- Who can participate in the TWSE SBL System?
- Are all FINIs able to participate in the TWSE SBL System?
- Are there any restrictions on participation of privately raised funds in the SBL market?
- How to open an SBL account?
- What are loanable securities?
- What kinds of SBL transaction types does TWSE provide?
- What are the trading flows for three types of SBL transactions?
- What is the eligible collateral provided in fixed-rate and competitive auction transactions? How does TWSE evaluate those accepted collateral?
- What is the eligible collateral provided in negotiated transactions? How is the collateral managed?
- Are there any restrictions on short selling borrowed stocks?
- How to obtain information on the real time available volume for short selling?
- What are the related costs derived from the TWSE SBL System for borrowers and lenders?
- What is the tax treatment of SBL transactions?
- How long is a lending period? Can an SBL transaction be rolled over when it is due?
- How do lenders early recall loaned securities?
- What is the process for dealing with default matters?
1. Who can participate in the TWSE SBL System?
The participants are limited to specific institutional investors pursuant to Article 5 of the Taiwan Stock Exchange Corporation Securities Borrowing and Lending Regulations. The permitted participants are as follows:
- Permitted lenders include insurance companies, banks, investment and trust companies, securities firms, securities investment trust companies (i.e. funds raised by), dedicated futures commission merchants, securities finance companies, foreign institutional investors (FINIs), four governmental funds (labor pension fund, labor insurance fund, public service pension fund and Taiwan postal fund), trust business (specific trust contracts where securities of employees or clients are trusteed) and others approved by the competent authority.
- Permitted borrowers include banks, securities firms, securities investment trust companies (i.e. funds raised by), futures dealers, securities finance companies, foreign institutional investors (FINIs) and others approved by the competent authority.
2. Are all FINIs able to participate in the TWSE SBL System?
No, FINI participants are limited to specific offshore institutional investors, approved by the competent authority. Currently, FINIs which qualify as foreign banks, insurance companies, securities firms, fund management institutions, institutional investors operated by a foreign government, pension funds, mutual funds, unit trusts, investment trusts, trust companies and academic or charitable organizations may participate in the TWSE SBL System.
3. Are there any restrictions on participation of privately raised funds in the SBL market?
In terms of domestic privately raised funds, the total value of short sold borrowed stocks and margin short sales cannot exceed 50% of their net assets, and the lending volume of each single stock cannot exceed 50% of the total amount of that stock held. Regarding foreign private funds, currently, only mutual funds and unit trusts are allowed to participate in our SBL market. When opening SBL accounts, they must submit documentation of management by a corporate institution in addition to currently required documents. The total short selling value of borrowed stocks of foreign private funds cannot exceed 50% of their net assets in Taiwan. In addition, the lending volume of each single stock cannot exceed 50% of the total amount of that stock held.
4. How to open an SBL account?
An SBL participant is required to enter into a “Letter of Entrustment for Securities Borrowing and Lending Transaction” with a securities firm, who handles the linkage with the TWSE SBL System. The securities firm shall submit the required documents of the participant to TWSE to open an SBL account. This enables the participant to make SBL transactions through the System.
5. What are loanable securities?
The loanable securities include securities eligible for margin trading, underlying securities of issued call/put warrants, stock options, overseas issued depositary receipts, overseas and domestically issued convertible corporate bonds, exchangeable corporate bonds, constituent stocks of ETFs and ETFs.
The loanable securities are posted on the “Securities Lending Section” of TWSE website at
http://www.twse.com.tw/en/page/products/sbl/sbl_info.html on a daily basis.
6. What kinds of SBL transaction types does TWSE provide?
TWSE provides three kinds of SBL transactions: fixed-rate transactions, competitive auction transactions and negotiated transactions.
- Fixed-rate transactions: TWSE acts as a guarantor in fixed-rate transactions. The fee rate is fixed at 3.5% per annum. TWSE regularly reviews and announces the rate.
