TAIWAN FUTURES EXCHANGE



TAIWAN FUTURES EXCHANGE

TSEC Non-Finance Non-Electronics Sub-Index Futures and Options Operational Plan

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Sep. 2007

Table of Contents

Chapter 1 Introduction 4

Chapter 2 Current Status of Taiwan’s Non-Finance Non-Electronics Sector Stock Market 5

Section 1 Non-Finance Non-Electronics Sector Stock Market 5

Section 2 Market Participants 7

Section 3 Economic Benefits and Public interest Analysis 18

Part 1: Tsec non-fiannce non-electronics sub-index futures of taiwan futures exchange

Chapter 3 Specifications of TSEC Non-Finance Non-Electronics Sub-Index Futures Contract 19

Section 1 TSEC Non-Finance Non-Electronics Sub-Index Futures Contract Specifications 19

Section 2 Contract Design 20

Chapter 4 Trading System of TSEC Non-Finance Non-Electronics Sub-Index Futures (XIF) 23

Section 1 Trading Process 23

Section 2 Order Placement 24

Section 3 Trade Matching 25

Section 4 Information Disclosure 26

Section 5 Market Maker 26

Chapter 5 Clearing and Settlement System of TSEC Non-Finance Non-Electronics Sub-Index Futures (XIF) 28

Section 1 Position Management 28

Section 2 Margin calculation 29

Section 3 Daily Settlement Price 31

Section 4 Settlement Operation 32

Section 5 Risk Control Operation 33

Part 2: Tsec non-fiannce non-electronics sub-index futures of taiwan futures exchange

Chapter 6 Specifications of TSEC Non-Finance Non-Electronics Sub-Index Options Contract 35

Section 1 TSEC Non-Finance Non-Electronics Sub-Index Options Contract Specifications 35

Section 2 Contract Design 36

Chapter 7 Trading System of TSEC Non-Finance Non-Electronics Sub-Index Options (XIO) 41

Section 1 Trading Process 41

Section 2 Order Placement 41

Section 3 Quote Request and Quoting 44

Section 4 Trade Matching 44

Section 5 Market Maker 45

Chapter 8 Clearing and Settlement System of TSEC Non-Finance Non-Electronics Sub-Index Options (XIO) 46

Section 1 Position Management 46

Section 2 Margin Calculation 47

Section 3 Settlement Price 50

Section 4 Exercise Operation 51

Section 5 Risk Control Operation 51

TSEC Non-Finance Non-Electronics Sub-Index Futures and Options Operational Plan

Chapter 1 Introduction

Currently in the global trading of futures and options, more than 90% are financial products. Among them, stock related products (including stock index and individual stock), have the shortest yet fastest development history. In 2006 for example, equity futures and options accounted for as high as 61.82% of total market turnover. Among the 14 products launched by the Taiwan Futures Exchange, stock index products are the most actively traded with average daily turnover of 457,413 contracts in 2006, up 23.29% from the year before. It is indicative of high market acceptance to this type of product and its great growth potential.

The indices underlying the stock index products launched by TAIFEX so far include the TSEC weighted index (TAIEX), Taiwan 50 Index, MSCI Taiwan Index, TSEC electronic sector index, and TSEC finance sector index. However, there are no hedging or arbitrage instruments for non-finance and non-electronics sector index. Providing comprehensive futures and options products gives investors greater flexibility in the use of trading instruments, effectively enhances trading efficiency, and benefits the overall market. In practice, retail and institutional investors can engage in arbitrage and spread strategies involving index. Also, in the cash market, it is common to see sector stocks taking turns rallying, and the board of the Taiwan Securities Association also voiced the wish to see related products on the market. Thus there has been a need to evaluate the offering of related futures and options products in response to market demands. From the perspectives of regulations, policies and computer systems, the TSEC Non-Finance Non-Electronics Sub-Index Futures and Options Contract” (referred to hereafter as “XIF and XIO respectively) are in principle similar to stock index products currently traded on the market. Thus not much adjustment is necessary.

Chapter 2 Current Status of Taiwan’s Non-Finance Non-Electronics Sector Stock Market

Section 1 Non-Finance Non-Electronics Sector Stock Market

TSEC now issues thirty-five different indices. Of them, thirty are compiled by the TSEC itself. The remaining five are jointly compiled with FTSE. Among indices used for evaluating the traditional industries, the primary choice is non-finance non-electronics sub-index. The following is an introduction of the market scale, compilation methods, stock selection standards and market volatility of this index.

I. Market Scale

The market scale of Taiwan’s securities market started its rapid growth in 1985 and 1986. Based on statistics from the “Statistics of Stock Trading by Industry” of TSEC, market turnover from January to April in 2007 reached between NT$1.095 trillion (February 2000) and NT$2.6302 trillion (January 2007), or an average of NT$2.1044 trillion per month. Of this, the non-finance non-electronics sector contributed between NT$265.7 billion (February 2007) and NT$586.6 billion (April 2007), or an average of NT$463.8 billion per month, and amounted to between 18.24% (March 2007) and 27.72% (April 2007), or an average of 23% of total market turnover. With the exception of its March performance, there is a growing trend in this sector.

II. Compilation Method

The non-finance non-electronics sub-index began with 5890.69 points (base index which is the closing volume-weighted stock index) on the base date of December 31, 2003 and was officially introduced on March 1, 2005. The TSEC opens from 9:00 to 13:35 every day, and computes and publishes real-time index based on the latest transaction prices of component stocks at one-minute intervals.

The index is computed by the volume-weighted share prices of the component stocks according to the formula below:

Non-finance non-electronics sub-index = current aggregate market value [pic] base value × base index

The base value of TSEC non-finance non-electronics sub-index is the aggregate market value of component stocks on the base date (=the aggregate of the market values obtained by multiplying the average price of each component stock by the number of shares outstanding on December 31, 2003). The base value is subsequently adjusted in the event of change to component stocks or ex-rights to maintain the continuity of the index. The aggregate market value of TSEC non-finance non-electronics sub-index is the sum of the market capitalization of all component stocks, while the market capitalization of individual stock is its share price multiplied by the number of shares outstanding.

III. Stock Selection Standards

Samples for this index are chosen from among non-finance non-electronics stocks with sampling standards similar to “TAIEX” i.e., all common stocks on the trading floor are included in the sampling. Processing is carried out as follows:

1. Stocks of newly listed companies are included in the sample from the first trading day of the next month following one full calendar month from listing; provided, stocks of listed companies converted into financial holding companies and listed companies transferred from OTC market are included in the sample from the day of listing..

2. Stocks suspended from trading are included in the sample from the first trading day of the next month following one full calendar month from reinstatement of normal trading; provided, stocks suspended from trading because of issuance of replacement shares due to capital reduction resulted from a corporate split are included in the sample from the day of resuming trading of the new shares.

3. Stocks changed to full-delivery trading are excluded from the sample, and will be included again on the date restoring regular trading status.

IV. Market Volatility

Taking data from Jan. 2, 2006 to April 30, 2007 of non-finance non-electronics sub-index and TAIEX, average, maximum and minimum index levels and volatilities are tabulated in Table 2-1 below.

