TIP Taiwan Bio Futures Taiwan Futures Exchange May
TIP Taiwan Bio Futures Taiwan Futures Exchange May 2020
Outline Purpose n Introduction n Contract Specifications n TIP Taiwan Market Biotechnology and Medical Care (TIP Taiwan BIO) Index is owned by the Taiwan Index Plus Corporation (TIP) and the Taipei Exchange (TPEx). The use of TIP Taiwan BIO index has been authorized by the TIP and the TPEx. The TIP and the TPEx make no warranties and bear no liability with respect to TIP Taiwan BIO Futures. 2
Purpose 3
Booming Biotech Industry n Biotechnology and medical care industry is a key sector in Taiwan. The government has also included biotech industry in the “Five Plus Two Industry Innovation Plan” to accelerate its development. Additionally, the industry marked with steady growth in the market capitalization and number of companies listed on Taiwan Stock Exchange (TWSE) and Taipei Exchange (TPEx). Rapid increase in biotech sales* Number of exchange-listed biotech companies (year-end) Market capitalization (year-end) • 2005: NTD 160 Billion • 2014: NTD 288. 6 Billion • 2018: NTD 514. 8 Billion • 2007: 35 (TWSE: 11; TPEx: 24) • 2015: 94 (TWSE: 28; TPEx: 66) • 2019: 122 (TWSE: 35; TPEx: 87) • 2007: NTD 107. 7 Bn (TWSE: NTD 59. 3 Bn; TPEx: NTD 48. 4 Bn) • 2015: NTD 836 Bn (TWSE: NTD 247. 8 Bn; TPEx: NTD 588. 2 Bn) • 2019: NTD 711. 5 Bn (TWSE: NTD 264. 6 Bn; TPEx: NTD 446. 9 Bn) Source: 2019 Biotechnology Industry in Taiwan, Industrial Development Bureau, Ministry of Economic Affairs 4
Considerations of Launching TIP Taiwan Market Biotechnology and Medical Care Index Futures n The government has strong support in the development of biotechnology and medical care industry. Next only to electronics and finance, biotech ranks the third largest sector in trading value, and its potential draws considerable attention from the market and industry participants. n Features of TIP Taiwan Bio Index: l Constituents are industry benchmarks of exchange-listed companies in the biotechnology and medical care sector, making the index a representation of the overall performance of Taiwan’s biotech industry. l With an upper limit set in the weighting of constituents, none of its individual constituent shall comprise too heavy weights and have substantial impact on the index. TIP Taiwan Bio Futures launch scheduled on June 8, 2020 5
Introduction of TIP Taiwan Bio Index 6
Index Rules n Index compiler: Taiwan Index Plus Corporation (TIP) n Date of launch: July 17, 2017 (base date: July 14, 2017 and base value: 5, 000 points) n Selection: Constituents are selected from biotechnology and medical care companies listed on TWSE and TPEx, ranked by their market capitalization in descending order and further selected subject to the total weight being greater than or equal to 90% of the industry market capitalization. n Weighting: Determined by the free-float adjusted market capitalization, the weight of individual constituent shall not exceed 20%, and the total weight of the top five constituents shall not exceed 60%. n Periodic review and adjustment of constituents: Constituents are reviewed four times a year on the 7 th trading day of February, May, August and November, with results of the review becoming effective 5 trading days afterwards. Data cut-off dates are the last trading day of January, April, July and October, respectively. If the coverage rate of the constituents is less than 60% of the overall industry, then the Liquidity Criteria shall be relaxed progressively, until the coverage rate is at least 60%, to effectively express the industry performance. 7
Disclosure of Index Information n Information of TIP Taiwan BIO Index can be accessed via websites such as TAIFEX’s Real-Time Snapshot Quotes (https: //info 512. taifex. com. tw/EN/index_home. aspx), Taiwan Index Plus Corporation, TWSE’s Market Information System, and market data providers such as Bloomberg (Code TWIX 0103 <INDEX>) and Mitake’s APP, etc. n Range of points since launched: 3, 000 to 6, 000 n Points closed on May 12, 2020: 4, 181. 49 TIP Taiwan BIO Index 8
Weight of Constituents n As of April 30, 2020, TIP Taiwan BIO Index was comprised of 52 constituents (TWSE: 21 and TPEx: 31), of which market capitalization totaled NTD 483. 4 Bn (TWSE: NTD 198. 4 Bn and TPEx: NTD 285 Bn). n The five highest weighted index constituents, as of April 30, 2020, were: TCI (6. 97%), Grape King Bio (6. 90%), Taimed Biologics (5. 50%), Pharmaessentia (5. 04%) and St. Shine Optical (4. 79%). 9
Volatility and Correlation n TIP Taiwan BIO Index has higher volatility than TAIEX, TWSE Finance Sector Index, TWSE Electronics Sector Index and TPEx Stock Index, offering various opportunities for hedgers and arbitragers. n TIP Taiwan BIO Index is not highly correlated to domestic equity index futures currently listed on TAIFEX. It differentiates itself with a unique industry sector. 2017 2018 2019 ~2020/4 TIP Taiwan BIO Index 0. 14 0. 22 0. 13 0. 38 Correlation Coefficient Year TIP Taiwan BIO Index 2017 2018 2019 ~2020/4 Volatility TPEx Stock Index 0. 11 0. 20 0. 11 0. 35 TPEx Stock Index 0. 63 0. 80 0. 64 0. 93 TPEx 200 Index 0. 14 0. 24 0. 14 0. 40 TPEx 200 Index 0. 62 0. 77 0. 62 0. 92 TAIEX 0. 08 0. 16 0. 11 0. 32 TAIEX 0. 32 0. 65 0. 39 0. 87 TWSE Electronics TWSE Finance Sector Index 0. 11 0. 08 0. 19 0. 12 0. 15 0. 09 0. 34 0. 31 TWSE Electronics TWSE Finance Sector Index 0. 26 0. 21 0. 60 0. 57 0. 36 0. 24 0. 82 0. 85 10
