TWSE Market Insights

＜中文版＞

In recent years, Taiwan’s capital market has undergone significant transformation. The stock market has performed remarkably well, with the index surpassing 20,000 points. Not only has it attracted a large influx of newly registered investors, but trading volumes have also repeatedly reached record highs. Behind the evolution of trading models and the surge in market activity, multiple risks have accumulated simultaneously. Faced with a rapidly changing trading environment and emerging business models, securities firms are encountering unprecedented challenges in risk management.

To enable early detection of operational risks at securities firms, provide timely warnings, and strengthen supervisory guidance, the Taiwan Stock Exchange established the Rules Governing Early Warnings for Overall Operational Risk of Securities Firms (hereinafter referred to as the Rules Governing Early Warnings) in 1996, thereby creating a risk-oriented regulatory framework. The Rules serve as the basis for project-based inspections and selective audits conducted by the Taiwan Stock Exchange, Taipei Exchange, Taiwan Securities Association, and Taiwan Futures Exchange. The framework includes both general risk indexes and special risk indexes. The “general risk indexes” aggregate and score various indexes, taking into account score volatility, and classify securities firms into four rating levels: A, B, C, and D. The special risk indexes, on the other hand, issue warnings for abnormal values in specific businesses. When a securities firm receives a poor rating or its indices reach warning thresholds, the Taiwan Stock Exchange will initiate audit and guidance procedures, intervening in advance to provide support before the firm’s risk deteriorates.

However, with changes in market structure, a younger investor demographic, and the widespread adoption of online trading and day trading, the original early-warning framework may no longer fully reflect the operational risks faced by securities firms. To strengthen securities firms’ risk management mechanisms and enhance supervisory foresight, the Taiwan Stock Exchange has launched a project to optimize its early-warning system. In the current year (2025), Articles 3, 4, and 6 of the Rules Governing Early Warnings have been amended and officially announced on June 12, taking effect from the monthly report for October submitted by securities firms in November. The new system will enable more comprehensive risk detection and more precise warnings, thereby providing a stronger safeguard for the operational safety of securities firms and the stability of the market.

The strengthening measures of the current early-warning mechanism are reviewed based on three core principles: “consistency,” “fairness,” and “effectiveness.” Under the principle of “consistency,” the amended risk indexes are designed not only to better reflect the actual operations of securities firms but also to align with existing regulatory requirements, thereby enhancing coordination and coherence among various supervisory regulations. In setting warning thresholds, the principle of “fairness” is taken into account, balancing market practices with supervisory resource allocation to ensure that the system is reasonable and feasible. At the same time, conditions for the increase of warning messages have been added to more accurately reflect abnormal risks, preventing normal business activities from being misidentified as anomalies and thereby ensuring the “effectiveness” of the early-warning system.

The key amendments to the Rules Governing Early Warnings focus on the optimization and restructuring of the special risk indexes. The specific adjustments encompass four major aspects: separately listing capital financing items within credit indexes; establishing dedicated indexes for securities lending and short selling; incorporating a day trading supervision mechanism; and modifying alert thresholds for wealth management and custody services. These changes aim to enhance the precision of identifying potential risks at securities firms. The key revisions for each dimension, along with the underlying considerations and specific benefits, are outlined as follows:

Dimension 1: Optimize credit risk indexes to focus on assessing financing risks, while taking collateral quality into account, thereby enhancing the supervisory effectiveness over lending activities

Credit business is one of the core sources of risk for securities firms. Prior to the revisions, the early-warning index for securities firms’ credit operations was defined as follows: “the ratio of the combined monthly securities lending and borrowing, securities lending balances, and margin financing and short selling balances to the firm’s net worth reaches 100% or more, and the balances of small-cap stocks or abnormal stocks account for 50% or 20% or more of the total balance, respectively.” This index only covers the credit items of securities firms related to margin financing and securities lending, borrowing or lending money in connection with securities business, and securities borrowing and lending for clients. However, it does not include the later-introduced non-restricted purpose loan business.

In recent years, with a booming stock market and continuously rising trading volumes, the scale of non-restricted purpose loans and their collateral has also grown rapidly, leading to a significant increase in securities firms’ overall credit exposure. If the early-warning framework does not timely incorporate monitoring of these activities, it may result in insufficient risk assessment by the firms. Pursuant to Article 30 of the “Operating Rules for Securities Firms Handling Non-Restricted Purpose Loan,” in non-restricted purpose loan conducted by a securities firm, the sum of the financing amount and total amount of financing to clients plus the total financing amount in margin purchases and short sales of securities may not exceed 400% of the securities firm’s net worth. To align with regulatory control standards and focus on assessing securities firms’ credit business risks, securities lending and short selling balances have been moved to other indexes, and non-restricted purpose loans have been incorporated into the scope of this index.