Table 2-1. Comparison of Indices for Non-Finance Non-Electronics and Weighted Price

|Basic Information |TAIEX |Non-Finance Non-Electronics Sub-Index |

| |(Base Period 1966) |(Based date: Dec. 31, 2003) |

|Average |2006 |6,842.04 |6,734.59 |

| |2007/1/2～4/30 |7,823.78 |8,244.64 |

|Highest |2006/1/2～2007/4/30 |7,935.54 |8,890.87 |

| | |（2007/1/24） |（2007/4/16） |

|Lowest |2006/1/2～2007/4/30 |6,250.8 |6045.8 |

| | |（2006/7/17） |（2006/1/23） |

|Annual |2006 |16.24% |13.99% |

|Volatility | | | |

| |2007/1/2～4/30 |16.04% |15.44% |

Data Source: TSEC

Section 2 Market Participants

I. Ratio Analysis

Potential traders of non-finance non-electronics sub-index futures (“XIF”) and options (“XIO”) may be observed through the perspectives of the stock market and the futures market. Taiwan’s stock market participants are mainly individual investors, making up 70% of the market. Institutional trading accounts for the remaining 30%. Individual investors are further subdivided into locals and foreigners. Institutional investors include the so-called “three major institutional investors,” i.e. investment and trust enterprises, dealers and foreign investors. In recent years, because of gradually relaxed restrictions on foreign investment and the gradual maturation of the stock market, there has been a growing trend in institutional trading. From less than 10% in 1998, the figure has risen to 25% in recent years. For details on investment trends in the Taiwan stock market by the various types of investors, please consult Figure 2-1 below.

Figure 2-1. Analysis of Trading Volumes in the Taiwan Stock Market Based on Type of Investors

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Figure 2-2 illustrates conditions among participants in the local futures market. The figure shows that from 2003 to April 2007, Taiwan futures market was dominated by individual investors, accounting for 49% of all trades, followed by futures dealers at 46%, and foreign institutional investors and managed futures enterprises combined at 5%.

Figure 2-2 Breakdown of Participants in Taiwan Futures Market (2003 to April 2007)

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II. Manner of Market Participation

For non-finance non-electronics sub-index futures and options contracts, market participants include futures traders, individuals and special institutional investors. FCMs are subjected to the Futures Trading Law and relevant regulations. Regulations applicable to individuals and other special institutional investors are summed up as follows:

A. Account opening qualifications or restrictions

1. Qualification requirements for account opening by ordinary traders

Before conducting futures trading, a trader must open an account with a FCM. Pursuant to Article 25 of the Regulations Governing the Administration of Futures Commission Merchants, FCMs shall not accept the application for account opening by a trader, if the trader has any of the following situations:

(1) Age below 20 years,

(2) Announced bankrupt and prior to restoration of rights.

(3) Announced interdiction and prior to restoration of rights.

(4) Account opening on behalf of an institutional investor but without presentation of proof of said institutional investor’s authorization.

(5) Employees or hired personnel of futures regulatory authorities, TAIFEX, futures clearance institutions and Chinese National Futures Association (CNFA).

(6) Breaching futures trading contract or securities trading contract less than three years ago.

(7) Convicted as guilty for violation against future trading regulations or securities trading regulations less than five years ago.

2. Restrictions on special institutional investors

Securities firms, securities investment trust companies and banks all fall under chartered business, and are regulated by the Securities & Exchange Act, the Banking Act and regulations and decrees issued by their regulatory authorities. The following is an analysis of relevant regulations:

a. Securities Industry

According to Paragraph 1 of Article 45 of the Securities & Exchange Act, “Securities firms shall abide by Article 16 in operating according to type of securities and shall refrain from handling operations other than those prescribed for them. However, those permitted by regulatory authorities may also get involved in other securities operations or other related operations.” For this reason, securities firms wishing to carry out futures operations must get prior approval from regulatory authorities. In accordance with Taicaizheng Letter No.0920004861 issued on December 2, 2003 by the now-defunct Securities and Futures Commission under the Ministry of Finance, securities firms must abide by the Futures Trading Law, Regulations Governing the Establishment of Futures Commission Merchants and the Management Rules for Securities Firms Engaging in the Business of Introducing Broker to engage in securities-related futures trading, including “domestic stock related futures and options,” “domestic interest rates futures and options,” and “foreign Taiwan stock index futures, options and futures options contract,” but they may differ based on the amount of funds dedicated to the operations.

b. Securities investment and trust enterprises

After the Securities and Futures Commission allowed involvement of securities investment and trust funds in hedge trading on May 26, 1999, relevant regulations have been amended several times. The following section summarizes revised relevant regulations on the “Directions for Use of Securities Investment Trust Funds for Trading of Securities-Related Products by Securities Investment Trust Enterprises”:

(1) For purposes of hedging or additional investment, securities investment and trust enterprises may utilize securities investment and trust funds in securities-related products trading, and shall observe trading ratios and relevant regulations.

Consideration shall be made of the type of funds, their nature and their retained securities, and shall be limited to futures or options trading in derivative interest rates, stock index, stocks, trust certificates or ETF, as well as interest rate swaps.

(2) For hedging purpose, the total market value of the daily open short futures positions, plus the total (nominal) value of put options bought and interest rate swaps (held for hedging purpose) may not exceed the total market value of underlying securities held by the fund.

The term “underlying securities” refers to securities (or investment portfolios) highly related to price movement of the underlyings of futures contracts, options contracts or interest rate swap contracts.

(3) For investment purpose, the daily sum total of the following positions may not exceed 15% of the fund’s net asset value, and may not be larger than the fund’s utilizable assets less the lowest liquid asset ratio as regulated in Article 18 of the Regulations Governing Securities Investment Trust Funds:

a) The total market value of open long futures positions, plus the total (nominal) value of call options bought, put options sold, and call options sold.

(b) The net of total market value of open long futures positions plus the total (nominal) value of put options bought exceeding the total market value of underlying securities held by the fund.

(c) The total (nominal) value of interest rate swap contracts held for investment purpose.

(4) The total market value of the bull and bear positions of open contracts may offset each other as long as they are in keeping with relevant offset principles.

(a) Futures or options derived from the same interest rates, securities, indices or ETF.

(b) Interest rate swaps, futures or options derived from interest rate or fixed income securities to which the price movement of the swap, futures or option is highly related.

(5) The total daily investments in a listed company’s securities, plus the total (nominal) value of the call options bought and the put options sold, and the total market value of open long futures contracts with the company’s stock as underlying shall not exceed 15% of the fund’s net asset value.

(6) The total premium of open options bought for each day may not exceed 5% of the net asset value of the said security investment and trust fund.

(7) The proportion of liquid asset deducted of the required margins or premiums from open futures contracts and options contracts may not be lower than the minimum ratio prescribed in Article 18 of the Regulations Governing Securities Investment Trust Funds.

(8) Securities investment and trust enterprises shall report the ratios of relevant investment portfolios of individual funds under their management to TAIFEX on a daily basis.

c. Securities investment consulting and securities investment and trust enterprises may invest in the following securities-related products with assets under discretionary management:

(1) Futures, options and futures options (with values derived from stock index, stocks, depositary receipts, ETF or interest rates) that FCMs may trade on behalf of customers as announced by the Securities and Futures Commission pursuant to Article 5 of the Futures Trading Law.

(A) Trading in futures or options on the Taiwan Futures Exchange shall comply with the following regulations:

(a) The total market value of the daily open long futures positions, plus the strike price of call options bought and put options sold, multiplied by the contract multiplier or the total contract unit shall not exceed 15% of the net asset value of the said discretionary trust investment account. Moreover, the above may not be larger than the said account’s utilizable assets (referring to the account’s net asset less the total value of assets already invested in securities).

(b) The total daily investment in any given company-issued securities plus the contract price of call stock options and put stock options of the said company multiplied by total contract unit value shall not exceed 20% of the said account’s net asset value.

(c) The total market value of open short futures positions plus the strike price of put options bought and call options sold multiplied by the contract multiplier or the contract unit total shall not exceed the total market value of the underlying securities in the account. (“Underlying securities” shall mean securities highly related to the price movement of the underlyings of futures contracts or options contracts or stocks underlying equity options.)

(B) Futures or options traders involved in overseas trading shall comply with the following regulations:

(a) The daily total market value of the open short futures positions plus the strike price of put options bought and call options sold multiplied by the contract multiplier or the contract unit total amount shall not exceed 15% of the total market value of underlying securities in the account. (“Underlying securities” shall mean securities highly related to the price movement of the underlyings of futures contracts or options contracts or stocks underlying equity options.)

