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TAIFEX, Your Key to a Bright Future in Taiwan

TAIFEX, Your Key to a Bright Future in Taiwan. Agenda. Overview of TAIFEX TAIEX Options New measures & new products Prospects & future development. Overview of TAIFEX. Milestone of Taiwan Futures Market . 1997.09 Establishment of Taiwan Futures Exchange 1998.07 Listing of TAIEX Futures

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TAIFEX, Your Key to a Bright Future in Taiwan

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  1. TAIFEX, Your Key to a Bright Future in Taiwan

  2. Agenda • Overview of TAIFEX • TAIEX Options • New measures & new products • Prospects & future development

  3. Overview of TAIFEX

  4. Milestone of Taiwan Futures Market • 1997.09 Establishment of Taiwan Futures Exchange • 1998.07 Listing of TAIEX Futures • 2001.12 Listing of TAIEX Options • 2003.01 Listing of Single Stock Option (5 stocks) • 2004.01 Listing of 10-Year Government Bond Futures • 2004.09 Awarded “Derivatives Exchange of the Year” by Asia Risk Magazine • 2005.03 Listing of Electronic Sector and Finance Sector Index Options • 2006.03 Listing of Gold Futures, MSCI Taiwan IndexSM Futures and Options

  5. Market Growth VOLUME

  6. Open Interest

  7. Worldwide Ranking Data：FIA Annual Volume / Futures Industry Magazine (March/April 2006 Issue)

  8. “Exchange of the Year” in 2004 • Awarded “Derivatives Exchange of the Year” by Asia Risk Magazine in 2004 • Criteria • Types of product • Growth of trading volume • Success factors • New products development over the previous year • Prospects (including product development, system upgrading, development of trading and clearing system, market education and promotion, internationalization, etc)

  9. The Characteristics of Taiwan Futures Market • Efficiency • Fully electronic trading system • Free competition among FCMs • Lowering of transaction tax • Fairness • Electronic trading system • Matching principle adopts price then time priority • Real time disclosure of 5 best buy/sell prices & quantity • Safety • Margin are collected before order placement • Gross margining • Daily marking to market • Prudent financial requirements on Clearing Members • On-site inspection on FCMs: Both regular & special

  10. Regulatory Structure of Taiwan Futures Market • Rules and Regulations • Futures Trading Act • Regulator • Financial Supervisory Commission (FSC) • Exchange • Taiwan Futures Exchange • Self-Regulatory Organization • Chinese National Futures Association (CNFA)

  11. Financial Supervisory Commission / Securities & Futures Bureau TAIFEX Settlement Banks Individual Clearing Member General Clearing Member Settlement Banks FCM FCM FCM Designated Banks CPO IB IB CPO CPO Designated Banks CTA Customers Market Structure

  12. Criteria for Clearing Membership • Individual Clearing Member • A futures commission merchant that handles clearing and settlement for its brokerage and proprietary futures trading business. • Financial Requirement • FCM: minimum paid-in capital of NT$200 million • Concurrent futures business operator: at least NT$60 million in designated operating funds • General Clearing Member • A futures commission merchant that, in addition to handling clearing and settlement for its brokerage and proprietary futures trading business, may also handle clearing and settlement on consignment for other futures commission merchants. • Financial Requirement • The minimum paid-in capital of a futures commission merchant or the designated operating funds allocated by another business operating concurrently as a futures commission merchant shall be at least NT$400 million.

  13. Criteria for FCMs • Minimum capital (paid-in capital / designated operating funds) • FCM • Brokerage: NT$ 200,000,000 • Proprietary: NT$ 400,000,000 • Concurrent futures business operator • Stock-related futures and options contracts traded in TAIFEX: NT$50,000,000 • Interest rate futures and options traded in TAIFEX: NT$50,000,000 • Stock-related futures and options traded in TAIFEX & Interest rate futures traded in TAIFEX: NT$80,000,000 • Futures and Options contracts traded in TAIFEX: NT$100,000,000 • Futures and Options contracts traded in TAIFEX & TAIEX index futures, options and futures options traded on foreign exchanges: NT$200,000,000