The revised early-warning index is defined as follows: the ratio of the combined monthly securities business loans, non-restricted purpose loan balances, and margin financing balances to the securities firm’s net worth reaches 150% or more, and the balances of small-cap stocks or abnormal stocks account for 50% or 20% or more of the total balance, respectively. Considering that the inclusion of non-restricted purpose loans may increase the values of this index, maintaining the original 100% warning threshold could lead to frequent alerts and the dispersion of supervisory resources. Therefore, by referencing the current average ratio of non-restricted purpose loan balances to securities firms’ net worth, the warning threshold for this type of business has been raised from 100% to 150%, which remains below the statutory control limit of 400%, thereby balancing the actual business operations of securities firms with supervisory capacity.

In addition to overall exposure, collateral quality is also a key aspect of credit risk management. Therefore, the revised framework retains the sub-indexes for “small-cap stocks” and “stocks with abnormal price and volume.” However, based on the revised scope of client financing, the collateral is adjusted to be measured by the proportion of either the balance of small-cap stocks or stocks with abnormal price and volume to the total balance. This design aims to prevent the excessive concentration of credit resources in highly volatile or illiquid stocks, and by assessing the quality of the collateral obtained, it provides a multi-dimensional evaluation of the credit risk levels of securities firms.

Dimension 2: Establish independent risk measurement indexes for securities lending and short selling, thereby concretely implementing the supervision of securities lending and short selling activities

Under the current system, securities lending and short selling activities are often considered part of a securities firm’s credit business. However, as market prices remain high and trading volumes increase significantly, the scale of securities lending and short selling continues to expand. If the risks of these activities are combined with those of loan businesses, their specific risk profile may not be adequately highlighted. To effectively assess the risks of securities firms’ securities lending and short selling activities, and with reference to Article 38 of the “Operating Rules for Securities Lending by Securities Firms,” which stipulates that the sum of the total monetary value of securities loaned by a securities firm in conducting securities lending business and the total monetary value of securities loaned by it to clients for short sales in conducting securities margin purchase and short sale business shall not exceed 400 percent of its net worth, an independent measurement index has been established for securities firms’ securities lending and short selling activities.

The newly established early-warning index is defined as “the ratio of the combined monthly total amount of securities lending and the total amount of short selling to the securities firm’s net worth reaches 300% or more.” If the total amount of securities lending and short selling conducted by a firm reaches 300% of its net worth, a warning message will be triggered. This regulation is consistent with the control standards set forth in the aforementioned “Operating Rules for Securities Lending by Securities Firms.” Taking into account current safety control mechanisms – such as eligibility requirements for collateral in securities lending, margin ratio requirements for short selling, and the ability of securities firms to use proceeds from short sales as collateral – the warning threshold has been set at 300% to ensure alignment between supervisory standards and practical operations. Through the design of independent indexes, the exposure of securities firms’ activities can be more accurately captured, preventing these risks from being diluted or obscured by other credit indexes. At the same time, it encourages securities firms to strengthen internal controls, such as improving the quality of collateral for securities lending and enhancing client risk assessments.

Dimension 3: Incorporate day trading–related indexes to enhance monitoring of securities firms’ operational risks and improve supervisory coverage

Since the gradual liberalization of day trading in 2014, it has become an important hedging tool for investors and a mechanism for short-term traders to seek arbitrage opportunities. In recent years, the turnover from day trading has accounted for approximately 40% of the total market. This trading pattern has become a market norm. While day trading helps improve market liquidity and trading activity, its high concentration and volatility may also increase the risk exposure of securities firms. If a securities firm’s trading volume relies excessively on a small number of high-value day trading clients, any default by these clients could result in a significant financial impact on the firm. To reflect this risk, new indexes measuring the proportion of day trading transactions and related losses have been introduced. Securities firms exhibiting high concentration in such transactions and incurring losses large in comparison to their scale will be listed for alert.

