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These Directions are adopted pursuant to Article 12 of the Taipei Exchange Rules Governing Trading of Exchange Traded Funds.
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Definition of terms:
- Participating securities firm: Refers to a securities firm that has signed a participant agreement with a securities investment trust enterprise (SITE) that has sponsored an exchange-traded fund (ETF) and issues ETF beneficial certificates, and that can engage in creation and redemption operations for the fund for its own account or as a broker.
- Custodian Institution: Refers to a financial institution that has signed a trust agreement with a SITE that has sponsored an ETF and issues ETF beneficial certificates.
- Applicant: Refers to a principal who places orders for creation or redemption of ETF beneficial certificates through a securities trading account opened with a participating securities firm. A participating securities firm that creates or redeems ETF beneficial certificates for its own account is also an applicant.
- Portfolio Composition File (PCF): Refers to a list prepared and published by a SITE each business day based on the reference data of the underlying index forwarded by the index provider. The PCF indicates the portfolio of stocks or bonds and the estimated cash component that would be required to apply for in-kind creation or redemption of one creation unit of beneficial certificates on the next trading day.
- In-kind Creation: Refers to a participating securities firm, for its own account or as a broker, delivering the required portfolio of stocks or bonds for creation units published in the PCF and the cash component per basket as notified by the SITE, or their integer multiples, as consideration to the SITE for subscription to the ETF beneficial certificates.
- In-kind Redemption: Refers to a participating securities firm, for its own account or as a broker, delivering the ETF beneficial units corresponding to creation units published in the PCF, or integer multiples of such units, to a SITE in exchange for the portfolio of stocks or bonds and the cash component per basket.
- Cash Creation: Refers to a participating securities firm, for its own account or as a broker, delivering a cash consideration to a SITE to subscribe to ETF beneficial certificates; the basis of calculation for the monetary amount of the subscription and the number of ETF units shall comply with the provisions of the trust agreement.
- Cash Redemption: Refers to a participating securities firm, for its own account or as a broker, delivering beneficial certificates to a SITE in exchange for a cash consideration. The basis of calculation for the monetary amount of the redemption shall comply with the provisions of the trust agreement.
- Exchange Traded Fund (ETF) with Domestic Component Stocks: Refers to an ETF in which the component stocks of its underlying index are all domestic securities.
- ETF with Foreign Component Stocks: Refers to an ETF in which one or more of the component stocks of its underlying index is a foreign security.
- ETF with Component Bonds: Refers to an ETF that tracks, simulates, or replicates the performance of an underlying bond index.
- Aggregate In-Kind Creation: Refers to circumstances in which no more than three applicants, by mutual agreement, combine their individual holdings of shares into the portfolio of stock required for one creation unit as published in the PCF, or an integer multiple thereof, then designate one among them as payer of the cash component required, and jointly engage a participating securities firm (if one of the applicants is a participating securities firm with a proprietary trading department, the applicant will then be that participating securities firm) to subscribe to ETF beneficial certificates from a SITE using the aforementioned securities portfolio and cash component.
- Minimum In-kind Creation: Refers to circumstances in which a participating securities firm, with the consent of a SITE, creates beneficial certificates of an ETF with domestic component stocks for its own account by delivering a portfolio of stock as consideration that represents at least 90 percent of the types of stock required and at least 90 percent of the aggregate market value required, calculated based on the closing market price, of the portfolio required for in-kind creation, and submitting a monetary bond for any shortfall in the required stocks, after which it purchases or borrows the insufficient quantity of shares the next trading day and delivers the shares to the custodian institution.
- Cash in-lieu: When any of the following circumstances apply to any specific shares in the portfolio published in the PCF, a specific amount of cash, as calculated by the SITE, may be substituted for those shares when provided by (or returned to) the applicant as consideration during in-kind creation or redemption of ETF beneficial certificates:
- The applicant is restricted by law from holding or transferring the specific shares.
- Trading of the specific shares has been suspended on the exchange.
- The SITE has published the specific shares in the PCF as ones for which cash may be substituted.
