Newsletter
Financial Deregulation of OBU and DBU Businesses under Free Economic Pilot Zones Framework
President Ma declared in 2014 New Year's Day Address the establishment of Free Economic Pilot Zones ("FEPZs") to be one of the most important policies of Taiwan government presently. Using the "virtue zone" concept, the Executive Yuan has incorporated the financial industry into the "First-phase Action Plan of FEPZs" approved on 16 August 2013 and amended subsequently and hence, the demonstration zone of the financial industry shall not be limited to physical locations.
To coordinate the implementation of the FEPZs Framework, the Financial Supervisory Commission (FSC) established a plan for incorporating the financial industry into the FEPZs. The plan is to deregulate businesses conducting by the offshore banking unit ("OBU"), domestic banking unit ("DBU"), offshore securities unit and domestic securities unit. At the end of February 2014, 18 relevant banking laws, regulations and rulings have been amended. Due to space limitations, this article will in advance summarize the amendments to banking laws, regulations and rulings in connection with OBU and DBU under the FEPZs Framework as follows:
I. OBU
1. Provisions regarding investment in foreign financial products under the trust scheme (FSC ruling dated 11 April 2014, Ref. No. Jin-Guan-Yin-Wai-Zi-10300071870, and FSC ruling dated 29 January 2014, Ref. No. Jin-Guan-Yin-Gi-Wai-Zi-10350000200 )
In the past, when conducting trust-related businesses, OBUs shall comply with the Trust Industry Act, Securities Investment Trust and Consulting Act, Futures Trading Act and other applicable laws and regulations (collectively, the "Trust-related Laws and Regulations"); the Offshore Banking Act and rulings issued by the competent authority provided no exemption. However, according to an FSC ruling dated 11 April 2014, Ref. No. Jin-Guan-Yin-Wai-Zi-10300071870, and an FSC ruling dated 29 January 2014, Ref. No. Jin-Guan-Yin-Gi-(Wai)-Zi-1030000200, an OBU, pursuant to Paragraph 1 of Article 5 of the Offshore Banking Act, shall not be subject to the following restrictions under the Trust-related Laws and Regulations: (i) types and range of the management, use and disposition of trust assets; (ii) qualifications of professional investors; (iii) the rules that the financial products concerned shall be reviewed or approved by the industry associations or the competent authority or shall be filed for recordation or effectiveness; and (iv) the rules in respect of recommendations, advertisements, solicitations and promotional activities. Other than the above, OBUs shall comply with the following major requirements when conducting trust-related businesses:
(A) The counterparty is limited to offshore clients.
(B) The investment products in principle shall be foreign currency denominated products: Unless otherwise approved by the competent authority, the investment products shall comply with the following restrictions: (i) not denominated in New Taiwan Dollar ("NTD"); (ii) not linked to NTD exchange rate and NTD benchmark interest rate, not denominated in in NTD; and (iii) the portfolio shall not include any products denominated in NTD. Notwithstanding the above, the restriction described in item (iii) should not apply to the following investment products, provided that the amount invested in Taiwan securities market by such investment products shall not exceed 30% of their respective net asset value:
(a) offshore funds; and
(b) foreign-currency denominated SITE funds, in the category of multi-currency denominated SITE funds, issued by domestic securities investment trust enterprises.
In addition, the amount invested in foreign currency denominated bonds (including Formosa Bond) may be excluded when calculating investment in Taiwan securities market.
(C) The transaction content shall be fully explained to the client and the transaction-specific risks shall be disclosed: An OBU shall, in exercising its due care of a good administrator and duty of loyalty, fully describe the material contents of the products, services and agreements and fully disclose the transaction-specific risks to its clients.
(D) The operating procedure shall be established: The matters which shall be included in the operating procedure are: (i) customer eligibility standards and Know-Your-Customer guidelines; (ii) types and range of available products; (iii) customer-specific suitability rules; (iv) merchandise slotting review procedures; and (v) matters which shall be complied with when conducting product introduction, advertisements, solicitations and promotional activities. For domestic banks, the operating procedure shall be adopted by the board of directors; for Taiwan branches of foreign banks, the operating procedure shall be approved by the headquarter or regional center of the banks.
(E) The above requirements shall be incorporated into the internal control and audit system of the OBU.
2. Expanding eligibility criteria for clients who may invest in derivatives and the types of derivatives which they may invest in (FSC ruling dated 27 December 2013, Ref. No. Jin-Guan-Yin-Wai-Zi-10200293010)
(A) Expand eligibility criteria for customers: Before the issuance of this ruling, an OBU conducting the derivatives business other than dealing with Credit Default Swaps or Credit Default Options should divide their counterparties into "professional clients" and "retail clients'', to whom different requirements shall apply. However, the ruling above provides no such determining thresholds for professional and retail customers; instead, it provides that an OBU conducting the derivatives business shall establish customer eligibility standards, anti-money laundering compliance guidance, Know-Your-Customer guidelines, customer-specific suitability analysis procedures and the range of available products based on its internal and risk control.
(B) Ease restrictions on the range of products available to offshore retail customers who are individuals: When offering products to offshore retail clients who are individuals, an OBU conducting the derivatives business other than dealing with Credit Default Swaps or Credit Default is not subject to Article 3, Paragraph 2 of Article 25, Paragraph 2 of Article 28, Paragraph 4 of Article 30 and Article 33 of the Directions for Banks Conducting Derivatives Business.
For further details regarding this FSC ruling, please refer to the "Banking" section of "LEE & LI Bulletin - February 2014."
