Country Report Financial Supervisory Commission Chinese Taipei April

Country Report Financial Supervisory Commission Chinese Taipei April 2008 Financial Supervisory Commission 1

Content § § § § Snapshot of Economy Role of FSC and SFB Principal and Alternative Stock Markets Principal Derivatives Market Bond Market Recent Important Measures Key issues Financial Supervisory Commission 2

Snapshot of Economy Financial Supervisory Commission 3

Snapshot of Economy § the 144 th member of the World Trade Organization (WTO) § IMD’s report, “World Competitiveness, ” Taiwan’s overall competitiveness ranked 11 § Rank the top 5 competitive countries according to the WEF Global Competitiveness Report 2005 -2006 § By the end of Mar. 2008, the foreign exchange reserves hit US$286. 86 billion § The economic growth of 2008 is forecasted to 4. 53%. Financial Supervisory Commission 4

Niche of Taiwan Economy One of the East Asia’s economies § Geographic center § Comprehensive industrial infrastructure § Human resource § Research and development capabilities Financial Supervisory Commission 5

Role of Financial Supervisory Commission, Executive Yuan Financial Supervisory Commission 6

Financial Supervisory Commission, Executive Yuan § Background • Established on July 1, 2004 • One single vertical integrated institute, consolidating financial supervision of insurance, securities and banking affairs § Organization Structure • Of nine commissioners, one appointed as Chairperson and two as Vice Chairpersons • 4 Departments, 4 offices • 4 Bureaus: Banking Bureau, Securities and Futures Bureau, Insurance Bureau and Financial Examination Bureau Financial Supervisory Commission 7

Financial Supervisory Commission, Executive Yuan § Scope of Services § The development, supervision, administration and examination of the financial market and financial services industry § Responsibilities § Promote the internationalization and liberalization of both the capital and the financial markets § Solidify the operation of financial institutions § Emphasize the self-disciplinary of financial institutions § Develop risk-oriented supervisory mechanism Financial Supervisory Commission 8

Framework of the Organization Executive Yuan Financial Supervisory Commission Banking Bureau Securities and Futures Bureau Insurance Bureau Financial Examination Bureau Financial Supervisory Commission 9

Organization • The SFB is composed of eight functional divisions and three offices: • Division 1: Corporate finance • Division 2: Securities firms administration • Division 3: Securities market administration • Division 4: Securities service industries • Division 5: Securities and futures research and education Financial Supervisory Commission 10

Organization-1 • • • Division 6: Accounting administration Division 7: Futures Division 8: International affairs Auditing Office: securities auditing Legal Affairs Office: compliance and regulations • Information Management Office: information management and computer affairs Financial Supervisory Commission 11

Framework of Laws Securities & Futures Markets Securities and Exchange Act Futures Trading Act Securities Investment Trust and Consulting Act Securities Investor and Futures trader Protection Act Financial Supervisory Commission 12

Principal and Alternative Stock Markets Financial Supervisory Commission 13

Principal and Alternative Stock Markets § Taiwan Stock Exchange Corp (TSEC) and Gre. Tai Securities Market (GTSM) § The daily price limit, beneficiary certificates and convertible bonds § Clearing and settlement § Multilateral net clearing and T+2 rolling settlement convention § New products: REITs, REATs, CBO, ABS, MBS, SN Financial Supervisory Commission 14

The General Situation of Securities Markets Numbers and Market Capitalization of TSEC Listed Companies Financial Supervisory Commission 15

Numbers and Market Capitalization of GTSM Companies Unit: NT$ Billion Financial Supervisory Commission 16

Numbers and Market Capitalization of Emerging Stock Board Companies Unit: NT$ Billion Financial Supervisory Commission 17

The General Situation of Offering in Taiwan & Offshore of TSEC Listing & GTSM Companies Financial Supervisory Commission 18

Securities Trading Value on TSEC Market Securities Trading Value on GTSM Market Financial Supervisory Commission 19

Highlights of Fund Issuance Net Asset Value of Fund Financial Supervisory Commission 20

The General Situation of Securities Services Providers Number of Securities Firms No. of Securities Investment Trust Enterprises. & Securities Investment Consulting Enterprises Financial Supervisory Commission 21

Highlight of Market Performance § Stock Market • The market capitalization amounted to USD 0. 72 trillion with a total of 707 TSEC-listed companies at the end of Mar. 2008. • The trading value summed total USD 0. 26 trillion from Jan. to Mar. 2008 • Turnover rate 38. 35% (from Jan. to Mar. 2008) Financial Supervisory Commission 22