(b) Futures or options traders involved in overseas trading may trade foreign financial derivatives only and shall not trade futures or options with Taiwan securities, securities portfolios or stock index as underlying.

(2) The daily premium total for open options bought shall not exceed 5% of the account’s net asset value.

d. Banking industry

Based on regulations promulgated in Letter jinguanzi (1) No. 0931000568 on September 21, 2004 by the Executive Yuan Financial Supervisory Commission, banks may engage in futures trading as a futures trader but shall be regulated as follows:

(1) Futures trading approved by the Financial Supervisory Commission shall in principle be limited to products traded on the Taiwan Futures Exchange. For trading in foreign futures, prior permission shall be obtained from the Ministry of Finance.

(2) The total market value for open stock index futures positions (bear hedged position) plus the premium for put options bought and contract value of call options sold shall not exceed the total market value of stocks traded at closing of the previous day. However, the preceding provision does not apply when banks engage in derivative financial products such as NTD-denominated Taiwan equity linked notes for the purpose of hedging.

(3) When banks engage in interest rate futures trading, they may, for rate risk management policy purposes, control their bull and bear positions, and should conduct mark-to-market by a risk management unit independent from the trading department.

e. Insurance industry

Pursuant to the “Self-Regulatory Rules for Insurance Companies to Engage in Derivatives Trading” approved on April 18, 2003 by the MOF Department of Insurance, insurance companies may engage in futures or options trading on the Taiwan Futures Exchange. Letter Jinguanbao (1) No. 09502501541 issued on June 1, 2006 by the Financial Supervisory Commission announced the promulgation of the “Points to Note for Derivatives Trading By Insurance Companies.” In accordance with Letter Jinguanbao (1) No. 09502501544 issued on the same day, insurance companies that have drafted a derivatives trading procedure following the aforesaid Self-Regulatory Rules and engage in derivatives trading shall be considered as having complied with Article 2 of the Points to Note regulating trading in derivatives for hedging purposes.

f. Bills finance companies

Pursuant to the “Regulations Governing Trading of Financial Derivatives by Bills Finance Companies” amended on August 31, 2006 by the Financial Supervisory Commission, bills finance companies may engage in trading of TAIFEX interest rate futures but shall be regulated as follows:

(1) Bills finance companies may trade derivatives trading as a client or as an operator.

(2) Bills finance companies may engage in trading contracts derived from interest rates, stock price, stock index, and credit event (limited to the transfer of credit risks associated with on or off-balance sheet assets).

(3) When a bills finance company trades financial derivatives as a client, except for futures trades taken place on Taiwan Futures Exchange to which the Futures Trading Law and relevant regulations apply, its counterparty shall be limited to financial institutions that have been approved by the regulatory authorities or the Central Bank of China to operate financial derivatives business.

g. Offshore foreign institutional investors

Pursuant to the “Points to Note for Futures Trading of Overseas Chinese and Foreigners in Taiwan” promulgated on March 17, 2006 by the Executive Yuan Financial Supervisory Commission, offshore foreign investors may engage in Taiwan futures trading regardless of the trading pattern and purpose. However, they are subject to the same trading limits as those for local institutional investors and the position limits set forth by Taiwan Futures Exchange. However, for hedging purpose, they may apply for position limit exemptions from the Taiwan Futures Exchange according to through the “Guidelines for Application for Position Limit Exemption by Institutional Investors.”

Moreover, offshore foreign investors may directly open a future trading account with local FCMs and may also engage in Taiwan futures trading indirectly through an omnibus account.

B. FCM Qualifications and Business Restriction

Article 56 of the Futures Trading Law regulates that non-futures commission merchants shall not engage in futures trading. Establishment of futures commission merchant shall be regulated as shown in the following table.

Table 2-15. Relevant Regulations Governing the Establishment of Futures Commission Merchant

Unit: NT$

|Item |Futures commission merchant |Other enterprises engaging concurrently in futures |

| |(FCM) |business |

| | |Securities |Securities |

|Business type and items |Futures brokerage (local and |Local & foreign securities |Approved through Securities|

| |foreign futures) |related futures operations |& Futures Board based on |

| | | |type of futures merchants |

| | | |and establishment standards|

|Minimum capital of parent company |200 Million |

|(Operating Fund) | |

|Additional capital for futures |400 million |

|dealing business (or operating | |

|fund) | |

|Additional capital for establishing|15 million |

|one branch | |

|Operating margin |Brokers: 50 million |

| |Dealers: 10 million |

| |Additional branch: 10 million |

|Business location |Independent |May be shared but properly segregated |

|Internal management |Self-managed (separate from |Futures business department and accounting must be |

| |parent company) |independent. Other functions can be jointly managed. |

|Associated person |At least three. |Manager and associated persons of independent futures |

| | |department and must be fulltime but this does not apply |

| |Branch associated person at |in the case of associated persons handling trade on |

| |least three. |behalf of customers (i.e. qualified to engage in other |

| | |businesses and futures trading). |

Note: For details and relevant regulations on the establishment of foreign securities firms or financial institutions, please refer to Regulations Governing the Establishment of Futures Commission Merchants and Rules for the Administration of Futures Commission Merchants.

Application procedures for futures commission merchant shall comply with relevant regulations set by the Financial Supervisory Commission’s Securities & Futures Bureau and the Taiwan Futures Exchange. The procedures are as follows:

Figure 2-3. Operations Procedures for the Establishment Application of Futures Commission Merchant

Section 3 Economic Benefits and Public Interest Analysis

I. Economic Benefits Analysis

1. Hedging for cash market portfolio.

2. Creating variety in trading strategies:

As indices in the cash market differ in their strengths, traders use said index futures products and their association with other products to set various types of inter-commodity arbitrage and hedging strategies in order to attain profit goals and risk management objectives.

3. Price discovery functions.

4. Improving resources allocation and capital utilization efficiencies.

II. Public Interest Analysis

In terms of effects on demand, if the market can provide hedging channels, stability can be enhanced in terms of stock prices and risks associated with retained stocks can be lowered. As futures and options adopt the margin approach, capital utilization efficiency is higher than cash market trading. Furthermore, rapid reaction to prices provides more information to the stock market, through which investment desire is improved in the stock market.

III. In terms of the development of the futures market, the simultaneous launching of the XIF and XIO will contribute to the formation of a more comprehensive derivative products line, allowing traders greater flexibility in using index related products. The diversity with which strategies can be utilized will benefit the scale of the futures market as a whole, while at the same time contributing to the maturation of Taiwan futures market. Moreover, new products are expected to create new business opportunities for futures traders and open doors for further development in Taiwan futures industry. The trading taxes thus generated can be an added source of fiscal income for the treasury.

Chapter 3 Specifications of TSEC Non-Finance Non-Electronics Sub-Index Futures Contract

The design of the non-finance non-electronics sub-index futures contract must be done with due consideration of needs in the actual products and futures markets. Such factors as trading and clearance interfaces must be paid attention to, including taking as reference contract designs adopted by other countries. Contract specifications currently drafted are as follows:

Section 1 TSEC Non-Finance Non-Electronics Sub-Index Futures Contract Specifications

|Item |Description |

|Underlying index |Taiwan Stock Exchange Non-Finance Non-Electronics Sub-Index |

|Abbreviation |Non-finance non-electronics sub-index futures |

|Ticker symbol |XIF |

|Trading hours |Taiwan time Monday through Friday of the regular business days of the Taiwan Stock Exchange. |

| |The trading hours are 8:45 AM ~ 1:45 PM. |

|Contract size |NT$100 x index |

|Expiration months |Five expiration months, including spot month, the next calendar month plus the next three quarterly months. |

|Daily settlement price |The volume-weighted average price of all transactions executed in one minute before closing or otherwise determined by |

| |the TAIFEX according to the Trading Rules for Taiwan Stock Exchange Non-Finance Non-Electronics Stock Index. |

|Daily price limit |+/- 7% of previous day’s settlement price |

|Tick size |1 index point (NT$100) |

|Final settlement day |The first business day following the last trading day |

|Final settlement price |The final settlement price shall be computed based on the first fifteen-minute volume-weighted average price of each |

| |component stock on the final settlement day. For those component stocks that have not been traded during the first |

| |fifteen- minute interval on the final settlement day, their opening reference prices shall be applied instead. |

|Settlement |Cash settlement based on the difference with the final settlement price. |

|Position limit |Any investor's aggregate open same-side positions in the Contract for various expiration months at any time shall not |

| |exceed the limit standards announced by the TAIFEX. |

| |Institutional investors may apply for an exemption from the above limit on trading accounts for hedging purpose. |

| |These position limits are not applicable to omnibus accounts. |

|Margin |The initial and maintenance margin levels as well as the collecting measures prescribed by a FCM shall not be less than|

| |those required by the TAIFEX. |

| |The initial margin and maintenance margin announced by TAIFEX shall be based on the clearing margin calculated |

| |according to TAIFEX Criteria and Collecting Methods Regarding Clearing Margins plus a percentage prescribed by TAIFEX. |

Section 2 Contract Design

I. Underlying

The underlying of XIF is the “Taiwan Stocks Exchange Non-Finance Non-Electronics Sub-Index” independently compiled by the TSEC. TSEC samples the stocks of all companies listed on TSEC except for companies in the finance and electronic sectors.

II. Trading hours

Currently, TAIFEX’s stock index futures trading session starts 15 minutes earlier than that of the cash market and ends 15 minutes later. It is therefore recommended that this contract also adopts the same trading hours. This is advantageous for traders they can adjust their futures positions after cash market closed. Synchronizing with trading hours adopted for various index futures allows arbitrage and hedging, while also benefiting inter-commodity arbitrage.

III. Contract value

In terms of contract value, it is recommended that the design be patterned after contract values for current electronics and financial futures contracts. On May 10, 2007 for example, electronics and financial futures contract values were NTS1,386,480 and NT$981,660 respectively. After conversion, contract multipliers for non-finance non-electronics sub-index futures were calculated at NT$160 and 113 (the non-finance non-electronics sub-index on May 10, 2007 was 8.688.61 points.) If the integer closest to 50 were adopted, the contract multipliers were NT$150 or 100. For purposes of convenience and because of the fact that smaller contracts would attract investors, it is suggested that the contract adopts NT$100 per point. Thus, contract value for XIF will be NT$868,861, a figure slightly lower than that of financial futures.

IV. Expiration months

As Taiwan futures market trading volume favors the next-calendar month contract, compounded by common practices in the index futures market, it is suggested that two next calendar months plus three quarter months be adopted for this contract, to arrive at a design of five expiration months.

V. Daily settlement price

The daily settlement price provides the basis for margin and gain (loss) calculation. The method for determining daily settlement price differs among exchanges. In considering that the matching of this contract is not subject to the tick limit, the daily settlement price is set at the volume-weighted average price of transactions executed in one minute before closing as adopted by CBOT Dow Jones future contracts and Eurex’s Index Futures. Such settlement price is less susceptible to market manipulation and offers the following advantages:

(1) It offers definite sampling scale and is close to transaction price at market closing. Combined with weighting by volume, this mode reflects a market price accepted by the majority of market participants.

(2) The likelihood of adjusting daily settlement price determined in this manner is lower than if the price of the last transaction of the day were to be used.

VI. Daily price limit

Owing to practices in the cash market and in order to prevent sudden events from destabilizing the market, it is therefore suggested that this product’s fluctuation limits be patterned after other stock index futures, i.e. 7% as in the stock market.

VII. Tick size

The tick size of XIF is suggested to pattern after that used for the TAIEX futures, i.e. 1 point. Thus, on May 10, when the spot index was 8,688.61, the minimum tick size was about 1.15 parts per ten thousand of the index, a figure comparable to international average level.

VIII. Last trading day, final settlement day, final settlement price

To make it easier for traders to remember, it is suggested that this product, just like existing stock index futures, set its last trading day as the third Wednesday of the month of expiration (final settlement day is the day following the last trading day). The final settlement price shall be the average price of component stocks 15 minutes after the start of trading on the final settlement day at the Taiwan Stocks Exchange.

IX. Settlement

The XIF contracts will be settled in cash.

X. Position limits

To make it easier for traders to remember, it is suggested that just like financial futures, Taiwan 50 Index and MSCI Taiwan Futures, the total open positions held by traders at any time may not exceed standards set by TAIFEX, as follows:

1. Maximum 300 contracts for individual investors.

2. Maximum 1,000 contracts for institutional investors. However, for hedging purposes, institutional investors may apply to TAIFEX for exemption to position limits.

3. Maximum 3,000 contracts for futures dealers.

4. Omnibus accounts are not subject to these limits.

Chapter 4 Trading System of TSEC Non-Finance Non-Electronics Sub-Index Futures (XIF)

Section 1 Trading Process

The same as other index futures, XIF will be traded electronically according to the following process:

Section 2 Order Placement

Based on trading mode, orders are classified into regular and combination order. Regular orders are simple buying or selling a futures contract order of a delivery month. Combination orders are combined orders of buying and selling contracts with different expiration months, also called spread orders.

I. Regular Orders

1. Order types: Market order and limit order

2. Conditional orders

The two above-mentioned orders may be done in FOK (Fill-or-kill) or IOC (immediate-or-cancel). Limit orders not noted are considered good for the day only. Orders noted with FOK or IOC already input into the system for matching are automatically cancelled if it is not filled and will not be kept in the order book. In addition, rest-of-day (ROD) market orders are not accepted. Only FOK and IOC market orders are accepted.

In consideration of the fact that unfilled orders remaining in the placement record for new matching easily leads to deviation from previous trading prices, rest-of-day applications are not accepted, except those done in the FOK or IOC modes.

FOK orders (regardless whether market or limit order) may be input into the system during trading hours only. The system does not accept FOK orders in the pre-opening session.

II. Calendar spread order

A calendar spread order is a combination orders that entails buying (or selling) a near-month contract, and simultaneously selling (or buying) the same number of far-month contracts. The order price is calculated as the farther-month price minus the near-month price. It may either be positive or negative. The buy/sell direction of a calendar spread order is dictated by the far-month contract. That is, a buy calendar spread order is an order to buy a far-month contract and simultaneously sell a near-month contract. A sell calendar spread order is an order to sell a far-month contract and simultaneously buy a near-month contract.

1. Types of orders

Calendar spread orders are either market or limited orders. Market orders have to be FOK or IOC. Limited orders can FOK, IOC, and ROD (rest-of-day). For a ROD limit order, the unfilled legs will be transferred into the order book to wait for the next matching. Limit orders that are not specified are treated as ROD order.

2. Key-in time for calendar spread order

Key-in of calendar spread orders is not allowed during pre-opening session. Such orders are accepted only during trading hours.

3. Contents of orders

The calendar spread order sheet shall be filled out the same way as that for other stock index futures currently traded on TAIFEX.

Section 3 Trade Matching

Orders that enter the trading system will be matched by the following principles:

1. Matching is carried out by price priority and time priority.

2. Market order has precedence over limit order.

3. When order quantity decreases, the time ranking 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 during the opening session of market, and then order by order on continuous basis until the market closed.

In calendar spread orders, both legs of the order must be filled at the same time for the transaction to complete. Calendar spread orders may be matched with another calendar spread order or with regular single orders (through the creation of a virtual order). However, for better matching efficiency, the two legs of a calendar spread orders may not be matched with two spread orders with different expiration months.

Section 4 Information Disclosure

Operation for the disclosure of XIF order and trading information is planned the same as that for TAIEX futures.

Section 5 Market Maker

To maintain the market fluidity of new products in the initial period of launching, a market making scheme has been planned as follows:

1. Qualification for futures market maker:

Must be a futures dealer.

