Taiwan Stock Exchange Corporation

Domestic corporations, funds, and offshore foreign institutional investors.

In terms of domestic privately raised funds, the total value of short-sold borrowed stocks and margin short sales cannot exceed 50% of their net assets, and the lending volume of each single stock cannot exceed 50% of the total amount of that stock held. With regard to foreign private funds, the total short-selling value of borrowed stocks cannot exceed 50% of their net assets, and the lending volume of each single stock cannot exceed 50% of the total amount of that stock held.

An SBL participant is required to enter into a “Letter of Entrustment for Securities Borrowing and Lending Transaction” with a securities firm, who handles the linkage with the TWSE SBL System. The securities firm shall submit the required documents of the participant to the TWSE to open an SBL account. This enables the participant to make SBL transactions through the System.

Loanable securities include securities eligible for margin trading, securities eligible to be underlying securities in the issuance of call/put warrants, domestic constituent stocks of ETFs, and underlying securities of issued stock options, stock futures, overseas depositary receipts, domestic/overseas convertible or exchangeable corporate bonds. The underlying securities of SBL which meet one of each criteria of the Indicator 1~4 or Indicator 7 related to financial conditions listed in the Financial Information Indicator of the “Market Observation Post System,” will be suspended from SBL trading from the next business day. The loanable securities are posted on the “Securities Lending Section” of the TWSE website at https://www.twse.com.tw/en/products/sbl/disclosures/info.htmlon a daily basis.

The TWSE provides three kinds of SBL transactions: fixed-rate transactions, competitive auction transactions and negotiated transactions.

1. Fixed-rate transactions: The TWSE acts as a guarantor in fixed-rate transactions. The current fee rate is fixed at 3.5% per annum.
2. Competitive auction transactions: The TWSE acts as a guarantor in competitive auction transactions. Based on a deal-matching principle, the fee rate of each transaction should be determined by bids and offers mechanism through the TWSE SBL System subject to a maximum interest rate of 16% per annum, with 0.1% as the fluctuant unit.
3. Negotiated transactions: Both parties negotiate the fee rate through the SBL contract. When SBL related terms and conditions have been negotiated and determined by the parties and confirmed by the TWSE for consistency, the TWSE requests Taiwan Depository & Clearing Corporation (TDCC) to transfer the loaned securities. The risk of the borrower defaulting should be born by the lender. Loaned securities are transferred into borrowers’ accounts as soon as the TWSE SBL system matches related terms and conditions of both parties. The TWSE SBL system also provides an option to transfer loaned securities on the following day. Thus, borrowers may short sell after matching rather than having to have loaned securities in their accounts.

Chart 1 The Trading Process for Fixed-Rate and Competitive Auction Transactions

Chart 2 The Trading Process for Negotiated Transactions

The TWSE acts as a guarantor in fixed-rate and competitive auction transactions. When borrowing securities through fixed-rate or competitive auction transactions, a borrower should provide collateral to the TWSE. The eligible collateral includes:

1. Cash: The TWSE shall pay interest to borrowers at the interest rate of current deposit accounts of the corresponding bank and withhold the interest income tax on behalf of the competent authority;
2. Securities eligible for margin trading: The evaluated rates are 70% of the opening reference price of the relevant day in the trading market for TWSE-listed securities and 60% for OTC-listed securities. (Please visit the TWSE website at https://www.twse.com.tw/en/products/sbl/disclosures/info.html）to check the eligible collateral list);
3. Bank guarantees;
4. aiwan scripless government bonds: The value of such bonds provided as collateral shall be calculated at 90% of their face value.

In negotiated transactions, the terms and conditions of the collateral and the collateral ratio are to be determined and transferred by the parties themselves. When borrowing securities in negotiated transactions, FINIs may provide onshore or offshore collateral. Where TWSE-listed or OTC-listed securities are provided as collateral by FINI borrowers, FINI lenders shall entrust Taiwan Depository & Clearing Corporation (TDCC) to take custody into dedicated custody accounts.

There are three ceilings adopted to monitor the volume of short selling borrowed shares over the whole market:

1. Daily maximum short selling of borrowed stocks cannot exceed 30% of their average daily trading volume over the previous 30 trading sessions;
2. Maximum short selling of borrowed stocks cannot exceed 10% of outstanding shares per lending stock;
3. The total volume of short selling borrowed stocks and margin short sales cannot exceed 25% of outstanding shares per stock.

