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Title	Rules Governing the Lending of Book-Entry Central Government Bonds by Securities Firms CH
Date	2006.11.21 ( PROMULGATED )

Article Content

Chapter I General Principles

Article 1	These Rules are adopted pursuant to Article 38, paragraph 2 of the Regulations Governing Securities Lending by Securities Firms.
Article 2	Securities firms shall comply with the Securities and Exchange Act, these Rules, and the bylaws, rules, public announcements, and circular letters of the Taipei Exchange (TPEx), Taiwan Stock Exchange Corporation (TWSE), and Taiwan Depository and Clearing Corporation (TDCC) when engaging in the lending of book-entry central government bonds.
Article 3	The lending of book-entry central government bonds by a securities firm refers to the business activity of lending book-entry central government bonds to its customers, while stipulating that the customer, within a specified period, will return the same type and quantity of book-entry central government bonds to the lender.
Article 4	To apply to lend book-entry central government bonds, a securities firm shall satisfy the eligibility criteria and submit a proper application along with relevant supporting documents to the relevant authority. For securities firms that have entered into a Contract for Use of the Centralized Securities Exchange Market with the TWSE, all matters requiring prior approval in connection with the business activity described in the preceding paragraph shall be forwarded to the competent authority through the TWSE. Securities firms that have only entered into a Contract for Trading of Securities on the TPEx Market with the TPEx shall forward their applications to the competent authority through TPEx. Securities firms that have been authorized by the competent authority to lend book-entry central government bonds are required to submit the following documents to the TPEx for recordation two days before commencing lending: A photocopy of the approval document issued by the competent authority. A list of officers and associated persons who will be involved in the lending of book-entry central government bonds, supported by valid eligibility documents. The abovementioned officers and associated persons shall also be registered with the relevant agency before commencing business activities. A change in registration shall be made within 5 days whenever there is any change in the above personnel. Securities firms that have been authorized by the competent authority to lend book-entry central government bonds are required to amend their registered types of securities business with the relevant institution before commencing. In addition, all associated persons involved in the lending of book-entry central government bonds shall satisfy the eligibility requirements provided in the Regulations Governing Responsible Persons and Associated Persons of Securities Firms. A securities firm approved by the competent authority to lend book-entry central government bonds will be required to suspend all lending activities except returns of loaned securities if the firm's regulatory capital adequacy ratio falls below 200 percent for two consecutive months, whether or not the firm has commenced lending since approval. Securities firms that are suspended from lending due to the above may resume lending only after having satisfied the capital adequacy requirement for three consecutive months, subject to the approval of the competent authority, and a securities firm that has been approved but has not yet commenced lending activities shall cease lending activities.

Chapter II Book-entry Central Government Bond Lending Practices

Article 5	A securities firm that engages in lending of book-entry central government bonds shall establish a lending agreement with the customer and issue a Risk Declaration Statement to disclose the possible risks involved in lending book-entry central government bonds. The sample templates for the abovementioned lending agreement and Risk Declaration Statement will be adopted by the Securities Investment Trust and Consulting Association of the R.O.C. (SITCA).
Article 6	Securities firms shall maintain a separate account for each customer, in which separate entries for the following items shall be made on a daily basis: Matters relating to the lending and return of securities. An itemized statement of the collateral, its value, and the collateral ratio. Calls for collateral and the withdrawal, replacement, and disposal of collateral. Matters relating to compensation for entitlements. The securities firm shall deliver to the customer with a monthly reconciliation statement based on the entries of the preceding paragraph. No statement will be required if no transaction has taken place in the current month and the customer has not requested such a statement in writing. The securities firm shall obtain a signed letter of consent from the customer allowing the customer's securities lending data to be legally gathered, computer-processed, used, or transmitted cross-border by the TPEx, TWSE, or any institution designated by the competent authority.
Article 7	All notifications to customers that securities firms are required to provide pursuant to these Rules shall be delivered by mail, by signed acceptance in person by the customer, or by another method agreed upon between the two parties. If a notification served by mail does not reach the customer on time for reasons attributable to the customer, notification will be deemed effective from the day on which the postal service first attempts delivery. When a securities firm notification is issued by signed acceptance in person by the customer, the customer's signature or seal must match the signature in the lending agreement or the sample seal impression originally filed, and must be dated.

