tsec taiwan 50 index futures operation plan

TSEC Taiwan 50 Index Futures Operation Plan

June 2003

Content

CHAPTER 1 ABOUT THE TSEC TAIWAN 50 INDEX*...........................................1SECTION 1 COMPILATION OF TSEC TAIWAN 50 INDEX...............................1SECTION 2 TSEC TAIWAN 50 INDEX CONSTITUENTS.................................4

CHAPTER 2 TAIWAN FUTURES EXCHANGE TSEC TAIWAN 50

INDEX FUTURES CONTRACT SPECIFICATIONS....................................6SECTION 1 TSEC TAIWAN 50 INDEX FUTURES CONTRACT SPECIFICATIONS6SECTION 2 POSITION LIMITS.......................................................................7

CHAPTER 3 TRADING SYSTEM....................................................................9SECTION 1 TRADING FLOW..........................................................................9SECTION 2 ORDER PLACEMENT.................................................................10SECTION 3 TRADE MATCHING....................................................................10SECTION 4 DISCLOSURE OF TRADING INFORMATION................................11

CHAPTER 4 CLEARING AND SETTLEMENT SYSTEM......................12SECTION 1 POSITION MANAGEMENT..........................................................12SECTION 2 MARGIN OPERATION................................................................13SECTION 3 SETTLEMENT OPERATION.........................................................13SECTION 4 DETERMINATION OF DAILY SETTLEMENT PRICE......................14SECTION 5 RISK CONTROL OPERATION......................................................15

Chapter 1 About the TSEC Taiwan 50 Index*

The TSEC Taiwan 50 Index is the first index for Taiwan designed specifically for

derivative and OTC trading in the Taiwan market. It is an ideal tool to gain exposure to

the Taiwan market.

Taiwan Stock Exchange Corporation (TSEC) enlisted the expertise of FTSE in

the design and ongoing calculation of the TSEC Taiwan 50. TSEC has a long history of

index compilation in the Taiwan market with unique authority and market acceptance.

FTSE's internationally recognized standards compliment TSEC local expertise. The

cooperation of the two institutes provide the TSEC Taiwan 50 with both domestic and

international competitive advantages.

Section 1 Compilation of TSEC Taiwan 50 Index

The TSEC Taiwan 50 has been designed to represent the performance of the

Taiwan stock market. All stocks listed on TSEC that meet the criteria for component

stocks are eligible to join. Following the strict screening process, the top 50 stocks are

selected by market capitalization to become index constituents. This selection process

ensures that the TSEC Taiwan 50 is the most cost effective and tradable index for

Taiwan.

FTSE's free float methodology has been applied throughout the index, to ensure

the weights within the index reflect the market capitalization available for investment.

The bands are narrow at the lower end of the scale where greater sensitivity is required

for accurate representation and broader at the higher end to ensure that the weightings of

larger companies do not fluctuate unless a significant corporate event occurs. This

system accurately reflects the investibility of a company, without subjecting the investor

to frequent rebalancing and transactions costs. These bands are shown in Table 1 below.

Table 1: Free Float and Index Weighting of Taiwan 50 Index

Free Float Index Weighting

Less than or equal to 5% Ineligible

Greater than 5% but less than or equal to 15% Actual free float*

Greater than 15% but less than or equal to 20% 20%


1

Free Float Index Weighting




Greater than 75% 100%

* Actual free float will be rounded up to the next whole number.

The TSEC Taiwan 50 Index is calculated and published in real-time (every 15

seconds) and disseminated by Taiwan Stock Exchange and major data vendors.

The constituents of Taiwan 50 Index are classified according to the FTSE Global

Classification System, a system that has been adopted worldwide by both exchanges

and data vendors and regarded as the best definition of industry sector segmentation by

investors globally.

