Transcript Trading Volume

Securities Lending in Taiwan
Pony B.L.Huang
Trading Department
Taiwan Stock Exchange
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)
Trading Value by Month
As of Jan. 31 , 2006
(NTD. millions)
12,000.000
10,000.000
8,000.000
6,000.000
4,000.000
2,000.000
0.000
Jul Oct Jan Apr Jul
2003
2004
Oct Jan Apr July Oct Jan
2005
2006
Transaction Types Analysis by Year
90
80
70
60
50
40
30
20
10
0
Fixed-Rate
Competitive
Negotiated
2003
2004
2005
Borrower Analysis by Year
100
80
60
FINI
Local Securities Dealer
40
Local Futures Dealer
20
0
2003
2004
2005
Lender Analysis by Year
100
FINI
90
80
Insurance Co.
70
60
50
Securities Investment
Fund
40
Bank
30
Government Fund
20
10
0
Trust Co.
2003
2004
2005
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
Reporting the
execution
Lender
Sending the
lending
application
B
r
o
k
e
r
r
Reporting the
execution
Reporting the
execution
TSE
Forwarding
Matching
the
application
Forwarding
the
application
Informing the lending
security and collateral
to be frozen.
Informing the securities to
be transferred
B
r
o
k
e
r
Reporting the
execution
Borrower
Sending the
borrowing
application
Informing the securities
and collateral have been
frozen
Informing the securities
have been transferred
TSCD
Transferring the
lending securities
after matching.
Negotiated Transactions
TSCD
Informing the
securities to
be transferred
TSE
Reporting the
lending
Reporting the
borrowing
Broker
Broker
Sending the
application
Sending the
application
Transferring the
lending securities
Lender
Borrower
Transferring
the collateral
Acceptable Collateral from FINIs
Transaction
Types
Fixed rate
Competitive
Negotiated
Fee Rates
Collateral
Rates
Acceptable
Collateral
Pledgee
Guarantor
140% of
the loan
NTD or eligible
TSEC
TSEC
Bids and
Offers
140% of
the loan
NTD or eligible
TSEC
TSEC
Negotiable
Negotiable Onshore Cash or
Securities or
offshore collateral
Lender
N/A
3.5%
Securities for
margin trading
Securities for
margin trading
Qualified Borrowers:
•
•
•
•
FINIs
Securities dealers
Futures dealers
Securities investment trust enterprises
(only ETF issuers)
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
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
Tax Responsibility for Interest Revenue from Cash Collateral
Lender
Borrower
Income tax responsibility Income tax responsibility
for fixed rate or
for negotiated transactions
competitive auction
transactions
Domestic
Domestic
TSEC withholds the tax Domestic lender withhold
on behalf of the borrower 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
Regulatory Update
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.
Feedback from the Market
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.
Prospects for the Future
• 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: [email protected]