  14. Market Participants (as of April 30, 2006) • FCMs: 24 (42 branch offices) • Concurrent FCMs: 19 (84 branch offices) • Introducing brokers (IB): 71 (1007 branch offices) • Proprietary Trading Companies: 39 • Commodity Trading Advisors (CTAs): 22 • Commodity Pool Operators (CPOs): 13 • Clearing Members: 34 • Individual Clearing Members: 10 • General Clearing Members: 24

  15. Account opening of Market Participants (as of April 30, 2006) Accumulated numbers of account opening: 1,119,950 accounts- 1,113,880 of individualinvestors and 6,070 of institutional investors

  16. Trading Structure

  17. TAIFEX Products • Stock Index Futures • TAIEX Futures (July 21, 1998) (with CFTC No-action Letter) • Electronic Sector Index Futures (July 21, 1999) (with CFTC No-action Letter) • Finance Sector Index Futures (July 21, 1999) (with CFTC No-action Letter) • Mini-TAIEX Futures (April 9, 2001) (with CFTC No-action Letter) • Taiwan 50 Futures (June 30, 2003) • MSCI Taiwan IndexSM Futures (March 27, 2006) • Stock Index Options • TAIEX Options (Dec 24,2001) • Electronic Sector Index Options (March 28, 2005) • Finance Sector Index Options (March 28, 2005) • MSCI Taiwan IndexSM Options (March 27, 2006)

  18. TAIFEX Products -cont. • Stock Options • Jan 20,2003 Listed 5 stocks • Aug 2,2004 Added 10 stocks • Sep 27,2004 Added another 15 stocks • Interest Rate Futures • 10-Year Government Bond Futures (Jan 2, 2004) • 30-Day Commercial Paper Interest Rate Futures (May 31, 2004) • Metal Futures • Gold Futures (March 27, 2006)

  19. Trading Volume by Products 2006 Jan.~Apr. Unit: 1,000 contracts

  20. Trading Volume by Equity Products (Exclude TXO) 2006 Jan.~Apr. Unit: 1,000 contracts

  21. 3 TAIEX Options (TXO) The world' s top 10 index options-TXO ranked No. 3 in the category. Data: FOW TRADEData (Volume in million contracts)

  22. TAIEX Options

  23. Success Factors of TAIEX Options (TXO) • Contract specifications tailors the needs of domestic investors • Market maker mechanism • Efficient electronic trading platform • Reduction of transaction costs driven by high internet accessibility and competition among FCMs • Volatility of underlying index (TAIEX) • Increasing participation of institutional investors • Continuous marketing and investors education

  24. Contract Specification Tailors the Needs of Domestic Investors • Providing pay-off pattern with limited risk and unlimited return • High leverage characteristics • Providing risk diversification tool that meets investors’ needs • Contract specifications tailored to the needs of domestic investors • Using TAIEX as underlying index • Product characteristics similar to the existing warrants that are wildly accepted by investors

  25. TAIEX Options Contract Spec. • Underlying Index: Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX) • Ticker Symbol: TXO • Exercise Style: European • Multiplier: NT$50 (per index point) • Expiration Months • Spot month, the next two calendar months followed by two additional months from the March quarterly Cycle (March, June, September, and December) • Strike Price Intervals • Strike price between 3,000 points and 8,000 points: 100 points for the 3 serial months, 200 points for the 2 quarterly months

  26. TAIEX Options Contract Spec.-cont. • Strike (Exercise) Prices • Initial listing: 1 at-the-money strike price, plus • 5 ITM and 5 OTM for the 3 serial months • 3 ITM and 3 OTM for the 2 quarterly months • Premium Quote • < 10 points: 0.1 point (NT$5) • >=10 points,<50 points: 0.5 point (NT$ 25) • >=50 points, <500 points: 1 point (NT$ 50) • >=500 points, <1,000 points: 5 point (NT$ 250) • >=1,000 points: 10 point (NT$ 500) • Daily Price Limit • +/- 7% of previous day's closing price of the underlying index

