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					    Taiwan Futures Exchange
          Corporation
30-Day Commercial Paper Interest
  Rate Futures Operational Plan




            May 2004
                                     Table of Contents
Chapter 1 Introduction .......................................................................1

Chapter 2 Current Status of Taiwan Bills Market ....................3
     Section 1 Market Scale ................................................................................... 3
     Section 2 Interest Rate Volatility .................................................................. 5
     Section 3 Market Participants ....................................................................... 7

Chapter 3            Short-term interest Rate Index ................................9
     Section 1 The Use of Commercial Paper Rate as Interest Rate Index 9
     Section 2 Construction of Short-term Interest Rate Index................... 10
     Section 3 Compilation of Short-term Interest Rate Index ................... 12
Chapter 4 Specifications of TAIFEX 30-day Commercial

               Paper Interest Rate Futures Contract .......................16
     Section 1 Contract Specifications .............................................................. 16
     Section 2 Contract Design ........................................................................... 17
Chapter 5 Trading System ...............................................................24
     Section 1 Trading Process ............................................................................ 24
     Section 2 Order Placement .......................................................................... 25
     Section 3 Trading Matching ........................................................................ 26
     Section 4 Information Disclosure .............................................................. 27
Chapter 6 Clearing and Settlement System ...............................28
     Section 1 Position Management ................................................................. 28
     Section 2 Calculation of Margin ................................................................ 29
     Section 3 Settlement upon Expiry.............................................................. 31
     Section 4 Determination of Daily Settlement Price .............................. 32
     Section 5 Risk Control Operation .............................................................. 33




                                                       I
                           Chapter 1 Introduction

     TAIFEX has introduced predominantly stock-related products over the years,

including stock index futures, stock index options, and equity options. This is because

stock market is more familiar to the investing public. As international trade and

finance has become increasingly active in recent years, Taiwan‟s financial market is

also moving towards liberalization and diversification, including offering a complete

range of derivative instruments that meet the trading and hedging needs of investors.

As part of the collaborative efforts of our financial market, TAIFEX debuted the

government bond futures on January 2, 2004 to accommodate the increasing hedging

needs of investors in a bond market that has been persistently growing in scale.


     In our money market that plays an important role in the supply of short-term

funds, the turnover of bills market totaled nearly NT$49 trillion in 2002, representing

an average of nearly NT$200 billion in daily turnover. This market reflected the views

of its participants, mainly banks, bill finance companies and finance departments of

corporations towards their financing needs in the upcoming year. But as the level of

short-term interest rate dropped drastically from 4.8% in early 2001 to 1.0% at the end

of 2003, market participants were not given the options to hedge their interest rate

exposure.


     Taking into account the current condition of the domestic money market and the

experiences of foreign markets, TAIFEX has completed the planning for the

short-term interest rate futures. This futures contract takes the most actively traded

financing commercial papers that best reflect the actual funding needs in the market

as underlying and settles by cash. Its designed aim is to provide more hedging tools

for investors, and more so, to build the term structure of short-term interest rates. In


                                           1
the planning, the construction of a short-term rate index was the key. In support of the

“Debt Instruments Depository and Clearing System” project of the Bureau of

Monetary Affairs, MOF, TAIFEX and Financial Information Service Company (FISC)

began collaboration in constructing the Short-term Interest Rate Information System

(SIRIS) in 2001. This system, now under the operation and maintenance of the Debt

Instruments Depository and Clearing Corporation (DIDC), has been publishing

real-time interest rate index since September 2003, and provides significant aid to the

marketing of short-term rate futures.


     The construction of interest rate futures market is included in the financial

reform program of the Executive Yuan and an important task of the Capital Market

Task Force in its efforts to promote the sound development of the futures market.

Interest rate futures and options consistently account for nearly 30% of business in the

derivative market all over the world and represent the great majority of the top ten

products in the derivative market. Thus either from the perspectives of market

demands, policy planning, or development potential, there is a pressing need to bring

short-term interest rate futures products into the market.




                                            2
               Chapter 2 Current Status of Taiwan Bills Market

Section 1 Market Scale

           The bills market is a part of the money market. The issues in its primary market

reflect the short-term financing needs of market participants, mainly banks, bills

finance companies and financial departments of corporations, and represent the chips

in the market. The trading of bills in the secondary market reflects the supply and

demand of short-term funds and level of activity in the market. In our financial market,

the stock market is the most mature market with extensive participation. But in the

money market that has long played an important role of short-term money supply, the

bills market has always had comparable scale as the stock market. As shown in Table

1, the 2003 turnover in the bills market amounted to NT$4.9 trillion, which was

NT$20 trillion more than the stock market and averaged NT$200 billion of trading a

day. The amount of bills issuance also exceeded NT$7 trillion in the year, indicative

of its paramount role in the money market.

Table 1 Issuance and Trading in Domestic Bills Market (in NT$100m)

           Year        Total            TB              CP             BA               NCD
           2000         103,246              950            90,327           462              11,508
Issuance




           2001           99,015             850            89,268           361               8,536
           2002           83,781           1,800            75,251           401               6,329
           2003           75,477             600            68,151           345               6,381
           Year        Total            TB              CP             BA               NCD
           2000         639,153            6,853        569,423            1,758              61,118
           2001         580,594            1,907        502,166            1,097              75,424
Trading




           2002         530,483           35,611        431,220            1,872              61,780
           2003         489,621          28,017         396,616            1,633              63,355

           Source: Central Bank of China‟s Financial Statistics Monthly in Taiwan (01/2004)



                                                        3
                     The main instruments in the bills market include: commercial paper (CP),

banker‟s acceptance (BA), treasury bill (TB) and negotiable certificated of deposit

(NCD). Again referring to Table 1, it is found that commercial papers accounted for

close to 81% of trading in the bills market. From the perspective of issuance,

commercial papers represented 90% of all issues in the year, while the other three

instruments played a relatively minor role in the bills market.