Chapter III Lending and Return of Securities

Article 8	Business hours for lending of book-entry central government bonds are from 9 am to 3 pm.
Article 9	Book-entry central government bonds may not be lent for more than six months, starting from the transaction date. Furthermore, the lending period may not include the two business days preceding the interest payment date of the lent security or any government bond secured by it. However, when the securities firm and the customer have entered into a separate written agreement governing the taxation of principal and interest payments and related fees for the book-entry central government bonds, that agreement may govern.
Article 10	The delivery and return of book-entry central government bonds, when lent or when serving as collateral, shall be done by means of registration of transfer in accordance with the Directions for the Operation of Book-Entry Central Government Securities. Delivery and settlement statements shall be produced and delivered to the customer for signing. However, the delivery and return of stripped bonds shall be done by means of book-entry.
Article 11	When borrowing book-entry central government bonds from a securities firm or returning them, customers are required to fill out applications specifically labeling the transaction as a "borrowing" or "return" transaction. Once a lending transaction has been completed, the securities firm shall prepare a lending report labeled in the same way, detailing the borrower's name and account number, the transaction date, transaction reference number, application number, transaction type, name of the government bond, the quantity borrowed, the transaction rate, lending fees, and the type and quantity of collateral. Articles 62 and 62-2 of the Taipei Exchange Rules Governing Securities Trading on the TPEx apply mutatis mutandis to the provisions of the preceding paragraph.
Article 12	The interest rate at which book-entry central government bonds are lent is negotiated between the securities firm and the customer, subject to a maximum of 20 percent per annum and a tick size of 0.01 percent. The methods for calculating and collecting lending fees are negotiated between the securities firm and the customer, and shall be specified in the agreement.
Article 13	Securities firms are required to set up dedicated accounts for lending book-entry central government bonds. Only book-entry central government bonds from the following sources may be lent to customers: Bonds held in the securities firm's possession. Bonds borrowed from the TPEx securities lending system. Bonds acquired in a reverse repurchase agreement.
Article 14	The types of collateral that securities firms may request from customers for lending book-entry central government bonds, and the applicable discounts on collateral values, are listed below: Cash. Book-entry central government bonds. Collateral value is 90 percent of the face value. The collateral of the preceding paragraph may not be used for any purposes other than the ones described below: To serve as collateral for borrowing through the TPEx securities lending system. Bank deposits. Purchase of short-term bills. When lending bonds to a customer, a securities firm may only collect collateral that is owned by the customer itself. When the collateral is cash, the securities firm shall pay interest to the customer at a rate agreed between two parties.
Article 15	Pledged book-entry central government bonds may neither be lent nor used as collateral.
Article 16	Upon receiving a customer request to substitute collateral, the securities firm shall complete the substitution, at the latest, by the second business day in the manner agreed between the two parties.
Article 17	The securities firm shall notify the customer in accordance with Article 7, paragraph 1 at least 10 business days before the expiration of the loan period. The customer's collateral shall be returned on the date of expiry when the customer returns the loaned securities. Cash collateral shall be returned by deposit into the customer's bank account; book-entry central government bonds shall be returned in the manner described in Article 10.
Article 18	The securities firm may notify the customer to return the bonds early according to such terms as have been agreed upon between the two parties for early return, and shall return the customer's collateral on the day the bonds are returned. The customer may apply to make a partial or full return of the borrowed bonds during the loan period, and at the time of application shall stipulate with the securities firm the means and timeframe in which the loaned bonds and the collateral are to be delivered. The securities firm shall return the customer's collateral no later than the second business day after the customer has returned the loaned bonds.
Article 19	When engaging in the lending of book-entry central government bonds, a securities firm shall maintain detailed records and retain documentation of payments and receipts for all payments and securities receivable and payable, and shall prepare the following statements on a daily basis: Daily statement of book-entry central government bond lending. A summary statement and an itemized statement of book-entry central government bond lending position balances. An itemized statement of book-entry central government bond collateral delivery, disposal, and utilization. An itemized statement of collateral. An itemized statement of collateral shortfalls and collateral calls. Itemized statement of compensation for entitlements. The statements of the preceding paragraph shall be prepared so as to include all items required by the TPEx, and may be stored on media for retrieval.

