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1. Characteristics
of Taiwan's Securities Market
Since Taiwan Stock Exchange Corporation (hereinafter
referred as TSEC or the Exchange) was established
40 years ago on Feb 9, 1962, it has been performing
its duties as a centralized securities market
in Taiwan. Compared with other developed countries,
the history of the market development is rather
short and its economic scale is also limited.
However, statistics show that Taiwan's securities
market is fast developed and full of momentum.
As
far as the number of the listed companies is concerned,
there were 595 in April of 2002. In contrast with
ten years ago, in which only 221 companies listed,
the number expresses that 372 more companies have
joined the market with an increment of 168%. As
for the item of securities, there were only 284
items of stocks, beneficiary certifications, government
bonds and convertible bonds ten years ago. Currently,
566 items have been included on warrant bonds,
stock warrants and Taiwan Depositary Receipts
which totalized 850 items, accounting for an increment
of 199%. Among those, the value of shares listing
is NT$ 11,409 billion (around US$ 330 billion)
in April of 2002. In contrast with ten years ago,
in which the value of the market capitalization
only reached to NT$ 3,184 billion (around US$
92 billion), the figures show an increment of
258% with the market capitalization standing for
120% of GDP bringing Taiwan closely to the level
of maturity market. Based on a newly updated statistic
data from FIBV as of April of 2002, Taiwan's securities
market is ranked as the 16th of the world in terms
of the number of 595 listed companies and the
13th in market capitalization of US$ 329,740.52
million.
With
respect to trading activities, the number of opened
accounts has reached 12,615,401 generalized to
7,087,748 people. However, ten years ago, there
were only 5,162,908 opened accounts to 3,188,375
people. The current number of investors stands
for 1/3 of total population in Taiwan. Apparently,
trading securities is popular in the country.
In 1991, retail investors accounted for 96.9%
of the market participation. However, in 2002,
the proportion reduced to 84.7%. The information
interprets a phase that individual investors still
play the major role of the market participation.
In Jan of 2000, there was a phenomenon of a daily
trading value gaining closely at around US$ 10
billion. Thereafter, referred by FIBV's report
in April of 2002, Taiwan's securities market ranked
the 7th of the world in terms of shares trading
with traded value reaching at US$ 280,956.28 million.
From Jan to April of 2002, accumulation of the
market's turnover rate was 84.32% and daily turnover
rate in average was 1.11%. Comparing with past
10 year records, annual average turnover rate
sustained at about 250 %. FIBV's statistics, therefore,
make Taiwan's securities market the 3rd of the
world in terms of turnover velocity, and also
implicitly tell us that Taiwan stock market is
still full of speculation. With regard to daily
transactions, in which margin trading is, presently,
accounted for 48.33%. The proportion shows that
leveraged transactions will expose to higher market
risks. For market volatility, Taiwan Stock Exchange
Weighted Index (TAIEX) had slid from the high
of 12,495.34 in 1990 to the low of 2,560, an 80
% drop from the top to the bottom. However, the
index surged form the low of 3,446.26 in2001 to
the high of 6,462.30 in April of 2002, a more
than 80% raise from the low to the high. The evidence
shows that the market volatility has always been
drastic in the yearly development.
In general, although
there has been some progress in the market development,
the above status shows that our securities market
still remains a "shallow basin" style.
The characteristics contain retail investors as
a major role of the market participants, high
volatility as well as turnover rate of shares
trading, highly leveraged transactions and more
speculation than investment in the market. Therefore,
how to protect less-privileged investors well
is a challenge of market regulators in the country.
2.
Mechanism for Investor Protection in Taiwan
A sound market should possess not only the function
of offering enterprises a place for fund raising,
but also the function of providing investors with
a fair and efficient marketplace for trading.
With both of these functions, a stock market can
help a country's economy development. The regulatory
objectives and scopes of securities authorities
may vary widely among different securities markets,
but investor protection is always what they have
in common. Investor protection is the center philosophy
of all regulators' administrative measurements.
For instance, our Securities and Exchange Law
(hereinafter referred as the Law) states clearly
in its first article that investor protection
is one of two purposes of its enactment. Now I
will give you an overview about how our market
implements investor protection.
1) Direct Instruments
a. Statutory vehicles
First of all, the Law prescribes securities
firm must deposit an operation bond after its
incorporation and registration. Creditors whose
claims arise from the specially approved business
of a securities firm shall have preferential right
of payment from that bond. The current amounts
of operation bond required for dealer and broker
are NT$10 million and NT$50 million respectively.