Fig. 1                   Structure of Financial Market

                                                                                         Government bond market


                                                                    Stock market          Agency bond market

                                            Capital market
                                                                                           Financial debenture
                                                                    Bond market                  market
                       Direct financial
                           market                                                         Corporate bond market
                                                                    Interbank call
                                                                                          Foreign Bond Market
Domestic financial




                                                                Interbank loan-deposit

                                            Money market
    market




                                                                                         Bankers‟ Acceptance

                                                                                                                  CP1
                                                                                          Commercial paper

                                                                     Bills market
                                                                                            Treasury bill
                                                                                                                  CP2

                                            Bank short-term                                  Negotiable CD
                          Indirect           loan-deposit
                         financial              market
                          market


                                            Bank long-term
                                          loan-deposit market




Source: Prof. S. Y. Lee of Department of Finance, National Taiwan University

                     Based on the above analysis, commercial paper is the de facto most important

financial instrument in the domestic bills market. Commercial paper is a short-term

debt instrument issued by businesses in the open market to acquire financing. By

market practice, there are two types of commercial paper:


1. Transactional commercial paper (CP1)

                                                                            4
     This type of commercial paper is issued based on actual transaction that takes

place between two parties. Each commercial paper has a term of no longer than 180

days. It is usually issued at a discount rate. But as the payment practice changes, most

issuers make the CP1 they issue non-endorsable and non-transferable or issue a

post-dated check instead without the guarantee of a third party. As a result, CP1 is no

longer a popular instrument in the commercial paper market and accounts for only a

small percentage of CP transactions.


2. Financing commercial paper (CP2)

     This is a type of bill issued by businesses for short-term financing purpose with a

maximum term of one year. When a business has financing needs, it can issue long or

short-term financing commercial paper in reference to the prevailing rate structure in

the money market and bank‟s lending rate to gain more flexibility in the management

of their working capital. Thus CP2 is the most active instrument in the commercial

paper market.


     By market function, commercial paper market may be divided into primary

market and secondary market. Primary market is also termed the issuing market

where commercial papers are first sold to buyers; secondary market is also termed the

circulation market where the financial instruments created in the primary market are

traded in the market. Given that financing commercial paper is the most active

instruments in both primary and secondary commercial paper markets, it provides an

important reference in the planning of short-term rate futures.


Section 2 Interest Rate Volatility

     In general, short-term interest rate is less volatile than long-term rate. But as the

Central Bank of China dropped the required reserve ratios for deposits several times

                                            5
in recent years in line with the economic situations at home and abroad, both

short-term and long-term interest rates underwent considerable fluctuations. The

30-day commercial paper rate in the domestic secondary market was relatively stable

in 2000. But between early 2001 and the end of 2003, it went on a steep slide from

4.8% to 1.0%. From the basis point (bp, i.e. 0.01%) representing the difference

between the highest and the lowest interest rate in the year, it was 290 bps, 92 bps,

and 73 bps for 30-day commercial paper from 2000 to 2003 as shown in Table 2,

indicating considerable volatility of short-term interest rate. But market participants

so far do not have any hedging tools available to them.

Fig. 2   Rate Movement of 30-day Financing Commercial Paper in Secondary
Market




Source: Page 6165, Moneyline Telerate Ltd (data up to 2003/12/31)




                                                 6
Table 2
Comparison of Highest and Lowest Rate of 30-day Financing Commercial
Paper in the Secondary Market
Rate level               2000                        2001                   2002

  Hi/Lo          5.24%          2.34%        2.42%          1.50%   1.47%          0.74%

Difference             290bps                        92bps              73bps

 Average                3.68%                        2.05%              1.05%

    SD                  0.82%                        0.27%              0.17%

Source: Page 6165, Moneyline Telerate Ltd (data up to 2003/12/31)



Section 3 Market Participants

     Participants of the primary bills market are government and private enterprises

who issue commercial papers to raise funds. Participants of the secondary market

include banks, government enterprises, private enterprises, bills finance and

investment & trust companies, insurance companies and individuals. These market

participants play the role of both demander and supplier of funds.


     In general, banks, private enterprises, bills finance and investment & trust

companies are major participants in the bills secondary market. Banks actively

purchase notes and bills which may be used as current reserve; private enterprises

participate in the secondary market for short-term financial management; bills finance

companies also play an indispensable role in the bills secondary market for they often

handle the certification, underwriting, guarantee, endorsement or agency of bills;

while insurance companies and government enterprises play a relatively minor role in

the secondary market.


     As shown in Fig. 3, private enterprises accounted for 38.7% of commercial paper


                                                 7
market activities, followed by banks at 29.1%, bills finance and investment & trust

companies at 17.2%, and individuals at 0.4%. It is obvious participants of bills market

are primarily institutional investors, unlike stock market where participants are

predominantly individuals. There are several reasons for this disparity: (1) investment

in bills market requires professional knowledge and more sophisticated market

techniques; average individual investors tend to have limited understanding of the

bills market, hence more likely to stay away from it; (2) investment in bills market

tends to be large and hence is affordable to fewer individuals with financial prowess;

and (3) currently investment income from the bills market is subject to a separate tax

rate of 20% while that from repo trade of bonds is practically tax free, although our

government is currently studying the taxation of interest income. Because of such

disparity in taxation, wealthy individual investors tend to put their money in repo

bond trade or bond funds, and largely neglect the financial instruments available in

the bills market.