Principal Derivatives Market Financial Supervisory Commission 23

Principal Derivatives Market § Taiwan Futures Exchange (TAIFEX) established in 1998. § Products: § NT$: 7 equity index futures, 2 interest rate futures, 5 equity index options, 30 equity options, and a gold futures § US$: 1 equity index futures, 1 equity index option and 1 gold futures § New Reforms to Foreign Investors: Non-hedging & Omnibus acc. § 33 clearing members and 57 FCMs § Trading system: In-house developed Electronic Trading System (ETS) Financial Supervisory Commission 24

Hightlights of Futures Market Year Remarks： the end of Mar. 2008, the number of Managed Futures Enterprises is 9. By 　　 By the end of Mar. 2008, the number of Futures Advisory Enterprises is 26. Financial Supervisory Commission 25

Growth and Ranking of Taiwan’s Futures Products Year Total trading volume International ranking* Annual growth rate 1998 277, 909 57 _ 1999 1, 075, 789 48 287. 10% 2000 1, 926, 789 44 79. 10% 2001 4, 351, 390 38 125. 84% 2002 7, 944, 254 35 82. 60% 2003 31, 874, 934 26 301. 23% 2004 59, 146, 376 20 85. 56% 2005 92, 659, 768 18 56. 66% 2006 114, 603, 000 18 24. 00% 2007 115, 150, 624 21** 0. 48％ *Source: Futures Industry magazine, **The trading volume during the 1 Q in 2008 totaled 29, 782, 604 contracts, which increases 14. 42% over the 26, 029, 358 contracts during the 1 Q in 2007. 　 Financial Supervisory Commission 26

Highlight of Market Performance n Futures Market n Rapid growth of trading volume n n 115 million contracts in 2007 Options accounted for 85% Ranked 21 st on trading volume in 2007 Awarded “Derivatives Exchange of the Year 2004” by Asia Risk Magazine in Oct. 2004 Financial Supervisory Commission 27

Bond Market Financial Supervisory Commission 28

Bond Market § GTSM was authorized to take over fixed-income market since 1994. § EBTS (Electronic Bond Trading System )was implemented in July 2002. • A trading platform with functions of quoting, trading risk management as well as clearing and settlement • Set up a real time and transparent benchmark indicator • Expand repo-trading function into the system in March 2005. § New OTC products: Interest rate derivatives such as IRS, IRO and bond derivatives such as bond option and bond forward § New trading mechanism: bond lending, margin trading, when issued trading Financial Supervisory Commission 29

Issues and Trading of Bond Year Financial Supervisory Commission 30

Highlight of Market Performance • Bond Market • By the end of Mar. 2008, the turnover reached USD 1. 36 trillion. • Outright trades amounted to USD 0. 72 trillion and repo/reverse repo trade counts USD 0. 64 trillion. • Government bond outright trading takes 98. 4% of total outright trading. • The number of primary dealers recorded 103, including banks, securities firms and bills finance companies. Financial Supervisory Commission 31

Recent Important Measures • Securities Market üExpanded the scope of financial institutions üUnderwriting system üExpanded the business scope of securities firms üWealth Management Business üBorrowing and lending securities and money üDiversified financial product trading business üOpening up securities firms to issue foreign call (put) warrants üConcurrent operation of Securities Investment Trust Enterprise and Futures Trust business üDeregulation on Foreign Investors Financial Supervisory Commission 32

Recent Important Measures • Bond Market üCompile Taiwan Government Bond Index (GTSM) üIntroduce Strip trading of financial debenture, corporate bond and government bond üBuild International Bond Market Financial Supervisory Commission 33

Recent Important Measures § Futures Market • Introduction of Omnibus Accounts • Allowing Trading for Non-Hedging Purpose • Launched US dollar denominated products • Reduction of margin requirements Financial Supervisory Commission 34

Supervision of Broker/Dealers & SROs • Supervision of securities firms – Finance and Business Operation (the Securities and Exchange Act Article 44 ) – Examination: the SFC may order a securities firm to provide financial or business reports and information, or examine the business operations, assets, books and records, documents or other relevant objects (the Securities and Exchange Act Article 64 ). Financial Supervisory Commission 35