2. Application procedure:

Market maker applicants shall submit relevant documents to TAIFEX according to the TAIFEX Regulations Governing Market Makers to apply for the status of market maker, and can engage in market making business upon approval by TAIFEX.

3. Account Opening

The opening of market making accounts shall follow the existing practice for options market makers.

4. Rights

Upon complying with the TAIFEX regulations on market making, market makers shall enjoy discounts on relevant fees. For futures dealers, expenses that may be discounted include: exchange fees and clearing service fees. The extent of discounts shall depend upon the applicants’ market making volume for the month.

5. Duties

FCMs wishing to engage in market making shall, during the trading session for each business day as prescribed in the contract, give quotes according to the TAIFEX market maker regulations on price quote, time limits, quantity and spread limits.

Parameters for the rights and obligations mentioned above will be published before the product is listed.

Chapter 5 Clearing and Settlement System of TSEC Non-Finance Non-Electronics Sub-Index Futures (XIF)

Section 1 Position Management

The company’s system will compute trader accounts’ remaining positions anytime during the trading session. Principles of calculation, adjustment operations and inquiry methods are outlined as follows:

I. Principles for calculating position balance:

1. “New/offset” code of orders

1) FCM’s system compares the number of contracts ordered with the number of open positions in the account. If there are sufficient opposite-direction positions, the order placed will be “offset”, otherwise, they will be treated as “new” position.

2) If the transaction code indicates “offset” and the trade is executed, but said trader does not have sufficient offsetting positions in the account, such data are viewed as offset error and will be made available for FCM query on the same day under the “offset error query” transaction.

2. Automatic offset

Account position is calculated on real-time basis during the market. The opposite positions of the same product having the same delivery month in the same account are automatically offset.

II. Inquiry of position balance

TAIFEX will provide “position balance query” service for inquiry by FCMs about the open interests of certain client. When FCM needs to apply for position adjustment due to account error, FCM should check first the position balance of the client to make position adjustment.

Section 2 Margin Calculation

The purpose of setting margin is to cover the loss associated with single-day volatility of futures price with certain time period. Margin is a form of guarantee to ensure contractual performance by the parties. The margin requirements for futures contracts are determined by the contract value and risk coefficient. Risk coefficient is determined based on the value-at-risk (VAR) concept. That is, at 99% confidence level, after computation within a designated period of the positioning, it is possible to arrive at a range of price volatility covering at least one business day and the potential maximum loss value.

The margin requirement for XIF is described as follows:

I. Margin Types and Ratios

When the non-finance non-electronics sub-index futures products are launched, TAIFEX must announce standards for calculating clearing margins, maintenance margins and initial margins. Their ratios shall be determined based on the following:

Clearing margin: maintenance margin: initial margin = 1 : 1.15 : 1.5

II. Method for Setting Clearing margin

1. Method

Margin amount shall be the futures contract value times the risk coefficient.

2. Risk coefficient

Obtain it by observing the price volatility within a period of time, and at least cover volatility for one business day at 99% level.

3. Margin calculation

In concurrence with the introduction of SPAN (Standard Portfolio Analysis of Risk) margin system in October 2007, TAIFEX will apply the SPAN margin system at the level of TAIFEX clearing members and FCMs only. FCMs will follow the prevailing margin rules to collect margins from traders as described below:

(1) Clearing members and FCMs shall calculate margin through SPAN.

TAIFEX’s SPAN covers clearing members and FCMs in calculating margins based on exposed risks. At the same time consideration is made on cross-product trading risk parameters in making margin calculations for clearing members and FCMs.

(2) Existing margin calculation methods shall apply to futures traders.

FCMs will collect margins from traders based on the existing regulations; the margining for futures calendar spread shall follow the newly established margining operation for GTEX futures calendar spread.

According to the TAIFEX margin system for futures calendar spread order, an order or a combination of one long XIF and one short XIF will be subject to the margin for one XIF as presented in the table below. below:

|Position combination |Margining |Remark |

|A long XIF and a short XIF|Collect margin for one XIF |(1) Within the scope of application for spread positions as announced by |

| |contract |TAIFEX, combination priority is given to combined positions that will |

| | |result in the largest reduction in margin (to be calculated in NT$, but |

| | |the actual reduction will be calculated by the product-denominated |

| | |currency). |

| | |(2) Where the amounts of reduction are identical, order sequence shall be |

| | |based on alphabetical arrangement. |

| | |(3) Product month shall be from near to far. |

| | |(4) In case of cross-currency combination, and when US$ and NT$ are the |

| | |same in value, priority will be given to US$. |

III. Adjustment mode for Futures Contract Margin

After launching of non-finance non-electronics sub-index futures, the adjustment of margin amount shall follow existing stock index futures adjustment operations.

Section 3 Daily Settlement Price

The daily settlement price of XIF is determined by the established method and published on a daily basis. All open XIF positions are marked-to-market daily.

The daily settlement price of XIF is determined in the following manner:

1. The daily settlement price is in principle the volume-weighted average price of all transactions executed in one minute before closing.

2. If there has been no transaction price in one minute before closing, the daily settlement price will be the average of the highest bid and lowest ask offered but not executed in the closing session.

3. If there are no bids offered in the closing session, the lowest ask will be the daily settlement price; if there are no ask offers, the highest bid will be the daily settlement price.

4. When there are no bid nor ask offers for a distant-month contract, the day’s settlement price of nearest-month contract plus the difference between the settlement price of said contract and that of nearest-month contract in the previous business day will be the daily settlement price for the distant-month contract.

5. If the daily settlement price cannot be determined by any of the methods described above or the determined settlement price is apparently unreasonable, TAIFEX will determine the daily settlement price.

Section 4 Settlement Operation

I. Operational principles

1. Cash settlement.

2. If a trader has open position on delivery-month XIF contracts after market closing on the last trading day, TAIFEX will, during the business hours of the final settlement day, settle the position on a net cash basis based on the difference between the final settlement price and the previous day’s settlement price.

3. XIF contracts are automatically nullified after settlement upon expiration.

II. Operations

1. Operations shall be at 9:30 am of the last settlement day of each delivery month.

2. If a clearing member has expired open positions for the month at the end of the trading session of the last trading day, TAIFEX will carry out cash settlement based on the final settlement price.

3. The final settlement price is determined by the index computed by the first fifteen-minute volume-weighted average of each component stock’s prices in the index on the final settlement day as provided by the TSEC. For those component stocks that are not traded during the beginning fifteen- minute interval on the final settlement day, their last closing prices would be applied instead.

Section 5 Risk Control Operation

Risk control is carried out according to the prevailing Measure for Market Position Monitoring Operation of TAIFEX for risk control of clearing members:

I. Volume control

The net of margin required for newly added futures and option contracts and net premium thereof of individual clearing member shall not exceed its excess margin deposits.

II. Margin and position control

1. TAIFEX carries out trial calculation of equity in 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 wild fluctuation in the market, TAIFEX will carry out trial calculation at any time as deemed necessary.

2. When equity in clearing member’s margin and premium account is below the required margin for the open futures position and open put options, the clearing member shall make up the shortfall within one hour.

3. Adjusted net capital ratio

Calculate and check the net capital as a percentage of the total clearing margin required for the open futures positions and open seller’s options.

4. Position concentration

Calculate and check the open XIF positions as a percentage of open interest on XIF in the market. The calculation of position concentration is not required if the total such position is less than 3,600 contracts.

5. Position loss

Calculate and check the difference between the equity in clearing member’s margin and premium account and the required clearing margin for the open futures positions and open seller’s options (if the former is less than the latter) as a percentage of the adjusted net capital.

