Clearing Mechanism Developing History
| Futures clearing houses are responsible for the clearing and settlement of executed futures trades and are obliged to honor futures contracts. Therefore, the settlement system focuses on maintaining the safety of futures markets, protecting the rights and interests of participants, and providing efficient settlement services.
Based on the launch of new products, the demand of settlement members and the promotion of internationalization, the following settlement system reform has been carried out:
|1.||Launching 10-Year Government Bond Futures cash settlement system|
| The "10-Year Government Bond Futures" launched by the TAIFEX in 2004 is a physical delivery. But it is difficult for the seller's trader to obtain the cheapest deliverable bond in the spot market to participate in physical delivery. Thus after consideration, the TAIFEX allows the seller's trader choosing to settle by cash settlement. In the previous cash settlement methodologies, the TAIFEX has gradually revised down the gap between the seller's physical delivery and cash settlement so as to enhance the willingness of traders to participate in delivery.
The method of determining the cash settlement price from January 2, 2004 is the weighted average yield which weights of the transaction volume of the top three deliverables in the Electronic Bond Trading System of the Taipei Exchange on the last trading day. The yield is converted into the price of the Government Bond Futures and plus 3%. On May 13, 2005, the percentage of the cash settlement price was reduced from 3% to 1%. Thereafter, on September 20, 2006, the cash settlement price was calculated based on the theoretical cheapest delivery bond price on the last trading day, and compared with the final settlement price of the 10-Year Government Bond Futures contract. The higher price is the cash settlement price. The "10-Year Government Bond Futures" is delisted on September 12, 2019.
|2.||Set the Criteria to Control the Position Concentration Risk of the TAIEX Option Contract|
| When the concentration ratio of certain clearing member's position is too high, the market security may be affected. Hence, TAIFEX had set the criteria to control position concentration risk. The position concentration rate refers to the ratio of the open interest of a clearing member to the total open interest of the overall market. The TAIEX option contract was listed on 24 December 2001, both trading volume and open interest continued to grow ever since. TAIFEX constituted the criteria of position concentration risk based on the overall market conditions.
The original criterion was that any stock index futures contract position reaching 15 percent of the total open interest hit the position concentration restriction (the restriction does not apply to members with total open interest less than 1,800 contracts). Since Apr 18, 2002, the open interest of the market makers was no longer included in the open interest of the clearing members. From August 8, 2003, the position threshold for the clearing members was increased from 1,800 to 3,600. From December 2, 2019, in order to improve the method of estimating the risk of clearing members, the criterion was adjusted to the risk exposure of the clearing member's open positions reaches 15 percent of the risk exposure of all open positions in the whole market (this does not apply, however, if the risk exposure of the clearing member's open positions is less than NT$200 million).
In order to make clearing members recognize the potential liquidity risk of option, enhance risk awareness and strengthen market risk management, TAIFEX setup the liquidity risk management measurement in single series of option contracts for clearing members since February 15th, 2019. Any clearing member reaches the liquidity standard of single series of option contracts and the total market positions of that series after deducting the market maker's open positions are over 15 percent and over 1,000 contracts should declare to TAIFEX on the same day; if the total market positions of that series after deducting the market maker's open positions are over 20% and over 1,000 contracts, TAIFEX may apply additional margin requirement or other disposals to the clearing members.
|3.||Establish the Margin Reduction Mechanism for the Long/Short Combination Futures Positions of Equity Index.|
| In order to provide multiple trading strategies for traders, reduce the capital cost of futures trading and activate the futures market, TAIFEX considers the volatility offsetting effect between buying and selling parties and gradually established the margin reduction mechanism for the long/short combination futures positions of the equity index.
After adopting margin reduction initiatives for after-market long/short combination futures trading on August 29, 2005, TAIFEX implemented the futures spread (horizontal, vertical, inter-commodity) margin reduction mechanism on October 8, 2007. The futures trading system now will automatically process the margin calculation and collection in accordance with the regulations and the procedure can take effect intraday.
|4.||Adjusting the position mutual offset function of TAIEX Futures and Mini-TAIEX Futures for immediate effect|
| The TAIEX Futures and Mini-TAIEX Futures are position mutually offset, and the margin is released immediately for the effective use of the trader's assets. The original position mutual offset function of TAIEX Futures and Mini-TAIEX Futures came into effect after the daily settlement. Since September 30, 2005, the position mutual offset function of TAIEX Futures and Mini-TAIEX Futures has been adjusted to take effect immediately.
|5.||Adopt Day Trade Margin Reduction Measure for the Futures Contract|
| Day trade means buying and selling identical financial instruments within the same trading day, such that all positions are closed before the market closes for the trading day. Since October 8, 2007, the day trade margin reduction mechanism was adopted for the nearby two months’ contract of TAIEX Futures, Mini-TAIEX Futures, Electronic Sector Index Futures and Finance Sector Index Futures (under the condition that the margin must remain higher than 50% of the initial margin). These measures have helped traders make more efficient use of funds and lowered their trading cost.
|6.||Implementation of SPAN Margining System to End Clients|
| The concept of portfolio risk requires parameters and valuation models to measure the risk-offsetting effect of different contracts and sets the required margin for the portfolio upon that basis. That is, all positions in the trader's account are treated as a single portfolio. SPAN margin is a leading system that has been adopted by most options and futures exchanges around the world.