It is the essence of securities business that
debts and credits always occur in a securities
firm's normal operations. The deposit of operation
bond can enhance the firm's solvency credit and
assure creditors' right of claim for they are
given superior priority.
Secondly, the
securities firms must also deposit a certain amount
of clearing and settlement fund. The fund is used
as coverage for securities firm's obligation to
market and investors, while the securities firms
fail to fulfill the duty of settlement. The Law
prescribes such order of priority of claimants
that the stock exchange is in first place, the
customers of the securities firms violating the
responsibilities of settlement, the second place,
and the other affected securities firms, the third.
In the event that the fund is insufficient to
meet such claims, rest of the claims may be compensated
according to the provisions of operation bond.
The Law stipulates the process of the use of fund
as well, if any transacting party fails to fulfill
its payment and delivery obligation. In the case
of a securities firm's failure of the obligation,
the Exchange shall first designate other members
to make payment and delivery in place. The losses
and expenses incurred can be compensated by the
fund. In other word, the Exchange is entitled
to use the fund to maintain the market's settlement
in a better order and as a result assure investor's
right of claim in a better priority. Before a
broker's initiation of operation, it must deposit
NT$15 million as clearing and settlement fund,
and another NT$3 million for an additional branch
office. The application of clearing and settlement
fund pooled by the securities firms is based on
joint liability. That is, the pool of fund shares
the default risk from the market as a whole. A
special committee is set up within the Exchange
to manage the fund. The present amount of fund
is about NT$8.7 billion; the committee may compulsorily
advise the member to deposit additional fund to
the pool, depending on member's different level
of risk exposure. If a securities firm fails to
abide by this rule, the Exchange can suspend its
participation of the market trading. What's more,
the fund can not be transferred and pledged by
the securities firm. The committee's management
of the fund is conservative. It must be kept in
a designated custodian account in the form of
a bank deposit or government bond only, unless
others approved by the SFC.
b. TSEC's vehicles
In addition to the above mentioned bond and
fund, the Exchange established an investor protection
fund in which the contributors include some TSEC's
related companies or securities related organizations.
According to the rules governing this fund, the
fund subsidizes only those uncompensated portion
of the investor claims, and the investor is limited
to those who has performed the obligation relative
to securities trading while whose brokers default
in the subsequent settlement obligation. The subsidy
rule also applies to investor who exercises derivative
product's rights to buy or sell through securities
broker and is unable to get the payment. The fund's
reimbursement to each investor shall be limited
to NT$1 million; the maximum amount paid to all
investors of a single securities firm shall not
exceed NT$100 million. Of course the compensation
does not apply to investors who are insiders and
related persons of the securities firm; the fund
pays only to investors who have fulfilled obligations
of payment/delivery of the transaction while the
securities firm defaults. Currently the fund has
a total amount of around NT$1 billion. This fund
has never been used since its establishment in
1993, though there were some critical events of
market default happened since then. It was because
the clearing and settlement fund had taken over
the transaction obligations due to be paid to
investors.
2) Indirect Instruments
a. Public offering and listing
Besides, there are some provisions of the Law
regarding issuer and its related person's behavior
and company disclosure, that are designed to prevent
investor's damages indirectly from listed company's
unjustified activities. The article#20 forbids
fraudulent conduct and false settlement involved
in public offering, issuance and trading of securities,
and violation of the Law will be punished with
imprisonment or substantial amount of fine. The
article#32 prescribes the issuer, its responsible
persons, employees, underwriters, accountants,
attorneys, and other professional persons must
be responsible for the information contained in
prospectus, which they have signed to certify
the accuracy of the information. In the event
that there are misrepresentation, false statement,
and material omission in the prospectus, which
results in misleading effect, they are jointly
and severally liable for investor's damages. According
to the article#36, listed company must periodically
disclose CPA audited and/or reviewed financial
reports to the public; and if there is an event
occurred to have material impacts on shareholder's
equity or the stock price, it must be disclosed
two days within its appearance. Furthermore, the
Law forbids insider's unfair or unjustified conduct
of securities transaction. The article#157 requires
that the profits resulted from insiders' (director,
supervisory director, executive staff, shareholder
holding more than 10% of company's outstanding
shares, etc) buying and selling stock within a
period of 6 months, belong to the company. The
board directors, on behalf of the company, are
obligated to implement the restitution. The article#157-1
also forbids the insiders' securities trading
by taking advantage of undisclosed information.
