TWSE Market Insights

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As of today, global index funds and actively managed exchange-traded funds (ETFs) are no longer merely financial innovations; they have gradually evolved into core pillars supporting liquidity in global capital markets. According to data from ETF GI, a research and consulting firm, as of the end of November 2025, global ETF assets had grown 30.9% from USD 14.85 trillion at the end of 2024 to USD 19.44 trillion, setting a new record. Net inflows in 2025 reached USD 2.04 trillion, also a historical high, marking the 78th consecutive month of positive inflows and solidifying ETFs as a key driver of global portfolio diversification.

In Taiwan, ETFs have likewise become a regular option for investors, with market penetration reaching historic highs, reflecting the maturity of Taiwan's capital markets and the integration of financial technology. However, the rapid growth of ETFs also presents unprecedented challenges, particularly when extreme market events cause a “mismatch” between the trading convenience of ETFs and the liquidity of their underlying assets. Ensuring that ETF frameworks possess sufficient resilience and risk control mechanisms has thus become critical for maintaining market order and safeguarding investor interests.

This article examines ETFs from a regulatory perspective, outlining the basic framework for ETF price formation and risk management. It further explains Taiwan’s recently revised mechanisms for ETF trading suspension and premium/discount control, helping investors understand the supervisory rationale behind regulatory announcements.

The key difference between ETFs and traditional mutual funds lies in the “dual-market trading mechanism.” The secondary market allows near-instant trading, similar to stocks, with prices determined by market supply and demand. The primary market, on the other hand, enables investors to create or redeem ETF units through participating dealers (PDs) using cash or in-kind securities, allowing the number of ETF units in circulation to flexibly adjust according to market demand. The dual-market mechanism is designed to ensure that ETF market prices remain closely linked to net asset value (NAV) through arbitrage opportunities between the two markets.

When the market price exceeds NAV, participants can create new ETF units and sell them in the secondary market, increasing supply and limiting premiums. Conversely, when the market price falls below NAV, redemption mechanisms reduce the number of circulating units, supporting prices. Under normal market conditions, this mechanism effectively maintains alignment between ETF prices and NAV.

However, if an ETF’s underlying securities are traded overseas, factors such as market holidays, time-zone differences, or temporary disruptions in price information may limit the timeliness of creation/redemption activities. As a result, market prices may reflect investors’ expectations of future price movements, causing short-term expansions in premiums or discounts. Such price fluctuations do not indicate a failure of the mechanism but rather reflect market adjustments under limited information conditions.

Therefore, establishing a comprehensive, flexible, and transparent risk management framework is essential to mitigate risks arising from market manipulation and information asymmetry. This consideration underpins Taiwan’s recent regulatory revisions, which strengthened mechanisms for trading suspension, secondary market selling of subscription units, and premium/discount disclosure.

In major international markets such as the U.S., Japan, Hong Kong, and South Korea, regulators generally adopt a principle of respecting the “market price discovery” function for exchange-traded products (ETPs), including ETFs. Premiums and discounts are expected outcomes of the dual-market structure, and excessive efforts to eliminate them may weaken price discovery, leading investors to mistakenly assume that ETF prices always equal real-time NAV, thereby ignoring market risks. Consequently, most international regulators do not treat premiums or discounts as abnormal events that must be immediately corrected.

When the trading markets of an ETF’s underlying securities are closed, subject to time-zone differences, or temporarily unavailable, ETFs are typically allowed to continue trading, with prices reflecting futures markets, related instruments, or investor expectations of future movements. While most markets have mechanisms to adjust or halt trading during extreme price fluctuations, these measures generally apply to the broader market or exceptional scenarios, rather than being ETF-specific. This demonstrates that trading suspension is considered a last resort, aimed at preventing disorderly markets rather than replacing price discovery or arbitrage mechanisms, thereby preserving the core value of ETFs as real-time trading instruments.

Taiwan places high importance on monitoring ETF premiums/discounts and trading risks. The Taiwan Stock Exchange has established guidelines for issuing announcements or notifications to alert investors when abnormal price or volume fluctuations occur. ETF premiums/discounts are included in this monitoring. When premiums exceed 10%, accompanied by abnormal price movements, high broker concentration, or unusual loan-to-value ratios, alerts are issued. For ETFs that repeatedly meet these criteria, measures such as pre-funded securities management and batch trading are applied to mitigate premium/discount risks.

Price stabilization mechanisms also exist during the trading day and at market open/close:

1. Trading delay at open/close: If prices fluctuate sharply, matching is delayed for two minutes to allow investors to reassess trading strategies.