Supervision of Broker/Dealers & SROs • Supervision of Securities Dealers Associations – Finance and Business Operation (the Securities and Exchange Act Article 90 ) – Examination: the SFC may order a securities dealers association to amend its articles of association, bylaws, or resolutions, and also to provide reference materials and reports, or to perform any other acts (the Securities and Exchange Act Article 91 ). Financial Supervisory Commission 36

On-line Trading & Supervision （Securities Business） • Law and Rule – Operating Rules of the Taiwan Stock Exchange Corporation – Relevant rules of E-signature Law Financial Supervisory Commission 37

On-line Trading & Supervision （Securities Business） • Key Points of Supervision of Broker/Dealers & SROs – Before Applying for Operating, Securities Firms shall Report the Authorities for Reference – Signing with Digital Signature Issued by Certificate Signing Services – Encrypting Investors’ Data – Reporting month trading summary to the Authorities – Setting up an Inspection Mechanism for Information & Communication Security. (To be included in annual Audit) Financial Supervisory Commission 38

On-line Trading & Supervision （Futures Business） • The FCMs are permitted to accept orders made through the Internet • The FCMs are not required to fill out an individual order form provided that trading order records shall be printed out in order • The FCMs shall record each the trader's Internet Protocol (IP) address and electronic signature issued by a certificate authority • Each FCM shall set up its internet certificate regime Financial Supervisory Commission 39

Investor Education ◆Established the “Market Observation Post System（ MOPS）” ◆Established the search engine - “Engine for Securities and Future Laws and Regulations” ◆Organized the “Securities and Futures Education Promotion Committee” ◆Supervise the SFI to hold workshops to discuss hot topics Financial Supervisory Commission 40

Investor Education ●To strengthen investors protection and education 1. Supervising the Securities and Futures Protection Center to claim actively the rights and interests of investors. 2. Combining relevant securities and futures institutions to set up a propaganda cell to advance market education. 3. Holding a series course regarding investment to improve investors’ finance knowledge. 4. Holding workshops for juridical authorities to know securities and futures markets. 5. Holding workshops for all levels of schools to firmly boost financial literacy. Financial Supervisory Commission 41

Securities Borrowing and Lending Market • Launched in 2003. • Provided a centralized system by Taiwan Stock Exchange. • Targeted at qualified institutional investors. Financial Supervisory Commission 42

Securities Borrowing and Lending Market • Qualified lenders: insurance companies, financial institutions, securities investment trust companies (i. e. funds raised by), dedicated futures commission merchants, securities firms and others approved by the competent authority, such as foreign institutional investors (“FINIs”), and four governmental funds: labor pension fund, labor insurance fund, public service pension fund and Chunghwa postal fund. • Qualified borrowers: securities dealers, securities investment trust companies (currently limited to ETF issuers), futures dealers, banks and others approved by the competent authority such as FINIs. Financial Supervisory Commission 43

Securities Borrowing and Lending Market • TSEC’s SBL system provides three kinds of transactions: fixed-rate transaction, competitive auction transaction and negotiated transaction. • SBL brokers and TSEC act as intermediaries in TSEC’s SBL system. • For fixed-rate transaction and competitive auction transaction, TSEC also acts as a guarantor and requires collaterals. Financial Supervisory Commission 44

Securities Borrowing and Lending Market ● Remove purpose test requirement and on shore collateral restrictions in 2005. ● Ceilings for short selling. 1. Daily maximum short selling shares of borrowed stock cannot exceed 3% of outstanding shares per lending stock. 2. Maximum short selling of borrowed stock cannot exceed 10% of outstanding shares per lending stock. 3. The total volume of short selling of borrowed stock and margin sale cannot exceed 25% of outstanding shares per stock. Financial Supervisory Commission 45

Securities Borrowing and Lending Market （Securities Firms） 1. Based on Article 60 of the Securities and Exchange Act, FSC issued "Regulations Governing Securities Lending by Securities Firms" on August 11, 2006. 2. Comply with the ceiling rules of short selling Financial Supervisory Commission 46

Securities Borrowing and Lending Market （Securities Finance Enterprises） the securities finance enterprises to engage in borrowing or lending securities v Based on Article 18 of the “Securities and Exchange Act”, the FSC amended “Regulations Governing Securities Finance Enterprises” to allow the Securities Finance Enterprises to engage in Securities Borrowing and Lending on March 12, 2007. v Comply with the ceiling rules of short selling. ●Allowing Financial Supervisory Commission 47

Thank You Financial Supervisory Commission 48