Violation of the Law shall be liable for civil
damages and criminal action.
So as to prevent
issuing company from fraudulent and illegal activities,
after its listing, which could damage investor,
the Exchange's rules of listing consider lots
of qualifications in addition to financial requirements
for a company that applies for listing. The Exchange
would take account of the facts, such as the company's
independence of financial operation, the company's
history of doing material transaction with its
related persons, the company's compliance with
its internal control system and accounting system,
and its faithful implementation on auditing system.
The Exchange is also concerned with the board
directors' and top management's conduct. The conduct
and activities regarded as not qualified for listing
include:
the board members' and responsible persons' involvement
in activities that is against integrity principle
for past 5 years, the board members' and big shareholders'
transferring substantial amount of share in the
applying year and previous fiscal year, the number
of board members less than five or independent
directors less than two, the board of directors'
inadequacy of independence, and so on.
Full and timely
disclosure of company information is also an important
measure for investor protection. The scope of
disclosure is comprehensive, while the Exchange
provides specific access and procedure of disclosing.
What the listing company should disclose includes
six categories. They are financial and investment
related matters, legal actions, material events
related to operation and production, changes in
management and board members, decisions related
to dividend and shareholders' right, and other
matters that may have impacts on stock price or
shareholders' equity. The company accordingly
shall file its financial reports including quarterly,
semi-annual and annual reports, and report of
monthly revenue as well. And, if there are any
information related to company's significant decision,
or any events that may affect stock price, on
the day of events or before the next trading day
if it has been reported by media, the company
must input the information into the Market Observation
System (MOS) with the Exchange. The MOS is linked
to TSEC Website where everyone can easily have
accesses to the aforesaid matters. Further to
the MOS input, under some circumstances the company
must release the related information in details
to the press by sending spokesman or authorized
staff to the Exchange's press room on or before
the prescribed day.
b. Examination and market surveillance
Securities firms function as intermediaries
in the market. Therefore, the soundness of a securities
firm really is critical to the fairness and efficiency
of market. The SFC's Securities Company Regulation
requires all the securities firms must establish
a sound internal control and auditing system which
should consist of every aspect of the company's
business, operation, and related rules and regulations.
We suppose if a company has a good compliance
with its control system, the disputes and conflicts
with investor's could be minimal. With the SFC's
authorization, the Exchange is in a position to
examine how well the securities firm complies
with the securities related rules and regulations,
and its own control system. TSEC normally conducts
field examination on each securities firm once
a year. We may also conduct extra or special examination
on the basis of the SFC's instruction, securities
firm's deteriorating financial condition, and/or
investor's act of disclosing and appealing. If
we find the securities firm is financially embarrassed
or involved in risky trading, we can restrict
its market transaction to a limited amount. The
statistics show the Exchange's auditors carried
out 167 annual routine examinations and another
335 examinations for investors' disclosing/appealing
and other causes. We believe our examination measurement
is advantageous to investor protection and helpful
to securities firms' risk prevention as well.
Market surveillance
is another important vehicle for the TSEC to maintain
market in good order and protect investors accordingly.
Our surveillance operation is implemented through
on line monitoring and off line investigation
as well, with an aim to discover and prevent from
manipulation and insiders trading. For some information
that may have substantial impact on the market,
our surveillance department also makes immediate
investigation and verification so as to stop the
scattering of rumors and further manipulation.
Prevention of securities firm's likely default
in the market is another objective of the surveillance
operation. If any securities trading is found
unusual in its price or quantity, we usually take
preliminary actions such as adjusting margin ratio,
delaying time of matching cycle, restricting securities
firms' amount of trading for that particular securities,
and demanding delivery and payment in advance,
etc. If the unusual trading is found having influences
on market order or damages to investors' interest,
the TSEC may make temporary halts for a particular
stock or the whole market's trading. Once there
is evidence of illegality, the Exchange will further
turn the case to the SFC or authority of justice.
Last year, the TSEC totally conducted 112 investigations
among which 16 cases were suspected manipulation
and insider trading.
* Speech
delivered at International Seminar on Investor
protection on June 20-21
in Shanghai.
* * Chairman of Taiwan Stock Exchange Corporation.
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