In principle, short selling borrowed stocks is subject to the uptick rule, which requires SBL short sales for borrowed shares to be entered at a price equal to or higher than the previous day’s closing price. However, since September 23, 2013, borrowed stocks eligible for margin trading are exempted from the uptick rule. The waiver does not apply under certain conditions, as illustrated per the following case: If the subject borrowed security’s closing price of the previous day reaches the limit down price, or if the subject security’s price is the lowest recorded sell order at market close of the previous trading day (and no trade is executed), then the uptick rule applies for the following trading day and the subject borrowed security may not be entered at a price lower than the previous day’s closing price. The waiver is reinstated only after such an aforementioned trading day and only if the subject security’s price does not remain at the limit down price at market close. Please visit the TWSE’s website at https://www.twse.com.tw/en/trading/margin/twt92u.html

The TWSE discloses the available volumes for SBL short sales through the ”SBL Section” of the TWSE website at https://www.twse.com.tw/en/trading/margin/twt96u.html on a daily basis. Moreover, the disclosure of the real-time available volumes for SBL short-sales in the Market Information System of the TWSE website is at
https://mis.twse.com.tw/stock/sblInquiryCap.jsp to facilitate sellers before they place a short sale order. In addition, the sellers can ask securities firms to check it for them by way of computer linkage to the TWSE. Once the ceiling is reached, the short-sale order will be rejected from the trading system automatically.

At the time of returning loaned securities, the borrower should pay an SBL fee for the lender, an SBL service fee for the TWSE and an SBL brokerage commission for the securities firm. Likewise, the lender should pay an SBL service fee for the TWSE and an SBL brokerage commission for the securities firm.

1. The calculation of the SBL fee is as follows:
   1. For fixed-rate and competitive auction transactions: The SBL fee shall be calculated on a daily and trade-by-trade basis. The total SBL fee is an accumulative total of the daily closing price of the loaned securities multiplied by the trading volume and the SBL fee rate. When there is no closing price, the calculation shall be made on the basis of the most recent closing price.
   2. For negotiated transactions: The SBL fee shall be determined by the borrower and the lender through negotiation.
2. The calculation of the TWSE SBL service fee is as follows:
   1. For fixed-rate and competitive auction transactions: The TWSE charges both parties the amount of 80% on 2% of the SBL fee.
   2. For negotiated transactions: The TWSE charges both parties the amount of 0.02%p.a. of the SBL trading value.
3. The calculation of the SBL brokerage commission is as follows:
   1. For fixed-rate and competitive auction transactions: The securities firm charges both parties the amount of 20% on 2% of the SBL fee. Also, parties may negotiate such commission rate among themselves.
   2. For negotiated transactions: The securities firm negotiates SBL brokerage commissions with its clients.

On August 20, 2007, the MOF Tax Authority amended tax treatment on SBL related fees and revenue. The following is a summary of the key points:

Item	Manufactured Dividends	SBL Fees	Offshore Agent Fees	Interest on Offshore Collateral
Income Tax	Yes (borrower holds)	Yes	No	No
	No (borrower sells)
Business Tax	NA	No (Both sides are FINIs w/out PE or agent in Taiwan)	No	No

1. Manufactured dividends are treated as lenders’ dividend income or capital gains, depending on whether borrowers hold borrowed securities as of the record date. If held on the record date, manufactured dividends are treated as lenders’ dividend income and are subject to income tax. If sold, manufactured dividends are deemed to be capital gains, which are currently tax free in Taiwan. In addition, no business tax is levied on dividend income or capital gains.
2. SBL fees are considered Taiwan sourced income and are subject to income tax as well as business tax. The Tax Authority further clarified that when both parties are FINIs without permanent establishments in Taiwan, the SBL fees are outside of business tax coverage.
3. Regarding offshore agent fees, when all of the agency services are provided offshore, and all parties including the lender, the borrower, and the offshore agent do not have permanent establishments in Taiwan, the agent fees are not subject to income tax or business tax.
4. The interest on the onshore cash collateral received by the borrower shall be subject to income tax. However, if the borrower is a financial institution or trust investment company, business tax shall also be levied. In addition, interest on offshore collateral is not considered Taiwan sourced income, and is therefore not subject to tax in Taiwan.
5. No securities transaction tax or capital gain tax will be levied on the SBL transactions. If, however, a borrower defaults, and equivalent cash instead of the physical securities is returned to a lender, it shall be deemed that the lender has sold the loaned securities and shall be subject to securities transaction tax.

The lending period cannot exceed 6 months. Upon the maturity date, participants can apply for a rollover, extending the period by another 6 months, and each loan could be allowed to roll over twice. Consequently, the maximum lending period could be 18 months. In an application for the extension of a loan, no terms or conditions of the loan can be amended except the loan period. The rules of lending period can be applied to all types of SBL transactions.

By giving a 1-day, 3-day, or 10-day prior notice period, lenders can early recall loaned securities in fixed-rate or competitive auction transactions. For recalling securities on loan in negotiated transactions, lenders shall follow the agreement reached between the parties.

In fixed-rate and competitive auction transactions, when a borrower fails to fulfill his or her obligations in a timely manner, such as returning loaned securities or manufactured dividends, providing additional collateral, or paying related fees, the TWSE shall dispose of the provided collateral to buy the loaned securities back. If any shortfall is left, the TWSE will notify the borrower. If the borrower fails to bridge the shortfall by a prescribed deadline, the TWSE shall deem the borrower to be in breach of the contract and terminate his or her SBL participation. In negotiated transactions, upon any event of default, either party shall forthwith report to the TWSE on the handling of the default event.