The TSEC Taiwan 50 is managed by the TSEC Taiwan 50 Index Committee, an

independent committee of market practitioners. The Committee undertakes the quarterly

reviews and approving changes to constituents to ensure an objective and independent

management structure for the index. The index is reviewed quarterly in January, April,

July and October, and constituent changes are implemented on the next trading day

following the third Friday of the same month. The published and publicly available

Ground Rules, detailing inclusion and ongoing maintenance methodology, make the

Index highly transparent.

The base date for Taiwan 50 Index is April 30, 2002 and the base index is set at

5,000.

The Taiwan 50 Index is calculated by the algorithm descried below:

: The number of securities in the Index.

: Price; the latest trading price of the component stock (or the price at the closing of

the Index on the previous day).: Exchange Rate; the exchange rate required to convert the stock’s home currency

into the Index base currency.

2

: Shares in Issue; the number of shares in issue used by FTSE for the stock, as defined

in the Ground Rules.: Free Float Factor; the factor to be applied to each stock to allow amendments to its

weighting, expressed as a number between 0 and 1, where 1 represents a 100% free

float. The free float factor for each stock is published by FTSE.: Divisor; a figure that represents the total issued share capital of the Index at the base

date. The divisor can be adjusted to allow changes in the issued share capital of the

individual stocks to be made without distorting the Index.

3

Section 2 TSEC Taiwan 50 Index Constituents

Table 2: TSEC Taiwan 50 Index Constituents Date: 05/20/03

FTSE Global Classification

Stock

Code

Name of ConstituentNumber of shares

in issue

(in shares)

Free float

factor (%)Eco-

nomic

Group

Industry

Sector

Industry

Sub-

sector

Chinese

NameEnglish Name

90 93 932 2409 友達光電 AU Optronics 4,024,194,453 75.00

90 93 932 2353 宏碁 Acer 2,019,508,086 100.00

90 93 936 2311 日月光 Advanced Semiconductor 3,254,800,000 75.00

90 93 932 2357 華碩電腦 Asustek Computer Inc 1,998,880,000 75.00

90 93 932 2352 明基電通 Benq 1,681,051,025 75.00

80 87 879 2882國泰金融控股

Cathay Financial Holding 8,307,489,100 50.00

80 81 810 2801 彰化銀行 Chang Hwa Bank 3,459,475,600 75.00

30 31 317 2105 正新橡膠 Cheng Shin Rubber Industry 886,173,000 50.00

90 93 932 3009 奇美電子 Chi Mei Optoelectronics 1,620,000,000 40.00

50 59 591 2610 中華航空 China Airlines 2,542,614,446 30.00

80 87 879 2883開發金融控股

China Development

Financial Holdings10,769,673,737 100.00

30 31 311 2204 中華汽車 China Motor 1,304,100,635 40.00

10 18 188 2002 中國鋼鐵 China Steel 9,267,992,933 50.00

80 81 810 2891中信金融控股

Chinatrust Financial Holding 4,605,426,788 75.00

60 67 673 2412 中華電信 Chunghwa Telecom 9,647,724,900 6.00

90 93 932 2475 中華映管 Chungwha Picture Tubes 5,106,201,133 40.00

90 93 932 2323 中環 Cmc Magnetics Corporation 2,600,265,824 100.00

90 93 932 2324 仁寶電腦 Compal Electron 2,547,659,000 100.00

20 25 253 2308 台達電子 Delta Electronic Industrial 1,387,879,000 75.00

50 59 597 2603 長榮海運 Evergreen Marine 2,104,782,108 30.00

30 34 349 1402 遠東紡織 Far Eastern Textile 3,361,024,608 75.00

80 81 810 2892第一金融控股

First Financial Holding 3,821,600,000 75.00

10 11 113 1326 臺灣化纖 Formosa Chemicals & Fibre 4,180,552,245 75.00

4


Stock

Code


in issue

(in shares)