Fig. 3 Types and Percentage of Participants in the Bills Secondary Market



                                  I ndi vi dual
                                                                     Ot her s
                                      0. 4%
                                                                      5. 6%



                                                                                                       Bank
                                                                                                      29. 1%




     Pr i vat e ent er pr i s e
               38. 7%




                                                                                                         Bi l l s f i nance and i nves t ment &
                                                                                                                           t r us t
                                                                                                                           17. 2%

                                                                                I ns ur ace company
                                         Gover nment ent epr i s e                       6. 6%
                                                  2. 4%




Source: Central Bank of China‟s Financial Statistics Monthly in Taiwan (01/2004)

Data period: 2003/01~2003/12



                                                                                8
              Chapter 3 Short-term Interest Rate Index

     The planning of short-term interest rate futures should factor in the underlying

and settlement method at the same time. For the short-term interest rate futures

planned by TAIFEX, the underlying is the interest rate of financing commercial paper,

which is the most actively traded in the bills market and best reflects the actual

funding needs in the market, and the futures contract is settled by cash. This chapter

introduces the construction process of short-term interest rate index in Taiwan and the

principles for its compilation.


Section 1 The Use of Commercial Paper Rate as Interest Rate Index

     The design of short-term interest rate futures in other countries typically uses the

short-term interest rate index compiled and published by an impartial institution as

underlying. Better known interest rate indices in the international markets, including

LIBOR (London Interbank Offered Rates), EURIBOR (Euro Interbank Offered Rate),

Sterling Short Rate, Treasury Bill Auction Rate, Federal Funds Rate, Bankers‟

Acceptance Rate, and NCD Rate, are all compiled and published by certain impartial

institution. Such indices must not be subject to manipulation and must be acceptable

to both parties to a transaction. In addition, it should be representative, fluid, credible

and disclosurable.


     Our domestic market has been lacking such widely accepted short-term interest

rate benchmark or reference as LIBOR. We have interbank money market, but it is

mostly overnight transaction and there is usually an asymmetry of funds between the

bidders and offerors. In such environment, it is difficult to establish a credible and

instant NTD short-term interest rate index.


     A representative short-term interest rate index must sufficiently reflect the

                                              9
short-term financing cost in the money market. Bills market is a part of the money

market. The issuance in its primary market manifests the needs of its participants,

mainly banks, bills finance companies and financial departments of private enterprises,

for direct, short-term financing. It also represents the chips in the bills market. The

trading of bills in the secondary market reflects the short-term money supply and

demand and level of activity in the market.


     In our financial market, the scale of bills market has always been comparable to

that of the stock market. The trading of commercial papers in the bills market

accounts for more than 80% of market turnover and the issuance of commercial

papers takes a lion‟s share in the issuing market, accounting for as much as 90% of

market turnover. In light that more and more government and private enterprises are

getting familiarized with short-term, direct financing instruments and a more mature

interest rate environment is taking shape, our commercial paper market is gaining

scale, fluidity and more investors, and less likely to be subject to fraud or

manipulation. The executed interest rates of commercial paper in the secondary

market are primarily the rates the government or private enterprises pay for short-term

financing. Since the actual transaction data are available from bills finance companies

that sell the commercial papers, the short-term interest rate index to be established

should give priority consideration to the executed rate of commercial papers in the

secondary market.


Section 2 Construction of Short-term Interest Rate Index

     Of the commercial paper rate indices currently available in the domestic market,

only the fixing of commercial paper rate index established by Moneyline Telerate

(previously Bridge Information System) and published on page 6165 at 11:00AM is


                                          10
better known. This interest rate index is compiled from the published rates of sampled

banks and bills finance companies, not the actual executed rate in the commercial

paper market, and it is published only once a day. Thus using this rate to calculate the

final settlement price of a contract is not exactly fair, in the view of the industry

representatives. For futures traders, the Telerate 6165 does not provide instant

information on the price movement in the spot market, which tends to curtail their

desire to participate in the short-term rate futures market. In addition, Telerate 6165 is

compiled by a private institution. Its credibility might come into question if it is used

as the benchmark in the futures market.


     TAIFEX embarked on studying the issue of short-term interest rate index in June

1999 in the hope to establish an index that reflects the status of short-term money

supply and demand in the bills market. Prof. S. Y. Lee also suggested in his paper –

The Study of Design and Promotion of Short-term Bills Futures Contract which was

commissioned by TAIFEX and published in May 2000 that the most actively traded

30-day commercial paper rate be used as the underlying of short-term interest rate

futures. Prof. Lee also suggested that commercial paper rate futures be settled by cash

in considering that physical delivery of commercial paper might be difficult, given the

different credit rating of its issuer and guarantor. Prof. Lee‟s paper also analyzed the

principles for compiling the short-term rate index. TAIFEX subsequently finished the

planning and system design for short-term interest rate index during 2001. But later

on the Bureau of Monetary Affairs (BMA), MOF, the competent authority overseeing

the bills industry initiated the “Debt Instruments Depository and Clearing System”

project and hoped that the interest rate index compilation system would be included in

this central system. Following the BMA instruction, TAIFEX transferred the planning

and relevant data to the Financial Information Service Company (FISC) for the


                                           11
construction of the Short-term Interest Rate Information System (SIRIS). FISC

subsequently transferred the SIRIS to the Debt Instruments Depository and Clearing

Co. (DIDC) after it was established on August 15, 2003 under The Regulations

Governing the Admission and Management of Bills Clearing and Settlement

Organization. The SIRIS went online in early September 2003. TAIFEX for its part

continues to provide assistance in sampling, compilation technology and verification.


