June 2003

1
TSEC Taiwan 50 Index Futures

• June 2003

2
Background

• The current TAIEX index and sector indices
  deviate measurably from most cash portfolio held
  by stock investors, adding to the difficulty of
  utilizing hedging and arbitrage strategies, and
  affects
• the price discovery function of futures market
• the market mechanism to maintain effective
  prices and
• the precision and efficiency of futures trading
  strategies
• Most renown stock index futures contracts use the
  index composed by a fixed number of component
  stocks as underlying to facilitate hedging
  purpose and, thereafter, the development of
  futures markets.

3
Background

• TAIFEX Products at a Glance

Daily average (contracts)
TAIEX Futures (07/98) Electronic Sector Index Futures (07/99) Finance Sector Index Futures (07/99) Mini-TAIEX Futures (04/01) TAIEX Option (12/01) Equity Option (01/03) Total
98 2,233
99 3,653 714 155 4,522
00 4,944 1,512 654 7,100
01 11,659 2,807 1,596 2,334 856 19,252
02 16,661 3,367 1,479 4,210 6,316 32,033
03 19,217 3,357 3,410 4,451 45,508 1,512 77,455
2003 data up to May 30
4
Contract Specifications

• Underlying the TSEC Taiwan 50 Index
• Abbreviation Taiwan 50 Futures
• Ticker symbolT5F
• Trading hours845 AM145PM Taiwan time on
  trading days of Taiwan Stock Exchange
• Contract sizeNT500 Index

5
Taiwan 50 Index Futures Contract Specifications

• Delivery months Five delivery months, including
  spot month, the next calendar month plus next
  three quarter months of the March, June,
  September, and December cycle.
• Daily price limit7 of previous day's
  settlement price.
• Last trading dayThe third Wednesday of the
  delivery month.
• Final settlement dayThe first business day
  following the last trading day.
• SettlementOn net cash basis.

6
Contract Multiplier- 500

• Contract sizeTSEC Taiwan 50 Futures Index
  NT500
• The medium contract size accommodates the
  features of the index and encourages
  participation of institutional investors by
  meeting their needs
• Establishing market segregation from TAIEX
  futures reduces crowding out between the two
  products, while taking into account both the
  needs of institutional and individual investors
• Reducing trading cost
• Larger contract size (than TAIEX future) is more
  in tune with international trend

7
Contract Multiplier- 500

• In reference to international practice and based
  on contract size, a proper integer multiple is
  set for the conversion between futures contract
  and the ETF to facilitate hedging, arbitrage and
  regular trading.

8
Trading System

• Order
• Order placementlimit order or market order.
• Orders are accepted starting at 830AM.
• Matching
• 845 (market open)competitive auction.
• 845 1340 Match order by order.
• 1340 1345 (market closing) competitive
  auction.

9
Settlement System

• Position Management
• Opposite positions of the same delivery month for
  the same product in the same account are
  automatically offset.
• Margin Calculation
• Margin calculation will be the same as that for
  stock index futures of TAIFEX, that is risk
  coefficient is used to estimate the greatest
  possible variation in the price of underlying to
  cover single-day index volatility risk.
• Cash settlement

10
Market Participants
Futures market participant ETF market participants ETF market participants
Futures market participant Primary market Secondary market
Market participants Securities dealers Mutual fund companies QFII Futures dealers Banks and insurance companies CPO Other juristic persons Individuals Participating securities firms, Institutional investors Institutional investors, Small traders
11
Needs of ETF Market for Futures Products

• Hedging needsETF issuing market (creation and
  redemption)
• ETF participating firms that create or redeem ETF
  shares can use futures products for hedging when
  they face price risk arising from time
  difference.
• When ETF participating firms intend to engage in
  arbitrage trading, they can resort to futures
  trading when buying or selling a basket of stocks
  is hard to execute.

12
Needs of ETF Market for Futures Products

• Needs of hedging ETF trading market
• After the TSEC Taiwan 50 Index ETF is listed on
  the TSEC, its fluctuation will reflect the
  fluctuation of all component stocks.
• Institutional or individual investors can use
  futures products to hedge the risk of ETF price
  volatility.
• Needs of arbitrage
• Price imbalance in the spot market, EFT market
  and futures market may be corrected using futures
  products.