TAIFEX, Your Key to a Bright Future in Taiwan

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TAIFEX, Your Key to a Bright Future in Taiwan
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Agenda

• Overview of TAIFEX
• TAIEX Options
• New measures new products
• Prospects future development

3
Overview of TAIFEX
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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

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Market Growth
VOLUME
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Open Interest
7
Worldwide Ranking
DataFIA Annual Volume / Futures Industry
Magazine (March/April 2006 Issue)
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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)

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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

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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)

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Market Structure
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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 NT200 million
• Concurrent futures business operator at least
  NT60 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 NT400 million.

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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 NT50,000,000
• Interest rate futures and options traded in
  TAIFEX NT50,000,000
• Stock-related futures and options traded in
  TAIFEX Interest rate futures traded in TAIFEX
  NT80,000,000
• Futures and Options contracts traded in TAIFEX
  NT100,000,000
• Futures and Options contracts traded in TAIFEX
  TAIEX index futures, options and futures options
  traded on foreign exchanges NT200,000,000

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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

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Account opening of Market Participants (as of
April 30, 2006)
Accumulated numbers of account opening 1,119,950
accounts- 1,113,880 of individual investors and
6,070 of institutional investors
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Trading Structure
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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)

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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)

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Trading Volume by Products
2006 Jan.Apr.
Unit 1,000 contracts
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Trading Volume by Equity Products (Exclude TXO)
2006 Jan.Apr.
Unit 1,000 contracts
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TAIEX Options (TXO)
The world' s top 10 index options-TXO ranked No.
3 in the category.
Data FOW TRADEData (Volume in million
contracts)
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TAIEX Options
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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

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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

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TAIEX Options Contract Spec.

• Underlying Index Taiwan Stock Exchange
  Capitalization Weighted Stock Index (TAIEX)
• Ticker Symbol TXO
• Exercise Style European
• Multiplier NT50 (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

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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,
• 50 points,
• 500 points,
• 1,000 points 10 point (NT 500)
• Daily Price Limit
• /- 7 of previous day's closing price of the
  underlying index

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TAIEX Options Contract Spec.-cont.

• Position Limit (on either direction of the
  market)
• Individuals8,000 contracts
• Institutional investors16,000 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

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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

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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

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New Measures New Products
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Trading for Non-Hedging Purposes
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Status

• Prior to March 27 2006, foreign investors could
  only invest in Taiwans futures market for
  hedging purposes
• Must trade in Taiwans 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

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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

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Omnibus Account
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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

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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

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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.

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USD-Denominated Products
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MSCI Taiwan IndexSM Futures Contract spec.

• Underlying Index MSCI Taiwan Stock IndexSM
• Ticker Symbol MSF
• Trading Hours 0845AM - 145 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)

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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

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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

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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,
• 2.5 points,
• 25 points,
• 50 points0.50 point (US 10)
• Daily Price Limit
• /- 7 of previous day's closing price of the
  underlying index

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MSCI Taiwan IndexSM Options Contract spec.-cont.

• Position Limit (on either direction of the
  market)
• Individuals1500 contracts
• Institutional investors5,000 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

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Gold Futures contract spec.

• Underlying Gold with a purity of .995
• Ticker symbol GDF
• Trading Hours 845am 145pm
• 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
• US0.10 per troy ounce (US10 per contract)

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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

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Prospects future development
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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

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Improvement Measures of trading and clearing

• Spread order for futures contract
• Relaxation for price limit
• SPAN
• Accept securities and government bond as
  collateral

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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

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Summary Conclusion
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Summary

• The Taifex Market
• Vibrant, liquid and high growth market
• Implemented major cost reduction exercise
• Large retail participation base
• Liberalizing the market progressively
• Actively attract international participation
• Taking initiatives to enhance its
  products/markets, and trading/clearing functions

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Contact Us

• Web site www.taifex.com.tw
• E-mail service_at_taifex.com.tw
• Contract persons
• Ms. Sarah Chiu
• E-mail sarahchiu_at_taifex.com.tw
• TEL [phone]
• Ms. Rita Tsai
• E-mail ritatsai_at_taifex.com.tw
• TEL [phone]

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Thank You