Section 3 Compilation of Short-term Interest Rate Index

     SIRIS is a sub-system under the “Debt Instruments Depository and Clearing

System”. In the future, the trading of bills will be settled by DVP (Delivery Versus

Payment). The payment will be cleared through the Real Time Gross Settlement

(RTGS) system of the Central Bank of China. In anticipation that bills finance

companies would wish to receive the payment proceeds as soon as possible to cover

their fund position, they are expected to transmit their transaction data (including term

of the bill, transaction amount and executed rate) electronically once the transaction is

concluded into the system of DIDC. The SIRIS will then calculate and disclose

instantly the weighted average interest rate of bills of different terms for each session.


     Based on commercial papers of different terms, the SIRIS of DIDC will disclose

five rate indices for one-month, three-month, six-month, nine-month and

twelve-month commercial papers. According to the study of Prof. S. Y. Lee, the great

majority of commercial papers traded in the secondary market have a term of 30 days.

As a dominant financial instrument in the bills market, 30-day commercial paper rate

is a viable underlying for the short-term rate futures under planning by TAIFEX.

TAIFEX intends to refer to the one-month interest rate index published by DIDC in

determining the settlement price of commercial paper rate futures. By customary


                                            12
market practice, the one-month interest rate index includes the rates of transacted

commercial papers having a term of 21 days to 31 days.


     Currently the SIRIS of DIDC receives instantly transmitted transaction data from

bills finance companies (including outright or repo trades) and publishes the

“sessional executed interest rate index” and “cumulative executed interest rate index”

starting at 9:00AM each day and every 15 minutes as a session thereafter until

3:30PM for a total of 27 sessions a day. The system receives transaction data daily

from 8:30AM until 3:30PM.


     The “sessional executed interest rate index” takes into account volume-weighted

average of transaction prices and calculated by the following formula after excluding

transaction data received during session judged as extraordinary:


     [Sessional executed interest rate index = (rate per transaction  volume per

transaction)  trading volume during the session]

     The “cumulative executed interest rate index” includes transaction data received

by the SIRIS since market opening up to the end of said session and is calculated by

the formula described above after excluding the extraordinary data received during

the period.


     For example, assuming the system receives data of 20 transactions by 9:00AM,

the system will, after excluding extraordinary data and weight averaging the

transaction volume, publish the first-session “sessional executed interest rate index”

and “cumulative executed interest rate index” at 9:00AM sharp. Those two rate

indices should coincide.


     If the system receives the data of another 30 transactions by 9:15AM, the system

will, after excluding extraordinary data and weight averaging the transaction volume,

                                          13
will publish the second-session “sessional executed interest rate index” and

“cumulative executed interest rate index” at 9:15 AM sharp. In light that this sessional

executed interest rate index was calculated based on the 30 transactions executed in

the second session, while the cumulative executed interest rate index includes the data

of altogether 50 transactions executed in the first and the second sessions, those two

rate indices might not be identical. The interest rate indices in the ensuing sessions are

also compiled according to the same principles as described.

                                                                                      Ri
     The steps below are used for determining extraordinary data. First define             as
                     Qi
executed rate and           as transaction amount.

                                            Qi
      Step 1: Calculate the mean of               as Q .


                                            Xi         ( Ri  Qi ) / Q
     Step 2: Define a new variable                as                     .


                                                  as X and standard deviation  X .
                                            Xi
     Step 3: Calculate the mean of


                X
                    n
                                  X
                                    2
                                                 n X i2       X             2

     X            i 1
                                        
                             i                                               i

                           n 1                         n(n  1)



     Step 4: Based on the 90% confidence level of X (i.e. X  1.645   X ), throw out

corresponding transaction data Ri and Qi at both ends of Xi; the transactions with

price being greater or equal to 5% of the total transaction amount in said session are

retained.

     Step 5: Use remaining Ri and Qi for calculating sessional executed interest rate
index and cumulative executed interest rate index.


     The “sessional executed interest rate index” should reflect the movement of

executed interest rate in the last 15 minutes. It is an instant index, like the stock index,

which may be used by futures traders to discern the price movement of the underlying.

                                                   14
The “cumulative executed interest rate index” covers the transaction data from the

time of market opening. Because of its mild fluctuation, using it to calculate the final

settlement price of interest rate futures can reduce the possibility of manipulation.

Thus publishing both “sessional executed interest rate index” and “cumulative

executed interest rate index” serves respective functions and is considered necessary.




                                          15
   Chapter 4 Specifications of TAIFEX 30-day Commercial
                   Paper Interest Rate Futures Contract

Section 1 Contract Specifications
Table 3
Specifications of TAIFEX 30-Day Commercial Paper Rate Futures Contract

            Item                              Description

Name                      30-Day Commercial Paper Interest Rate Futures
Ticker Symbol             CPF
                          30-day financing commercial paper having a
Underlying
                           face value of NT$100 M
                          Spot month and the next eleven calendar
Delivery Months
                           months.
                          Quoted by 100 minus interest rate in
Price Quotation &          percentage.
Tick Size                 0.005 which generates a price change of
                           NT$411
Trading Hours             08:45AM-12:00 noon on banking days
                          The last trading price at the closing session.
                          If there is no closing price, as determined by
Daily Settlement Price     TAIFEX according to TAIFEX Trading Rules
                           for 30-Day Commercial Paper Rate Futures
                           Contract.