Free float

factor (%)Eco-

nomic

Group

Industry

Sector

Industry

Sub-

sector

Chinese

NameEnglish Name

10 11 116 1301 臺灣塑膠 Formosa Plastics Corp 4,534,733,509 100.00

80 87 879 2881富邦金融控股

Fubon Financial Holdings 8,291,437,344 75.00

20 25 253 2317 鴻海精密 Hon Hai Precision Co. 2,064,897,000 75.00

80 87 879 2880華南金融控股

Hua Nan Financial Holdings 4,478,543,305 75.00

90 93 932 2356 英業達 Inventec Co. 1,835,000,000 100.00

90 93 932 2301 光寶科技 Lite-On Technology 1,909,438,288 100.00

90 93 936 2337 旺宏電子 Macronix International 3,691,276,875 100.00

90 93 936 2454 聯發科技 MediaTek 460,465,370 75.00

80 87 879 2886兆豐金融控股

Mega Financial Holding 11,048,840,244 75.00

90 93 932 2377 微星科技 Micro-Star International 555,632,604 75.00

10 11 116 1303 南亞塑膠 Nan Ya Plastic 6,214,479,521 75.00

90 93 936 2408 南亞科技 Nanya Technology 3,100,000,000 40.00

30 34 341 9904 寶成工業 Pou Chen 1,632,582,229 100.00

50 52 527 2912 統一超商 President Chain Store 772,031,899 40.00

90 93 932 2382 廣達電腦 Quanta Computer 2,461,842,835 50.00

90 93 936 2379瑞昱半導體

Realtek Semiconductor 527,838,732 100.00

90 93 936 2325 矽品精密Siliconware Precision

Industries1,885,173,683 75.00

80 87 879 2890建華金融控股

Sinopac Holdings 3,748,127,000 100.00

90 93 936 2401 凌陽科技 Sunplus Technology 694,950,000 75.00

80 87 879 2887台新金融控股

Taishin Financial Holdings 3,631,623,623 100.00

60 67 678 3045台灣大哥大

Taiwan Cellular 4,502,683,512 46.55

90 93 936 2330 臺灣積電 Taiwan Semiconductor 18,622,886,745 75.00

5


Stock

Code


in issue

(in shares)

Free float

factor (%)Eco-

nomic

Group

Industry

Sector

Industry

Sub-

sector

Chinese

NameEnglish Name

40 43 435 1216 統一企業 Uni-president Enterprises 3,442,245,800 100.00

90 93 932 2303 聯華電子 United Microelectronics 15,474,845,646 75.00

90 93 936 2388 威盛電子 Via Technologies 1,191,854,000 75.00

90 93 936 2344 華邦電子 Winbond Electronics 4,425,297,193 75.00

30 31 311 2201 裕隆汽車 Yulon Motor Co. 1,829,146,403 50.00

*Source: Taiwan Stock Exchange

All rights in the TSEC Taiwan 50 Index vest in the Taiwan Stock Exchange (“TSEC”) and FTSE

International Limited (“FTSE”). “TSEC” is a trademark of TSEC and is used by FTSE under licence.

Neither TSEC, FTSE nor TAIFEX shall be liable (including in negligence) for any loss arising out of,

reliance on or use of the TSEC Taiwan 50 Index or the contents of this publication by any person

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Chapter 2 Taiwan Futures Exchange TSEC Taiwan 50 Index

Futures Contract Specifications

Section 1 TSEC Taiwan 50 Index Futures Contract Specifications

Contract Description

Underlying ●TSEC Taiwan 50 Index

Abbreviation ●Taiwan 50 Futures

Ticker Symbol ●T5F

Trading Hours●08:45AM-1:45PM Taiwan time Monday through Friday of the regular trading

days of the Taiwan Stock Exchange

Contract Size ●NT$500 x Index

Delivery Months●Five delivery months, including spot month, the next calendar month plus next

three quarter months of the March, June, September, and December cycle

Daily Settlement

Price

●The last trading price of the closing session or otherwise determined by the

TAIFEX according to the Trading Rules for TSEC Taiwan 50 Index Futures.

Daily Price Limit ●±7% of previous day's settlement price

Minimum Price

Fluctuation

●One index point (NT$500)

Last Trading Day ●The third Wednesday of the delivery month

Final Settlement

Day●The first business day following the last trading day.