The newly added early-warning index is: “When the ratio of securities firms' entrusted day trading transaction amounts to total transaction amounts reaches 50% or higher, and the ratio of monthly losses from entrusted day trading transactions to net worth reaches 3% or higher.” This business is monitored using two warning indexes concurrently. The first index is the ratio of day trading transaction amounts to total transaction amounts; when this ratio reaches 50%, it is considered an abnormal signal, aimed at assessing whether a securities firm’s operations rely excessively on day trading and encouraging the firm to independently review its client structure and business concentration. The second index is the ratio of monthly losses from entrusted day trading transactions to net worth; when this ratio simultaneously reaches 3%, a warning is triggered. This measures the potential impact on a firm’s net worth if its clients incur losses or defaults from day trading. By applying these two indexes together, high-risk securities firms can be more effectively identified, prompting them to strengthen client structure and risk management.

Dimension 4: New monthly increase alerts added to wealth management and custodial funds and securities business indexes to effectively identify abnormal change risks and enhance early warning accuracy

The previous early-warning index for securities firms’ wealth management and custody of clients’ funds and securities was defined as: “When the risk-equivalent amounts of monetary and securities trusts under wealth management or of clients’ funds and securities under custody reach 20% or more of the securities firm’s net self-owned capital.” This index was established by the Taiwan Stock Exchange in 2014, taking into account the operational risks involved in securities firms’ wealth management and custody services. Referencing the advanced calculation method for securities firms’ capital adequacy ratio, the risk-equivalent amounts of securities firms’ operations in these businesses were estimated using risk coefficients of 12% and 15%, and the index was set to trigger an early-warning alert when its value reaches 20% or higher.

In recent years, the scale of securities firms’ handling of monetary trusts, securities trusts, and the custody of clients’ funds and securities has continued to grow, becoming an important operational business for these firms. As the scale steadily increases, the original single-threshold early-warning standard of “20% of the securities firm’s net self-owned capital” has gradually lost its effectiveness in distinguishing normal growth from abnormal risk. Considering that securities firms have been conducting wealth management businesses since 2009 and have developed a certain level of operational proficiency, with no major deficiencies occurring during this period, and that client funds and securities under custody are held in segregated accounts with all interest income, gains, and losses fully belonging to the clients, the revision aims to ensure that supervision reflects actual risk changes and effectively functions as an early warning. Therefore, the focus of the revision shifts from solely monitoring scale to also emphasizing risk fluctuations, concentrating on abnormal expansion, and introducing a new alert condition of a “10% monthly growth.”

The revised early-warning index is: “When the risk-equivalent amounts of monetary and securities trusts under wealth management or of clients’ funds and securities under custody reach 20% or more of the securities firm’s net capital, and the month-over-month growth reaches 10% or more.” The 10% monthly growth threshold was established as a new alert condition after analyzing recent business fluctuations of securities firms. It aims to filter and focus supervision on firms experiencing abnormal short-term business expansion, thereby clarifying whether the growth stems from concentration in specific clients or raises concerns of operational risks triggered by market systemic factors.

The enhancement of the securities firms’ early-warning mechanism helps adjust the supervisory approach toward these firms, implements the principle of differentiated management, and comprehensively improves overall regulatory effectiveness. The new mechanism can target securities firms that are truly abnormally high-risk while encouraging them to proactively strengthen internal controls, avoid excessive reliance on a single business line, and refrain from engaging in short-term aggressive expansion strategies, thereby establishing a more resilient and forward-looking risk management framework. By virtue of the rigor and comprehensiveness of the mechanism design, it not only enhances the safety of the investment environment but also helps strengthen investors’ confidence in Taiwan’s capital market, laying a solid foundation for the sound development of the market.

Striking a balance between “promoting business innovation” and “ensuring controllable risk” is a core challenge that the Taiwan Stock Exchange and all securities firms must jointly address. Looking ahead, the Taiwan Stock Exchange will uphold the principle of advancing market openness and supervision in tandem, continuously rolling out adjustments to management measures in response to the diversified new products and services introduced by market participants. It will also refine the design of the early-warning framework, continue to integrate supervisory technology, and build a real-time, dynamic supervisory mechanism, enabling Taiwan’s capital market to maintain innovation while ensuring sound risk controls. Moreover, the Taiwan Stock Exchange will comprehensively strengthen the competitiveness and sustainable development of the domestic securities industry in the international financial market, while concretely implementing the Financial Supervisory Commission’s policy goal of establishing Taiwan as an “Asian Asset Management Center.”