May 2023
Jiselle Ong and Teresa Huang
To attract continued inflows of foreign capital to the Taiwan capital market and enhance the willingness of investors to hold Taiwan stocks for a long time, the Taiwan Stock Exchange Corporation (the “TSE“) announced on March 31, 2023 the formulation of the Regulations of the Taiwan Stock Exchange Corporation on the Operation of Using Domestic Securities as Collateral for Overseas Investment Activities by Overseas Chinese and Foreign Nationals (the “Regulations“) in accordance with a directive from the Financial Supervisory Commission[1] to allow overseas Chinese and foreign nationals to use Taiwan securities as collateral for overseas investment activities without being subject to the restrictions under Article 21, Paragraph 3[2] of the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals” (the “Investment Regulations”). The Regulations will go into effect on September 25, 2023 and are highlighted below:
I. Definition of “overseas investment activities” and “collateral”: (Articles 4 and 6)
The “overseas investment activities” set forth in the Regulations are limited to activities including “trading of overseas derivative financial instruments, overseas securities lending, and foreign currency fund lending” conducted by overseas Chinese and foreign nationals in foreign countries. Those which may serve as “collateral” are limited to listed and OTC-traded stocks eligible for margin trading and securities lending in Taiwan and do not include securities obtained through securities lending transactions.
II. Overseas Chinese and foreign nationals allowed to be “collateral providers” and “collateral receivers” (Articles 5, 8, and 11)
Overseas Chinese and foreigners who are registered or licensed to invest in Taiwan securities in accordance with the Investment Regulations may be “collateral providers” or “collateral recipients.” The collateral provider shall declare in a guarantee statement that the funds obtained through overseas investment activities with the collateral will be used overseas in foreign currency and will not involve any activities within the territory of the Republic of China (Taiwan).
The collateral provider shall, within 15 days after the end of each month, compile the relevant information about the collateral provided at the end of the previous month pursuant to the Regulations. Such information includes, for example, the name of the collateral provider, the value of the collateral, the type of the relevant foreign investment contract, etc., and the information shall be provided to the collateral provider’s custodian in Taiwan for reporting to the Foreign Exchange Department of the Central Bank. The information should be concurrently provided to the TSE for registration.
III. Required designation of an overseas ” collateral manager” and domestic ” collateral custodian” for the handling of collateral: (Articles 3, 5, and 12)
Overseas Chinese and foreign nationals shall designate an overseas ” collateral manager” to handle the suitability confirmation, allocation, replacement, mark-to-market operation, bookkeeping, notification of additional collateral, and instructions for default disposition of collateral. Such collateral manager shall also appoint a qualified domestic ” collateral custodian” to keep, collect, and dispose of the collateral on their behalf.
The ” collateral custodian” shall be a bank or securities firm approved by Taiwan competent authority to conduct custodianship business, and shall submit an application to the TSE along with supporting documents pursuant to law. In the event of a default by an overseas Chinese and foreign national engaging in overseas investment activities with collateral, the collateral custodian shall dispose of the collateral as instructed by the collateral manager and shall report to the TSE prior to the disposal.
IV. Potential disqualification scenarios: (Articles 15 and 16)
If overseas Chinese or foreign nationals do not meet the eligibility requirements specified in the Regulations, if the guarantee statement is false, or if there is a major default in overseas investment activities, the TSE may prohibit them from providing or accepting Taiwan securities as collateral. If the collateral manager or the collateral custodian has incomplete or false application documents, the TSE may notify the collateral custodian to stop accepting instructions from the collateral manager to add new collateral custody positions.
After the enactment of the Regulations, foreign investors engaging in overseas investment activities may use Taiwan’s listed or OTC-traded stocks as collateral to obtain funding without the need to sell their Taiwanese stocks, which will help increase the flexibility of capital utilization by foreign investors and their willingness to invest in Taiwanese stocks, promote the liquidity of Taiwan’s financial market, and strengthen the stability of the securities trading market. It is recommended that eligible overseas Chinese and foreign nationals arrange their investment activities accordingly.
[1] The Jin-Guan-Zheng-Juan-1120335161 Directive of March 30, 2023 from the Financial Supervisory Commission.
[2] Overseas Chinese and foreign nationals shall use inwardly remitted investment funds to invest in domestic securities in accordance with the Regulations and relevant laws and regulations and shall also comply with the following requirements except as otherwise stipulated by the Financial Supervisory Commission:…3. no loans or guarantee may be provided.
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