Policies and Regulations of Non-Hedge Trading and USD TWD

Policies and Regulations of Non-Hedge Trading and USD/TWD Denominated Products 1

Contents n Brief on TAIFEX n Foreign Futures Enterprises Application Procedure n Status quo and proposed Changes n ID system n Omnibus account n Trading and settlement of omnibus account n Position limits for overseas Chinese and foreign investors n Account Structure and Forex Regulation 2

Brief on TAIFEX n The development of Taiwan Futures Market n Market structure n Clearing procedure n TAIFEX products n Market updates 3

The development of Taiwan Futures Market n n n n 1997. 03 1997. 9. 9 1998. 7. 21 2001. 12. 24 2002. 11 2003. 12 2004. 1. 2 Futures Trading Law was promulgated The Taiwan Futures Exchange (TAIFEX) was established 1 st equity futures contract (TAIEX Futures) was launched 1 st options contract (TAIEX Options) was launched Futures Advisory business was opened Managed Futures business was opened 1 st 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 4

Market Structure Financial Supervisory Commission / Securities & Futures Bureau TAIFEX Individual Clearing Member General Clearing Member FCM Settlement Banks FCM Fund transfer CTA CPO IB IB Customers CPO Fund transfer CNFA (Chinese National Futures Association) Settlement Banks 5

Clearing procedures FSC/SFB TAIFEX Position Management Settlement/Clearing Trading report Discretionary operation Submit tickets to CTA CPO IB Deal-done report FCMs Margin deposit / orders Settlement request Clearing Member Deal-done report Customers 6

TAIFEX Products Futures n TAIEX Futures n TE Futures n TF Futures n Mini-TAIEX Futures n TSEC Taiwan 50 Futures Equity Index Futures n Government Bond Futures n Commercial Paper Interest Rate Futures Options n TAIEX Options n Finance Sector Index Options n Electronic Sector Index Options n Equity Options 7

Market Growth 8

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. 9

Trading behavior 10

Worldwide Ranking Year Market Turnover 1998 277, 909 1999 Growth Rate Ave. Daily Trading Vol. 57 - 2, 223 1, 077, 672 47 287. 8% 4, 522 2000 1, 926, 789 44 78. 79% 7, 110 2001 4, 351, 390 38 125. 84% 19, 252 2002 7, 944, 254 35 82. 60% 32, 033 2003 31, 874, 934 26 301. 23% 128, 067 2004 59, 146, 376 20 85. 56% 237, 144 2005 48, 005, 840 18 162. 33% 346, 220 Jan. ~Jul. World Ranking Data Resource: Futures Industry Association 11

5 TAIEX Options (TXO) The world' s top 10 index options-TXO ranked No. 5 in the category. 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 Data: Trade Data Global Service. 12

Derivatives Exchange of the Year 2004 TAIFEX awarded by Asia Risk on Oct 14, 2004 n. The best practices and innovation in derivatives and risk management in Asia-Pacific. n. Innovative and well-infrastructure in derivatives market, commodity as well as information of the year. 13

Foreign Futures Enterprises Application Procedure n Overview of Establishment Criteria for Futures Enterprises (p. 14 -1) FCM n Concurrent futures business operator n IB n n Flowchart of Application for Establishment of FCMs (p. 14 -2) 14

Status Quo n Legal basis n Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals (Article 4 -2) n Guidelines for Futures Trading by Overseas Chinese and Foreign Nationals n Trading purpose n Only for the purpose of hedging a position on domestic securities. n Only hedge account is allowed to be opened. n Investment limits and restrictions n 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. n 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. n 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. 15

Proposed Changes n Legal basis n Futures Trading Law. n Trading purpose is not restricted. n Investment limits and restrictions n Position limit: According to rules governing position limits for various products. n Foreign institutional investors (the same as local institutional investors) may apply for exemption of position limit. n Fund regulation: Margin deposit/withdrawal in US Dollar only. n Offshore Funds shall be separated into two different accounts for securities and futures markets, respectively. 16

Proposed Change-cont. n Side-effect after change: n Foreign investors may trade futures products for non-hedge purpose through an direct account or an omnibus account. n The benefiaries: overseas Chinese and foreign investors (including corporations and individuals). 17

