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1.To engage in financial derivatives transactions, this Directions for Transaction in Derivatives for Labor Retirement Fund (hereinafter referred to as the Directions) is hereby stipulated in accordance with Subparagraph 9, Paragraph 1, Article 6 and Paragraph 2, Article 10 of the Regulations for Revenues, Expenditures, Safeguard and Utilization of the Labor Retirement Fund (hereinafter referred to as the Regulations).
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2.The Labor Retirement Fund (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 derivatives shall fall within the scope specified in Article 6 and Article 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 finance, securities and 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, it shall 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 the investment categories.
Evaluation of profit and loss of the financial derivative products transactions based on the market value on the date of evaluation.
Liquidity risk management: 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 the opinions rendered by a legal counsel.
Annual status regarding the compliance of laws and regulations related to handle financial derivative products transactions by the Fund.
(5)Operation risk management:
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 document shall be provided regarding the trading counterparties, the total contractual amount, the utilization limit, the risk management target and the utilization strategy. Said written document 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 competent authority in regular intervals for recordation.
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11.The delegated institution of the Fund shall provide conditions for the selection of derivatives trading counterparties.