Daily Price Limit         0.5 of previous day„s settlement price.

Last Trading Day          The third Wednesday of the delivery month.

Delivery                  Cash settlement.


                                       16
Final Settlement Day       Same as last trading day.

                           100 - one-month cumulative executed rate
                             index published by a TAIFEX-designated
                             institution at 12:00 noon on the last trading day,
Final Settlement Price       rounded down to the nearest integer multiple of
                             tick size.
                           TAIFEX will announce the name of the
                             institution.
                           500 contracts for any single month, and 2,000
Position Limit
                             contracts for all months combined.
                           The initial and maintenance margin levels
                             collected by FCM from its customers shall not
                             be less than those announced by TAIFEX.
                           The initial margin and maintenance margin
Margin                       announced by TAIFEX shall be based on the
                             clearing margin calculated according to
                             TAIFEX Criteria and Collecting Methods
                             Regarding Clearing Margins plus a percentage
                             prescribed by TAIFEX.


Section 2 Contract Design

1. Contract name and underlying commercial paper


     30-day interest rate futures product is not prevalent in foreign markets. But major

exchanges, including CME, CBOT, and Eurex have similar products listed. HKEx

also has short-term interest rate futures with one-month HIBOR as underlying. Mx

recently launched the 30-day overnight futures contract. TAIFEX picks 30-day

financing commercial paper as underlying in the design of the short-term interest rate

                                            17
futures to stay in line with the domestic money market. This new futures product is

named 30-day Commercial Paper Rate Futures with ticker symbol of CPF.

2. Price Quotation

      The prices of short-term interest rate futures contracts in the international
markets are quoted in terms of an index, that is, 100 minus interest rate. For example,
if the interest rate is 1.645%, the contract is quoted at 98.355 (i.e. 100 – 1.645 =
98.355). This index was first adopted by IMM (International Monetary Market of
Chicago Mercantile Exchange) for three-month Eurodollar futures and later on widely
adopted by relevant short-term interest rate futures. The TAIFEX short-term interest
rate futures contract will also be quoted in terms of index consisting of 100 minus
interest rate.

3. Contract Size, Tick Size and Tick Value


     The size of a futures contract should be in inverse relationship with spot

volatility. In light that the rates of 30-day commercial papers have relatively low

volatility and traders are expected to be primarily institutional investors, contracts of

larger sizes are more appropriate. Otherwise, the fluctuation of contract price might

make the product less interesting to investors. In reference to the size of similar

products traded on foreign exchanges being in the range of NT$1,420,000 to

NT$175,000,000 while that of products traded on CME and Eurex is in the range of

NT$100 million, we think 100 million NTD should be an appropriate size for the

30-day commercial paper interest rate futures contract.


     The tick size of 30-day interest rate futures in other exchanges has either of the

two designs, that is, 0.01 (1 bp) or 0.005 (0.5bp), which is valued between NT$12 to

NT$902. In consideration of the tick size of $12.5 USD and $12.5 Euro at CME and

Eurex respectively, TAIFEX sets the tick size for the 30-day interest rate futures

contract to be 0.005, which is valued at NT$411 based on NT$100 million face value

                                             18
and comparable to the designs of contracts traded on the aforementioned exchanges.

                30 
     0.0051%  365 100,000,000  411
                   


4. Trading Hours


     Generally the trading days of the domestic commercial paper market follow the

banking days. Banks usually are open a day or two after the stock market closes for

the Chinese New Year to give banks and businesses more time to move funds. In light

that futures are derived from the spot markets and futures prices are closely related to

the spot price and its volatility, the trading hours of futures should coincide with those

of the spot market to facilitate arbitrage or hedging between the two markets. Thus the

trading days of the contract are designed the same as banking days.


     In the commercial paper market, the bills finance companies post the bid and ask

rates for bills of different maturities before 9:00AM, that is, making two-way quote,

and then begin negotiation with clients by phone. Usually 95% of the trades are

completed before 12:00 noon, and the trading turns light afterwards. Taking into

account the price discovery and hedging functions of futures, the trading hours for the

contract are set from 8:45AM ~ 12:00 noon on banking days, beginning 15 minutes

earlier than the spot market.

5. Delivery Month and Last Trading Day


     In reference to the designs of delivery months for 30-day interest rate futures

contract adopted by other exchanges, except for the Budapest Stock Exchange that

takes four quarter months (March, June, September and December cycle) and the next

two calendar months as delivery months, other foreign exchanges take spot month and

several next calendar months ranging from four to 25 months as delivery months for


                                           19
30-day interest rate futures contract. Referring to the design of CME, this contract

takes spot month and the next eleven calendar months as delivery months in the hope

to provide price discovery function, which will help produce the yield curve of

commercial papers with maturity less than one year and accommodate the varying

trading strategies of the investors at different periods, for example, to hedge forward

rate agreements (FRA) positions having different durations.


     As for last trading day, domestic banks currently put aside reserves on a monthly

basis, which starts on the fourth of each month. By the middle of the month as many

banks practice negative intervention, short-term rates tend to move downward; at the

end of the month as many banks need to make up the reserve, short-term rates tend to

edge up. Thus the final trading day of this rate futures contract is set on the third

Wednesday of each delivery month, which is also the expiration date of the contract.

