Trading Volume

1
Securities Lending in Taiwan
Pony B.L.Huang Trading Department Taiwan Stock
Exchange
2
SBL Market Conditions

• Taiwan Stock Exchange launched SBL system on June
  30, 2003.  

2003/06/30-12/31 2004/01/01-12/31 2005/01/01-12/31
Total transactions 105 orders 1311 orders 1120 orders
Total volume traded 344,634,000 shares 3,048,953,000 shares 2,275,341,000 shares
Total value traded 10,806,478,000 NTD (around 337 million USD) 81,255,152,400 NTD (around 2.5 billion USD) 68,461,675,090 NTD (around 2.1 billion USD)
3
Trading Value by Month
As of Jan. 31 , 2006
(NTD. millions)
4
Transaction Types Analysis by Year
5
Borrower Analysis by Year
6
Lender Analysis by Year
7
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

8
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.

9
Roles of SBL Brokers

• Act as agents for borrowers and lenders.
• Sign a contract with the TSE and take the TSEs
  training course before conducting business.
• Relay the TSEs information,e.g. margin call or
  manufactured dividends, and inform their clients.
  Handle settlements with TSE.

10
Fixed Rate Transactions and Competitive Auction
Transactions

11
Negotiated Transactions

• 
  

12
Acceptable Collateral from FINIs
Transaction Types Fee Rates Collateral Rates Acceptable Collateral Pledgee Guarantor
Fixed rate 3.5 140 of the loan NTD or eligible Securities for margin trading TSEC TSEC
Competitive Bids and Offers 140 of the loan NTD or eligible Securities for margin trading TSEC TSEC
Negotiated Negotiable Negotiable Onshore Cash or Securities or offshore collateral Lender N/A
13
Qualified Borrowers

• FINIs
• Securities dealers
• Futures dealers
• Securities investment trust enterprises
• (only ETF issuers)

14
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

15
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.

16
Tax Responsibility for Borrowing Fee and
Manufactured Dividend
Lender Borrower Business tax responsibility Income tax responsibility
Domestic FINIs Domestic lender Domestic lender
FINIs Domestic Domestic borrower Domestic borrower should withhold 20 of income on behalf of the FINI lender
FINIs FINIs FINI lender FINI lender
Domestic Domestic Domestic lender Domestic lender
17
Tax Responsibility for Interest Revenue from Cash
Collateral
Lender Borrower Income tax responsibility for fixed rate or competitive auction transactions Income tax responsibility for negotiated transactions
Domestic Domestic TSEC withholds the tax on behalf of the borrower Domestic lender withhold the tax on behalf of domestic borrower
FINIs Domestic TSEC withholds the tax Domestic borrower
FINIs FINIs TSEC withholds the tax FINIs borrower (No tax liability for offshore collateral)
Domestic FINIs TSEC withholds the tax Domestic lender has to withhold the tax on behalf of the FINIs borrower
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Regulatory Update
19
Regulations Implemented in 2005

• One rollover permitted
• Partial return
• Taiwan scripless government bonds accepted as
  collateral.
• Cash collateral directly credited into the
  borrowers account.
• Borrower can withdraw the excess collateral (
  over 140 of the loan) at any time.

20
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/

21
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.

22
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.

23
Feedback from the Market
24
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.

25
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.

26
Prospects for the Future
27

• 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
  TSECs lending system.

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• Thank you.
• Pony Bo-Li Huang
• Vice President
• Trading Department
• Taiwan Stock Exchange
• Tel [phone]
• Fax [phone]
• E-mail pony_at_tse.com.tw