1

Policies and Regulationsof

Non-Hedge Trading and

USD/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

Individual Clearing Member General Clearing Member

FCM FCM

IBIB

Settlement Banks

Fund transfer

Settlement Banks

Fund transfer

Customers

IBIB CPOCPO

FCM

CPOCPOCPOCPO

CTA

CN

FA

(Chinese N

ational F

utures Association)

6

Clearing procedures

FSC/SFB

Trading report

TAIFEX

FCMs

Margin deposit/ orders

Position Management

Settlement/Clearing

Submit tickets to

Clearing Member

Deal-done report

Deal-done report

Settlement request

CTA CPO IB

Discretionary operation

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

59,146.38

64,760.88

31,874.93

7,944.254,351.39

1,926.791,077.67277.91

356.15

237.14

128.07

32.0319.25

7.114.522.22

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1998

1999

2000

2001

2002

2003

2004

2005

/09

0

100

200

300

400

Total tradi ng vol ume

Average dai l y tradi ngvol ume

uni t thousand：

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

94.41% 92.44% 90.49%

80.74%

68.57%65.02%

57.61%

42.39%34.98%

31.43%

19.26%

9.51%7.56%5.59%

0%

20%

40%

60%

80%

100%

1999 2000 2001 2002 2003 2004 2005/09

Institutional investors Individuals

11

Year Market Turnover

World Ranking

Growth

Rate

Ave. Daily Trading Vol.

1998 277,909 - 2,223

1999 1,077,672 287.8% 4,522

2000 1,926,789 78.79% 7,110

2001 4,351,390 125.84% 19,252

2002 7,944,254 82.60% 32,033

2003 31,874,934 301.23% 128,067

2004 59,146,376 85.56% 237,144

5757

4747

4444

3838

2626

3535

2020

Data Resource: Futures Industry Association 2005

Jan.~Jul.

48,005,840 162.33% 346,220 1818

Worldwide Ranking

12

TAIEX Options (TXO) The world' s top 10 index options-TXO ranked No. 5 in the

category.

Data: Trade Data Global Service.

5

Rank

Contract Exchange Trading Volume

of 2004

1 KOSPI 200 Index Options Kofex 2,512,125,963

2 Dow Jones Euro STOXX 50 Index Options Eurex 70,938,301

3 CAC 40 Index Options Euronext 63,152,339

4 SPX S&P 500 Index Options CBOE 49,472,117

5 TAIEX Index Options TAIFEX 43,824,511

6 DAX Index Options Eurex 42,081,067

7 TA 25 Index Options Tel-Aviv Stock Exchange 36,792,551

8 FTSE 100 Index Options Euronext 17,866,310

9 AEX Index Options Euronext 17,093,573

10 Nikkei 225 Index Options Osaka 16,560,874

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

TAIFEX

FCM2 FCM1

Foreign investor(Direct acct A)

Foreign investor(Direct acct B)

FCM3

Foreign investor(individual acct)

Foreign FCM 2（ (Omnibus acct 2)

、Foreign FCM and foreignInvestors shall obtain

an ID before opening an account through the custodian banks.

The omnibus account agreement，should indicate the

party whois obliged to file details of positions held by individual clients

Foreign investor(individual acct)

Foreign FCM 1 (Omnibus acct 1)

19

Proposed targets of futures market relief

Offshore institutionalinvestor

Offshore overseasChinese andforeigners

Onshore institutionalinvestor

Onshore overseasChinese andforeigners

May apply forexemption of position

limit

Obtain ID thrucustodian bank

Obtain ID thrulocal securities firm

or FCM

1. First obtain ID.2. Comply with position limits for thecommodity (corporation or individual)

Foreign FCM

Individual client

OmnibusaccountDirect account

1. First obtain ID.2. Omnibus account is not subject toposition limit, butindividual clients under the omnibusaccount will be assigned an ID andsubject to position limits for regularaccounts.