Final Settlement

Price

●The final settlement price of the contract is set based on the index obtained by

calculating the volume-weighted average price of the component stocks of the

index within the first 15 minutes after the beginning of the trading period of

the final settlement day as provided by the Taiwan Stock Exchange. Provided

that there is no trade price established in the first 15 minutes, the closing price

of the previous trading day or the ex-right reference price of the componenet

stock shall be taken as the trade price.

Settlement ●Cash settlement

Position Limit ●Total open position of contracts held at any time is limited as follows:

1. Individuals: 300 contracts.

2. Institutional investors: 1000 contracts.

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Contract Description

3. Institutional investors may apply to TAIFEX for an exemption from

position limit for hedging purpose.

4. Position of futures dealers is not limited.

Margin

●The initial and maintenance margin level set by the FCM for its customers shall

not be less than those required by the TAIFEX.

●The margin level will be adjusted and announced by the TAIFEX in accordance

with the Criteria and Collecting Methods regarding Clearing Margins.

Section 2 Position Limits

A. Setting position limits

In reference of the systems adopted by other exchanges, some exchanges do not

have position limits for index futures contract (e.g. EUREX and KOFEX), and some

have regulation only over net long or net short position in respect of any one contract

month (e.g. CBOT, CME, and KSE).

In consideration of the maturity of our market, the needs for market management

and the importance of upholding trading security, position limits are set to preclude the

situation where specific investors attempt to manipulate market prices by holding many

Taiwan 50 futures contracts. The aggregate open position of contracts held by a trader

at any one time shall conform to the limits set forth below:

1. Individuals: 300 contracts.

2. Institutional investors: 1000 contracts.

3. The open position of contracts held by futures dealers is not limited.

4. Institutional investors may apply to TAIFEX for an exemption from position

limit for hedging purpose.

The size of Taiwan 50 futures contract might be bigger than other futures

contracts listed on TAIFEX, but TSEC and FTSE plan to authorize domestic securities

investment trust institutions to issue exchange-traded fund (ETF) on Taiwan 50 index

to render the index tradable. ETF units are traded in the secondary market, but their

creation and redemption take place in the primary market. Because these activities

involve the trust of large blocks of stocks, which might be carried out by participating

dealers (PD) as planned, PDs will then have considerable hedging needs.

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When there is certain amount of discount or premium existing between ETF

price and net asset value, PD can bring the price back to balance through the creation

and redemption mechanism, while investors can engage in arbitrage through futures

trade to let the market price effectively reflect the real-time information.

B. Definitions of tradersThe term “trader” in the description of position limit refers to the same individual

or institutional investor. The accounts of same individual or institution investor with

different futures commission merchant (FCM) are combined together in the calculation

of position limit.

C. Over-limit actionsUpon finding that the open position held by a certain trader exceeds the position

limit set forth above, TAIFEX may ask all FCMs to stop accepting new orders from

said trader or order FCM to liquidate specific positions of such trader in order to uphold

market order.

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Chapter 3 Trading System

The trading system for Taiwan 50 Futures is basically the same as that of TAIEX

futures as described below:

Section 1 Trading Flow

The trading of Taiwan 50 futures, like other stock index futures, is carried out

electronically by the following process:

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Section 2 Order Placement

Orders may be market order or limit order based on the price instruction. A

market order is an order to buy or sell a stated amount of contracts at the best price

available; a limit order is an order to buy or sell a stated amount of contracts at a

specified price, or at a better price if obtainable. FCMs may accept orders other than the

above two types, such as stop-loss order.

Particulars to be indicated in the order sheet are the same as those for stock index

futures currently on the market, including order No., FCM code, customer’s account

No., ticker symbol, quantity, price (market/limit), buy/sell, and open/offset.

Section 3 Trade Matching

Orders in the trading system are matched by the following principles:

1. Price priority and time priority, that is, execution priority will be given to orders

with the better bid/offer prices; if the prices are the same, execution priority will be

given to orders that enter the system earlier.

