The Taiwan SBL MarketThe Taiwan SBL Market

Li-Chen,YangLi-Chen,YangClearing DepartmentClearing Department

Taiwan Stock ExchangeTaiwan Stock ExchangeMarch 13, 2008March 13, 2008

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OutlineOutline

SBL market conditionsSBL market conditionsThe TSEC SBL systemThe TSEC SBL systemRegulatory updatesRegulatory updatesFuture prospectsFuture prospects

SBL Market ConditionsSBL Market Conditions

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Market DevelopmentMarket Development

The TSEC SBL system launched- June 2003The TSEC SBL system launched- June 2003Purpose test and onshore collateral requirements Purpose test and onshore collateral requirements removed- June 2005removed- June 2005Ceilings set for short selling- June 2005Ceilings set for short selling- June 2005Price restriction removed for designated stocks- May Price restriction removed for designated stocks- May and November 2007and November 2007Securities firms allowed to conduct SBL acting as Securities firms allowed to conduct SBL acting as lending principal- July 2007lending principal- July 2007

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Market StructureMarket StructureTSEC SBL System

(Fixed-rate, competitive auction, negotiated)

Qualified institutionalinvestors(Principal)

Securities FinanceCompanies

(Lending principal)

Direct lending to investorsSecurities firms

(Lending agent)

Investors

Securities firms(Lending principal)

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Statistics- SBL Trading AmountsStatistics- SBL Trading Amounts

Year 2004 2005 2006 2007

Total transactions

1,311 orders 1,120 orders 1,455 orders 2,799 orders

Total volume traded

3.0 billion shares

2.3 billion shares

2.8 billion shares

5.7 billion shares

Total value traded

US$2.5 billion(approx.)

US$2.1 billion(approx.)

US$2.7 billion(approx.)

US$9 billion(approx.)

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Statistics- Transaction Types by VolumeStatistics- Transaction Types by Volume

0

10

20

30

40

50

60

70

80

90

%

2003 2004 2005 2006 2007

Fixed-Rate

CompetitiveAuctionNegotiated

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Statistics- FINIs’ ParticipationStatistics- FINIs’ Participation

FINI Trading Volume Total SBLTradingVolume

Ratio of FINI toTotal SBL Trading

VolumeLend Borrow Lend Borrow

2004 6 3,007 3,049 0.2% 98.6%2005 45 2,232 2,275 2.0% 98.1%2006 664 2,658 2,761 24.0% 96.3%2007 3,482 5,684 5,739 60.7% 99.0%

(FINIs, Foreign Institutional Investors) Unit:Million shares

The TSEC SBL SystemThe TSEC SBL System

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A centralized system, launched in June 2003A centralized system, launched in June 2003Limited to qualified institutional investorsLimited to qualified institutional investorsClassifies SBL transactions into 3 types:Classifies SBL transactions into 3 types:* Fixed-rate - fee rate fixed at 3.5% p.a.* Fixed-rate - fee rate fixed at 3.5% p.a.* Competitive auction - fee rate by “bids & offers”* Competitive auction - fee rate by “bids & offers”* Negotiated - fee rate via negotiations* Negotiated - fee rate via negotiations

Features of the TSEC SBL SystemFeatures of the TSEC SBL System

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TSEC Roles in the SBL SystemTSEC Roles in the SBL System

Provides intermediary servicesProvides intermediary servicesRelays transfer requests to TDCC via networkRelays transfer requests to TDCC via networkManages collateral in fixed-rate & competitive Manages collateral in fixed-rate & competitive auction transactionsauction transactionsActs as a guarantor in fixed-rate & competitive Acts as a guarantor in fixed-rate & competitive auction transactionsauction transactions

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Roles of SBL BrokersRoles of SBL Brokers

Act as agents for borrowers and lendersAct as agents for borrowers and lenders Relaying TSEC SBL system informationRelaying TSEC SBL system information Applying for SBL trades with TSECApplying for SBL trades with TSEC Handling settlementHandling settlement

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Transaction Types Transaction Types