- Competitive auction transactions: TWSE acts as a guarantor in competitive auction transactions. Based on a deal-matching principle, the fee rate of each transaction should be determined by bids and offers mechanism through the TWSE SBL System subject to a maximum interest rate of 20% per annum, with 0.1% as the fluctuant unit.
- Negotiated transactions: Both parties negotiate the fee rate through the SBL contract. When SBL related terms and conditions have been negotiated and determined by the parties and confirmed by TWSE for consistency, TWSE requests Taiwan Depository & Clearing Corporation (TDCC) to transfer the loaned securities. The risk of the borrower defaulting should be born by the lender. Loaned securities are transferred into borrowers’ accounts as soon as TWSE SBL system matches related terms and conditions of both parties. TWSE is also working to introduce an option which transfers loaned securities on the following day. Thus, borrowers may short sell after matching rather than having to have loaned securities in their accounts. The expected implementation date is at the end of July 2008.
7. What are the trading flows for three types of SBL transactions?
Chart 1 The Trading Process for Fixed-Rate and Competitive Auction Transactions Chart 2 The Trading Process for Negotiated Transactions
8. What is the eligible collateral provided in fixed-rate and competitive auction transactions? How does TWSE evaluate those accepted collateral?
TWSE acts as a guarantor in fixed-rate and competitive auction transactions. When borrowing securities through fixed-rate or competitive auction transactions, a borrower should provide collateral to TWSE. The eligible collateral includes:
- Cash: TWSE shall pay interest to borrowers at the interest rate of current deposit accounts of the corresponding bank and withhold the interest income tax on behalf of the competent authority;
- Securities eligible for margin trading: The evaluated rates are 70% of the opening reference price of the relevant day in the trading market for TWSE-listed securities and 60% for OTC-listed securities. (Please visit TWSE website at
http://www.twse.com.tw/en/page/products/sbl/sbl_info.html to check the eligible collateral list);
- Bank guarantees;
- Taiwan scripless government bonds: The value of such bonds provided as collateral shall be calculated at 90% of their face value.
9. What is the eligible collateral provided in negotiated transactions? How is the collateral managed?
In negotiated transactions, the terms and conditions of the collateral and the collateral ratio are to be determined and transferred by the parties themselves. When borrowing securities in negotiated transactions, FINIs may provide onshore or offshore collateral. Where TWSE-listed or OTC-listed securities are provided as collateral by FINI borrowers, FINI lenders shall entrust Taiwan Depository & Clearing Corporation (TDCC) to take custody into dedicated custody accounts.
10. Are there any restrictions on short selling borrowed stocks?
There are three ceilings adopted to monitor the volume of short selling borrowed shares over the whole market:
- Daily maximum short selling of borrowed stocks cannot exceed 30% of their average daily trading volume over the previous 30 trading sessions;
- Maximum for short selling of borrowed stocks cannot exceed 10% of outstanding shares per lending stock;
- The total volume of short selling borrowed stocks and margin short sales cannot exceed 25% of outstanding shares per stock.
11. How to obtain information on the real time available volume for short selling?
TWSE discloses the available volumes for SBL short sales through the
”SBL Section” of the TWSE website at http://www.twse.com.tw/en/page/trading/SBL/TWT96U.html
on a daily basis. Moreover, the disclosure of the real time available volumes
for SBL short sales in the Market Information System of TWSE website is at
http://mis.twse.com.tw/stock_SBLScap.html to facilitate sellers before they place a short sale order. In addition, the sellers can ask securities firms to check it for them by way of computer linkage to TWSE. Once the ceiling is reached, the short sale order will be rejected from the trading system automatically.
12. What are the related costs derived from the TWSE SBL System for borrowers and lenders?
At the time of returning loaned securities, the borrower should pay an SBL fee for the lender, an SBL service fee for TWSE and an SBL brokerage commission for the securities firm. Likewise, the lender should pay an SBL service fee for TWSE and an SBL brokerage commission for the securities firm.
