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FINIs May Obtain Pledge Over Local Securities Held by Other FINIs For Offshore Investment Activities From March 2026
The Taiwan Stock Exchange ("TWSE") announced on December 22, 2025 the amendments to its Operating Rules for Overseas Chinese and Foreign Nationals Using Domestic Securities as Collateral for Offshore Investment Activities (the "Rules"). The key focus of this amendment is to add pledge as a way to have right over collateral and aligh the calculation criteria of TWSE's administrative fees with that of stock borrowing/lending. These amendments will take effect from March 30, 2026. Following these amendments, foreign institutional investors ("FINIs") engaging in offshore derivative transactions, offshore securities lending, and non-NTD lending transactions (collectively, "Offshore Investment Activities") may use the local securities they hold as collateral to create a pledge in favor of their counterparts.
Background of These Amendments
Under Article 21 of the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals, FINIs are prohibited from providing security interests over local securities they hold unless otherwise exempted by the regulator. To enhance FINIs' funding flexibility, encourage them to hold Taiwanese stocks so as to reduce forced sale for funding, and strengthen market stability, the Financial Supervisory Commission ("FSC"), taking into account the recommendation from the 2022 American Chamber of Commerce White Paper, announced on November 22, 2022, that foreign investors may use Taiwanese listed securities as collateral for Offshore Investment Activities, and tasked the TWSE and the Taiwan Depository and Clearing Corporation ("TDCC") with developing relevant measures. The TWSE subsequently announced the Rules on March 31, 2023.
The Rules adopt a mechanism similar to that used for margin trading and short selling, whereby collateral is held in special custody accounts maintained by collateral custodians for specific purposes. Although the collateral recipient may instruct the collateral custodian to dispose of collateral upon default, the legal nature of such collateral under Taiwanese law is unclear. The right granted to the collateral recipient under this mechanism do not constitute a prescribed right in rem under the Civil Code nor do they confer ownership of the collateral. Accordingly, in the event of the collateral provider's bankruptcy, the collateral recipient may not have priority claims over the collateral under the Bankruptcy Act. Unlike securities lending where the borrowers obtain the ownership rights to the borrowed securities and can sell the securities even if the lenders go bankrupt, the mechanism established under the Rules lacks comparable protections. As a result, despite the FSC's good intention in 2023, FINIs rarely adopted this collateral mechanism under the Rules.
Key Amendments to the Rules
Introduction to pledge mechanism
More than two years after the Rules' initial implementation, TWSE announced amendments to the Rules to allow the creation of pledges over collateral. Under the new pledge mechanism, the collateral provider (pledgor) may create a pledge in favor of the collateral recipient (pledgee) over the local securities they holds that are listed on TWSE or Taipei Exchange and are eligible for margin trading or short selling, excluding securities obtained through securities borrowing. Therefore, if the pledgor becomes bankrupt, the pledgee has priority claim on the pledged property and can enforce its pledge without going through the bankruptcy proceedings.
Eligible pledgor and pledgee and pledged objects
Under the new mechanism, both the pledgor and the pledgee must be FINIs. In the case of foreign currency lending, the pledgee should be a bank or securities firm licensed under foreign law.
Appointment of collateral custodian and book-entry operations
The pledgee must appoint the collateral custodian as the main custodian or sub-custodian and open a custody book-entry account. The colllateral custodian, the pledgor's custodian and the pledgee's custodian can be the same person.
Book-entry operations are limited to pledge cancellation and sale of pledged securities or cancellation of the sale. The pledgee cannot apply to become the owner of the pledged securities through the book-entry mechanism. The collateral custodian of the pledgee must open a pledge special account with Taiwan Depositary & Clearing Corporation ("TDCC") to process pledge creation.
Reporting requirements
Under the amendments, the collateral custodian remains obliged to report to TWSE by 5:00 p.m. on the next business day after receiving the information of the pledge, including the names of pledgor, pledgee and collateral manager, except for participants who had previously reported to TWSE.
Use of the proceeds from the Offshore Investment Activities and verification requirements
Same as previous arrangement, the proceeds obtained by the pledgor from the Offshore Investment Activities should be in foreign currencies and used outside of Taiwan. The pledgor should issue a certificate in the form prescribed by TWSE for that purpose to its custodian. In the case of non-NTD lending transactions, the pledgee should issue a qualification certificate to its custodian as well. The collateral custodian should verify the certificates issued by the pledgor and the pledgee before accepting the pledged securities.
Information disclosure to the Central Bank
In addition, the pledgor should prepare the information required under the Rules, including but not limited to name, amount and market values of pledged securities and total amount and value of the collateral that the pledgor should provide under the contracts for the Offshore Investment Activities, and the terms and type of the contracts for the Offshore Investment Activities, to its custodian which is required to report to the Central Bank of the Republic of China (Taiwan) ("CBC") within 15 days after the end of each month, with a copy sent to TWSE for recordation.
Default and disposal procedures
In case of a default in the Offshore Investment Activities, before disposing by the pledgee of the pledged securities, the collateral custodian should report such disposal to TWSE per the instruction of the collateral manager. After the sale, the collateral custodian should, per the instruction of collateral manager, handle book-entry of the share transfer procedure in accordance with relevant regulations and report the details to TWSE before 6:00 p.m. on the next business day following the settlement.
Use and remittance of disposal proceeds
Proceeds from the sale of pledged securities should be applied to settle debts between the pledgor and the pledgee. Any remaining balance should be returned to the pledgor's NTD account by the end of next business day after receipt of the proceeds by the pledgee.
The NTD amount from disposal is treated as remittance of investment principal into Taiwan by the pledgee and remittance of investment principal or earnings out of Taiwan by the pledgor. Custodian(s) of the pledgee and pledgor must report to the CBC on a daily-basis the status of remittance of the funds. Funds in NTD may also be retained by the pledgee or pledgor for settling existing securities transactions; otherwise, remaining amounts should be remitted out by the next business day.
Fees payable to TWSE
TWSE's fees for the pledge mechanism remain the same: collateral market value × 0.0004 ÷ 365, calculated on a daily basis, with a minimum fee of NT$100 if the amount calculated based on the above formula is less than NT$100. However, the basis of market value has changed from the previous day's closing price to the current day's closing price to align with the fee charge for securities lending/borrowing.
TWSE hopes these amendments may further enhance foreign investment flexibility in local securities, optimize related supervision procedures, and attract more international institutional investors to participate in the Taiwan stock market.