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On 3 January 2005 Taiwan's central bank, the Central Bank of China (CBC), introduced a new regulatory regime of negative listing and post-hoc filing in connection with the application of designated foreign exchange bank for en-gagement in forex derivative products business.
Under the new system, when a designated bank approved by the CBC to conduct certain forex derivatives business undertakes transactions in other type of forex derivative business (except for the restricted items described below), it must, within one week after beginning to conduct such new business, file a report with the CBC together with a brief product description, a product pro-spectus (stating, for products already being traded, the transaction date, settlement date, maturity date, notional principal, exercise price, or other relevant indicators or parameters) and other required documents. The approval for the new forex derivatives business should be deemed granted if the CBC expresses no objec-tion within three weeks after receiving the filing letter. The bank can then continue to conduct such business.
However, before conducting any of the follow-ing three types of business, a bank must first apply to the CBC for an approval:
New derivative products that are not yet au-thorized by the CBC or have been authorized for less than six months (including any prod-uct linked therewith);
Financial derivative products involving or linked to New Taiwan Dollar (NTD) exchange rates (but not including NTD-exchange-rate quanto products or derivative financial prod-ucts linked to standard NTD/FCY cross-currency swaps with exchange of prin-cipal at both outset and maturity); and
Foreign-currency-denominated products with underliers associated with Taiwan-based risk (including securities and beneficiary certifi-cates issued overseas by Taiwanese enter-prises (such as ECBs and GDRs), the share prices of Taiwanese enterprises and index of Taiwan stock market, the SIMEX MSCI Taiwan Stock Index and other products whose main underlier or credit risk is associated with Taiwan).
The CBC also ordered that a designated bank conducting forex derivatives business must treat its customers fairly in order to avoid the occur-rence of disputes, and must comply with the following requirements:
The bank must establish a "know your cus-tomer" system with follow-up checklists, and must ensure that it genuinely understands its customers' characteristics, including their fi-nancial status, investment experience, in-vestment needs, ability to withstand potential losses, and suitability to invest in the forex derivative products concerned.
Promotion materials for forex derivative products must be clear, fair, not misleading to investors and should enable investors to ap-propriately and properly understand the risks associated with the products. Customers must confirm, by signing each product prospectus, that the bank has sent specialist personnel to explain such risks to them.
The risk disclosure statement must fully dis-close the nature and content of the risks asso-ciated with the product. It must explain the source from which, and manner in which, the instrument will achieve the earnings yield promised by the bank, and if the product has a maturity exceeding one year the yield should be stated as an annual rate of return. The maximum possible loss associated with the product must be stated, and quantitative analysis examples must be presented showing possible profits and losses under different circumstances. Enhanced protection measures must be put in place to protect bona-fide non-specialist small amount investors, and the risk disclosure statement must disclose to the investors that they must bear credit risk asso-ciated with the bank, and that derivative fi-nancial products linked to structured deposits are not covered by deposit insurance.
The bank must establish after-sales service measures for products.
The bank must provide education courses at regular and irregular intervals to the investors, but these must not involve improper sales promotion activities or the prediction of product trends such as exchange-rate move-ments.