  27. TAIEX Options Contract Spec.-cont. • Position Limit (on either direction of the market) • Individuals：8,000 contracts • Institutional investors：16,000 contracts; • Institutions may apply for a higher position limit on trading accounts for hedging purpose • Last Trading Day • The third Wednesday of the delivery month of each contract • Expiration Date • The first business day following the last trading day • Final Settlement Price • Computed from the first fifteen-minute volume-weighted average of each component stock's prices in the index on the final settlement day • Settlement: Cash settlement

  28. Implementation of Market Maker Mechanism • Objectives • Enhancing price continuity, fairness and stability and provide liquidity • Attracting more participants to enter the options market • Applicable Products • TAIEX Options • Equity Options • Electronic Sector Index Options • Finance Sector Index Options • MSCI Taiwan IndexSM Options

  29. Efficient & Friendly Trading Platform • 95% of orders can be processed within 3 seconds. • Capacity of trading system is 8 million contracts / day • Over 1,000 FCM branches island-wide, providing face-to-face services for individual participants • Implementation of trading platforms by FCMs • Friendly interfaces for investors to participate the complicated derivatives market • 40% of orders placed through internet • Reducing transaction cost by 50%, compared with traditional orders placing through telephone

  30. New Measures & New Products

  31. Trading for Non-Hedging Purposes

  32. Status • Prior to March 27 2006, foreign investors could only invest in Taiwan’s futures market for hedging purposes • Must trade in Taiwan’s securities market • Margins for futures trading should not exceed 30% of inward- remitted funds • Total contract value of short position should not exceed the total market value of securities • Total contract value of short position should not exceed the total amount of cash equivalents • After March 27 2006, foreign investors are allowed to trade in TAIFEX market without limitation on trading purposes

  33. Investment limits and Restrictions • Fund regulation: Margin deposit/withdrawal in US Dollar only • Offshore Funds shall be separated into two different accounts for securities and futures markets, respectively • Position limit: According to rules governing position limits for various products • Foreign institutional investors (the same as local institutional investors) may apply for higher position limit

  34. Omnibus Account

  35. To Open an Omnibus Account • Offshore foreign FCMs with following requirement are eligible to open omnibus accounts • A clearing member of a foreign futures exchange recognized by the competent authority • Within the past one year, in its home country or in Taiwan, it has not been sanctioned by the relevant authorities or self-regulatory institutions for securities or futures by the suspension of the securities or futures brokerage business of its head (or a branch) office • Within the past three years, it has not breached a futures trading contract or securities trading contract in its home country or Taiwan, or violated the reporting obligations, where the circumstances are serious

  36. Settlement of Omnibus Accounts • Collection of margins • Each omnibus account is regarded as one single account, the local FCM will collect margins and premiums for futures and options from the offshore foreign FCM • Offshore foreign traders will deposit and withdraw margins for both NTD and USD denominated products in USD only • Computations of margins • The margins of an omnibus account will be collected on a gross basis with margins for long and short positions separately • Margin reduction in futures contracts cannot be applied to the omnibus account

  37. Rules and Regulations of Position Limit • Direct account • Position limits are set pursuant to the trading rules of each contract and in consistent with domestic investors • Position limits are applicable on ID level • Application for higher position limit based on hedging purpose • Omnibus account • An omnibus account is not subject to position limits. • Institutional investors who have applied for higher position limit are not allowed to trade through omnibus accounts except for liquidating the positions.

  38. USD-Denominated Products

  39. MSCI Taiwan IndexSM Futures Contract spec. • Underlying Index: MSCI Taiwan Stock IndexSM • Ticker Symbol: MSF • Trading Hours: 08:45AM - 1:45 PM • Contract Size: US $100 x Futures price • Delivery Months: • Spot month, the next calendar month, and the next three quarter months • Daily Settlement Price: • The last traded price of the closing session or otherwise determined by the TAIFEX according to the trading rules. • Daily Price Limit • +/- 7% of  previous day's settlement price • Minimum Price Fluctuation • 0.1 index point (US $10)