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

：Fig1 overseas Chinese and foreign investors obtain an ID

overseasChineseand foreigninvestors

onshore:FCM or local securities firm

offshore:costodian

bank ID registration system

TAIFEX

ID application request

Apply ID

Provide ID & certification

downloadabtain ID

Step1:obtain an ID

Step2:overseas Chinese and foreign investors account

opening procedure

Local FCM

1.apply to open an account

3.Sign service

agreement

overseas Chineseand foreigninvestors

TAIFEX

5.ask for supplemental information or cancel the

account

Bank

6.open a foreign

exchange account

：Fig2 overseas Chinese and foreign investors account opening procedure

2.qualification review

4.upload account opening data

24

Procedure for opening omnibus account

LocalFCM

1.Apply toopen anomnibusaccount

4. Sign serviceagreement

6. Send written information

A. Offshore foreignFCM (Omnibusaccount holder)

B.A local agent orrepresentative

TAIFEX6a. Ask for supplementalinformation or cancel theaccount

Bank

Enlist or assign

Fig. 2 Omnibus Account OpeningProcedure

2.Qualificationreview

3. Agree to partyresponsible forfiling positionreport

5. Upload account openingdata

8. A foreign FCM and itslocal agent representative canapply for authentication forthe electronic filing system atthe same time

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.

Client ForeignFCM TAIFEX

Place order Place order(through omnibus account)

Trade confirmationTransaction confirmation

Trade confirmationLocal FCM

Place order

Collect marginCollect margin

The trading and settlementbetween foreign FCM andits clients shall beundertaken pursuant to theregulations of the homecountry of foreign FCM

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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

NTD-denominated USD-denominated(TAIEX futures,

options)(gold futures, indexfutures and options)

Margin USD USD

Settlement

NTD (authorize FCM to settleexchange in USD when

depositing and withdrawingmargin)

USD

Margin NTD USD

Settlement NTD USD

OverseasChinese and

foreigninvestors

Locals

Commodity

Trader

30

No Reject order

Margin short

Margin equity short

Settlement upon expiry

Gain/loss of open positions

(Settlement netting)

FCM placesorder(buy/sell)

Check immediatelywhether margin

deposit is sufficient

足

TAIFEX matches trade

Automatic offset of long/shortpositions in the same account (netting)

Mark-to-market

足

Daily account settlement

Settlement upon expiry

MemberFCM

MemberFCM

MemberFCM

Deposit margin

$VISIO CORPORATION

Payment upon expiryLoss : Remit in fundsGain : Remit out funds

$VISIO CORPORATION

USD margin call

$VISIO CORPORATION

Settlement positionDaily Trading positionFutures margin(USD )

【 Description 】 Overseas Chinese and foreign investors pay margin in USD for trading of US-denominated products.

$VISIO CORPORATION

Deposit margin

FCM’smargin account

Clearing member’smargin account

TAIFEXMargin account

Client Client’s position

【 FIG.1 】 Margin and Trading Flow Process for Overseas Chinese and foreign investors

31

【 Fig.3】 Futures Margin Payment Scheme

NTD and USDDenominated commodities

【 Description 】 A. Principles

1.

Offshore foreign investors will deposit and withdraw margins for USD and NTD denominated commodities in USD.

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.

NTD futures margin account

NTD futures margin account

NTD futures margin account

Local and onshoreForeign investors

NTD

NTD

NTD

TAIFEX

FCM

Clearing member

Investor

USD futures margin account

USD futures margin account

USD futures margin account

Offshore foreign investor

Local and onshoreForeign investors

USD USD

USD

USD

32

Contact Us

Trading ：

Wen-Lin ChouE-mail: wlchou@taifex.com.tw

TEL ： 886-2-23695678 ext.126

Annie HsuE-mail: annie@taifex.com.tw TEL ： 886-2-23695678 ext.118

Maggie M.Y. ChienE-mail: maggie@taifex.com.tw

TEL ： 886-2-23695678 ext.116

Clearing ：

Jean YangTEL ： 886-2-23695678 ext.170

Simon Chen E-mail: simonc@taifex.com.tw

TEL ： 886-2-23695678 ext.171

Business Development ：

Ben YenE-mail: yjp@taifex.com.tw

TEL ： 886-2-23695678 ext.240

Rita TsaiE-mail: ritatsai@taifex.com.tw

TEL ： 886-2-23695678 ext.249

Visit Our web site at : WWW.TAIFEX.COM.TW