- The ETF does not own the specific stock or has insufficient shares of the stock and is unable to borrow sufficient shares to deliver to the applicant when the applicant redeems the ETF beneficial certificates in-kind.
- The applicant is unable to receive timely settlement of the specific stock in a foreign market, and the stock is approved by the management company for in-kind creation.
- Cash or bond in lieu for ETFs with Component Bonds: If any of the following circumstances apply to a specific bond in the portfolio published in the PCF, then a specific amount of cash, as calculated by the SITE, or another bond may be substituted for that bond during the applicant's in-kind creation or redemption of ETF beneficial certificates:
- The applicant is restricted by law from holding or transferring the specific bond.
- Ttrading of the specific bond has been suspended on the exchange.
- The SITE has published the specific bond in the PCF as one for which cash or another bond may be substituted
- The ETF does not hold the specific bonds, or does not hold a sufficient number of the specific bonds to meet the applicant's in-kind redemption.
- Cash Payment: Refers to the amount equivalent to the cash component multiplied by the number of creation or redemption units. If the cash payment is positive, the applicant shall pay the amount to the SITE when creating ETF beneficial certificates or the SITE shall pay the amount to the applicant when the applicant redeems ETF beneficial certificates; if the cash payment is negative, the SITE shall pay the amount to the applicant when the applicant creates ETF beneficial certificates or the applicant shall pay the amount to SITE when it redeems ETF beneficial certificates.
- Shortfall of Stock: Refers to shares in the portfolio of stock published in the PCF that a participating securities firm is unable to deliver when it transacts on a "minimum in-kind creation" basis.
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Operating principles for participating securities firms that, for their own accounts or as brokers, carry out in-kind creations (redemptions) of ETFs with domestic component stocks, or that on the same day concurrently sell beneficial certificates (portfolios of stock):
- The Taipei Exchange will process the applications of participating securities firms to carry out in-kind creation (redemption) of the ETF, or to concurrently sell beneficial certificates (portfolios of stock) on the same day by means of computer link. The input time is from 9 a.m. to 3:30 p.m. on market trading days. Delivery and receipt of the relevant stocks shall without exception be handled via central depository book-entry transfer. However, an application for which the Central Securities Depository (CSD) fails to complete earmarking may be corrected and input from 9a.m. to 10:00 a.m. on the following business day.
- To carry out in-kind creation or redemption for its own accounts or as a broker, a participating securities firm shall first produce an Application for In-kind Creation or Redemption of Exchange Traded Funds, attach the current day's PCF, and deliver it to the applicant for signing (in the case of an overseas Chinese, foreign national, or mainland area investor, their agent may sign the application). The documents shall be retained for future reference. The aforesaid Application for In-kind Creation or Redemption of Exchange Traded Funds (the "Application Form") shall contain the following particulars:
- Application No.: The code of the head office of the participating securities firm followed by a three-digit serial number.
- The account numbers of the applicants: There shall be no more than three applicants in the case of aggregate in-kind creation.
- Type of Application: Application types are divided into in-kind creation, in-kind redemption, aggregate in-kind creation, minimum in-kind creation, in-kind creation and also sale of beneficial certificates, in-kind redemption and also sale of stock portfolio, minimum in-kind creation and also sale of beneficial certificates.
- Quantity of beneficial units for in-kind creation or redemption.
- Details of the kind and quantity of the stock (beneficial certificates) for in-kind creation (redemption) delivered, and noting for each item whether they were from original holdings, purchased on the day of application, purchased on the previous business day, borrowed, a shortfall of stock, or in-kind redemption (creation) on the previous business day.
- The kind and quantity of stock for which cash in lieu is adopted, and the reasons for cash in lieu.
- The amount of the bond required for a shortfall of stock.
- An explanation of why the applicant is allowed to adopt cash in lieu in in-kind creation and redemption.
- An estimated cash payment based on the PCF.