Chapter 6 Specifications of TSEC Non-Finance Non-Electronics Sub-Index Options Contract

Section 1 TSEC Non-Finance Non-Electronics Sub-Index Options Contract Specifications

|Item |Description |

|Underlying index |Taiwan Stock Exchange Non-Finance Non-Electronics Sub-Index |

|Abbreviation |TSEC non-finance non-electronics sub-index option (call and option) |

|Ticker symbol |XIO |

|Exercise style |European (exercisable only on expiration date) |

|Multiplier |NT$25 per index point |

|Expiration months |Five expiration months, including spot month, the next two calendar months plus two nearest consecutive months |

| |of the March, June, September, and December cycle. |

|Strike price interval |Strike price below 3,000 points: 50 index points for near-month contracts, 100 index points for quarter-month |

| |contracts. |

| |Strike price between 3,000 and 8,000 points: 100 index points for near-month contracts, 200 index points for |

| |quarter-month contracts. |

| |Strike price between 8,000 and 12,000 points: 200 index points for near-month contracts, 400 index points for |

| |quarter-month contracts. |

| |Strike price above 1,200 points: 400 index points for near-month contracts, 800 index points for quarter-month |

| |contracts. |

|Contract series |When listing series of new contract months, one series with at-the-money strike price is listed based on the |

| |previous day’s closing price of the underlying index rounded down to the nearest multiples of strike price |

| |interval, and based on said strike price, for the spot month and the next two calendar months: five |

| |in-the-money series and five out-of-the-money series are listed. For the next two quarterly months: three |

| |in-the-money series and three out-of-the-money series are listed. |

| |Up to the 5th business days before expiration, |

| |1. For the spot month, and the next two calendar months: additional series are added to maintain at least 5 in-|

| |and 5 out-of-the-money strike prices. |

| |2. For the next two quarterly months: additional series are added to maintain at least 3 in-and 3 |

| |out-of-the-money strike prices. |

|Premium quote |=20 points, 100 points, < 1,000 points: 2 points (NT$50) |

| |>=1,000 points, = 2,000 points: 20 points (NT$500) |

|Daily price limit |+/- 7% of previous day’s closing price of underlying index |

|Position limit |Any investor’s aggregate open same-side positions on the contract for various expiration months at any time |

| |shall not exceed the limit standards set forth by the TAIFEX. |

| |The open same-side position means the combined position of call options bought and put options sold or the |

| |combined position of call options sold and put options bought. |

| |Institutional investors may apply to TAIFEX for relaxation of position limit for hedging purpose. |

| |The position limits do not apply to omnibus account. |

|Trading hours |Contract trading days are regular trading days of Taiwan Stock Exchange. |

| |The trading hours are 8:45 AM ~ 1:45 PM. |

|Last trading day |The third Wednesday of the expiration month. |

|Expiration date |The first business day following the last trading day. |

|Final settlement price |The final settlement price for each contract is the index computed by the first fifteen-minute volume-weighted |

| |average price of component stocks in the index on the final settlement day as provided by the TSEC. |

| |For those component stocks that are not traded during the beginning fifteen- minute interval on the final |

| |settlement day, their last closing prices would be applied instead. |

|Settlement |An option that is in-the-money and has not been liquidated or exercised on the expiration day shall be |

| |exercised automatically by cash based on the different between the strike price and the final settlement price.|

Section 2 Contract Design

I. Exercise style

The majority of global stock index options, with the exception of CBOE’s S&P 100 option and Eurunext-LIFFE’s FTSE100, which use US and European designs, adopt the European style. It is therefore recommended that the European style be adopted for XIO.

II. Contract multiplier

Currently, contract multipliers of XIO are patterned after existing stock index futures and their options, at 4 :1 ratio, with each point worth NT$25. Calculating based on a closing index of 8.688.61 for non-finance non-electronics sub-index on May 10, 2007, the contract value of XIO is NT$217,215.25, and is thus considered a small-size contract. It has a market segmenting effect. As local futures market trading is dominated by individual investors, smaller contract designs seem to be more appropriate.

III. Expiration months

As XIF provide three quarter-month contracts, XIO must be in line to be designed with quarter-month contracts. Because the XIO is designed to offer three near-months, if three quarter-months are also offered, there will be six expiration months. That means the market will end up having too many series at the same time, which tends to spread out the trading. In addition, other index options currently traded on TAIFEX only offer two quarter-months at the present time. Thus the same is recommended for XIO.

IV. Strike price interval

Taking the closing index on May 10, 2007 as base, TAIEX options’ contract price interval was 2.47% for the near month and 4.94% for the far month. If the same ratio is applied to XIO, their contract price interval will be 214.61 points for the near month and 429.22 points for the far month. Internationally adopted contract designs take 5 points as basis of calculation. It is thus suggested that the contract price interval be 200 points (2.3%) for the near month and 400 points (4.6%) for the far month. Taking as reference TAIFEX’s existing stock index options’ contract price interval to contract price ratio, four levels of intervals for the nearest and far months are obtained : 1.67-3.33%, 1.25-6.67%, 1.67-5%, and 3.33-6.67%. This contract’s price interval patterned after the above thus leads to the following :

■ Contract price lower than 3,000 points: 50 points for the near month and 100 points for the quarter month contracts.

■ Contract price higher than 3,000 points but less than 8,000 points: 100 points for the near month and 200 points for the quarter month contracts.

■ Contract price higher than 8,000 points but less than 12,000 points: 200 points for near month and 400 points for quarter month contracts.

■ Contract price higher than 12,000 points: 400 points for the near month and 800 points for quarter month contracts.

V. Contract series

In considering that the strike prices for new series could at least cover the range of index price fluctuation to satisfy the demands for out-of-the-money contracts, the design for listing series of new expiration months is that one series with at-the-money strike price is listed based on the precious day’s closing price of the underlying index rounded down to the nearest multiples of strike price interval. In addition, based on said strike price, five other series each with in-the-money and out-of-the-money strike prices are listed for the spot month and the next two calendar months, and three other series each with in-the-money and out-of-the-money strike prices are listed for the next two quarter months.

Up to the 5th business day before expiration, contracts with new strike prices are introduced under the following conditions:

1. For spot month and the next two calendar months, additional series are added when the underlying index trades through the fifth highest or lowest strike price available to maintain at last 5 in and 5 out-of-the-money strike prices.

2. For the next two quarter months, additional series are added when the underlying index trades through the third highest or lowest strike price available to maintain at least 3 in- and 3 out-of-the-money strike prices.

VI. Premium quotation

Quotation for XIO shall be patterned after existing stock index options’ designs, i.e., quotation units and prices shall have a ratio of 1-5%, that is:

■ Quotation with less than 20 points: 0.2 point (NT$5))

■ Quotation above 20 but less than 100 points: 1 point (NT$25)

■ Quotation above 100 but less than 1000 points : 2 points (NT$50)

■ Quotation above 1000 but less than 2000 points : 10 points (NT$250)

■ Quotation abobe 2000 points : 20 points (NT$500)

VII. Trading hours

Currently the opening time for XIF under planning and other TAIEX options traded on TAIFEX is 15 minute earlier than the cash market, while their closing time is 15 minutes later than that of cash market. It is suggested that same trading hours apply to XIO so traders have the chance to adjust their options position or engage in arbitrate or hedge trade after the cash market closes.

VIII. Daily price limit

Stock prices in the cash market in Taiwan are subjected to a 7% up/down limit. If no such limits are set for options, when the spot price hits its up or down limit, the extent of fluctuation for options may exceed it, and thus contribute to psychological impact on the cash market. To prevent the movement in the price of options from producing excessive impact on the cash market, it would be wise to pattern price limits used in warrants. That is, taking the maximum up/down limit of theoretical price as basis, establish a 7% limit on the daily price movement of options.

IX. Last trading day and expiration date

Thus in line with XIF, the last trading day of XIO is also set on the third Wednesday of the delivery month. Since the electronic options, the same as electronic futures, also uses the quotes in the opening session of expiration date, its expiration date is also set on the next business day following the last trading day.

