Futures market consists of several different institutions and groups. Only through learning the basic framework of futures market can you further understand how futures market works.
1. The Competent Authority
The competent authority in charge of overseeing futures market in Taiwan is Financial Supervisory Commission.
2. Self-regulatory institution of futures markets - The Federation of Futures Industry Associations
The self-regulatory institution of futures markets in Taiwan is The Federation of Futures Industry Associations, which is known as Chinese National Futures Association. It is established to effect the function of self-regulation and to coordinate in the development of the futures market.
3. Futures Exchange - TAIFEX
A futures exchange is established for facilitating public interest and ensuring the transaction fairness of futures market. A futures exchange can be organized in form of either memberships or company-type.
Taiwan Futures Exchanges(TAIFEX) comprises more than one hundred corporate shareholders, including futures, securities, banking, and securities/futures-related institutions, with capital of NT$2 billion contributed by these institutions. It is a company-type futures exchange having features of memberships.
4. Futures Clearing House
In futures trading, the Futures Clearing House acts as the counter party to both parties to the transaction (the seller for the buyer and the buyer for the seller) and assumes the obligation to perform the contract.
The Futures Clearing House handles the clearing and settlement of futures transactions. Its business includes: setting and adjusting the amount of margin, setting clearing and settlement procedures, handling settlement and delivery operations, managing clearing margin and default fund, and clearing member risk management. The clearing of futures trading is handled by the Futures Clearing House for the clearing members.
At present, the Futures Clearing House is concurrently operated by Taiwan Futures Exchange, and its business, finance and accounting are independent according to regulation.
5. Clearing Member
The clearing member is the legal person who conducts futures clearing business on behalf of the futures commission merchants.
Except for the Special Clearing Members, clearing members shall have the qualifications of futures commission merchants, and the types of clearing members shall be.
|(1) Individual Clearing Member:||Can only clearing for the transactions of their own brokerage or proprietary businesses.|
|General Clearing Member:||In addition to clearing and settlement for the transactions of their own brokerage or proprietary businesses, they may be entrusted to handle clearing and settlement business for other futures commission merchants.|
|Special Clearing Member:||Financial institutions licensed for the purpose of the competent authority may only be consigned to handle clearing and settlement business for futures commission merchants.|
6. Futures Commission Merchant (FCM)
There are two types of futures commission merchants: broker and dealer. The establishment of both has to be approved by the competent authority.
|(1) Broker (futures brokerage merchants):||The FCM specializes in trading futures and options contracts entrusted by the clients and opening futures trading account on behalf of the clients.|
|(2) Dealer (futures proprietary merchants):||The FCM specializes in trading futures and options contracts itself.|
As requested by the competent authority, the minimum paid-in capital for an exclusively operated futures brokerage merchant is NT$200 million. For securities firm concurrently engaging in futures business, the regulation about designated operating capital varies based on its business scope. (Please refer to Overview of Establishment Criteria for Futures Enterprises for details.) Setting up one branch office requires minimum capital of NT$15 million. For futures proprietary merchants, the minimum capital is NT$400 million.
7. Introducing Broker (IB)
Introducing brokers solicit business for the FCMs, accept orders from the customers and pass the orders to the FCMs. However, IB shall not involve in business of margin. Only securities broker is now applicable to be IB. The main operation scope of a futures introducing broker is to:
- (1) Solicit futures traders for futures trading
- (2) Accept account opening of futures traders on behalf of a FCM.
- (3) Accept orders for futures trading from futures traders and deliver the same to a FCM for execution.
- (4) Notify futures traders to meet margin calls and close out trades on their behalf.
8. Futures Specialist
A future specialist is mainly responsible for:
- (1) Solicitation, account opening, brokerage order taking, execution, or clearance and settlement in connection with futures trading
- (2) Proprietary trading, and clearance and settlement, in connection with futures trading
- (3) Internal auditing related to futures trading
- (4) Discretionary futures trading
- (5) Self-audit or legal compliance in connection with futures trading
- (6) In-charge accountant for futures trading
- (7) Risk management for futures trading
9. Futures Traders
Futures traders mean people who entrust FCM to do futures trading.
In the futures market, the futures traders!| motives behind the futures trades could be classified as follows.
|Hedging motive:||A physical holder who is exposed to the risk of fluctuation of spot price, uses futures contract to reduce the risk of keeping the assets.|
|Speculative motive:||A trader who wants to have high return on investment and is willing to take on the risks, uses futures contract to make a profit.|
|Arbitrage motive:||A trader purchases an asset at a low price and sells the same at a higher price once there is disequilibrium between futures price and spot price in the markets. It is the arbitrage opportunity that make the market prices become equilibrium.|