
Ref. No:94.1.28 Tai-Yang-Wai-(7)-Tze No. 0940008918
100.03.14
From the date of this letter, an Authorized Bank may apply to engage in the FX Credit Default Swap (“CDS”) business and FX Credit Default Option (“CDO”) business.
1.An Authorized Bank shall submit the relevant documents to apply to engage in the business in accordance with Article 13 of “Regulations Governing Foreign Exchange Business of Banking Enterprises”.
2.When engaging in the business, the Authorized Bank shall comply with the following:
(1) The provisions that limit the client base for “foreign currency loans” and“guarantees of foreign currency payments” to domestic customers and require foreign transaction documents under the “Directions Governing Banking Enterprises for Operating Foreign Exchange Business” need not apply to the business.
(2) The counterparties of the business shall be limited to domestic or foreign legal entities.
(3) If the transaction is settled in NTD, the Authorized Bank shall act in accordance with the “Regulations Governing the Declaration of Foreign Exchange Receipts and Disbursements or Transactions”.
(4) Banks engaging in the business, are required to put in place sound risk management, utilize appropriate credit risk model, collect timely market information and relevant risk indicators and comply with the relevant self-regulatory rules including the “Rules Governing Authorized Banks Engaging In FX Credit Derivative Transactions” and sample agreements established by the R.O.C. Bankers Association as required by the Taipei Foreign Exchange MarketDevelopment Foundation.
(5) When engaging in the business, banks shall strengthen legal compliance and information disclosure. Credit extension involving the holders of credit risk and credit extension to related parties shall be handled in accordance with the rules issued by the relevant competent authorities and tunneling of interest is prohibited. After Accounting Standard No. 34, applied in 2006,handling, evaluation and disclosure shall be done in accordance with the above Accounting Standard.
(6) The reference entity for FX credit derivatives agreements may be domestic or foreign legal entities or governments; Provided that the reference entity isa foreign legal entity or government and its counterparty is a domestic legal entity, the long term debt rating or country sovereign rating of the reference entity shall be “A” or higher by Standard & Poor’s Corporation (“S&P”), “A2” or higher by Moody’s Investor Service or “A” or higher by Fitch Rating Ltd. or shall comply with the rating requirements established by the relevant industry regulators of the counterparties.The reference entity as used in the preceding paragraph may not be the government of Mainland China, a company incorporated in Mainland China or a company more than 30% of the shares of which are owned, directly or indirectly, by the government of, or companies incorporated in, Mainland China.
(7) Calculation methods of Regulatory Capital and Risk-weighted Assets required for banks engaging in credit derivatives shall comply with the “Statement Regarding Calculation Methods of Regulatory Capital and Risk-weighted Assets When Banks Engage In Credit Derivatives” enacted by the FSC.
(8) Matters regarding prospectuses, wealth management staff, marketing staff and other relevant staff, promotional materials, clients, risk disclosure statements to clients and after-sale services shall comply with Explanations 7 and 8 of the CBC letter, dated January 3, 2005 (Ref. No. Tai-Yang-Wai-Chi-Tze-0940002564).
3.With respect to the transaction volumes of the business, the buyer and seller of credit risk under CDS, and Call Option and Put Option under CDO(Options bought and sold) shall be separately filled in the “Monthly Report Regarding Notional Amount Transactions Volume of Derivatives”, which shall be submitted to the Department of Financial Inspection of the CBC.