Contract Specifications 11
Contract Specifications n Underlying Index: TIP Taiwan Market Biotechnology and Medical Care Index (TIP Taiwan BIO Index) n Ticker Symbol: BTF n Multiplier: NTD 50 l l The contract value of TIP Taiwan Bio Futures was approximately NTD 210, 000, as the index closed at 4, 181. 49 points on May 12, 2020. With a small contract size and a low threshold for trading, traders are able to trade TIP Taiwan Bio Futures with low capital costs, yielding high efficiency and flexibility. 12
Contract Specifications (cont. ) n Minimum Price Fluctuation: 1 index point (NTD 50) l It was observed in the product design phase that between December 30, 2011 and January 31, 2020, the average high and low price spreads of TIP Taiwan BIO Index during market hours were close to those of TAIEX in the same period. Setting the minimum price fluctuation at 1 index point should be appropriate. l A change of 2 index points can cover the transaction costs of buying and selling one contract. n Trading Hours: 8: 45 AM-1: 45 PM Taiwan time; 8: 45 AM-1: 30 PM on the last trading day for the delivery month contract 13
Contract Specifications (cont. ) n Delivery Months: Spot month, the next two calendar months, and the next three quarterly months n Daily Price Limit: +/- 10% of previous day's settlement price n Daily Settlement Price: The volume-weighted average price, which is calculated by dividing the value of trades by the volume within the last one minute, or otherwise determined by TAIFEX according to the Trading Rules. n Last Trading Day: The third Wednesday of the delivery month n Final Settlement Day: The same day as the last trading day n Settlement: Cash settlement n Final Settlement Price: The average price of the underlying index disclosed within the last 30 minutes prior to the close of trading on the final settlement day. The method used to calculate the final settlement price is prescribed by TAIFEX. 14
Trading Scheme 15
Trading Scheme (1) l The Order Types、Matching Principles • l Same as other domestic equity index futures of Taifex Information Disclosure before market open • • Orders are accepted from 8: 30 to 8: 45 before opening, and disclosure include the total number of bid/ask orders, the cumulative quantity of bid/ask orders, the calculated opening prices and volume, the best 5 bid/ask prices and corresponding volumes of simulated matching every 5 seconds for each contract. 2 minutes prior to opening of trading session(8: 43 am~8: 45 am), orders can only be entered, but not deleted or modified. 16
Trading Scheme (2) l BTF Futures is applicable for Dynamic Price Banding Mechanism Rejection Threshold l Spread 3% 1. 5% Marker Maker • l Outright A futures dealer or a specified institutional investor may apply to become a TAIFEX market maker and engage in market making business after obtaining approval from the TAIFEX. Block Trade • The block trade Minimum Thresholds of BTF Futures is 200 lots. 17
Trading Scheme (3) l Position Limits • The position limits for BTF Futures are 1, 000 lots for Individual, 3, 000 lots for Institution and 9, 000 lots for Proprietary Trader/Market Maker. Proprietary Category Individual Institution Position Limits 1, 000 Lots 3, 000 Lots Trader/Market Maker 9, 000 Lots 18
Clearing Mechanism
Clearing Mechanism n n n n Margining Requirements and Adjustment Margin Calculation The Daily and Final Settlement Prices Settlement on the Expiration Date Position Handling and Daily Settlement Operation Risk Management to Clearing Members Risk Management of FCM to it’s Clients 20
Margining Requirements and Adjustment n Currency of Margin and Profit and Loss l l TIP Taiwan BIO Futures(BTF) is NTD-denominated. The domestic traders who participate in BTF trading shall deposit NT Dollars; the offshore foreign traders shall pay in 7 foreign currencies announced by TAIFEX. n Margin Calculation l l The clearing margin shall be the futures index multiplied by the value of each index point multiplied by the risk coefficient. The ratios of clearing margin to maintenance margin and to initial margin are 1: 1. 035: 1. 35. The collection of margin under for a contract shall be in units of NT$1, 000, and amounts less than NT$1, 000 shall be automatically rounded upward to NT$1, 000. n Risk Coefficient l The calculation of the risk coefficient is based on the price volatility of the underlying stock index within a certain period, anti-procyclicality, and other possible factors, with at least a 99 percent confidence interval to cover two-day index price variation. n Margining Adjustment l If the difference between the current clearing margin level and the level calculated daily reaches 10 percent or more, or when necessary based on market conditions, the TAIFEX may adjust the collection level of the clearing margin. 21
