Regulations for Banks Conducting Financial Derivatives

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(6) Marketing Control

In significant, in order to protect general customer, the Rule specifies that offshore product that are not to be sold to general customer offshore are not permitted also to be sold to the general customer in Taiwan. In additionally, Trustee or distribution agent should not permit customer that is of low risks level to invest in a risky Structured Product that may be higher then their risks tolerance level.

(7) The requirements of public announcement and reporting

Under the new Rule, the Issuer or Master Agent should publicly announce via the Offshore Structured Note Market Observation System set up by the Taiwan Depository and Clearing Corporation (TDCC) on 23 August 2009²⁸ to upload relevant Structured Note Product Basic information, reference price, daily sales information and material news etc. information for customer‟s easy inquiry.

5.2.2 Regulations for Banks Conducting Financial Derivatives Business (“the Regulations”)²⁹

(1) The Regulations was first announced on 25 April 1995 and following the promulgation of the Regulation Governing offshore Structured Product, FSC further revised the said Regulations at the end of December of 2009 to align with the Rules that were in connected to the Governing of the structured products. In line with the revision, the disciplinary rules of the Regulation are newly announced on mid

28Taiwan Depository & Clearing Corporation, 2010.04. Newsletter Issue 127

29金融法規全文檢索查詢系統 行政院金融監督管理委員會銀行局 銀行辦理衍生性金融商品業務應注

意事項(last Modified 2009.12.31)

<http://law.banking.gov.tw/Eng/FLAW/FLAWDAT01.asp?lsid=FL006459>

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December 2010. The Regulations cover generally all domestic derivatives transactions except those offshore structured products that are separately regulated under the Regulation Governing Offshore Structured Products and those securitization products, structured bond or convertible bond which are of derivatives nature securities products. In particularly, the below are the significant revisions of the Regulations:

(i) The new revised Regulations requested Bank to categorize its customers also into professional and non-professional customer (i.e. general customer). The criteria to meet the professional customer‟s categorizes is clearly stipulated in the Regulations.

(ii) New qualification examination requirements for sales that engaged in the sales of structured Products. Other than the original trainings, Sales are required to pass also the specific Structured Product Sales Qualification examination.

(iii)New requirements which states that Bank should stipulate clearly the calculation method of early termination of derivatives contract, including the requirement to show how the early redemption amount is settled and to reflect the market value at the time of calculation.

(iv)Specially stipulate in the Regulations that Bank when conducting the relevant Business should act in good faith and exercise due care and fiduciary duty of a good administrator based on the principles of honesty and integrity.

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(v) Legal documents in specific format with required contents( for instant product term sheets, investor information summaries, risks disclosure, transaction confirmation etc. ) and internal controls requirements, including marketing and sales process as required for its professional and non-professional customers are clearly stipulated. In specific for sales process controls, banks have to work out the sales process that includes the establishment of KYC and product suitability for their general customer.

The risks profile of customers and product should be categorized at least in three different segments. Customer must signed to agree on the customer segment they are classified. And Bank is prohibited to sell any product that does not match customer‟s risks profile or if product is only to be sold to professional customer only. Sales of standard Structured Product with specific length tenor (more than six months) shall have a contract preview period of not less than seven days. In additionally, Bank is required to read out the content in the Investor Information Summary and maintain such evidence by tape recording when providing Structured Note Business with non-professional customer.

(vi)Bank should not offer Structured Product transaction services in the name of deposits and all transaction documents should be kept record for audit track.

(vii)Specify restrictions on marketing and promotional materials. For marketing materials, the DM should be clear, fair and not misleading and most importantly, the rewards and risks should be released to the customer in a balance manner, Banks should not mislead customer that Structured Note products are guarantee by the

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government by expressing that such products are approved by the authorities.

(viii)Complaints/Disputes resolution mechanisms should be established in place and relevant information should be released on transaction document and Bank‟s internet.

If customer is unable to resolve the disputes via Banks internal disputes procedures, customer may approach Banker Association for arbitration or mediation.

(2) Self Disciplinary Rules for Bank Conducting Derivatives Financial Product Business³⁰

The Rules is newly issued around mid-December of 2010, in significant, it regulate to detailing the required context in the relevant Structured Product legal documentations and sales process requirements, the Rules set forth the types of derivatives products that Bank may sold to its non-professional investor. In additionally, the Rules distinguish the Structured Product into “principal protected” and “non-principal protected” and restricts on the types of derivatives that may be linked to the principal or non-principal protected structured note. For non-principal protection structured product, other than the above restrictions, it is also specified in the Rules that the redemption amount at the maturity of the non-principal protected structured product should retain at least seventy-percent of the original investment amount.