2. Intraday price stabilization: Similar delays occur during extreme intraday price swings to curb irrational trading and maintain market order.

These regulatory mechanisms effectively protect investors, maintain market fairness and stability, and ensure resilience under conditions of limited information or high volatility.

At the end of 2024, global funds showed strong interest in assets related to China’s economic stimulus policies. Taiwan was no exception. For example, the “Yuanta China Technology 50 ETF (00887)” experienced a dramatic surge in secondary market demand during China’s National Day holiday. With the underlying market closed, primary market subscriptions could not respond immediately, causing the ETF price to spike over 200% above NAV. Despite reminders from the fund company, market irrationality still drove significant capital inflows.

To further safeguard investors and stabilize market order, the Taiwan Stock Exchange implemented additional ETF monitoring and risk management measures beyond existing premium/discount oversight, including trading suspension mechanisms, relaxed rules for selling subscription units in the secondary market, and enhanced premium/discount disclosure, aiming to reduce market risks.

(i) Legalization of the ETF Trading Suspension Mechanism

To strengthen risk control under extreme conditions and prevent excessive deviation from NAV when foreign ETF markets are closed, the “ETF trading suspension upon request” mechanism was legalized. This provides a clear regulatory basis and objective conditions for preventive action when price discovery may temporarily fail, thereby protecting market order and investor interests.

Drawing from suspension practices for listed companies, clear conditions were established to ensure trading suspensions are applied only when necessary:

1. The primary foreign market for the ETF is closed for five consecutive trading days or more, and accounts for at least 60% of the ETF’s NAV.

2. The ETF’s NAV falls below a certain threshold, or premiums/discounts exceed a specified level for two consecutive trading days prior to the request, indicating structural price risk.

Eligible fund companies may submit a suspension request at least four trading days before the foreign market closure, ensuring sufficient preparation time for the market and investors. This mechanism emphasizes proactive management and preventive controls, allowing issuers to implement suspension measures when necessary, thereby reducing irrational price volatility under high information asymmetry and enhancing market resilience.

(ii) Relaxation of Secondary Market Selling Timing for Subscription Units

Under existing rules, domestic ETF subscription units may be sold in the secondary market on the same day, while foreign ETF units may be sold the next trading day. For ETFs classified as handled securities, investors were previously required to wait until the second trading day post-subscription due to pre-funded security requirements. To prevent opportunistic selling during high premiums, previous rules also required liquidity providers to follow this timeline.

In practice, ETF subscriptions already involve pre-funded payments and in-transit units, effectively exposing investors to market and capital lock-in risks. In the 00887 case, delaying secondary market sales until the second day prevented immediate selling pressure, prolonging extreme premiums.

To efficiently narrow premiums/discounts while maintaining fairness, the revised rules allow investors and dealers to sell subscription units according to standard ETF trading rules once payment is confirmed, regardless of handling classification: domestic ETFs may be sold on the subscription day, and foreign ETFs on the next trading day. This harmonizes primary and secondary market standards, enabling timely arbitrage and liquidity provision, and reduces the risk of excessive premiums/discounts under extreme conditions.

(iii) Enhanced Disclosure of Premiums/Discounts

International ETF markets, including Hong Kong, Japan, and the U.S., recommend that fund companies establish internal control procedures for managing and disclosing excessive premiums/discounts. While premiums/discounts are expected outcomes of dual-market trading, sustained or extreme deviations without proper disclosure can increase trading risk and affect market order.

Taiwan adopted similar practices, requiring fund companies to disclose detailed premium/discount information on their websites, including data for the past year and past quarter, presented in tables or line charts for visual clarity. If premiums/discounts exceed certain thresholds over time, companies must explain key factors contributing to the deviation, enabling investors to make informed trading decisions. Internal procedures must also include steps to alert investors to elevated trading risks. These measures enhance corporate self-discipline and guide rational market behavior, allowing market mechanisms to gradually absorb premium/discount risks.

Overall, ETF trading suspension serves as the final line of defense within the risk management framework, rather than a tool for price adjustment. Both international experience and Taiwan’s regulatory design emphasize respecting the market price discovery function, intervening only when necessary in a prudent and transparent manner to maintain market order and protect investors. Through trading suspension, relaxed rules for selling subscription units, and enhanced premium/discount disclosure, Taiwan’s ETF framework balances market efficiency with investor protection, ensuring a resilient market.

As ETFs continue to diversify in type and strategy, regulatory measures will be periodically reviewed and refined. The Taiwan Stock Exchange’s core objective remains consistent: achieving a stable and sustainable balance between market efficiency and risk management, providing investors with a fair, transparent, and resilient trading environment.