3. Allow OBUs to conduct the foreign bond agency business (FSC ruling dated 28 January 2014, Ref. No. Jin-Guan-Zheng-Quan-Zi-10300014311)
According to an FSC ruling dated 28 January 2014, Ref. No. Jin-Guan-Zheng-Quan-Zi-10300014311, if a domestic bank or a branch of foreign bank in Taiwan has been approved by the FSC and the Central Bank of the Republic of China (Taiwan) (CBC) for concurrently conducting the foreign bond agency business, the OBU of such bank/branch may apply to the FSC for conducting such business. However, buyers of such foreign bonds are restricted to offshore clients.
With respect to other relevant requirements for the OBU to conduct the foreign bond agency business, please refer to Paragraph 1 of Section II in this article.
4. Simplify the application process for conducting new financial related foreign exchange business (FSC ruling dated 27 December 2013, Ref. No. Jin-Guan-Yin-Wai-Zi-10200293011)
In 2005, in order to encourage OBUs to conduct new types of financial related foreign exchange business, the FSC issued the "Negative-Listing Rules for Offshore Banking Unit Conducting Financial Related Foreign Exchange Business" ("2005 Rules") stipulating that, for the foreign exchange business which is neither related to NTD nor the business provided under Subparagraphs 1 to 10 of Article 4 of the Offshore Banking Act ("New Type Foreign Exchange Business"), OBUs meeting certain financial and business conditions may conduct such business with offshore individuals, juristic persons and government agencies and onshore or offshore financial institutions, without case-by-case submitting the applications for such business; provided, however, an OBU may not commence such business until being notified by the FSC letter copying the CBC as a matter of formality.
On 27 December 2013, the FSC then issued a new letter, Ref. No Jin-Guan-Yin-Wai-Zi-10200293011, to abolish the 2005 Rules and stipulated that, upon meeting certain financial and business conditions, an OBU may directly conduct New Type Foreign Exchange Business and file the relevant documents to the competent authorities for future reference within 15 days after the commencement of such business. The above procedures are simpler than those provided under the 2005 Rules.
For further details regarding this FSC ruling, please refer to the "Banking" section of "LEE & LI Bulletin - February 2014."
II. DBU
1. Allow DBUs to conduct the foreign bond agency business (FSC ruling dated 28 January 2014, Ref. No. Jin-Guan-Zheng-Quan-Zi-10300014311)
According to an FSC ruling dated 28 January 2014, Ref. No. Jin-Guan-Zheng-Quan-Zi-10300014311, DBUs meeting certain financial and business conditions may, after obtaining approvals from the FSC and the CBC, concurrently conduct the foreign bond agency business. Referring to an FSC ruling dated 28 January 2014, Ref. No. Jin-Guan-Zheng-Quan-Zi-1030001431, relating to requirements on securities brokers conducting the foreign bond agency business, the major requirements on DBUs concurrently conducting foreign bond agency business are as follows:
(A) Obtain a written authorization from the foreign financial institution and executing agency agreement: Any DBU conducting such business shall obtain in advance authorization of the foreign financial institution registered with and approved to engage in securities business by the competent authority in its country of domicile, and shall execute a bond agency agreement with such foreign financial institution.
(B) Qualification restriction on buyers: Buyers of foreign bonds shall be limited to professional institutional investors under Subparagraph 1 of Paragraph 3 of Article 3 of the Regulations Governing Offshore Structured Notes.
(C) Definition of foreign bonds: Foreign bonds in this ruling refer to bonds denominated in a foreign currency and issued by foreign issuers offshore, excluding the following : (i) overseas corporate bonds issued by domestic companies; (ii) bonds issued in the PRC securities market and bonds issued or managed by the PRC government or PRC companies; (iii) bonds issued by the reference companies of Hang Seng China-Affiliated Corporate Index; or (iv) bonds issued in Hong Kong or Macau securities market by any company in which 30% or more of the total issued and outstanding shares are directly or indirectly held by the PRC government or PRC companies. The agency of purchasing and selling offshore structured products shall comply with the requirements under the Regulations Governing Offshore Structured Products.
(D) Personnel allocation, facilities and internal control system: A DBU shall at least have three qualified persons to conduct the foreign bond agency business. DBUs shall be equipped with data transmission equipment to capture real-time bond market data. DBUs shall incorporate the procedures for foreign bond agency business into the internal control and audit system.
2. Broaden the range of Renminbi ("RMB") financial derivatives business (Subparagraph 3 of Article 23 of the Self-Regulations for Banks Conducting Derivatives Businesses, a ruling of Foreign Exchange Bureau of the CBC dated 14 September 2013, Ref. No. Tai-Yang-Wai-Qi-Zi-1020035760, and a ruling of the CBC dated 29 January 2013, Ref. No. Tai-Yang-Wai-Qi-Zi-1020005806)
The CBC has approved certain types of RMB derivatives businesses to be conducted by DBUs by a ruling dated 29 January 2013, Ref. No. Tai-Yang-Wai-Qi-Zi-1020005806. The Foreign Exchange Bureau of the CBC further issued a ruling, Ref. No. Tai-Yang-Wai-Qi-Zi-1020035760 on 14 September 2013 to further approve certain other types of RMB derivatives businesses on the ground that such derivatives businesses are not associated with NTD exchange rate-related derivatives, NTD interest rate-related derivatives, NTD credit-related derivatives or NTD product-related derivatives.
On 15 January 2014, the Banking Association of the ROC, based on the above two rulings, promulgated its amendments to Subparagraph 3 of Article 23 of the Self-Regulations for Banks Conducting Derivatives Businesses, which provides that, when providing the structured products defined in such subparagraph to retail clients who are individuals, the banks shall comply with the range allowed and the restrictions set by the CBC (such as the following requirements: derivatives to which the structured products may be linked, the denomination currency or settlement currency and the base currency of the fixed-income products), and shall make a post filing or a prior application to the CBC in accordance with the above rulings of the CBC and applicable rules of the Banking Bureau.