Since October 8, 2007, TAIFEX has implemented SPAN to clearing members and FCMs. In order to extend the benefit of SPAN to all market participants, the SPAN system was extended to the end clients in November 2008.
In addition, to cover the most frequently cited Value at Risk (VaR) concept in risk management, SPAN divides all contracts into Commodity Group and Combined Commodity according to the characteristic of each underlying asset. Through the scenario analysis method, the expected loss of a portfolio after a given period of time is estimated. In addition to price fluctuation, SPAN also considers the volatility change and the correlation change between Intra-Commodity and Inter-Commodity factors. Due to the concept of dynamic risk management, it is relatively accurate in terms of the margin requirement and risk measurement.
SPAN designs different parameters to quantify risks. Through the analysis of various parameters and the precise calculation process, the margin requirement can not only effectively cover the loss caused by the risks, but also avoid overcharging for the efficiency of the capital. If the end clients want to use SPAN margining, it must meet the eligibility to apply for SPAN and enter into an agreement "Agreement for Using Span Margining" with the FCMs.
|7.||Raising the upper limit of foreign exchange settlement amount in realized NT$ profit gains of offshore overseas Chinese and foreign nationals, and expending the multi-currency margin system, as well as opening up the fund transfers in segregated foreign exchange deposit account for the same foreign investor between different futures commission merchants to increase the margin diversification and funding efficiency.|
| In cooperation with the TAIFEX opening up the foreign investors engaging in non-hedge futures trading and the introduction of USD-denominated products on March 27, 2006, the offshore overseas Chinese and foreign nationals participating in the futures market must be based on the premise of “US dollars incoming and US dollars outgoing”. The TAIFEX is actively attracting foreign investors to engage in domestic futures trading. Thus the policy of foreign exchange settlement amount of the cumulative realized NT$ profit gains of offshore overseas Chinese and foreign nationals was releasing from the original regulation that each individual trader must not exceed NT$100 million and each individual omnibus account of foreign FCM shall not exceed NT$200 million to which each individual trader and each individual omnibus account shall not exceed NT$300 million respectively from June 25, 2007.
In order to increase the diversification of foreign currency margin, in addition to the US dollar, the foreign currency is opened Euro, Japanese yen, British pound, Australian dollar, and Hong Kong dollar on June 23, 2008, and Chinese yuan is accepted on Jul 20, 2015, a total of 7 foreign currencies as the futures trading margin to achieve the policy of enhancing the willingness of foreign investment and the stabilization of the foreign exchange market.
The TAIFEX further suggests the competent authority to open the transfer of funds between the accounts of different futures commission merchants in the same identity number of the foreign investor, and implementing on April 14, 2014, under the principle that each individual trader and each individual omnibus account shall not exceed NT$300 million respectively. It is not only beneficial to foreign investors to use and exchange for futures trading funds between different futures commission merchants, but also to reduce foreign exchange procedures, time and cost of capital allocation, and to enhance investment in the domestic futures market and the willingness to trade for foreign investors to engage in the futures market. Since 13 November 2017, TAIFEX has permitted offshore foreign institutional investors trading RMB denominated products to pay the relevant margins and premiums in currencies TAIFEX approved. This makes it easier for them to trade such products, while also helping unify FCMs’ risk-control principles for such investors.
|8.||Implement the FCMs Reporting Mechanism Regarding Trader’s Equity and the Trading and Risk Control Mechanisms for FCMs Program|
| On 1 July 2013, TAIFEX implemented the FCMs Reporting Mechanism regarding trader’s equity as a means to oversee FCM’s implementation of risk controls, to enhance the security of segregated margin accounts, and to protect end clients’ rights. Formerly, the definition and calculation method of certain terms like equity, liquidation value, and risk indicators often had inconsistency among the stakeholders, which may cause confusion and misunderstanding when end clients opened accounts in multiple FCMs. To solve the problem, Trading and Risk Control Mechanisms for FCMs program required a standardized consignment contract between the FCMs and end clients, which could reduce disputes between the FCMs and the end clients regarding margin call and position close (related information can refer to Chinese National Futures Association Website).
| The FCMs Reporting Mechanism regarding trader’s equity utilized the reporting of segregated margin account, total equity, and segregated margin account deposit balances by FCMs to enhance the protection of segregated margin account equity, to strengthen the security of the futures market, and to protect the rights of end clients.
|9.||Implementing "Futures Trader's Pledging of Securities as Margin Collateral System"|
| In order to improve the efficiency of the use of funds by futures traders and to be in line with international standards, the TAIFEX has implemented the “Futures Trader’s Pledging of Securities as Margin Collateral System” since November 10, 2008. The relevant provisions include the proportion of the value of futures trader's pledging securities in the total amount of the margin requirement shall not exceed 50%, and the trader shall be able to pledge the stocks, government bonds and international bonds with the TAIFEX.