TransactionTypes

Fee Rates Collateral Rates

Period Pledgee Guarantor

Fixed-rate 3.5% 140% of loan value

6 months and one-time rollover permitted

TSEC TSEC

Competitive Auction

Bids and Offers

140% of loan value

6 months and one-time rollover permitted

TSEC TSEC

Negotiated Negotiable Negotiable 6 months and one-time rollover permitted

Lender NA

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Ceilings set for total short selling volume in the whole Ceilings set for total short selling volume in the whole market:market: Daily maximum for short selling of borrowed stocks Daily maximum for short selling of borrowed stocks

cannot exceed 3% of outstanding shares per lending cannot exceed 3% of outstanding shares per lending stockstock

Maximum for short selling of borrowed stocks cannot Maximum for short selling of borrowed stocks cannot exceed 10% of outstanding shares per lending stock exceed 10% of outstanding shares per lending stock

The total volume of short selling borrowed stocks and The total volume of short selling borrowed stocks and margin short sales cannot exceed 25% of outstanding margin short sales cannot exceed 25% of outstanding shares per stockshares per stock

Market Rules for Short Market Rules for Short Selling(1)Selling(1)

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Market Rules for Short Selling(2)Market Rules for Short Selling(2)

Only ‘covered’ short selling allowedOnly ‘covered’ short selling allowedUp-tick rules mandatoryUp-tick rules mandatoryExemptions for up-tick rules:Exemptions for up-tick rules:

Warrant Issuers and Stock OptionWarrant Issuers and Stock Option Market MakersMarket Makers

ETFsETFs

Constituents of TW 50 IndexConstituents of TW 50 Index

Constituents of TW Mid-Cap 100 Index and TW Constituents of TW Mid-Cap 100 Index and TW Technology IndexTechnology Index

Regulatory UpdatesRegulatory Updates

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Major Reforms in 2007Major Reforms in 2007

Additional early recall optionAdditional early recall optionPrice restriction removalPrice restriction removalSBL taxation reformSBL taxation reformTSEC SBL service fee revisionTSEC SBL service fee revision

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Additional Early Recall OptionAdditional Early Recall Option11

An additional option for early recall:An additional option for early recall: 1-day prior notice in addition to 3 & 10-day 1-day prior notice in addition to 3 & 10-day

notice in fixed-rate and competitive auction notice in fixed-rate and competitive auction transactionstransactions

1 Implemented on January 29, 2007

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Price Restriction RemovalPrice Restriction Removal

Constituents of Taiwan 50 Index exemptedConstituents of Taiwan 50 Index exempted22

Constituents of Taiwan Mid-Cap 100 and Taiwan Constituents of Taiwan Mid-Cap 100 and Taiwan Technology Index exemptedTechnology Index exempted33

Aforementioned stocks constitute 84% of total Aforementioned stocks constitute 84% of total market valuemarket value

3 Effective from November 12, 20072 Effective from May 11, 2007

2020

SBL Taxation ReformSBL Taxation Reform44

Item Manufactured Dividends

LendingFees

Overseas Agent Fees

Interest on Overseas Collateral

Income Tax

Yes(borrower holds)

Yes No NoNo

(borrower sells)

Business Tax NA

No(Both sides are FINIs w/out PE or agent in Taiwan)

No No

4 Effective from August 20, 2007

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TSEC SBL Service Fee RevisionTSEC SBL Service Fee Revision55

Charges both parties in a negotiated transaction at Charges both parties in a negotiated transaction at 0.02% p.a. of borrowed stock’s trading value0.02% p.a. of borrowed stock’s trading valueSwitched from per transaction basis to per annum Switched from per transaction basis to per annum basisbasisReduces costs to participants for short-term Reduces costs to participants for short-term transactionstransactions

5 Effective from December 3, 2007

Future ProspectsFuture Prospects

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Future ProspectsFuture Prospects

Pre-arranged negotiated transactionPre-arranged negotiated transaction A borrower can short on day T though actual transfer A borrower can short on day T though actual transfer

of securities occurs on T+1of securities occurs on T+1Find a method to solve late return of stocks for Find a method to solve late return of stocks for lenders selling lent stocks lenders selling lent stocks Streamlining of pledge procedureStreamlining of pledge procedureTDCC participants can directly get access to the TDCC participants can directly get access to the pledge system to carry out the pledgepledge system to carry out the pledge

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Thank you