According to the Commodity Exchange Act (CEA), three criteria to govern the trading of futures contracts on a group of index of securities on designated contract markets and registered derivatives transaction execution facilities (“DTEFs”):
- the contract must provide for cash settlement;
- the contract must not be readily susceptible to manipulation nor to being used to manipulate any underlying security; and
- the group or index of securities must not constitute a narrow-based security index
Accordingly, the CFTC has examined the TE/TF and TE/TF futures contracts to determine whether the Indices and the futures contracts meet the requirements enumerated in CEA Section 2(a)(1)(C)(ii).
Based on the data supplied by the TAIFEX, the TE and TF are broad-based, market capitalization-weighted composite indices maintained by the Taiwan Stock Exchange Corporation (TSEC). The TE covers all electronics related stocks that are listed on the TSEC, and the TF covers all finance related TSEC listed stocks. Both Indices exclude preferred stocks, full-delivery stocks and newly listed stocks that are listed for less than one calendar month. Base on the data supplied by TAIFEX, the total adjusted market capitalization of the TE and the TF were approximately US$195.56 billion and US$85.55 billion, respectively, as of November 30,2004. Also as of that date, stocks of 289 companies were components of the TE and 43 companies were components of the TF. The largest single security by weight represented 17.53% of the TE and 18.77% of the TF. The five most heavily weighted securities represented 43.13% and 51.40% of the TF, respectively. The securities comprising the lower 25% of the respective indices had six-month aggregate dollar values of average daily trading volume in excess of US$30 million; approximately US$421.9 million for the TE and US$125.1 million for the TF for the 6-month period ending November 2004. The indices are calculated in real time and are disseminated by electronic means through major data vendors, such as Bloomberg and Reuters.
TAIFEX’s TE and TF futures contracts both commenced trading on July 21, 1999. Both contracts provide for cash settlement. Regarding the exchange’s ability to access information of the securities underlying the index, TAIFEX entered into a joint surveillance and information sharing agreement with the TSEC as well as the GreTai Securities Market (the OTC Market) and the Taiwan Securities Central Depository Co., Ltd., for the exchange of market and surveillance information. Thus, TAIFEX should have access to information necessary to detect and deter manipulation.
After receiving the No Action Letter, persons and entities in the US can increase to trade in these approved contracts, which would greatly help enhancing the competiveness of TAIFEX among global market as the no-action letter not only stands for CFTC's recognition of the contracts, but also the further step for TAIFEX to link up with the US investors.