The next trading day will be the starting day for the trading of contract with new

delivery month.

6. Delivery Method and Final Settlement Price


     30-day interest rate futures contracts are settled by cash upon expiry in other

exchanges where the short-term interest rate index compiled and published by an

impartial institution during certain time on the last trading day is used for determining

final settlement price, and traders receive or make payment on net cash basis on the

final settlement day.


     The commercial papers that serve as underlying of the interest rate futures

contract are actively traded interest rate products. But their issuing conditions differ

given the different conditions of the issuers. Currently commercial papers are traded

over-the-counter through phone negotiation. As a result, the trading information in the


                                           20
spot market is relatively non-transparent. In addition, commercial papers are settled

manually. Thus if the interest rate futures contract is settled by physical delivery, the

credit rating and term of the commercial paper must be taken into account, while the

issuer and the guarantor of the commercial paper often have different credit rating.

Thus physical delivery is inconvenient in practice. Therefore, this interest rate futures

contract will be settled by cash to resolve the issue of delivering commercial papers

having different conditions. By cash settlement, traders have the liberty to clear their

positions in part or in whole before closing on the last trading day with cash.


     Since this rate futures contract will be settled by cash, the short-term interest rate

used to calculate the final settlement price must be fair and widely accepted. TAIFEX

will adopt the one-month cumulative executed interest rate index published at 12:00

noon on the last trading day by the SIRIS of DIDC for determination of final

settlement price, which is expressed in 100 minus interest rate, rounded down to the

nearest integer multiple of tick size (0.005). For example, if the interest rate published

at 12:00 noon on the last trading day is 1.168%, the final settlement price for the

contract is 98.830.


     100  1.168  98.832  98.830

     The SIRIS discloses simultaneously the executed sessional interest rate index

and cumulative executed interest rate index, which are obtained from the transaction

data and should be sufficient to reflect the actual trading in the market. In

consideration that the cumulative executed interest rate index covers the transaction

data received since the market opening up to the end of said session, it fluctuates less

and reduces the possibility of manipulation if it is used for determining the final

settlement price of 30-day interest rate futures.



                                            21
7. Daily Price Limit and Position Limit


     Currently the domestic market for commercial papers, a non-centralized market

where negotiation takes place, does not have daily price limit set. But irrational

trading behaviors in terms of price variation are not expected since the majority of

traders are institutional investors. Foreign exchanges, with the exception of Budapest

Stock Exchange which sets the daily price limit to 1.0 (i.e. 100 basis points) for

30-day interest rate futures, do not have such limits for similar products. But in light

that our market for interest rate futures is still nascent, we intend to set a daily price

limit to preclude the situation where drastic price fluctuation leads to irrational trading

behavior and undermines the operation of the spot market.


     Prof. S. Y. Lee, who was commissioned by TAIFEX to study the design of

interest rate futures contract in May 2000, suggests the daily price limit be set at 0.5

(i.e. 50 basis points). Also, in reference to the difference between the highest and

lowest executed rates in the domestic commercial paper market, the daily price limit

of 0.5 (i.e. 50 basis points) set for the initial stage of the market should be appropriate.


     Different exchanges have different designs for position limit of 30-day interest

rate futures contract. CBOT and CME require reporting of position only if trading

volume reaches certain level; EUREX does not have position limit, while HKEx and

Mx have set specific position limit. Taiwan‟s bills market in which the trading of

commercial papers is the most active has taken shape, and the majority of traders are

institutional investors. Out of concern that the interest rates of commercial paper,

hence the contract prices might be manipulated by a few large–sum transactions,

position limits for this contract are deemed necessary in the initial stage of listing. On

the other hand, institutional investors may apply for exemption of position limit for

their hedging accounts.

                                             22
     The position for 30-day commercial paper interest rate contract is limited to 500

lots for any single month and 2000 lots for all delivery months combined, which are

translated into contracts on commercial papers having face value of NT$50 billion in

a single month and NT$200 billion for all months combined. In reference that the

daily average transaction amount in the domestic bills market is over NT$500 billion,

such position limits are deemed reasonable without imposing undue restriction on

institutional investors.




                                         23
                        Chapter 5 Trading System

     Except for particulars specified in the contract specifications, the trading system

for 30-day commercial paper interest rate futures is the same as the prevailing systems

for stock index futures as presented below:


Section 1 Trading Process

     30-day commercial paper interest rate futures will be traded electronically, the

same way as the listed stock index futures products. Its trading process is summed up

below:




                                          24
       Fig. 4 Trading Flow Chart


            Clien                   FCM                 TAIFEX          Information
                                                                          Vendor
            t

                               Accept Order & Fill
      Place Order               Out Order Form
                                TIME STAMP 1



                      NO
                                Control Operation:
      Return Order               Check Margin &
                                     Position

                                           YES


                                 Place the Order       Trading System
                                 TIME STAMP 2



      Inquire Order             Confirm Receipt of
         Status                       Order



      Inquire Trade                Display             Accept Order
         Status                    Market
                                 Information
                                                                           Display Market
                                                                            Information
     Inquire Trade             Confirm Trade            Enter Order
     Confirmation                                        Book for
                              TIME STAMP 3               Matching


Mail Transaction            Produce Transaction
  Statement                     Statement



 Mail Account              Produce Monthly Account
  Statement                       Statement




                                                  25
Section 2 Order Placement
     By price condition, FCM may place orders at market or limit. A market order is
an order to buy or sell a stated amount of contracts at the best price available. A limit
order is an order to buy or sell a stated amount of contracts at a specified price, or at a
better price if obtainable. FCM may accept other types of order (e.g. stop) in addition
to market order and limit order.