Proposed methodology for nonhedging trading by foreign investors The omnibus account agreement should indicate the， party who is obliged to file details of positions held by individual clients FCM 3 TAIFEX FCM 2 Foreign FCM 2 （ (Omnibus acct 2) Foreign FCM 1 (Omnibus acct 1) Foreign investor FCM 1 Foreign investor (individual acct) Foreign investor (Direct acct B) Foreign investor (Direct acct A) Foreign FCM、 foreign and Investors shall obtain an ID before opening an account through the custodian banks. 18

Proposed targets of futures market relief 19

ID System n 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. n Every foreign investor must obtain an ID before trading futures. n 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. 。 20

Qualifications of a foreign investor to open a futures trading account n Direct account The requirements are the same as the prevailing regulations. n Omnibus account— eligible offshore foreign FCM n A clearing member of a foreign futures exchange sanctioned by Taiwan’s regulatory authority. n Its home office or branch in Taiwan is free of disciplinary action imposed by securities or futures authorities or selfregulatory organization to suspend its securities or futures brokerage practice in the past year. n 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. n 21

Restrictions on account opening n Direct account Foreign investors may open more than one futures account with a local FCM, or with several local FCMs. n Omnibus account n 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. n Only TAIFEX clearing member may accept the opening of omnibus account by foreign FCMs. n 22

Procedure for opening direct account Step 1: obtain an ID Step 2: overseas Chinese and foreign investors account opening procedure 23

Procedure for opening omnibus account 24

Trading and settlement of omnibus account n 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. n Trading: Local FCM will treat each omnibus account as a trader and place orders by each the omnibus account. n 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. 25

Position limit of direct account n Position limit is regulated according to the prevailing ID system. n Position limits are the same as those for local individuals and corporations. n Exemption of position limit n Institutional investors may apply for exemption of position limit. n The extent of relaxation will be regulated by rules to be prescribed. n 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. 26

Position limit of omnibus account n Position limit n Omnibus account is not subject to position limit. n Individual clients under the omnibus account will be assigned an ID and subject to position limits for regular accounts. 27

Account Structure and Forex Regulation n Margin account n 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. n Margin payment 【 Overseas Chinese and foreign investors】 n Deposit and withdraw margin in USD only. n Forex regulation n Pursuant to Regulations Governing Foreign Exchange and Rules for Declaring Receipt, Payment and Transaction of Foreign Exchange. 28

Margin System 29

【 FIG. 1】Margin and Trading Flow Process for Overseas Chinese and foreign investors Futures margin ( USD ) Daily Trading position Settlement position Client’s position Client FCM places order (buy/sell) VISIO CORPORATION $ Deposit margin Check immediately whether margin deposit is sufficient FCM’s margin account Clearing member’s margin account No Reject order 足 TAIFEX matches trade Automatic offset of long/short positions in the same account (netting) TAIFEX Margin account Member FCM VISIO CORPORATION $ Margin short Mark-to-market USD margin call Member FCM VISIO CORPORATION $ Margin equity short 足 Daily account settlement Deposit margin Member FCM Settlement upon expiry VISIO CORPORATION $ Settlement upon expiry Payment upon expiry Loss : Remit in funds Gain : Remit out funds Gain/loss of open positions (Settlement netting) 【Description】 Overseas Chinese and foreign investors pay margin in USD for trading of US-denominated products. 30

【 Fig. 3 】 Futures Margin Payment Scheme NTD and USD Denominated commodities USD futures margin account TAIFEX NTD futures margin account USD NTD USD futures margin account Clearing member NTD futures margin account USD NTD USD futures margin account FCM USD NTD USD futures margin account NTD Investor Offshore foreign investor 【 Description Local and onshore Foreign investors 】 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. 31

Contact Us Visit Our web site at : WWW. TAIFEX. COM. TW Trading： Wen-Lin Chou Annie Hsu Maggie M. Y. Chien E-mail: wlchou@taifex. com. tw TEL： 886 -2 -23695678 ext. 126 E-mail: annie@taifex. com. tw TEL： 886 -2 -23695678 ext. 118 E-mail: maggie@taifex. com. tw TEL： 886 -2 -23695678 ext. 116 Clearing： Jean Yang Simon Chen TEL： 886 -2 -23695678 ext. 170 E-mail: simonc@taifex. com. tw TEL： 886 -2 -23695678 ext. 171 Business Development： Ben Yen Rita Tsai E-mail: yjp@taifex. com. tw TEL： 886 -2 -23695678 ext. 240 E-mail: ritatsai@taifex. com. tw TEL： 886 -2 -23695678 ext. 249 32