Beginning with December 2, 2013, a "negotiated block trade", which is a commonly adopted mechanism by international exchanges, has been added to the futures block trading system in Taiwan in addition to the existing "continuous matching" block trading in order to fall in line with international practices. Operators who have been locally licensed futures proprietary merchants in foreign countries may also engage in negotiated block trade for one-on-one futures block trading in Taiwan. However, a specific application procedure should be followed and limitations under relevant laws and regulations should be complied. The statutory procedure and relevant requirements that should be followed by foreign futures proprietary merchants seeking to engage in negotiated block trade in Taiwan are discussed below.
- Introduction of the block trading system in Taiwan
The futures block trading system is regulated under the Taiwan Futures Exchange Corporation Operational Regulations for Block Trading (hereinafter, the "Block Trading Regulations") with its enabling regulation being Article 43, Paragraph 3 of the Operating Rules of Taiwan Futures Exchange Corporation (hereinafter, the "TAIFEX Rules").
Under Article 2 of the Block Trading Regulations, block trading may be conducted via the "continuous matching" or "negotiated block trade." The so-called "continuous matching" refers to a trading mode under which the principle of "price priority and time priority" is followed and computerized matching is conducted in the block trading market when block trading orders are entered into the trading system of Taiwan Futures Exchange by futures commission merchants (Article 8 of the Block Trading Regulations). In comparison, the "negotiated block trade" refers to a trading mode under which a futures commission merchant in Taiwan is retained to report a transaction to the futures exchange, which verifies and confirms the closing of the transaction, without matching in a centralized trading market after the price is negotiated between the buyer and seller (Article 9 of the Block Trading Regulations). Therefore, if a foreign futures proprietary merchant seeks to engage in one-on-one block trading in Taiwan, the trading mode of "negotiated block trade" should be followed.
Futures products which may be block traded are limited to products announced by the futures exchange after they are submitted to the competent authority for recordation (See Article 3, Paragraph 2 of the Block Trading Regulations").
- Pursuant to the Tai-Chi-Jiao-10002020540 Circular of October 27, 2011 of Taiwan Futures Exchange, block trading applies to three products, namely the TAIEX Futures contracts (TX), the Mini-TAIEX Futures contracts (MTX), and TAIEX Options contracts (TXO).
- When the Tai-Chi-Jiao-10100013520 Circular of April 23, 2012 was issued, the Single Stock Futures contracts (STF) were added. Therefore, the futures exchange permits the block trading of four products – TAIEX Futures (TX), Mini-TAIEX Futures (MTX), TAIEX Options (TXO) and Single Stock Futures (STF).
When negotiated block trading is conducted in Taiwan, it is also necessary to note if the products to be trade are currently allowed for block trading.
Article 3, Paragraph 1 of the Block Trading Regulations provides that except for otherwise stipulated, with respect to the reporting volume for futures block trade, the minimum volume reported each time shall be 200 contracts in case of the same futures contracts. For the same options contracts, the minimum volume reported each time shall be 400 contracts.
- Identity registration and account opening
The Block Trading Regulations do not have any qualification restriction on "those who may engage in futures block trading." Basically, any person may engage in block trading. With respect to the procedure, however, if a foreign futures proprietary merchant seeks to engage in futures trading in Taiwan, "identity registration" shall be completed first and an account shall be opened at a futures commission merchant under our laws and regulations before such foreign entity may trade as a futures trader in the futures market in Taiwan.
- Identity registration based on the identity of a foreign institutional investor
Point 7 of the Directions for Futures Trading by Overseas Chinese and Foreign Nationals (hereinafter, the "Directions") provides: " To engage in domestic futures trading, an overseas Chinese or foreign national shall apply to the TAIFEX or the Taiwan Stock Exchange Corporation and submit relevant documents for registration in accordance with TAIFEX operating rules and bylaws." Article 44-4, Paragraph 1 of the TAIFEX Rules also provides: " Overseas Chinese and foreign nationals, and mainland area investors may engage in domestic futures trading only after submitting the relevant documents and carrying out identity registration as required in accordance with the Operation Directions for Applications by Overseas Chinese, Foreign Nationals, and Mainland Area Investors for Registration to Invest in Domestic Securities or Trade Domestic Futures. " "Foreign futures proprietary merchants outside the territories of the Republic of China which are incorporated and registered under local laws and regulations" are the "foreign institutional investors" within the meaning of Article 3 of the TAIFEX Rules (they may be "onshore foreign nationals" or "offshore foreign nationals, depending on whether they have any branch office in Taiwan). Therefore, if a foreign futures proprietary merchant seeks to engage in futures trade in Taiwan, it will have to register its identity in the capacity of a "foreign institutional investor" first.