     The same as that for buying or selling TAIEX futures, the order form for 30-day

commercial paper rate futures should indicate order No., FCM code, customer‟s

account No., ticker symbol of product, quantity, price (market/limit), type of order,

and open/offset.


Section 3 Trading Matching
     Orders that enter the trading system will be matched by the following principles:

1.   Matching is carried out by price priority and time priority, that is, execution

     priority will be given to orders with the better bid/ask prices; if the prices are the

     same, execution priority will be given to orders that enter the system earlier.

2.   Market order has precedence over limit order.

3.   When order quantity decreases, the time ranking of the order stays unchanged;
     when order price changes or order quantity increases, the order is considered a
     new order.


     Matching is carried out on competitive auction basis at the opening of market,

order by order on continuous basis during market hours, and by competitive auction at

closing of market. That is, at the time of opening, orders accepted by the system

before market opening are matched by the principles described above (orders with

identical price are ranked randomly). Opening price is the price that satisfies the

greatest number of trades where at least either buy orders registered with prices higher

than the determined price or sell orders with prices lower than the determined price

                                            26
must be all filled. During trading hours, each order or quote enters the order book to

find a match after it is input into the trading system. At closing, orders are again

matched on competitive auction basis to determine the transaction price.


Section 4 Information Disclosure

     Operation for disclosure of 30-day commercial paper interest rate futures trading

information is planned the same as that for TAIEX futures. That is, TAIFEX only

accepts order input by FCMs and does not display any such information to the market

before it opens. After trading starts, the system will, in line with the practice of

foreign futures exchanges (e.g. EUREX, OM) and foreign information vendors (e.g.

Reuters and Bloomberg) disseminate trading information on each order on real-time

basis, for fixed-hour disclosure will undermine the timeliness and truthfulness of the

displayed information. During market hours, TAIFEX will update the day‟s ask/bid

prices, transaction price, quantity, number of contract executed and day‟s high and

low, total transaction volume, and transmit such information to information vendors

who can then produce added value information. With regard to order information,

prices and volumes of the best five ask/bid will be provided, the same as that in the

stock index futures market. At the start of closing session, orders will be accepted, but

order information will not be updated until after the last competitive auction at the

time of closing, upon which, the transaction price and trading volume as well as the

remaining five best ask/bid offers will be disclosed.




                                           27
                        Chapter 6 Clearing Services
     In coordination with the listing of 30-day commercial paper interest rate futures,
its clearing service is planned as follows in accordance with the prevailing clearing
system and operational process:

A. Position management: Based on the prevailing position management structure for
   futures contracts of TAIFEX, the opposite positions of the same product having
   the same delivery month in the same account are automatically offset.

B. Margin methodology: Based on the prevailing method of margin determination for
   futures contracts of TAIFEX, margin will be collected to cover the risk associated
   with single-day interest rate volatility.

C. Settlement procedures: The operation of cash settlement is carried out on the last
   trading day based on the final settlement price.

D. Determination of daily settlement price: Daily settlement price is determined
   basically the same as that of TAIFEX listed index futures contract, that is, by the
   closing price of respective 30-day commercial paper interest rate futures contract.

E. Risk management: The risk management for commercial paper rate futures will be
   the same as that for TAIFEX listed index futures contracts.


Section 1 Position Management

     Account position is calculated on real-time basis during the market. Positions are

entered according to the “new/offset code” of the transaction records and processed

by way of automatic offset. If the transaction code indicates “offset” and the trade is

executed, but said trader does not have sufficient balance in the account for offset,

offset will be carried out for off settable positions, while the remaining open lots are

treated as new positions. Such data are viewed as offset error and made available for

FCM query on the same day. If the transaction code indicates “new” and the trade is

executed, the available positions in the trader‟s account will be used for offset, while


                                               28
the remaining open lots are treated as new positions. Such data are viewed as new
position error and made available for FCM query on the same day.

     TAIFEX will provide “position balance query” service to FCMs for them to

inquire about the open interests of certain client. When the margin deposited by the

client does not cover his open positions, FCM should make margin call and may

liquidate the client‟s position if the client fails to meet the requirement of margin call
within the specified time.

     When FCM needs to apply for position adjustment due to account error, FCM

should check first the position balance of the client to make position adjustment. The

adjusted data should be transmitted to the TAIFEX clearing and settlement system via

subsystem to correct the position structure of a client before the prescribed deadline
(2:15PM, Monday ~ Friday).


Section 2 Margin Methodology

     Margin is a form of guarantee for future contract performance by clearing

member, FCM and client. It is also the most fundamental risk management measure.

In setting minimum margin requirements for futures contracts, TAIFEX factors in

security and market and refers to past price volatility and market risks. Clearing

margin collected by TAIFEX covers the open positions of clearing members as well

as new orders. Currently clearing members pay clearing margins in advance. When

market price fluctuates widely or new positions continue to increase that the margin

deposited by the clearing member becomes inadequate, TAIFEX will make margin
call according to the established criteria.