X. Final settlement price and settlement

Currently, plans for XIF call for the adoption of special quotation at the opening of the day following the final trading day, i.e., calculation shall be based on the index computed by the first fifteen-minute volume-weighted average price of component stocks in the index on the final settlement day as provided by the TSEC. XIO shall also pattern the futures mode in which the quotes for the spot at opening session on the next day (i.e. expiration day) following the final trading day be used in settlement. Furthermore, to simplify operations and to guarantee traders’ rights, all in-the-money contracts are automatically exercised upon expiration by TAIFEX without applications from traders. If traders should wish to abandon their rights, they shall apply for abandonment of exercise.

XI. Position limit

Taiwan futures market sets position limits after considering traders’ identities, trading motivation, contract size and product trading volume, market maneuverability and other such factors. To make it easier for traders to remember, it is suggested that this product pattern position limit regulations after those of electronics and financial options, that is:

■ Any investor’s aggregate open same-side positions on the contract for various expiration months at any time shall not exceed the limit standards set forth by the TAIFEX, which is planned at 1,000 contracts for individual traders at the present time.

■ The so-called same direction unsettled positions refers to the combined position of call options bought and put options sold or the combined position of call options sold and put options bought.

■ Current limit for institutional investors is 2,000 contracts. However, for hedging purposes, institutional investors may apply for limit relaxation from TAIFEX.

■ Current plans call for limits of 6,000 contracts for market makers and futures dealers.

■ These limits shall not apply in the case of omnibus accounts.

Chapter 7 Trading System of TSEC Non-Finance Non-Electronics Sub-Index Options (XIO)

The trading system of TSEC non-finance non-electronics sub-index options (XIO) is essentially the same as that of TAIEX options.

Section 1 Trading Process

XIO trading process:

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Section 2 Order Placement

Orders placed by traders come in regular order and combination order.

I. Regular Orders

1. Order types: Market order and limit order

2. Conditional orders:

The two above-mentioned orders may be done in FOK (Fill-or-kill) or IOC (immediate-or-cancel). Limit orders not noted are considered good for the day only (ROD). Orders noted with FOK or IOC are automatically cancelled if it is not filled

In addition, rest-of-day (ROD) market orders are not accepted. Only FOK and IOC market orders are accepted.

FOK orders (regardless whether market or limit order) may be input into the system during trading hours only. The system does not accept FOK orders in the pre-opening session.

Quotes are given by market makers in response to market request or initiated by the market makers.

II. Combination order

1. Trading pattern and strategy:

There are five standard trading strategies for combination orders:

(1) Price (Vertical) Call ∕ Put Spreads

(2) Time (Horizontal) Call ∕ Put Spreads

(3) Straddles

(4) Strangles

(5) Conversion ∕ Reversals

2. Order types

They may be market or limit orders, both of which are required to be in FOK or IOC modes. No ROD orders are accepted. Orders not matched will be cancelled automatically.

3. Placement of combination orders

(1) Spread placements

Spread orders are input on the basis of net premium. The limit price is premium payable by the second leg minus the premium receivable from the first leg. In a buy spread limit order, if the premium difference between the two legs is smaller or equal to the limit price, the order may be filled; in a sell spread limit order, if the premium difference between the two legs is bigger or equal to the limit price, the order may be filled.

(2) Straddles and Strangles

Straddle and strangle orders are input using the order’s total premium. Its limit price is the total of the first leg premium and the second leg premium. In a buy straddle or strangle limit orders, if the total premium of the two legs is lower than or equal to the limit, the order may be filled. In a sell straddle or strangle limit order, if the total premium of the two legs is higher than or equal to the limit, the order may be filled.

(3) Conversions and Reversals

Conversion and reversal orders are input using the net premium. Its limit price is the premium payable by the second leg premium minus the premium receivable from the first leg. In a buy conversion order, if the net premium of the two legs is smaller or equal to the limit, the order may be filled. In a reversal order, i.e. a sell conversion order, if the net premium of the two legs is larger or equal to the limit, the order may be filled.

4. Input time for combination orders

Combination orders are accepted only during the trading session.

III. Placement Procedures

When a FCM receives an order from a trader, it will stamp a time mark. After risk control operation is done, the order is input into the trading system. The trading system will send a response message of order receiving and receiving time, and enter the order in the order book for matching.

Section 3 Quote Request and Quoting

A. Quote request

For trading purposes, traders may request FCMs to make quote requests through their computer systems. Requests shall include information such as product ID and option series. There is no need to specify quantity or an ask or bid quote. No such requests are processed during pre-opening session.

B. Quoting

Upon receiving the quote request message, all market makers of the product inquired are obligated to give a two-way (ask/bid) quote in the system within 60 seconds. When the quote is considered acceptable, the quote requester can proceed to place an order. Quotes may only last for some time (currently set at 20 seconds). In case of failed match, the information is deleted from the order book.

Section 4 Trade Matching

I. Matching principles

1. Matching is carried out by price priority and time priority.

2. Market order has precedence over limit order and quote order.

3. For combination order, all option series in the order must be filled simultaneously.

4. When order quantity decreases, the time ranking of the order stays unchanged; when order price changes or order quantity increases, the order is considered a new order.

II. Matching method

Matching is carried out on competitive auction basis at the opening of market, and then order-by-order on continuous basis until closing of market.

Section 5 Market Maker

I. Application qualifications and procedure

Futures dealers may, based on TAIFEX’s Regulations Governing Market Makers, apply as a market maker for this contract. After submission of required documents and approval by TAIFEX, they shall be allowed to engage in market making operations.

II. Account opening

FCMs engaged in market making shall be required to open a separate market maker account, which bears designated ID code and account numbers. This facilitates statistical operations as well as management and monitoring of market making operations.

III. Rights

Market makers are entitled to discount of exchange fees and clearing service fees as announced by TAIFEX if they meet their monthly market making obligations.

IV. Obligations

In keeping with TAIFEX regulations such as those on trading volume limits, price difference limits, ratio of response to quote requests and market maker’s monthly or annual trading limits, FCMs engaged in market making shall report on a daily basis during session to the Taiwan Futures Exchange.

Chapter 8 Clearing and Settlement System of TSEC Non-Finance Non-Electronics Sub-Index Options (XIO)

Section 1 Position Management

I. Principles for calculating position balance:

1. “New/offset code” of order

1) If the trader fails to indicate “new” or “offset,” the order is taken as “automatic processing.” Orders with an opposite-direction position in the account are “offset.” Orders without sufficient opposite direction position in the account are treated as “new.”

1) If a trader places on offset order but there is insufficient opposite-direction position for offsetting, the data shall be taken as offset error.

2. Designated position offset

Traders may, through FCMs, designate position offset to close out remaining positions in the account.

3. Designated position combination

Traders holding XIO open positions may, in keeping with TAIFEX rules for combination position margin calculation, ask their FCM to apply for position combination for margin reduction purpose.

II. Inquiry on position balance

TAIFEX provides FCMs with position balance inquiry service. When traders’ open positions are not covered by insufficient margins, FCMs are required to pay additional margin within a prescribed time. FCMs that need to apply for “position adjustment application” due to error account shall do so during specified hours (Monday to Friday at 2:30 pm).

