Policies and Regulations of Non-Hedge Trading and USD/TWD Denominated Products

1. Policies and Regulationsof Non-Hedge Trading andUSD/TWD Denominated Products

2. Contents • Brief on TAIFEX • Foreign Futures Enterprises Application Procedure • Status quo and proposed Changes • ID system • Omnibus account • Trading and settlement of omnibus account • Position limits for overseas Chinese and foreign investors • Account Structure and Forex Regulation

3. Brief on TAIFEX • The development of Taiwan Futures Market • Market structure • Clearing procedure • TAIFEX products • Market updates

4. The development of Taiwan Futures Market • 1997.03 Futures Trading Law was promulgated • 1997.9.9 The Taiwan Futures Exchange (TAIFEX) was established • 1998.7.21 1st equity futures contract (TAIEX Futures) was launched • 2001.12.24 1st options contract (TAIEX Options) was launched • 2002.11 Futures Advisory business was opened • 2003.12 Managed Futures business was opened • 2004.1.2 1st bond futures contract Gov. Bond Futures was • launched • 2004.5.31 30-day CP Interest Rate Futures was launched • 2004.10.14 Award the " Derivatives Exchange of the Year 2004" by • Asia Risk • 2005.3.28 Electronic Sector & Finance Sector Index Options were • launched

5. Market Structure Financial Supervisory Commission / Securities & Futures Bureau TAIFEX CNFA (Chinese National Futures Association) Settlement Banks Individual Clearing Member General Clearing Member Settlement Banks FCM FCM FCM Fund transfer CPO IB IB CPO CPO Fund transfer CTA Customers

6. Clearing procedures FSC/SFB Position Management TAIFEX Settlement/Clearing Trading report Deal-done report Discretionary operation FCMs Clearing Member Submit tickets to Settlement request CTA CPO IB Margin deposit / orders Deal-done report Customers

7. TAIFEX Products Futures • TAIEX Futures • TE Futures • TF Futures • Mini-TAIEX Futures • TSEC Taiwan 50 Futures • Government Bond Futures • Commercial Paper Interest Rate Futures Options • TAIEX Options • Finance Sector Index Options • Electronic Sector Index Options • Equity Options Equity Index Futures Interest Rate Futures

8. Market Growth

9. The number of trading accounts Total trading accounts is up to 1,100,257, including 1,094,344 of individual and 5,913 of institutional investors.

10. Trading behavior

11. Worldwide Ranking 57 47 44 38 35 26 20 18 Data Resource: Futures Industry Association

12. 5 TAIEX Options (TXO) The world' s top 10 index options-TXO ranked No. 5 in the category. Data: Trade Data Global Service.

13. Derivatives Exchange of the Year 2004 TAIFEX awarded by Asia Risk on Oct 14, 2004 • The best practices and innovation in derivatives and risk management in Asia-Pacific. • Innovative and well-infrastructure in derivatives market, commodity as well as information of the year.

14. Foreign Futures Enterprises Application Procedure • Overview of Establishment Criteria for Futures Enterprises (p.14-1) • FCM • Concurrent futures business operator • IB • Flowchart of Application for Establishment of FCMs (p.14-2)

15. Status Quo • Legal basis • Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals (Article 4-2) • Guidelines for Futures Trading by Overseas Chinese and Foreign Nationals • Trading purpose • Only for the purpose of hedging a position on domestic securities. • Only hedge account is allowed to be opened. • Investment limits and restrictions • Long hedge: The aggregate market value of long positions on futures and options shall not be more than the combined holding of NTD cash and cash equivalent. • Short hedge: The aggregate market value of short positions on futures and options shall not be more than the total market value of securities holdings. • Investment limit: The aggregate amount of the initial margins required for futures contract, premiums required for buying of options, combined with the investment in money market instruments shall not be more than 30% of inwardly remitted funds.

16. Proposed Changes • Legal basis • Futures Trading Law. • Trading purpose • Trading purpose is not restricted. • Investment limits and restrictions • Position limit: According to rules governing position limits for various products. • Foreign institutional investors (the same as local institutional investors) may apply for exemption of position limit. • Fund regulation: Margin deposit/withdrawal in US Dollar only. • Offshore Funds shall be separated into two different accounts for securities and futures markets, respectively.

17. Proposed Change-cont. • Side-effect after change: • Foreign investors may trade futures products for non-hedge purpose through an direct account or an omnibus account. • The benefiaries: overseas Chinese and foreign investors (including corporations and individuals).

18. Proposed methodology for non-hedging trading by foreign investors The omnibus account agreement should indicate the party who ， is obliged to file details of positions held by individual clients TAIFEX FCM3 FCM2 FCM1 Foreign FCM 2 Foreign FCM 1 Foreign investor Foreign investor （ (Omnibus acct 2) (Omnibus acct 1) (Direct acct B) (Direct acct A) Foreign investor Foreign investor (individual acct) (individual acct) Foreign FCM and foreign 、 Investors shall obtain an ID before opening an account through the custodian banks.

