatesCollateral Rates Acceptable Collateral PledgeeGuarantor Fixed rate3.5%140% of the loan NTD or eligible Securities for margin trading TSEC CompetitiveBids and Offers 140% of the loan NTD or eligible Securities for margin trading TSEC NegotiatedNegotiable Onshore Cash or Securities or offshore collateral LenderN/A
Qualified Lenders: Insurance companies Banks, trust investment companies Securities investment trust enterprises FINIs Futures dealers Securities firms Other: Labor Insurance Fund Post Office Insurance Fund Labor Pension Fund Public Service Pension Fund
Restrictions on Covered Short Sales When short selling borrowed stock, all transactions have to follow the up-tick rules. Exemptions: Short selling ETF for conducting arbitrage or hedging of ETF. Short selling underlying stock of put warrants for hedging of put warrants.( for warrants issuers ) Short selling underlying stock of stock options for hedging purpose.( for stock options market makers ) Short selling underlying stock of structured notes for hedging purpose. ( for structured products issuers ) Borrowing and selling of stocks have to go through the same SBL brokerage firm.
Tax Responsibility for Borrowing Fee and Manufactured Dividend LenderBorrowerBusiness tax responsibility Income tax responsibility DomesticFINIsDomestic lender FINIsDomesticDomestic borrowerDomestic borrower should withhold 20% of income on behalf of the FINI lender FINIs FINI lender Domestic Domestic lender
Tax Responsibility for Interest Revenue from Cash Collateral LenderBorrowerIncome tax responsibility for fixed rate or competitive auction transactions Income tax responsibility for negotiated transactions Domestic TSEC withholds the tax on behalf of the borrower Domestic lender withhold the tax on behalf of domestic borrower FINIsDomesticTSEC withholds the taxDomestic borrower FINIs TSEC withholds the taxFINIs borrower (No tax liability for offshore collateral) DomesticFINIsTSEC withholds the taxDomestic lender has to withhold the tax on behalf of the FINIs borrower
Regulations Implemented in 2005 One rollover permitted Partial return Taiwan scripless government bonds accepted as collateral. Cash collateral directly credited into the borrower’s account. Borrower can withdraw the excess collateral ( over 140% of the loan) at any time.
Regulations Implemented in 2005 ( Cont. ) Remove purpose test requirement and on shore collateral restrictions. Set ceilings for short selling. 1. Daily maximum short selling shares of borrowed stock cannot exceed 3% of outstanding shares per lending stocks. 2. Maximum short selling of borrowed stock cannot exceed 10% of outstanding shares per lending stock. 3. The total volume of short selling of borrowed stock and short selling by margin transactions cannot exceed 25% of outstanding shares per stock. Investors can get the real time available short selling shares through the TSEC Market Information System on http://mis.tse.com.tw/
Regulations Implemented in 2005 ( Cont. ) In addition to the underlying stocks of financial derivatives, those securities eligible for margin trading were included in the loanable securities for Securities Lending. Allow participants to open multiple SBL accounts and transfer the lending securities among them freely.
Regulations Implemented on January 23, 2006 In addition to 10-day prior notice, TSEC allows 3-day prior notice for recall by a lender in a fixed-rate or a competitive auction transaction.
Suggestions from PASLA Taiwan Roundtable Meeting Held on Dec. 15, 2005 Establish a short-term SBL market to facilitate settlement issues. Abolish current up-tick rule or establish a more flexible up-tick rule. Create an exemption from manufactured dividend tax and when the collateral is held overseas an exemption from lending income tax. Allow borrowed securities to be further lent out.
Suggestions from PASLA Taiwan Roundtable Meeting Held on Dec. 15, 2005 (Cont.) Allow account-level collateralization and margin call. Allow lending fee settlement on a monthly basis. Allow return of manufactured dividends and return of a SBL trade to be handled separately.
Securities Exchange Act, Article 60 already was passed on Dec. 20th, 2005, implementation pending. Based on the revised Article 60, a securities firm can conduct SBL business as a principal, an agent or an intermediary. Securities Financing Company can be a lender in TSEC’s lending system.
Thank you. Pony Bo-Li Huang Vice President Trading Department Taiwan Stock Exchange Tel: 886-2-8101-3573 Fax: 886-2-8101-3685 E-mail: firstname.lastname@example.org@tse.com.tw