- The calculation of the SBL fee is as follows:
- For fixed-rate and competitive auction transactions: The SBL fee shall be calculated on a daily and trade-by-trade basis. The total SBL fee is an accumulative total of the daily closing price of the loaned securities multiplied by the trading volume and the SBL fee rate. When there is no closing price, the calculation shall be made on the basis of the most recent closing price.
- For negotiated transactions: The SBL fee shall be determined by the borrower and the lender through negotiation.
- The calculation of the TWSE SBL service fee is as follows:
- For fixed-rate and competitive auction transactions: TWSE charges both parties the amount of 80% on 2% of the SBL fee.
- For negotiated transactions: TWSE charges both parties the amount of 0.02%p.a. of SBL trading value.
- The calculation of the SBL brokerage commission is as follows:
- For fixed-rate and competitive auction transactions: The securities firm charges both parties the amount of 20% on 2% of the SBL fee. Also, parties may negotiate such commission rate among themselves.
- For negotiated transactions: The securities firm negotiates SBL brokerage commissions with his clients.
13. What is the tax treatment of SBL transactions?
On August 20, 2007, the MOF Tax Authority amended tax treatment on SBL related fees and revenue. The following is a summary of the key points:
|Item||Manufactured Dividends||SBL Fees||Offshore Agent Fees||Interest on Offshore Collateral|
(Both sides are FINIs w/out PE or agent in Taiwan)
- Manufactured dividends are treated as lenders’ dividend income or capital gains depending on whether borrowers hold borrowed securities as of the record date. If held on the record date, manufactured dividends are treated as lenders’ dividend income and are subject to income tax. If sold, manufactured dividends are deemed to be capital gains, which are currently tax free in Taiwan. In addition, no business tax is levied on dividend income or capital gains.
- SBL fees are considered Taiwan sourced income and are subject to income tax as well as business tax. The Tax Authority further clarified that when both parties are FINIs without permanent establishments in Taiwan, the SBL fees are outside of business tax coverage.
- Regarding offshore agent fees, when all of the agency services are provided offshore, and all parties including the lender, the borrower, and the offshore agent do not have permanent establishments in Taiwan, the agent fees are not subject to income tax or business tax.
- The interest on the onshore cash collateral received by the borrower shall be subject to income tax. However, if the borrower is a financial institution or trust investment company, business tax shall also be levied. In addition, interest on offshore collateral is not considered Taiwan sourced income, and therefore, not subject to tax in Taiwan.
- No securities transaction tax or capital gain tax will be levied on the SBL transactions. If, however, a borrower defaults, and equivalent cash instead of the physical securities is returned to a lender, it shall be deemed that the lender has sold the loaned securities and shall be subject to securities transaction tax.
14. How long is a lending period? Can an SBL transaction be rolled over when it is due?
The lending period cannot exceed 6 months. Upon the maturity date, a one-time rollover is allowed to extend the loan term up to another 6 months. Consequently, a maximum lending period could be one year. In an application for the extension of a loan, no terms or conditions of the loan can be amended except the loan period. The rules of lending period and the one-time rollover can be applied to all types of SBL transactions.
15. How do lenders early recall loaned securities?
By giving a 1-day, 3-day or 10-day prior notice period, lenders can early recall loaned securities in fixed-rate or competitive auction transactions. For recalling securities on loan in negotiated transactions, lenders shall follow the agreement reached between the parties.
16. What is the process for dealing with default matters?
In fixed-rate and competitive auction transactions, when a borrower fails to fulfill his or her obligations in a timely manner, such as returning loaned securities or manufactured dividends, providing additional collateral, or paying related fees, TWSE shall dispose of the provided collateral to buy the loaned securities back. If any shortfall is left, TWSE will notify the borrower. If the borrower fails to bridge the shortfall by a prescribed deadline, TWSE shall deem the borrower to be in breach of the contract and terminate his or her SBL participation. In negotiated transactions, upon any event of default, either party shall forthwith report to TWSE on the handling of the default event.