19. Proposed targets of futures market relief

20. ID System • Single ID: Single ID system will apply to foreign investors who trade in the futures market. A foreign investor that has already had an ID issued by Taiwan Stock Exchange Corporation (TSEC) for investment in domestic securities can use the same ID for futures trading and vice versa. • Every foreign investor must obtain an ID before trading futures. • The ID may be applied through a local FCM or securities firm for onshore foreign investors, and through a custodian bank for offshore foreign investors. 。

21. Qualifications of a foreign investor to open a futures trading account • Direct account • The requirements are the same as the prevailing regulations. • Omnibus account—eligible offshore foreign FCM • A clearing member of a foreign futures exchange sanctioned by Taiwan’s regulatory authority. • Its home office or branch in Taiwan is free of disciplinary action imposed by securities or futures authorities or self-regulatory organization to suspend its securities or futures brokerage practice in the past year. • Free of incident of violating futures or securities trading agreement signed with the futures exchanges in home country or Taiwan in the past three years.

22. Restrictions on account opening • Direct account • Foreign investors may open more than one futures account with a local FCM, or with several local FCMs. • Omnibus account • An offshore foreign FCM may open more than one omnibus account with a local FCM; an offshore foreign FCM may also open an omnibus account with different local FCMs on account of its trading strategy or clientele attributes. • Only TAIFEX clearing member may accept the opening of omnibus account by foreign FCMs.

23. Procedure for opening direct account Step1:obtain an ID Step2:overseas Chinese and foreign investors account opening procedure

24. Procedure for opening omnibus account

25. Trading and settlement of omnibus account • Foreign FCMs are not required to disclose trading information and identities of individual clients behind the omnibus account to local FCMs.The omnibus account can be treated and processed as a single account for trading and settlement purpose. • Trading: Local FCM will treat each omnibus account as a trader and place orders by each the omnibus account. • Individual clients under an omnibus account may apply for position offset, designated options combination for strategic purpose, and designated position offset to reduce margin payment.

26. Position limit of direct account • Position limit is regulated according to the prevailing ID system. • Position limits are the same as those for local individuals and corporations. • Exemption of position limit • Institutional investors may apply for exemption of position limit. • The extent of relaxation will be regulated by rules to be prescribed. • Actions in case of over-limit: Same as those for local investors where the FCM will be notified to stop accepting new orders from the account.

27. Position limit of omnibus account • Position limit • Omnibus account is not subject to position limit. • Individual clients under the omnibus account will be assigned an ID and subject to position limits for regular accounts.

28. Account Structure and Forex Regulation • Margin account • TAIFEX, clearing members, FCM and local traders open both a NTD margin account and a USD margin account, while offshore foreign investors only need to open a foreign currency account. • Margin payment 【Overseas Chinese and foreign investors】 • Deposit and withdraw margin in USD only. • Forex regulation • Pursuant to Regulations Governing Foreign Exchange and Rules for Declaring Receipt, Payment and Transaction of Foreign Exchange.

29. Margin System

30. Futures margin Daily Trading position Settlement position USD ( FCM places order (buy/sell) Check immediately whether margin Reject order No deposit is sufficient 足 TAIFEX matches trade Automatic offset of long/short positions in the same account (netting) Member FCM VISIO CORPORATION Mark-to-market Margin short $ USD margin call Member 足 FCM Daily account settlement Margin VISIO CORPORATION $ equity short Deposit margin Member Settlement upon expiry FCM Gain/loss of open VISIO CORPORATION Settlement upon expiry $ positions (Settlement netting) Payment upon expiry Loss : Remit in funds Gain : Remit out funds 【FIG.1】 Margin and Trading Flow Process for Overseas Chinese and foreign investors ) Client’s position Client VISIO CORPORATION $ Deposit margin FCM’s margin account Clearing member’s margin account TAIFEX Margin account 【 Description】 Overseas Chinese and foreign investors pay margin in USD for trading of US-denominated products.

31. 3 【Fig. 】 Futures Margin Payment Scheme NTD and USD Denominated commodities TAIFEX USD NTD futures margin account futures margin account USD NTD Clearing member USD NTD futures margin account futures margin account USD NTD FCM USD NTD futures margin account futures margin account USD USD NTD Investor Local and onshore Foreign investors Offshore foreign investor Local and onshore Foreign investors 【Description 】 A. Principles Offshore foreign investors will deposit and withdraw margins for USD and NTD denominated commodities in USD. 1. 2. Local and onshore investors will deposit margins for USD-denominated commodities in USD, or in NTD through a FCM who will exchange it into USD ; local and onshore foreign investors will pay margin in NTD for NTD denominated commodities. B. Advantages To engage in futures trading, offshore foreign investors will remit the funds in and out in USD, which helps lower the risk of NTD exchange rate fluctuation and does not impact the foreign exchange market.

32. Trading： Wen-Lin Chou E-mail: wlchou@taifex.com.tw TEL：886-2-23695678 ext.126 Annie Hsu E-mail: annie@taifex.com.tw TEL：886-2-23695678 ext.118 Maggie M.Y. Chien E-mail: maggie@taifex.com.tw TEL：886-2-23695678 ext.116 Clearing： Jean Yang TEL：886-2-23695678 ext.170 Simon Chen E-mail: simonc@taifex.com.tw TEL：886-2-23695678 ext.171 Business Development： Ben Yen E-mail: yjp@taifex.com.tw TEL：886-2-23695678 ext.240 Rita Tsai E-mail: ritatsai@taifex.com.tw TEL：886-2-23695678 ext.249 Contact Us Visit Our web site at : WWW.TAIFEX.COM.TW