- When carrying out the in-kind creation (redemption) of ETF beneficial certificates, the participating securities firm, based on the particulars stated in the Application for In-kind Creation or Redemption of Exchange Traded Funds, shall examine the number of shares (beneficial certificates) already held in the applicant's central depository account, and if those shares, together with borrowed shares (beneficial certificates), the balance of shares (beneficial certificates) bought on the previous trading day and bought on the day of application in regular trading, and those obtained through in-kind redemption (creation) on the previous trading day are sufficient for the in-kind creation (redemption), it shall submit the application to the TPEx.
Securities delivered by the applicant pursuant to the preceding paragraph may not be bought on margin, and reports of trading errors or corrections of account errors may not be submitted for securities bought on the day of application.
After the TPEx receives the applications of paragraph 1, and after the cutoff time for the application, the TPEx will forward all application information to the centralized securities depository enterprise for earmarking of the securities.
- If the applicant uses any balance of securities purchased in regular trading on the previous trading day or on the day of application for the securities required for in-kind creation or redemption of beneficial certificates, the participating securities firm shall, on the day of application, collect the amounts payable for such balance of securities purchased.
When accepting a customer order to create or redeem ETF beneficial certificates in-kind, the participating securities firm may collect in advance the cash component, cash in lieu and other relevant charges or payments calculated based on the PCF before applying for in-kind creation or redemption. After ascertaining the actual payment due and before delivering the prepaid amount to the custodian institution, the participating securities firm shall notify the applicant of any excess to be refunded or any supplemental payment required. The participating securities firm shall open a separate deposit account with its clearing bank specifically for the receipt and payment of the cash components, cash in lieu, and other relevant charges or payments associated with in-kind creation or redemption.
- The applicant for in-kind creation or redemption of ETFs, prior to the deadline for reporting, may prepare an Application for Canceling the Creation or Redemption of ETFs ("Cancellation Application") on their own or through the participating securities firm to apply for cancellation, and the participating securities firm will submit the Cancellation Application to the TPEx. Upon receipt of the application, the TPEx will notify the participating securities firm of receipt and request it to notify the applicant to confirm. The participating securities firm shall print out the notice of TPEx receipt and retain it for record, together with the Cancellation Application signed by the applicant (or the applicant's agent, in the case of an overseas Chinese, foreign national, or mainland area investor).
The aforesaid Application for In-kind Creation or Redemption of Exchange Traded Funds shall contain the following particulars: The application number, the applicants' account numbers (up to three in an aggregate in-kind creation), type of application, and applicants' signatures.
- Before submitting a customer order for purchase of a portfolio of stock (beneficial certificates) and sale of beneficial certificates (portfolio of stock) on the same day pursuant to Article 13 of the Taipei Exchange Rules Governing Trading of Exchange Traded Funds, the participating securities firm shall confirm the applicant's single-day trading limit and ask the applicant to produce, or produce for the applicant, a Report Confirmation Form for Same-Day Purchase and Sale of Exchange-Traded Fund Beneficial Certificates and the Portfolio Represented (see attached specimen), and save the confirmation form for records after signing by the applicant. The participating securities firm shall also report, via computer link, the applicant's account number and trading information relating to the applicant's in-kind creation or redemption, then proceed with the in-kind creation (redemption) operations according to the provisions specified above, and when reporting shall also enter the types of beneficial certificates (stocks) already sold that day and their quantities.
If the sum of the shares (beneficial certificates) held by the participating securities firm or its customer under the preceding paragraph, in combination with the balance of securities (beneficial certificates) bought on the previous business day and in regular trading on the application day, and the borrowing quantity and quantity of in-kind redemption (creation) on the previous business day is insufficient to meet the requirements and the quantities published in the PCF such that in-kind creation (redemption) cannot be effected, the portion purchased shall be processed in accordance with the relevant trading rules and regulations, while the portion sold may be handled in the following manner:
- An order for the sale of beneficial certificates may be changed on the given day from regular sale to short sale.
- To settle the sale of securities not held by the applicant, securities may be borrowed before 10 a.m. two business days after the transaction date in accordance with securities lending rules.