When identity registration is conducted by a foreign institutional investor without any branch office in Taiwan (i.e., "offshore foreign nationals"), application should be filed with Taiwan Stock Exchange along with a power of attorney for agents or a letter of appointment of the representative and the company incorporation certificate issued by local foreign government (such as company registration supporting documentation). After registration is completed following successful verification of such submissions, Taiwan Stock Exchange will issue a "Certificate of Completed Registration for Offshore Overseas Chinese and Foreign Nationals" (see Point 1 of the Operation Directions for Applications by Overseas Chinese, Foreign Nationals, and Mainland Area Investors for Registration to Invest in Domestic Securities or Trade Domestic Futures and Article 44-4, Paragraph 3 of the TAIFEX Rules and Point 7, Paragraph 2 of the Directions).
- Opening of "futures trading accounts"
After identity registration is completed, the identity of a foreign futures proprietary merchant is equivalent to that of a general futures trader (rather than futures commission merchant), and a "futures trading account" should be opened at a domestic futures commission merchant in order to engage in futures trading (see Point 6 of the Directions, Article 9 of the Block Trading Regulations, Article 44-5, Paragraph 2 of the TAIFEX Rules). In addition, like general futures traders in Taiwan, when commissioning a domestic futures commission merchant to engage in block trading, a foreign institutional investor shall also pay the margin in full beforehand in accordance with Article 11 of Block Trading Regulations.Opening of "futures trading accounts"
- Behavioral restrictions on one-on-one futures block trading engaged by foreign futures proprietary merchants in Taiwan
When applying for identity registration and opening a "futures trading account" at a futures commission merchant in Taiwan in order to engage in transactions, a foreign futures proprietary merchant does so as a "futures trader" (rather than as a "futures commission merchant"). Therefore, if its acts involve the operation of futures trading business, it would violate Article 56, Paragraph 1 of the Futures Trading Act, which stipulates "only authorized futures commission merchants shall engage in the business of futures trading ", and will be subject to imprisonment of up to seven years and/or a fine of up to NT$3 million in accordance with Article 112, Subparagraph 3 of the Futures Trading Act. Therefore, a foreign futures proprietary merchant should note if its acts may potentially involve the operation of futures business.
Under Article 2, Paragraph 2, Subparagraph 1 of the Regulations Governing Responsible Persons and Associated Persons of Futures Commission Merchants, the "solicitation" for futures trade falls within the scope of business of a futures commission merchant. Under Article 3 of the Administrative Rules for Advertising, Business Solicitation and Operating Promotion Activities by the Members of the Chinese National Futures Association and Futures Trust Fund Distribution Institutions, advertising, business solicitation and operating promotional activities engaged by a futures commission merchant refer to dissemination, distribution, advertising, propaganda, solicitation or promotion of futures business and relevant affairs to nonspecific multitudes for the purpose of business promotion via the following communication media, advertising tools or methods:
- Newspapers, magazines, periodicals or other print publications.
- Leaflets, letters, flyers, posters, advertising copies, newsletters, presentations, prospectuses, stickers, calendars, telephone directories or other print matters.
- Television, movies, slide shows, radio stations, scrolling texts, etc.
- Billboards, banners, signs, signposts, advertisements on buses or other means of transportation or via any other form of static or moving tools and facilities.
- Electronic mails, electronic billboards, Internet systems (including but not limited to Internet chat rooms or personal blogs) or other electronic communications equipment.
- Onsite workshops, hearings, seminars, roadshows or other public activities.
- Any other form of advertising, promotion, business solicitation and operation promotional activities.
Therefore, when engaging in price negotiation for futures block trading with trading counterparties in Taiwan, a foreign proprietary merchant should avoid "dissemination, distribution, advertising, propaganda, solicitation or promotion" of information about futures products to "nonspecific multitudes" via "above-mentioned media" to avoid being determined to engage in "solicitation" for futures trading business as a futures commission merchant.
In conclusion, a foreign futures proprietary merchant may engage in price negotiation for futures block trading in Taiwan. However, identity registration should be sought at Taiwan Stock Exchange and a "futures trading account" should be opened at a futures commission merchant in Taiwan before futures trading may be conducted in Taiwan. At the time of actual transaction, attention should be paid not only to the restrictions on the trading volume and the scope of permitted products under the block trading system in Taiwan but also to the fact that its behavior should not involve solicitation for futures trading to avoid relevant penalties and liabilities.