The Financial Supervisory Commission issued the interpretative letter on Article 13 of the Regulations Governing Derivatives Transactions Conducted by Insurance Companies, Ref. No. Jin-Guan-Bao-Cai-Zi No. 10500960781 dated 29 December 2016. The main points are as follows:

1. For insurance companies conducting derivatives transactions in over-the-counter markets to handle relevant management processes regarding appropriation and collection of collateral in accordance with the Credit Support Annex under ISDA (International Swaps and Derivatives Association) signed by such companies and their counterparties, if domestic and foreign banks are engaged as custodian institutions of collateral for said management processes, counterparty risk shall be included in the internal processing procedure of derivatives transactions based on Paragraph 1 of Article 13 of the Regulations.

(1) Selection and evaluation criteria for custodian institution: Qualification of the custodian institution, selection of the evaluation project, and selection and evaluation procedures shall be included, and the qualification of the custodian institution shall include at least the following items:

a) A bank ranking in the world’s top 500 by assets or net worth for the most recent year; and

b) Having a credit rating equivalent to A- or above in the most recent year from a domestic or foreign credit rating agency.

(2) the appropriation and collection of collateral contract signed by the custodian institution : shall include the services provided, responsibility, due care of a good administrator, confidentiality obligations, calculation of management fees and payment methods, termination of the contract, dispute settlement, events of default and its liability, jurisdiction and governing law, the internal dedicated units conducting collateral management and the firewall mechanism of custodian institution, and the custodian agreement shall stipulates that: If deemed necessary, the competent authority may dispatch personnel or order the insurer to appoint an accountant or other professionals to examine the insurer's overseas assets under the custody of the custodian institution and to submit a report or express opinions to the competent authority. In such event, the custodian institution entrusted by the insurer shall not refuse the related examination.

(3) Independent and effective risk management: shall include the verification review process for evaluation of collateral, appropriation and collection of collateral, replacement, dispute settlement, interest management and other information provided by the custodian institution.

2. Insurance companies handling relevant matters themselves internally shall establish procedures for matters listed in subsection 3 of preceding item to be included in risks of counterparties for the internal processing procedure of derivatives transactions.