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1.To engage in financial derivative products transactions, this Directions for Transaction in Derivatives For Labor Pension Fund under the Labor Pension Act (hereinafter referred to as the Direction) is hereby stipulated in accordance with Paragraph 2, Article 6 of the Regulations of Labor Pension Act on the Labor Pension Fund Management/Utilization and Profit/Loss Allocation (hereinafter referred to as the Regulations).
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2.The Labor Pension Fund under the Labor Pension Act (hereinafter referred to as the Fund) transacting in derivatives, as a principle, shall conform to the spirits of long-term operational stability, liquidly enhancement, more profitability and safety or risk mitigation.
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3.The Fund may invest by self-managed or delegated scheme to transact derivatives in domestic and foreign markets. The so-called financial derivative products shall fall within the scope specified in Article 4, Paragraph 1, subparagraphs 4, 5, 8-10 of the Regulations.
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4.When the Fund transacts in derivatives by self-managed investment, the transaction markets and the transaction items shall be traded only through financial institutions approved by the local financial, securities, futures competent authorities.
If the Fund transacts in an OTC market, the credit rating of the trading counterparty shall comply with one of the following levels:
(1)Its long-term debt credit rating shall be at least "A-" by Standard & Poor's Corp.
(2)Its long-term debt credit rating shall be at least "A3" by Moody's Investors Service;
(3)Its long-term debt credit rating shall be at least "A-" by Fitch Ratings Ltd.
(4)Its long-term debt credit rating shall be at least "twA-" by Taiwan Ratings Corporation
(5)Its long-term debt credit rating shall be at least "A-(twn)" by Fitch Ratings Limited, Taiwan Branch.
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5.When the Fund invests by self-managed or delegated scheme, as to the derivatives transactions not for purpose of hedging, the maximum transaction amount shall not increase the financial leverage of the Fund.
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6.When the Fund invests by self-managed or delegated scheme, as to the derivatives transactions for the purpose of hedging, the aggregate contractual value of the hedging position may not exceed the aggregate market value of the underlying spot assets that have already been held.
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7.The delegated institutions transact in derivatives, the derivatives transaction procedures or related risk management measures shall comply with the applicable laws, rules and regulations of the local competent authorities, and the execution rules shall be stated in the service proposal, and provide reports in regular interval, indicating transaction purpose, transaction details, investment performance and risk assessment.
The above transaction procedures consist of the four steps of transaction analysis, transaction decision making, transaction execution and transaction evaluation.
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8.When the Fund enters into an agreement with a delegated institution regarding handling derivatives transactions, the content of such agreement shall include the following matters:
(1)The purpose of the delegated institution engaging in derivatives transaction;
(2)The restrictions in the types of derivatives which the delegated institution may transact;
(3)The limit in the amount of derivatives which the delegated institution may transact;
(4)The personnel in charge of the derivatives transactions, the hierarchical responsibilities of such personnel and the agency mechanism be subject to its internal audit and internal control.
(5)A delegated institution transact in non-hedging derivatives shall set forth a stop loss limit.
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9.When the Fund transacts in derivatives by self-managed investment, in addition that the Directions for Risk Management of Pension Fund under the Labor Pension Act shall be abided by, it shall also comply with the following risk management principles:
(1)Credit risk management: when the securities trade over-the-counter, the transaction position amount based on the credit rating of the transaction counterparties.
(2)Market risk management:
Hedge ratio for various trades shall be drawn up based on its business duties.
Evaluation of profit and loss of the financial derivative products transactions based on the market value on the date of evaluation.
(3)Liquidity risk: the maximum daily net settlement amount shall not exceed a certain percentage of the total amount of the Fund.
(4)Legal risk management:
The legality of the trade agreement, in principle, will be based on the publicly recognized standard agreement. If necessary, it may be supplemented based on opinions rendered by a legal counsel.
Annual status of compliance of laws and regulations related to handle financial derivative products transactions by the Fund.
(5)Operation risk:
Risk management personnel shall not occupy any post of the financial derivative products trading department.
Trading staff shall not concurrently serve as the settlement staff and vice versa, and non-trading staff shall not engage any trade.
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10.The following are the operating procedures for the Fund to transact in derivatives by self-managed investment:
(1)Before a Trade: an official written documents regarding the trading counterparties, the total contractual amount, the utilization limit, the risk management target and the utilization strategy shall be provided. Said written documents shall clearly stipulate the utilization tool, utilization items and how to evaluate the fair price or cash flow of the investment position.
(2)During a trade:
When a trader makes a trade, the trade limit shall not exceed the authorized trade limit.
A trader shall make a trade only with approved trading counterparties.
After completion of a trade, relevant trade certificates and statements shall be delivered to the clearing and settlement staff as well as the accounting staff.
The clearing and settlement staff shall confirm, verify each item of the trade information, and then handle settlement and clearing operations as well as any follow up matters related to the maturity.
(3)After a trade: a monthly consolidated report on the trading volume, the contractual market price and the amount of loss or profit shall be prepared and the same shall be submitted to the Director-General of the Bureau of Labor Funds of the Ministry of Labor in regular intervals for review and approval.
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11.The Fund may designate a domestic delegated institution to serve as a broker to engage in derivatives transaction, and to uniformly negotiate processing fees and rates and relevant conditions. A foreign delegated institution shall provide conditions for the selection of derivatives trading counterparties.