- Handling in accordance with other relevant rules and regulations.
For the purpose of risk management, a participating securities firm may collect an appropriate monetary guarantee from the applicant when accepting a buy or sell order.
After an applicant receives beneficial certificates (stock portfolio) in exchange for the in-kind subscription (redemption) on the same day, and after the completion of settlement and in-kind creation or redemption operations, any remaining securities will be transferred into the applicant's central depository account.
- For shares serving as consideration for aggregate in-kind creation, with the exception of the portion handled by the participating securities firm, for which delivery may be made with the balance of securities purchased on the previous day or the same day, delivery by the other applicants must be made with shares already held or with borrowed shares. Subscribers in an aggregate in-kind creation must receive the beneficial certificates before placing a sell order for those certificates.
- If an applicant is restricted by law (e.g., by Article 167 of the Company Act, Article 38 of the Financial Holding Company Act, and Article 28-2 of the Securities and Exchange Act) from holding or transferring specific shares, but the applicant may hold or sell such shares on a temporary basis for in-kind creation or redemption of ETF beneficial certificates with the written consent of the relevant competent authority, then the TPEx, if it deems necessary for control purposes after the participating securities firm has submitted the application for in-kind creation or redemption, may notify the participating securities firm to further notify the applicant to undertake the necessary disposition of its holdings of such shares. In that event, the participating securities firm shall notify the applicant on the same day it receives its notice, and shall keep a record the actions taken and report them to the TPEx.
- A participating securities firm that handles its own in-kind creation and redemption of ETF beneficial certificates shall set up a securities trading account for dedicated handling of the related deposits and transfers of securities (the account numbers of all such accounts shall be 777777～7 under the securities firm's account). The account shall be restricted to transfers of securities and other transfers necessary for the participating securities firm's own in-kind ETF creation and redemption as well as buying and selling ETF beneficial certificates or the portfolio of stock they represent. (The account may also hold the same stock when the participating securities firm is required to hold that stock as the underlying of call (put) warrants it issues for hedging purposes, and when it deems necessary, may also hold the alternate constituent stock.) The participating securities firm may not use the dedicated account to purchase securities and then transfer them to another dealer account with restrictions on bid and ask quotes, nor accept a transfer of securities from another dealer account and subsequently quote those securities for sale. To open such a dedicated account, the participating securities firm shall submit to the TPEx a photocopy of its participant agreement, a photocopy of the approval letter for the offering of ETFs, and photocopies of documents evidencing its qualifications.
For ETFs with component securities listed on the Taiwan Stock Exchange (TWSE), the participating securities firm shall open a dedicated account for trading of TWSE listed securities in accordance with TWSE rules. For listed ETFs with component securities that include TPEx listed securities, the provisions of the preceding paragraph apply mutatis mutandis.
- If the component securities of an ETF's underlying index include TWSE listed securities, then after a participating securities firm applies for in-kind creation (or redemption) with the TPEx, the TPEx shall forward the application information to the TWSE.
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Operating procedures for in-kind creations and redemptions of ETFs with domestic component stocks:
- After referring to the PCF published by the SITE and accepting an application for in-kind creation or redemption with a listed portfolio of stock (beneficial certificates) that meets the requirements of the PCF, the TPEx will compile and forward the application information to the SITE for review, and will make the review results available on the TPEx computer system for inquiry by the participating securities firm. The participating securities firm will notify the applicant for confirmation on the basis of the review results, and shall retain a record of the review results and the aforesaid application information.
Regardless of whether the SITE approves the in-kind creation or redemption applications forwarded by the TPEx, it shall in each case notify the TPEx of its decision on the date of application so that the TPEx can make the information available for inquiry by participating securities firms.
- The TPEx will compile and forward lists of portfolios of stocks (beneficial certificates) in accepted applications to the central securities depository for earmarking. Upon receiving notice from the depository of the results of earmarking, the TPEx will forward the information to the SITEs and make the same information available on the TPEx computer system for inquiry by participating securities firms.