  40. MSCI Taiwan IndexSM FuturesContract spec. -cont. • Last Trading Day • The third Wednesday of the delivery month of each contract • Final Settlement Day • The first business day following the last trading day • Final Settlement Price • Computed from the first fifteen-minute volume-weighted average of each component stock's prices in the index on the final settlement day • Settlement: Cash settlement. • Position Limit: • Individuals: 300 contracts • Institutional investors: 1,000 contracts; • Institutions may apply for a higher position limit on trading accounts for hedging purpose

  41. MSCI Taiwan IndexSM Options Contract spec. • Underlying Index: MSCI Taiwan Stock IndexSM • Ticker Symbol: MSO • Exercise Style: European • Multiplier: US $20 (per index point) • Expiration Months • Spot month, the next two calendar months followed by two additional months from the March quarterly Cycle (March, June, September, and December) • Strike Price Intervals • Strike price between 150 points and 400 points: 5 points for the 3 serial months, 10 points for the 2 quarterly months

  42. MSCI Taiwan IndexSM Options Contract spec. -cont. • Strike (Exercise) Prices • Initial listing: 1 at-the-money strike price plus • 5 in-the-money and 5 out-of-the-money strike prices for the 3 serial months • 3 in-the-money and 3 out-of-the-money strike prices for the 2 quarterly months • Up to the 5th business days before expiration, add new strike prices to maintain: • 5 in-the-money and 5 out-of-the-money strike prices for the 3 serial months • 3 in-the-money and 3 out-of-the-money strike prices for the 2 quarterly months • Premium Quote • <0.5 point：0.005 point (US $0.1) • >=0.5 point, <2.5 points：0.025 point (US $0.5) • >=2.5 points, < 25 points：0.05 point (US $1) • >=25 points, <50 points：0.25 point (US $5) • >= 50 points：0.50 point (US $10) • Daily Price Limit • +/- 7% of previous day's closing price of the underlying index

  43. MSCI Taiwan IndexSM Options Contract spec.-cont. • Position Limit (on either direction of the market) • Individuals：1500 contracts • Institutional investors：5,000 contracts; • Institutions may apply for a higher position limit on trading accounts for hedging purpose • Last Trading Day • The third Wednesday of the delivery month of each contract • Expiration Date • The first business day following the last trading day • Final Settlement Price • Same as MSCI Taiwan IndexSM Futures • Settlement: Cash settlement

  44. Gold Futures contract spec. • Underlying : Gold with a purity of .995 • Ticker symbol: GDF • Trading Hours: 8:45am – 1:45pm • Contract Size: 100 Troy Ounces • Delivery Months • The current calendar month and each of the next 6 even-numbered months • Daily Price Limit • Prices will be permitted to rise or fall a maximum of 15% over the settlement price of the preceding day. • Minimum Price Fluctuations • US$0.10 per troy ounce (US$10 per contract)

  45. Gold Futures contract spec. -cont. • Last Trading Day • Trading terminates at the close of business on the third to last business day of the maturing delivery month • Final Settlement Day • The first business day after the last trading day • Final Settlement Price • Based upon the London Gold AM Fixing as released by The London Gold Marked Fixing Limited on the last trading day • Settlement: Cash settlement • Position Limits • Individual: 300 contracts • Institutional: 1,000 contracts

  46. Prospects & future development

  47. Improvement Programs • Improvement Measures Understudied • Government Bond • Further restrict the maturity of deliverable bonds from 8.5 years to 10 years • Calculation base of cash settlement price changes to CTD price base • Developing New Products • Currency cross-rate futures • DRAM futures • Single stock futures • Interest rate futures and options in various terms • Equity index futures and options for new indices • Energy futures

  48. Improvement Measures of trading and clearing • Spread order for futures contract • Relaxation for price limit • SPAN • Accept securities and government bond as collateral

  49. Internationalization of futures market • Actively attract foreign investors into the market • Forge strategic alliances with foreign exchanges and related organizations • Participate in international organizations • FIA, IOMA, WFE, IOSCO

  50. Summary & Conclusion

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