Subsequently, on October 18, 2009, in accordance with the demand of the market, the securities included in the Taiwan 50 ETF and the underlying of TAIFEX single stock futures were valued as the pledging securities. In order to enhance the willingness and convenience of the trader to pledge securities, on October 24, 2011, the futures trader will be able to remit securities for the pledging without visiting the counter to enhance the remitting efficiency of pledging securities.
On July 25, 2014, the TAIFEX further simplified the regulatory procedures for the "Pledging of Securities as Margin Collateral System". The competent authority set the principles, and permitting the futures trading margin can be collateralized by the pledging securities in compliance with Article 6 of the Securities Exchange Law and was announced by the clearing house To authorize the TAIFEX to set the basis for the selection of pledging securities, and to specify the type of the pledging, and the relevant pledging practices (such as the calculation of the value of the pledging, the haircut rate and the upper limit of the single securities).
|10.||Revise the Final Settlement Price Determination Method of Domestic Equity Index Contracts|
| On the final settlement date, TAIFEX will perform the settlement process to the open interest of every contract and calculate the profit and loss, so the final settlement price will affect the end clients' equity significantly. To protect the interests of end clients, TAIFEX will review the method of final settlement price from time to time to make it fair, reasonable and representative.
Since July 21, 1998, the final settlement price of TAIEX Futures had been determined by the spot market index that first revealed by Taiwan Stock Exchange on the final settlement date. At the time, the Taiwan Stock Exchange revealed the capitalization-weighted spot market index every five minutes, so the weighted spot market index of Taiwan Stock Exchange at 9:05 am was the final settlement price of TAIEX Futures.
After that, since the disclosure time of TAIEX had been changed from every 5 minutes to 1 minute on February 18, 1999, the final settlement price of TAIEX Futures was altered to the capitalization-weighted index revealed by Taiwan Stock Exchange at 9:01 am.
TAIFEX had taken the practice of major foreign stock index futures contracts into account. Since June 7, 1999, the final settlement price of TAIEX Futures had been revised to special opening quotation. The practice was the final settlement date determined by the Taiwan Stock Exchange provided an index based on the opening quotation of each constituent stock from the spot market. The opening quotation adopted the first striking price on the day.
In order to reduce the manipulation for inter-market traders of the final settlement price of the domestic equity index contracts, the method of determining the final settlement price of the domestic equity index contracts changed from the special opening quotation to the weighted average price within opening 15 minutes on final settlement day since November 22, 2001.
To eliminate overnight risk on the settlement day and let traders be able to access their fund on the trading day instead of the day after, the final settlement process changed. Since 11 November 2008, the final settlement price of domestic equity index contracts shall be determined based on the simple arithmetic mean index of the underlying index during the last 30 minutes of trading before the market close (Taiwan Stock Exchange or Taipei Exchange) on the final settlement date.
|11.||Adjustment of stock option settlement method from physical delivery to cash settlement|
| The stock option was listed on January 20, 2003. In order to reduce the cost of traders and attract traders to participate in stock option trading, the TAIFEX has adjusted the clearing system several times in order to achieve the purpose of activating the market.
When the stock option is listed, the settlement method is the physical delivery. The percentage of the cash settlement price is calculated by multiplying the closing price of the underlying securities by 110%. On August 28, 2003, the price was reduced to 105%.
In order to improve the liquidity of the stock option contract, after the TAIFEX considering no problem with the risk, then promote the underlying of the stock option as a margin and reduce the percentage of the cash settlement price. Since October 18, 2004, the TAIFEX has promoted the implementation of “The underlying of the stock option contract as the margin by the seller’s trader of call option (Covered Call) system ”, which is a pre-delivery of the underlying securities, and further implements the physical delivery system to reduce the risk of default by trader.
Subsequently, in order to increase the willingness of the seller’s trader of the call option to participate in the settlement, and thus increase the stock option trading volume, the percentage of the cash settlement price of the stock option contract was revised from September 20, 2005, and the underlying securities closing price is multiplied by from105 % down to 103%.
In order to simplify the settlement process, to reduce the inconvenience of physical delivery and the cost of traders' capital funds, the stock option contract was to be settled in cash on January 5, 2009.
|12.||Adjusting clearing margin interest calculation standard|
| The amount deposited by the clearing member to the clearing margin account of the TAIFEX will be calculated by the TAIFEX on a daily basis and paid semi-annually. Since 2009, the calculation of interest was adjusted from by the demand deposit rate and excess margin to base on the Bank of Taiwan 6-month Time deposit rate and full amount of the clearing margin, then after deducting the account management fee, paying the remaining amount to the clearing members. The interest calculation standard of this item is determined by the TAIFEX and the Futures Association after discussion.