- If an application for in-kind creation or redemption is found after review by the relevant institutions to comply with requirements, the custodian institution shall complete collection and payment of the cash component, cash in lieu, monetary bond, and other relevant charges or payments on the first business day following the date of application, and shall complete transfer of the beneficial certificates (shares) created (redeemed) no later than the second business day following the date of application. If there is cash receivable by the applicant after the completion of in-kind creation or redemption, the custodian institution, after completing the related operations, shall transfer the funds to the participating securities firm for delivery to the applicant.
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A participating securities firm carrying out creation and redemption of beneficial certificates for ETFs with foreign component stocks on behalf of customers shall comply with the following provisions:
- When an applicant uses beneficial certificates purchased through the same account but not yet settled to meet the requirements for beneficial certificates at redemption, and the SITE approves, the participating securities firm shall collect from the applicant in advance, on the date of application, the price payable on the purchased balance of certificates.
- When accepting a customer's order to create or redeem ETFs, the participating securities firm may collect in advance the cash component and other relevant charges or payments as calculated by the SITE. After the actual amount of payment due has been ascertained, the participating securities firm shall notify the applicant to make additional payment if the pre-collected payment is insufficient or to receive a refund if the pre-collected payment is excessive.
- The participating securities firm shall open another deposit account with its settlement bank specifically for the deposit and payment of cash payments, cash in-lieu, and other relevant charges or payments required under the preceding two subparagraphs.
Domestic securities to be delivered by the applicant may not be securities that were bought on margin, and reports of trading errors or correction of account errors may not be submitted with respect to domestic securities bought on the day of application.
The provisions of subparagraphs 7, 8, and 9 under Point 3 apply mutatis mutandis when a participating securities firm carries out creation or redemption of beneficial certificates of ETFs with foreign component stocks for its own account or as a broker.
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(deleted)
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Operating rules for participating securities firms carrying out creation and redemption of beneficial certificates of ETFs with component bonds for its own account or as a broker:
- A participating securities firm shall first produce a Bond ETF Creation/Redemption Application when carrying out subscriptions or redemptions of ETFs with component bonds. When the application involves an in-kind creation or redemption, the portfolio composition file as of the application date must also be attached for the applicant's signature (if an overseas Chinese, a foreigner, or a Mainland Chinese investor, the applicant's agent may sign), and the above documents shall be retained in records.
- The aforesaid Bond ETF Creation/Redemption Application shall contain the following particulars:
- Application No.: The code of the head office of the participating securities firm followed by a three-digit serial number.
- Applicant's account number.
- Type of Application: In-kind creation, in-kind redemption, cash creation, or cash redemption.
- The quantity of beneficial units for in-kind creation or redemption.
- Names and quantities of securities deliverable by the applicant. If beneficiary certificates are delivered, the application form shall distinguish between originally held certificates and those that were purchased on the business day preceding the application date or were borrowed.
- Where the settlement involves a cash or bond alternative, a list of the cash amount or alternative bonds must be provided.
- For cash creations or cash redemptions, the amount of the cash subscription or redemption.
- For in-kind creations or redemptions, an estimate of the cash component based on the portfolio composition file.
- When a participating securities firm subscribes on its own account to beneficial certificates of an ETF with component bonds and sells the same beneficial certificates on the same day, but is unable to complete in-kind creation as a result of failing to reach the types and amounts of securities required by the PCF, then the sale of the beneficial certificates may be handled as follows:
- An application for securities borrowing can be made before 10 a.m. on the second business day after the transaction date in accordance with securities lending rules to settle the sale of securities which the applicant did not have.
- Handling on the basis of other relevant rules and regulations.
- The provisions of the first section of subparagraph 9, Point 3 of these Directions apply mutatis mutandis when a participating securities firm subscribes to or redeems beneficial certificates of an ETF with component bonds for its own account.
- The provisions of Point 5, paragraph 2 apply mutatis mutandis when a participating securities firm carries out redemption of beneficial certificates of an ETF with component bonds on behalf of customers.
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(deleted)
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