Chapter IV Collateral Value and Remargining

Article 20	When accepting a customer's borrowing application, a securities firms shall obtain collateral from the customer, the total value of which shall represent an initial collateral ratio of no less than 110 percent of the market value of the lent bonds. The value of the collateral submitted by the customer shall be sufficient for a collateral maintenance ratio of no less than 105 percent of the market value of the lent bonds throughout the borrowing period. The collateral ratio is calculated as follows: The collateral ratio equals the total value of the collateral divided by the reference market value of the borrowed bonds, multiplied by 100 percent. The total value of the collateral value equals the reference market value of the bonds used as collateral plus the total value of cash collateral. The reference market values under the preceding 3 paragraphs shall be determined using the daily quotations on the GTSM Electronic Bond Trading System.
Article 21	If the customer's overall account collateral ratio falls below the 105 percent maintenance ratio, the securities firm shall immediately notify the customer to remargin each lending transaction that has fallen short of the required margin level, so as to return the collateral ratio for each such transaction to a level above the initial maintenance ratio, within 2 business days from the date the notice is delivered. If the customer has not remargined to the required level within 2 business days from the date the notice is delivered, or has only partially remargined, the securities firm shall proceed as follows: If the customer's account collateral ratio still falls short of the required maintenance ratio, then the securities firm, from the next business day, may apply Article 25, paragraph 1 mutatis mutandis and proceed to dispose of the customer's collateral. If the customer's account collateral ratio returns to a level above the required maintenance ratio, the disposal of collateral may be postponed. However, if the collateral maintenance ratio falls short again on any succeeding business day and the customer does not automatically remargin on that day, the securities firm may apply Article 25, paragraph 1 mutatis mutandis and proceed to dispose of the customer's collateral from the next business day. If, prior to the disposal of collateral pursuant to the preceding subparagraph, the customer successively supplements the collateral so that the total value of the supplemented collateral equals the amount of the collateral call, the securities firm shall purge the collateral call records for this instance. If the customer's overall account collateral ratio has returned to the initial collateral ratio or above, the securities firm shall purge the collateral call records for this instance.
Article 22	If the customer closes out one or more lending position, thereby causing the overall account collateral ratio for the remaining positions to fall short of the required collateral maintenance ratio, the securities firm may retain part or all of the collateral that should have been returned to the customer, to the extent necessary to maintain the required maintenance ratio.
Article 23	Customers shall warrant that the bonds they use as collateral are free and clear of all liens, claims, and encumbrances of any nature whatsoever. Collateral that is defective or the subject of a legal dispute shall be excluded from the securities firm's calculation of the collateral ratio under Article 20. The customer shall immediately be notified to provide eligible collateral of equivalent collateral value within 3 business days from the date the notice is delivered.
Article 24	If the customer's overall account collateral ratio rises above the initial collateral ratio as a result of price variations, the customer may request, subject to the terms agreed between the two parties, to have the collateral which is in excess of the initial collateral ratio for each given loan of book-entry central government bonds returned or used to secure other loan transactions. However, the overall account collateral ratio after the return of the collateral may not fall below the initial collateral ratio.

Chapter V Default and Risk Management

Article 25	Given any of the following circumstances, the securities firm shall dispose of the customer's collateral for each such lending transaction from the next business day and take the necessary measures pursuant to the agreement: The customer fails to return the borrowed book-entry central government bonds on the due date or at any earlier date agreed between the two parties. The customer fails to pay compensation for entitlements on the date payment is due. The customer fails to remargin to the required level or to substitute eligible collateral within the specified period. The customer does not pay the agreed expenses. If disposal of the customer's collateral for a given lending transaction pursuant to the preceding paragraph does not sufficiently cover the customer's outstanding debt, the securities firm may proceed to close out the customer's other book-entry central government bond lending transactions to the extent necessary to cover the outstanding debt. Any surplus amounts remaining after forced closure shall be returned to the customer, whereas the customer shall be notified to supplement the amounts of any remaining shortfall within a given notice period.
Article 26	A customer that fails to supplement a shortfall in accordance with paragraph 2 of the preceding Article is in default. The securities firm shall report the default to the TPEx, and the TPEx will further notify the TWSE and other securities firms. The securities firm may impose a penalty for default equal to 10 percent of the agreed lending rate on the amount of shortfall payable by the customer, starting from the date of default until the shortfall is settled.
Article 27	A securities firm is prohibited from lending book-entry central government bonds to the following related parties: The firm's directors and supervisors and the representatives of juristic person directors and supervisors; employees; and shareholders with more than a 10 percent ownership interest in the securities firm. A juristic person shareholder of the securities firm whose representative has been elected as a firm director or supervisor in accordance with Article 27, paragraph 2 of The Company Act. A spouse of any of the securities firm's directors or supervisors or of a representative of a juristic person director or supervisor. A minor child of a person listed in subparagraph 1. Securities firms shall incorporate the provisions of the preceding paragraph into their internal control systems.
Article 28	A securities firm may not lend book-entry central government bonds with a total face value exceeding 1 percent of the firm's net worth or NT$20 million to any single natural person, and may not lend book-entry central government bonds with a total face value exceeding 5 percent of the firm's net worth to any single juristic person. The firm may not lend book-entry central government bonds with a total face value exceeding 10 percent of the firm's net worth to the aggregate related parties of any single natural or juristic person, and the total face value of book-entry central government bonds lent to natural persons among such aggregate related parties of any single person may not exceed 2 percent of the firm's net worth.
Article 29	Following the execution of a book-entry central government bond lending transaction, a securities firm shall immediately enter the transaction information into the TPEx information system during its operating hours and in the TPEx-prescribed format.

Chapter VI Supplemental Provisions

Article 30	If the securities firm, its responsible person, or an employee is found to have violated these Rules, the TPEx may deal with the violation according to its relevant corporate bylaws.
Article 31	These Rules and any subsequent amendments hereto are adopted by the TPEx and shall be publicly announced and implemented following submission to and approval by the competent authority.

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