Section 2 Margin Calculation

I. Margin for XIO

|Trading strategy |Position |Margin requirements |Remark |

| |Long call |None | |

| |Long put | | |

| |Short call |Premium value＋MAX |1. The amounts of A and B are calculated by|

| | |(A – out-of-the-money amount, B) |the standards published by TAIFEX. |

| | | |2. Out-of-the-money call: |

| | | |MAX((strike price- underlying index price) |

| | | |× contract multiplier, 0) |

| | | |3. Out-the-money put: |

| | | |MAX((underlying index price – strike |

| | | |price)× contract multiplier, 0) |

| |Short put | | |

| |Buy call at lower strike, sell |None |1. Applicable only if the buy position and |

| |call at higher strike (bull | |the sell position have the same expiration |

| |call spread) | |date. |

| | | |2. If the expiration dates of the |

| | | |combination positions do not follow the |

| | | |aforesaid position portfolio, margin will |

| | | |be computed for individual positions. |

| | | | |

| | | | |

| | | | |

| | | | |

| | | | |

| | | | |

| | | | |

| | | | |

| | | | |

| |Buy put at higher strike, sell | | |

| |put at lower strike (bear put | | |

| |spread) | | |

| |Buy call at higher strike, sell|Strike difference between positions | |

| |call at lower strike ( bear |bought and sold x contract multiplier | |

| |call spread) | | |

| |Buy put at lower strike, sell | | |

| |put at higher strike (bull put | | |

| |spread) | | |

| |Buy call and sell call at same |Max (clearing margin for index futures|1. Not applicable if the buy position and |

| |strike with bought position |having the same underlying x 10%, 2 x |the sell position have the same expiration |

| |expiring at a later date (time |premium difference (points) x contract|date. |

| |call spread) |multiplier) | |

| | | |2. If the buy position has nearer |

| | | |expiration date than sell position, margin |

| | | |is computed for individual positions. |

| | | | |

| | | |3. Index futures having the same underlying|

| | | |as TAIEX options refers to one TAIEX |

| | | |futures contract. |

| |Buy put and sell put at the | | |

| |same strike with bought | | |

| |position expiring at a later | | |

| |date (time put spread) | | |

| |Long call, long put |None | |

| |Short call, short put |MAX((margin for call sold, margin for |It is straddle position if the strike |

| | |put sold) + premium value of position |prices are the same. |

| | |requiring less margin |It is strangle position if the strike |

| | | |prices are different. |

| |Long futures, short call |Margin requirement for futures + |1 XIF contract can be combined with 1 to 4 |

| | |premium on options |XIO contracts to form a combination |

| | | |position. |

| |Short futures, short put | | |

| |Conversion: |No margin required for bought | |

| |Long put, short call |position. | |

| | |Margin for sold position = | |

| | |premium＋MAX(A – out-of-the-money | |

| | |amount, B) | |

| |Reversal: | | |

| |Long call, short put | | |

II. Margin Calculation

In concurrence with the introduction of SPAN (Standard Portfolio Analysis of Risk) margin system in October 2007, the TAIFEX will charge margins from clearing members, FCMs and futures traders in the following manner:

1 The SPAN system will be implemented at the level of clearing members and FCMs where margin will be calculated based on the total portfolio exposures and takes into account the risk mitigation effect produced by intercommodity spread.

(2) The margining for futures traders follows the existing system.

III. Calculation of equity in margin and premium account

1. Clearing member’s margin equity

= Initial clearing margin deposit + day’s margin called + day’s deposited/ remitted-in amount - day’s withdrawn/remitted-out amount + day’s premium income – day’s premium expense + transaction gain/loss + day’s position gain/loss + day’s profit/loss upon expiration + day’s profit/loss from expired options

2. Clearing member’s margin equity - required margin (uncovered futures positions + clearing margin required for uncovered writer option positions) =

A(0 surplus margin

A(0 margin deficit

Section 3 Settlement Price

I. Determination and publication of daily settlement price

1. Determination of daily settlement price

(1) The daily settlement price of an option contract is the transaction price of the day’s last match executed.

(2) If there are no transactions in the last 15 minutes before closing or the settlement price seems unreasonable, TAIFEX will decide the daily settlement price.

2. Publication of daily settlement price

The daily settlement price of XIO is determined by the established method and published on a daily basis. All open XIO positions are marked-to-market daily.

II. Determination and publication of final settlement price

1. Determination of final settlement price

(1) The final settlement price for an option contract is determined based on the volume-weighted average of each component stock’s prices in the index in the first 15 minutes of trading on the expiration day as provided by TSEC.

(2) For component stocks that are not traded in the first 15 minutes of market on the expiration day, their last closing prices would be applied instead.

2. Publication of final settlement price

TAIFEX will publish the final settlement prices for options contracts of expiration month on the final settlement date.

Section 4 Exercise Operation

I. Automatic exercise

If a clearing member has open positions after closing on the last trading day of each expiration month, TAIFEX will perform automatic exercise for at-the-money contracts based on the final settlement prices at 9:30AM on the next business day.

II. Application procedures for abandonment and additional contracts

An investor that chooses not to exercise the contract or wishes to exercise a contract that does not meet the automatic exercise requirement should notify his/her FCM, and the FCM should request addition or deletion to the exercise list according to customer’s instructions through the clearing system.

III. Profit & Loss Calculation of Matured Contracts

TAIFEX will carry on settlement operation based on the final settlement price at 11:00 AM. The profit/loss on a contract upon exercise will be included in the trading period mark-to-market of clearing margin for clearing members.

Section 5 Risk Control Operation

I. Order volume control

The total margins and premiums required from futures and options orders by clearing members shall not exceed their excess margins.

II. Margin and Position Control

1. TAIFEX carries out trial calculation of equity in the margin and premium accounts of clearing members at fixed hours each day. When there is wild fluctuation in the market, TAIFEX will carry out trial calculation at any time as deemed necessary.

2. Adjusted net capital ratio

Calculate and check the net capital as a percentage of the total clearing margin required for the open futures positions and open seller’s options.

3. Calculation of Degree of Position Consolidation

Calculate and check the open seller’s positions on the call or put of XIO less the open seller’s position on the call or put of XIO held by market makers as a percentage of open interest on XIO in the market. The calculation of position concentration is not required if the total such position is less than 3,600 contracts.

4.Position loss

Calculate and check the difference between the equity in clearing member’s margin and premium account and the required clearing margin for the open futures positions and open put options (if the former is less than the latter) as a percentage of the adjusted net capital.

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14. Prepare for start of business operations

13. Apply for admission to CNFA and obtain membership document (contact CNFA)

12. Sign contracts on computer links and use of trading information with the TAIFEX.

10. Proof of business registration from relevant local governments

11. Pay fees for computer links and use of information equipments

9. Obtain permit from Securities & Futures Bureau (Section 7)

5. Deposit operating margin with a bank’s trust department

6 Obtain from IT supplier proof of legal and ready[pic]opvwxy{…†˜®°± | A C D a c d ‹ óèàÔȼ¸¦¸¼˜ÈŒ|le_le_RK_RK_R

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h^cÉ;?PJh^cÉ5?;?>*[pic]B*[?]PJ\?phÿ-h^cÉ5?>*[pic]CJ$PJ\?aJ$o([pic]h^cÉ5?>*[pic]CJ(\?aJ(hóyB*[pic]CJ(aJ(o([pic]ph#jh^cÉCJKHU[pic]aJmHsHh^cÉh^cÉB*[pic]CJ8aJ8phh^ access to local futures trading information and necessary transmission facilities

4. Company registration at MOEA Department of Commerce

3. Submit application for location and equipment inspection to the CNFA

2. Apply for permit from Securities & Futures Bureau (Section 7)

1 Apply to Taiwan Futures Exchange Online (Contact Information Department)

8. Apply to TAIFEX for issue of certificate to engage in futures trading and settlement (Trading Department)

7. Select clearing member

Managed Futures Enterprises

1%

Other Institutional investors

1%

Futures Proprietary Account

46%

Securities Investment & Trust Accounts

0%

Foreign Professional Investment Institutions

3%

Individual investors

49%

Securities Proprietary Accounts

0%

Foreign institutional investors

Foreign individual investors

Local institutional investors

Local individual investors

Notes:

1. Download relevant application forms from the Taiwan Futures Exchange website (.tw).

2. All procedures may require 7-14 business days to complete (actual timing depends upon processing unit and the conditions of the application. It may be shorter or longer.)

3. Contact telephones:

Securities & Futures Bureau, Financial Supervisory Commission

(02) 87735100

Chinese National Futures Association (02)-87737303

Taiwan Futures Exchange (02)-23695678

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