2. Market order has precedence over limit order.

3. When order quantity decreases, the priority of the order stays unchanged; when

order price changes or order quantity increases, the order is considered a new order.

Matching is carried out on competitive auction basis at the opening of market,

then order by order during market hours, and on competitive auction basis again at

closing session. That is, all orders accepted by the system before market opens are

matched by competitive auction based on the principles mentioned above (but orders are

ranked randomly if their prices are identical). And, opening price is the price that

satisfies the greatest number of trades where buy orders registered with prices higher

than the determined price or sell orders with prices lower than the determined price

must be all filled. During market hours, orders are matched order by order where each

new order or quote that enters the system will go into the order book to find its

matching. At closing session, trading prices are again determined by competitive

auction.

Section 4 Disclosure of Trading Information

The same as the practice for TAIEX futures, TAIFEX only accepts order input by

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FCMs for Taiwan 50 futures and does not disclose any such information to the market

before it opens. After trading starts, the system will, in line with the practice of EUREX,

OM and foreign information vendors (e.g. Reuters and Bloomberg) transmit trading

information on each order to information vendors on real-time basis, for fixed-hour

disclosure will undermine the timeliness and truthfulness of the displayed information

under the order by order matching method. The disclosed information includes day’s

opening prices for each delivery month, trading price, number of contract executed,

bid/offer prices and volume, day’s high/low, total trading volume and real-time

information on the spot. Regarding order information, disclosure is planned the same as

that of TAIEX futures, that is information on five best bid and offer prices will be

disclosed. At the start of closing session, orders are accepted, but order information will

not be updated until after the last competitive auction at the time of closing, upon

which, the remaining five best bid and offer prices are disclosed at the time trading

volume and closing prices are disclosed.

　

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Chapter 4 Clearing and Settlement System

The clearing and settlement system and operational flow for the Taiwan 50 futures

are planned as follows:

A. Position Management

Position management for Taiwan 50 futures will be the same as that for other

futures contracts of TAIFEX, that is, the opposite positions of the same delivery month

for the same product in the same account are automatically offset.

B. Margin Calculation

Margin required for Taiwan 50 futures will be the same as that for other stock

index futures of TAIFEX, that is, margin is set for covering single-day index volatility

risk.

C. Settlement Operation

The futures contracts will be settled by cash.

D. Determination of Daily Settlement Price

The same method for determining daily settlement price of other stock index

futures will be employed, that is, in principle, the trading price at closing session of

Taiwan 50 futures will be taken as daily settlement price.

E. Risk Control Operation

The risk control operation for Taiwan 50 futures will be the same as that for other

TAIFEX futures contracts.

Section 1 Position Management

The position management operation is described as follows:

1. Account position is calculated on real-time basis during the market. Positions are

entered according to the “new/offset code” of the transaction records and processed

by way of automatic offsetting.

2. The trader should indicate new or offset order by the established code; if the offset

order is transacted but the trader does not have sufficient balance in the account for

offset, offset will be carried out for offsettable positions, while the remaining open

13

lots are treated as new positions. Such data are viewed as offset error and available

for FCM query.

3. TAIFEX will also make daily new position error data available for FCM inquiry; if

the new order is transacted and the trader has position in the account available for

offset, offset will be carried out and the remaining open lots are treated as new

position.

4. TAIFEX will make position balance information available for FCM inquiry. If the

trader does not provide sufficient margin for open position in the account and fails

to meet the margin call by the prescribed deadline, FCM may liquidate the open

position of the customer.

5. When applying for position adjustment due to account error, FCM should check first

the position balance of the customer.

6. For position adjustment, FCM should transmit the data to the TAIFEX settlement

system via its subsystem to correct the position structure of a customer before the

prescribed deadline (2:15PM, Monday ~ Friday).

