The Taiwan Banker

Joey Chen, the new Chair of the Taiwan Securities Association, an industry body with an important role in Taiwan’s capital market, is an industry veteran. He has seen the impact of digital finance on securities, but believes that traditional firms will keep their important role. The key for them is to continue grasping the digital trend. The Association will also play an active communication role, and expand the scope of the securities market through new business development. The digital trend is irreversible Observing the changes in Taiwan’s securities market since the 2008 crisis, Chen is optimistic that Taiwan’s stock market is in good shape, and momentum has recovered rapidly. It once hit a historical high of 18,619, and the proportion of hedge funds exceeded 40%. Conditions now are quite positive, and market finances have entered a more mature stage. At the same time, the number of Taiwanese securities firms has dropped from more than 300 at the peak to 128 (including concurrent operations), and the competition for trading fees is fierce. Foreign online brokerages are vying for business with zero processing fees, and brokers are facing unprecedented pressure. Chen says that a key mission of the Association now is to find new business directions and opportunities. He noted that the securities market is digitalizing faster than banking and insurance. Nowadays, almost every investor has a mobile phone, and more than 70% use electronic orders. The digital trend is irreversible. Therefore, innovative products and digital finance applications will be important directions for future growth. The Association is helping securities firms find room for development and enhance cross-industry competition to promote their common interests. Regarding digital finance applications, it is necessary to accelerate promotion of an identity authentication mechanism for remote services, and provide new ways for customers to set up settlement accounts and make deposits and withdrawals online, so that firms can allow consumers enjoy the dividends brought by technology. Fairness, openness, and public participation Huang Tien-mu, chairman of the Financial Supervisory Commission (FSC), also expressed hope that the Taiwan Securities Association will fairly treat securities firms of different sizes, open communication channels, and actively participate in public welfare. Chen said this will be all implemented after he takes office. Regarding capital market stability, the FSC previously announced a three-year Securities Industry Sustainability Transformation Implementation Strategy. The Association has established a sustainable development committee, held a briefing for senior executives, formulated a training map for directors and supervisors, completed norms to protect the elderly and physically and mentally disabled, and studied self-regulatory norms and other specific measures related to cybersecurity and underwriting. The FSC has also invited the Taiwan Securities Association, Chinese National Futures Association, and Securities Investment Trust & Consulting Association of the R.O.C. to jointly study examples or guidelines for climate information disclosure, scenario analysis, and carbon inventory disclosure, and has also called on securities firms to collect relevant information as soon as possible. The Association will also arrange research units to study the industry so that all companies will implement and promote sustainability practices. Chen also invited the securities industry to promote ESG practices. Refining security issuance In terms of underwriting operations in the issuance market, Chen suggested that the IPO underwriting system on the Taiwan Innovation Board (TIB) be relaxed to allow more high-quality companies with potential to list. The TIB has been open since 3Q 2021. By November 2022, only one company was listed, and another two applied for IPO review. The exchange also recently relaxed the listing standards, including market value and revenue, and also shortened the transfer time and qualified investor conditions. The experience of underwriters, start-ups, and investors during the TIB promotion period has shown that diverse investor types is conducive to smooth listing. Chen suggests that IPOs should use cornerstone investors and use more public subscription underwriting to attract investors with different attributes and more diverse risk tolerance levels. This will promote long-term development, increase willingness to list, and enhance the competitiveness and attractiveness of Taiwan’s capital markets. As for issuance financing, issuing companies currently use IPO and SPO share offerings to raise capital, which can be subscribed with priority by employees and original shareholders. However, Chen recommends referring to international practice, whereby the securities firm can provide subscription financing services to the company employees and original shareholders to make up for the gap in their subscription funds to assist the issuing company to raise funds smoothly. This meets the needs of the employees and original shareholders for subscription financing, while also expanding the business scope of securities firms and enhancing the value of their investment banking services. Overseas transaction improvements It has been more than 40 years since foreign brokerage and sub-brokerage business by securities firms were first allowed in 1980. At present, Taiwanese people investing in foreign securities through securities firms can only buy and sell securities, with no margin lending. The FSC previously instructed the stock exchange to discuss opening only for stocks and ETFs, not foreign bonds. At that time, the Association stated that overseas debt was the main target of Taiwanese asset allocation, and the largest market for sub-brokerage is the US, with local financing targets including bonds. In line with international practice, the Association recommends allowing sub-brokerage with targets including foreign bonds, in order to fully meet consumer financing needs and enhance the international competitiveness of the securities industry. In addition, the international market has included securities lending for a long time. The international practice is to handle securities lending business through custodian banks or primary securities firms, allowing investors who lend securities enjoy protection and limited risks. The insurance industry and banks have been successively allowed to engage in securities lending by proxy with foreign securities held by them. Based on the principles of consistent domestic and foreign supervision, Chen proposes allowing securities firms to engage in sub-brokerage, lending foreign securities held through custodian banks or primary securities firms to help investors activate mid-to-long-term securities to generate additional income. Cybersecurity and risk control Regarding market risk control, in order to maintain the cybersecurity of securities transactions, securities companies have completed relevant security measures, including enhanced protection of electronic orders and quarterly cybersecurity drills. They have also improved self-regulatory norms related to cybersecurity and supply chain management, providing principles to strengthen security and joint defense so that the securities market can respond to major incidents. In addition, Taiwan’s credit transactions, securities business loans, unrestricted cash loans, and securities loans are currently regulated by different laws and regulations, so each collateral requirement must be calculated separately. The Association has proposed a One Account mechanism to manage the four loan types, calculating total collateral requirements on a consolidated basis. The Taiwan Stock Exchange is setting up a special group called the Taipei Exchange, Taiwan Depository & Clearing Corporation, and the Association plans to study the feasibility of a mechanism to manage all accounts. Integrated support will help improve the efficiency of investors' collateral use and securities market risk control. Further innovations on the way Chen has two suggestions. The first is to complete amendments to the Warrant Hedging Tax Act as soon as possible. He mentioned that securities firms have more than 24 years of experience in issuing warrants. They are responsible for warrant market-making, and must dynamically prevent risks. The 3% rate for warrant hedging is relatively high. Over the past 10 years, the Association has worked hard to reduce taxes on warrant hedging. The Ministry of Finance finally submitted draft amendments to the Securities and Tax Act to the Executive Yuan for review in May 2022. The Executive Yuan passed the motion, so he implores the Legislative Yuan to also pass it as soon as possible. Second, he also suggested allowing securities firms to issue foreign currency-denominated structured bonds and promote listing of more products. The Association selects the types and priorities of products that meet investor needs with reference to the structured products listed on the Swiss Exchange, and Chen suggests that the Taipei Exchange plan new structured products for listing. In addition, since banks are already able to issue structured financial bonds denominated in foreign currencies, Chen suggests that peer-to-peer securities firms also be able to issue structured bonds denominated in foreign currencies. After communication and coordination with the Association, the FSC invited the Taipei Exchange to discuss these issues. Securities firms must become more capable and design their own financial products to meet the diverse needs of domestic investors.