     The purpose of setting margin is to cover the loss associated with single-day

price fluctuation of futures in the latest period. Margin is a form of guarantee to

ensure contractual performance by the parties so as to prevent settlement default in

case of wild price fluctuation. Therefore, commercial paper interest rate futures


                                              29
contract adopts the value-at-risk (VAR) concept to assess the maximum possible

variation of the underlying price in the future, and the margin requirement is

determined by the contract value and risk coefficient. Risk coefficient is calculated

based on the interest rate movements within certain periods to cover maximum

possible loss or 99.7% of the single-day rate volatility risk.

     The margin requirements for 30-day commercial paper interest rate futures
contracts are described in detail below:

     1. Legal Basis


     Taiwan Futures Exchange Trading Rules for 30-day Commercial Paper Interest

Rate Futures Contract and Taiwan Futures Exchange Corporation Standards and

Methods for Receipt of Clearing Margins.


     2. Types and Ratios of Margin

     TAIFEX will publish the requirements for clearing margin, maintenance margin
and initial margin at the time the 30-day commercial paper interest rate futures
contracts are listed. The ratios of those margins are set forth as follows:
     Clearing margin: maintenance margin: initial margin = 1: 1.15 : 1.5

     3. Determination of Clearing Margin


     (1) Computing formula:

             Clearing margin =Face value of contract x 30  365 x risk efficient +

       contract price movement within certain period.


     (2) Risk coefficient


           Risk coefficient is determined based on the bill futures price movements

     within a certain period to cover 99.7% of the single-day price volatility risk.


      (3) Calculation result

                                            30
       The clearing margin, maintenance margin, and initial margin are trial

calculated below using the one-month cumulative executed rate index published by

SIRIS from 09/2003 to 02/2004; the results are rounded up to the thousands.



Table 4 Simulated Calculation of Margin Requirement
                                                   Clearing margin Initial margin as a
             Clearing Maintenance      Initial
 Product                                          as a percentage of percentage of
             margin     margin         margin
                                                    contract value   contract value

   CPF        11,000         13,000    17,000          0.011%               0.017%




     4. Adjustment of Margin


     The adjustment of margin requirements after the listing of government bond

futures will comply with the prevailing operation for index futures. That is, TAIFEX

will compute daily the day‟s clearing margins and changes, and will adjust the

requirement when the level of adjustment is reached. TAIFEX will publish the

adjusted requirements of clearing margin, maintenance margin and initial margin. The

new requirements apply after the closing of the next business day.


Section 3 Final settlement procedures

     The 30-day commercial paper rate futures will be settled by cash. TAIFEX will

calculate the net gain/loss of expired positions on the final settlement day based on the

final settlement price.


     The final settlement procedures for the 30-day commercial paper rate futures will

be carried out as follows:

1. After the closing on the last trading day of each delivery month, TAIFEX will
   carry out cash settlement based on the final settlement price for clearing members

                                           31
   with open positions.

2. The final settlement price is determined by 100 minus the one-month cumulative
   executed rate index published by a TAIFEX-selected institution at 12:00 noon on
   the last trading day, which is rounded down to the nearest integer multiple of the
   tick size.


Section 4 Determination of Daily Settlement Price
     Daily settlement prices for contracts of different delivery months are determined
at each closing which will be used to compute the daily market value of open
positions and announced. TAIFEX will determine the daily settlement price of 30-day
commercial paper rate futures contracts by the following principles:

1. The daily settlement price is in principle the transaction price at closing session of
   the day.

2. If there is no transaction price at closing session, the daily settlement price will be
   the average of the highest bid and lowest ask offered in competitive auction
   during closing session.

3. If there are no bids offered in competitive auction during closing session, the
   lowest ask will be the daily settlement price; if there are no ask offers, the highest
   bid offered will be the daily settlement price.

4. When there are no bid nor ask offers for a distant-month contract in competitive
   auction by the closing session, the difference between the settlement price of
   current-month contract and said contract in the previous business day will be used
   as calculation basis where the previous business day‟s settlement price of the
   distant-month contract plus said difference will be the daily settlement price for
   the distant-month contract.

5. If the daily settlement price cannot be determined by any of the methods described
   above or the determined settlement price is apparently unreasonable, TAIFEX will
   determine the daily settlement price.




                                           32
Section 5 Risk Management

       The prevailing Taiwan Futures Exchange Corporation Regulation Governing

Surveillance of Market Positions for risk management of clearing members will need

modification as described below after the introduction of commercial paper interest
rate futures.

1. Volume Control


       The net of margin required for newly added futures and option contracts and net

premium thereof of individual clearing member should not exceed its excess margin

deposits.

2. Margin and Position Control


(1) TAIFEX carries out trial calculation of equity in the margin and premium
       accounts of clearing members between 9:30~9:40, 11:00~11:10, and 12:30~

       12:40 each day. When there is wild fluctuation in the market, TAIFEX will carry

       out trial calculation at any time as deemed necessary.

(2) Adjusted net capital ratio

          Pursuant to Taiwan Futures Exchange Corporation Regulation Governing

      Surveillance of Market Positions, an alarm and a limit level should be set for

      clearing member‟s financial or open positions. That is, in addition to meeting the

      minimum paid-in capital requirement, the adjusted net capital of the clearing

      member as a percentage of its total margin required for open interests shall not

      exceed the established minimum level.


(3)     Position loss percentage

          Pursuant to Taiwan Futures Exchange Corporation Regulation Governing

      Surveillance of Market Positions, the loss in the open interests of a clearing



                                            33
member shall not exceed a certain percentage of its adjusted net capital. That is,

the negative difference between clearing member‟s margin account and the total

margin requirement for its open interests shall not exceed 60% of its adjusted net

capital.




                                      34

				
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