Section 2 Margin Operation

The purpose of setting margins to cover the loss from single-day price fluctuation

within certain periods is to guarantee performance of contract and prevent trade default

due to wild price volatility. The margin calculation for Taiwan 50 futures will adopt the

method as that for TAIEX futures, that is, estimate the greatest possible variation of the

price of underlying by market risk. The clearing margin for Taiwan 50 futures will be

calculated by contract size times risk coefficient.

The risk coefficient is calculated based on the movements of the stock index of the

futures contract within certain periods to cover 99.7% of the single-day price volatility

risk.

Section 3 Settlement Operation

1. Operating principles

(1) Taiwan 50 futures contracts will be settled by cash.

(2) If a trader has open (unsettled) position after the closing of the last trading day

for the contract, TAIFEX will settle those contracts during the business hours of

the final settlement day by the final settlement price, and charge or pay the

14

trader on net cash basis.

(3) The final settlement day is the first business day following the last trading day.

2. Operation

(1) The settlement operation starts at 9:30AM on the final settlement day (the first

business day following the last trading day) for the delivery month.

(2) If clearing members have unsettled position after the closing of the last trading

day, TAIFEX will carry out cash settlement by the final settlement price.

(3) The final settlement price of the contract is set based on the index obtained by

calculating the volume-weighted average price of the component stocks of the

index within the first 15 minutes after the beginning of the trading period of the

final settlement day as provided by the Taiwan Stock Exchange. Provided that

there is no trade price established in the first 15 minutes, the closing price of the

previous trading day or the ex-right reference price of the componenet stock

shall be taken as the trade price.

Section 4 Determination of Daily Settlement Price

The determination of daily settlement price for Taiwan 50 futures contracts refer

to that of other stock index futures of TAIFEX, that is, after closing each day, daily

settlement prices are determined according to the established method to calculate the

gain or loss of open positions and published in the market.

Daily settlement prices of Taiwan 50 futures contracts are calculated by the

following principles:

1. The daily settlement price of a Taiwan 50 futures contract is the trade price at

closing.

2. If there are no trade price during closing session of the day, the average of the

highest bid and lowest offer during competitive auction of the closing session will

be used as daily settlement price.

3. If there are no bids during closing session for competitive auction, the lowest offer

price will be taken as daily settlement price; if there are no offers, the highest bid

will be taken as daily settlement price.

4. If there are no bids nor offers for far month futures contracts for competitive auction

during the closing session, the day’s settlement price of the spot month contract plus

the difference between settlement price of spot month contract and that of said far

month contract on the previous business day will be taken as the settlement price for

15

said far month contract.

5. If none of the methods described above are able to decide the daily settlement price

or the settlement price thus calculated is obviously unreasonable, TAIFEX will

decide the price.

Section 5 Risk Control Operation

The prevailing Measure for Market Position Monitoring Operation of TAIFEX

for risk control of clearing members will still apply as described below after the

introduction of Taiwan 50 futures:

1. Control of order placement

The total of margin and premium required for newly added futures and option

contracts of individual clearing member shall not exceed its excess margin deposits.

2. Control of margin and position

(1) TAIFEX carries out mark-to-market the margin and premium accounts of clearing

members between 9:30～9:40, 11:00～11:10, and 12:30～12:40 each day. When

there is wide fluctuation in the market, TAIFEX will undertake mark-to-market at

any time as deemed necessary.

When the equity in clearing member’s margin and premium accounts fall below

the total clearing margin required for open positions in futures and option writing,

the clearing member must make additional margin deposit in one hour.

(2) Adjusted net capital ratio

Adjusted net capital∕（total margin required for open positions of futures＋open

positions in option writing）

(3) Concentration risk

The percentage of the open positions of Taiwan 50 futures held by each clearing

member to the total open interest of the same contract shall not exceed the

prescribed level, unless the total open position of the clearing member is less than

1,800 lots.

(4) Margin call in excess of certain percentage of ANC

The difference between equity in margin and premium accounts of clearing

16

member and total clearing margin required for open positions in futures and option

writing when the former is less than the latter / adjusted net capital.

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tsec taiwan 50 index futures operation plan

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