Clearing and Settlement

To streamline the securities market's clearing and settlement operation, the Securities and Futures Bureau, Financial Supervisory Commission promotes the "Book-Entry Settlement System of Securities in Centralized Custody" and TDCC would be in charge of handling relevant matters. The system utilizes the highly efficient transfer function of computers to perform the securities market's clearing and settlement operation in order to enhance the securities market's operating efficiency, lower its operating costs, and expand its development. Since TDCC takes charge of matters associated with the "Book-Entry Settlement System of Securities in Centralized Custody," it has continuously studied and initiated various new businesses to reduce the securities market's cost in handling related matters. Businesses engaged by TDCC include securities custody, trade settlement and transfer, pledge and delivery, securities loans, conversion of convertible bonds, ETF creation and redemption, and all of which can be conducted via book-entry transfer.

Introduction

Settlement and Book Entry of Securities

(1) Centralized Trades

In accordance with TWSE and GTSM operation regulations and rules, the delivery and settlement operations for securities traded on the TWSE or GTSM shall be handled by TDCC.

Operating procedures:

• TDCC compiles a settlement report on T day, based on the transaction record generated by TWSE or GTSM after the closing. The settlement report is then submitted to the participants for settlement operations.

• Before 10 a.m. on T+2, TDCC executes book entry transfer for participants with securities payable. In addition, TDCC executes book entry transfer for participants with securities receivable in accordance with the notification submitted by TWSE and GTSM.

• Once the settlement is completed, all transactions are recorded in the securities account passbooks; investors can check related balance via TDCC automated telephone inquiry service or the website for inquiry of central depository account data at any time.

• Before the issuer calls a shareholders meeting, decides to distribute dividends and bonus or other benefits, TDCC will compile a shareholders’ list and submit to the issuer or the transfer agent for transfer of title.

(2) Negotiable Trades in Over-the-Counter Market

TDCC provides book entry services for negotiable transactions between customer and Participant or between participants. Operating procedures:

• Where a participant undertakes a negotiated transaction involving government bonds, TDCC will implement book entry according to the notifications received from the two parties involved in the transaction.

• TDCC will implement book entry for both participants before the second business day after the transaction date according to the GTSM transaction record and the notification received from the seller, when a participant undertakes a negotiated equity transaction.

• TDCC will implement book entry for both participants on the day when the transaction takes place according to OTC transaction record and the notification sent from the seller; where a participant undertakes a negotiated transaction of convertible (exchangeable) corporate bonds and corporate bonds with warrants.

• When participant undertakes a negotiated transaction of debt securities, TDCC will implement book entry according to the notification send from the seller.

• Where a participant undertakes a negotiated transaction of debt securities, and where settlement is made by delivery of customer’s bond deposit account passbook, TDCC will execute book entry according to the notification send from the seller. If the seller fails to notify TDCC with the customer’s deposit account number, then the bond account passbook must be submitted to TDCC for verification.

(3) Clearing and Settlement of Emerging Stocks

To provide unlisted stocks with a legal, secure and transparent transaction platform, GTSM has established an emerging stocks transaction system on January 2, 2002, while TDCC handles the clearing and settlement of emerging stocks.

Once securities firms complete a transaction in GTSM’s Emerging Stocks Electronic Negotiated Trading System, GTSM will notify TDCC of trading details and settlement methods. TDCC will then carry out the subsequent payment and settlement operations as described below based on the GTSM notice:

Trade for trade: Buyers and sellers complete settlements on the trade day.

• Free of Payment (FOP) settlement: After payment is received from the buyer, seller must notify TDCC to transfer the Emerging Stock in request from the seller’s securities account to the buyer’s account.

• Delivery Versus Payment (DVP) settlement: Broker or dealer will represents the buyer on processing the payment to the designated bank account specified by TDCC, and then submits its remittance details to TDCC when complete. After all information are received and confirmed, TDCC then transfers the securities from seller’s account to buyer’s, and then remits the required funds into the seller’s bank.

Netting: Buyers and sellers complete settlements with TDCC on T+2.

• For Securities firms with payment payable are required to remit the funds into TDCC settlement account by 10:00AM on T+2.

• For securities firms with securities payable, TDCC debits their account on T+1.

• For securities firms with payment receivable, TDCC remits the funds into their designated settlement account from 10:00AM on T+2.

• For securities firms with securities receivable, TDCC transfers the securities into their account on T+2 after confirming required payment being made.

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