Margin Calculation n The TAIFEX calculates and collects required margin from clearing members based on the Standard Portfolio Analysis of Risk (SPAN) method. n The FCM shall stipulate with the trader that the margin shall be collected in accordance with the standards prescribed by the TAIFEX or the standards as prescribed under the SPAN margin calculation method. l A trader who wishes to participate in SPAN margining shall meet the requirements of Chinese National Futures Association Self-Regulatory Rules for Adoption by Customers of SPAN Methodology for Calculating Margins and enter into an agreement with the FCM l Margin Requirements of Spread Trading n Identical products Order and Portfolio Margin Requirement Buying one BTF and selling one BTF Margin of one BTF position Note Applicable only to combinations having different expiration dates. 22
The Daily and Final Settlement Prices n The Daily Settlement Price l The price is the volume-weighted average price of all trades during the last minute before market close. When there is no trade price, the highest unexecuted bid and lowest unexecuted ask prices quoted at market close will be taken into account for determination of the daily settlement price. n The Final Settlement Price l l The final settlement price of the contract shall be determined based on the simple arithmetic mean index of the underlying index during the last 30 minutes of trading before market close of the TWSE and TPEX on the final settlement day, consisting of each disclosed underlying index during the trading period from 1: 00 p. m. to 1: 25 p. m. and the last index. If the TWSE or TPEX postpones market closing or matching, the TAIFEX may extend the aforementioned 30 -minute sampling time. The aforesaid arithmetic mean index shall be rounded to the nearest minimum price fluctuation as specified by each contract or, where the final settlement price is an exact uneven multiple of one half of the minimum price fluctuation, to the nearest higher minimum price fluctuation. 23
Settlement on the Expiration Date n Settlement on the Expiration Date l l l BTF shall be settled in cash on the expiration day The open positions for the contract spot month are settled with the trader delivering or receiving the net amount of the price differential based on the final settlement price. The business hours of settlement on the last settlement day (the same as the last trading date) are from 14: 30. n The Calculation Method of Contract Value on the Expiration Day l Each contract value of the expiry position equals the final settlement price of the contract multiplied the value of each point of the index, with amounts of less than NT$1. 00 unconditionally rounded down. EX. If the arithmetic mean underlying index of BTF is 4, 656. 50, after being rounded to the nearest minimum price fluctuation, the final settlement price is 4, 657, and the contract value of BTF is NT$ 232, 850. 24
Position Handling and Daily Settlement Operation n Daily Settlement Operation l The business hours for daily settlement operation of regular trading session are from 13: 45. n Position Handling l Since the trading hours for the futures contract close at 13: 45, the business hours of the TAIFEX to accept that the futures commission merchants submit positions handling for BTF Contracts are from 7: 00 am to 2: 30 pm. 25
Risk Management to Clearing Members n Order Management Procedure l The required clearing margin of new orders of the clearing member shall not be greater than it’s excess margin. n Positon Concentration Management l According to the article 6 -1 of Taiwan Futures Exchange Corporation Rules Governing Surveillance Of Market Positions, if the risk exposure of the clearing member's open positions reaches 20 percent of the risk exposure of all open positions in the whole market, the TAIFEX may collect extra clearing margin. This does not apply, however, if the risk exposure of the clearing member's open positions is less than NT$200 million 26
Risk Management of FCM to it’s Clients n. Margin Collection l A futures commission merchant(FCM) shall collect margin when accepting orders from a trader in accordance with margin requirements and collection method announced by the TAIFEX. n. Margin Check of a New Order l A FCM shall calculate the profit and loss by market price of BTF open positions held by a trader, and calculate the excess margin of the trader. l A trader can put a new order when the trader’s excess margin is greater than the required initial margin. n. High-risk-account notification l If a trader’s equity falls below the maintenance margin of the trader’s open positions, the FCM shall issue a high-risk-account notification to the trader. n. Liquidation on behalf of a trader l During Day Trade Session, a FCM shall calculate a trader’s risk indicator by market price including BTF open positions held by the trader. l If a trader’s risk indicator drops below the standard(ex: 25%) stipulated with the FCM, the FCM shall liquidate all open positions of the trader in products that are still trading. 27
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