Taiwan Futures Market Second Largest in East Asia

UNCLAS SECTION 01 OF 02 TAIPEI 000855 SIPDIS SIPDIS STATE PLEASE PASS USTR STATE FOR EAP/RSP/TC, EAP/EP USTR FOR ALTBACH AND STRATFORD USDOC FOR 3132/USFCS/OIO/EAP/WZARIT TREASURY FOR OASIA/LMOGHTADER TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS, NEW YORK FRB/MARA BOLIS AND SAN FRANCISCO FRB/TERESA CURRAN E.O. 12958: N/A TAGS: EINV EFIN ECON PINR TW SUBJECT: Taiwan Futures Market Second Largest in East Asia SUMMARY -------------- ¶1. Although just started in 1998, Taiwan futures exchange (TAIFEX) has expanded quickly to become the second largest in East Asia. Its world ranking has moved up from 57th to 18th. Foreign investor participation remains relatively small since Taiwan only removed restrictions on non-hedged trading in March 2006. TAIFEX and Securities officials have told AIT that Taiwan should continue liberalization and reduction of taxes to further grow its futures market. END SUMMARY. Offshore Futures Trading -------------- ¶2. Taiwan started to permit offshore futures trading in April 1994 when local futures commission merchants began to emerge and foreign futures brokerage firms began to set up branches. Offshore trading orders are required to go through brokerage firms holding seats in selected foreign futures exchanges. Currently, Taiwan permits local investors to participate in transaction of 342 futures products listed on 29 overseas futures exchanges in 12 nations, including the United States. Taiwan Futures Exchange (TAIFEX) -------------- ¶3. The TAIFEX was inaugurated in July 1997 when Taiwan's first local futures product (i.e., Taiwan Stock Exchange index (TAIEX) futures) was put on market. A year later, Taiwan introduced electronic sector and financial sector index futures to the market. In December 2001, Taiwan put the first options product (i.e., the TAIEX options) on the market. In January 2004, the first interest futures product (i.e., 10-year government bond futures) was introduced to the market. In March 2006, Taiwan put three US$-denominated products on TAIFEX, including gold futures, MSCI TAIEX futures, and MSCI TAIEX options. (MSCI refers to Morgan Stanley Capital International.) Quick Expansion -------------- ¶4. Taiwan's futures market has seen quick expansion over the past ten years. The number of trading accounts has shot up from less than 140,000 in 1998 to 1.15 million in 2006. Meanwhile, the annual trading volume surged from 0.28 million lots to 11.5 million lots. Although individuals owned 99.4% of all trading accounts, institutional investors accounted for 61% of total trading volume. Meanwhile, the trading volume of Taiwan futures products surged from less than 300,000 lots to 114.6 million lots. ¶5. For offshore futures, the trading volume in 2006 totaled 2.68 million lots, more than double the one million lots in 1998. U.S. futures products account for 30-40% of total offshore futures trading, according to Taiwan's Securities and Futures Bureau. World Ranking -------------- ¶6. In term of 2006 trading volume, the TAIFEX ranked 18th largest in the world, up from 57th in 1998. The TAIFEX was the second largest in East Asia, only after the market in Seoul. Among 168 stock options products in the world, Taiwan's TAIEX options ranked fourth in 2006. However, the TAIFEX is very small in term of merchandise futures. The only merchandise product is US$-denominated gold futures which the daily trading volume is less than 0.05% of the TAIFES' total trading in 2006. TAIPEI 00000855 002 OF 002 Characteristics: Different Than U.S. Market -------------- ¶7. While most traders in the U.S. futures market are involved in the underlying commodity, few Taiwan traders have such involvement. The only commodity on the TAIFEX is gold futures. Like other futures markets in the region, all its other products are based on stock indices. According to local financial experts, this characteristic increases the unpredictability of these markets. The TAIFEX is dominated by financial derivatives. In 2006, Taiwan stock (TAIEX) index options accounted for 84.6% of total trading. TAIEX index futures, occupied the second largest share at 8.6%. The remaining 6.8% is split between 12 other categories, including gold futures, electronic sector index futures, financial sector index futures, government bond futures, and commercial paper interest rate futures. Foreign Participation -------------- ¶8. Foreign participation is very small, accounting for about five percent of total TAIFEX trading, much less than the more than 20% in South Korea and Hong Kong, and over 30% in Tokyo. The TAIFEX had been relatively closed to foreign investors until early last year. Prior to March 2006, the TAIFEX was opened only to foreign portfolio investors for hedging before investing money in Taiwan's stock market. At that time, foreign portfolio investors' futures trading were subject to a ceiling limit of 30% of inward remittances. Limited Liberalization -------------- ¶9. In March 2006, Taiwan abolished the 30% ceiling limit and started allowing foreign investors to trade for non-hedging purposes. Taiwan also began allowing offshore futures commission merchants (FCMs) to use omnibus accounts to accommodate these FCMs' offshore customers. ¶10. For NT$-denominated products, futures trading must be settled in the NT Dollar (NT$). Although there is no limit on foreign currency denominated capital remitted by foreign investors into Taiwan, there is a ceiling limit of NT$100 million (US$3 million) on a foreign investor's NT$ guaranty account. If profits gained from trading cause the outstanding amount in the NT$ account exceed the NT$100 million limit, foreign investors are required to exchange the part exceeding the limit into foreign currency, and the conversion will bring about additional cost. ¶11. Taiwan does not levy any capital gains tax. However, Taiwan collects a securities transaction tax. In January 2006, Taiwan reduced the tax rate from 0.025% to 0.001% for futures products and from 0.0125% to 0.001% for options products. However, foreign investors still complain that the taxes are too heavy. COMMENT -------------- ¶12. Foreign participation in Taiwan's futures market will likely remain small unless Taiwan can further liberalize restrictions and reduce tax burdens to make its futures products more attractive. Taiwan should also better publicize its futures market internationally. However, like other futures markets in the region, nearly all the trade on the TAIFEX is based on stock indices, rather than commodities, making its volatility quite high. YOUNG