Laws and Regulations Database of the Central Bank of the Republic of China(Taiwan)

Subject:
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.
Explanations: 
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 Market
　　　Development 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 is
　　　a 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.