VZCZCXRO7345
RR RUEHGH
DE RUEHIN #0855/01 1070055
ZNR UUUUU ZZH
R 170055Z APR 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 4915
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3647
RUEHBJ/AMEMBASSY BEIJING 6645
RUEHUL/AMEMBASSY SEOUL 8579
RUEHGP/AMEMBASSY SINGAPORE 6869
RUEHKO/AMEMBASSY TOKYO 8669
RUEHML/AMEMBASSY MANILA 0028
RUEHJA/AMEMBASSY JAKARTA 4067
RUEHKL/AMEMBASSY KUALA LUMPUR 3715
RUEHHI/AMEMBASSY HANOI 3299
RUEHBY/AMEMBASSY CANBERRA 4492
RUEHWL/AMEMBASSY WELLINGTON 1753
RUEHHK/AMCONSUL HONG KONG 7890
RUEHGH/AMCONSUL SHANGHAI 0994
RUEHGZ/AMCONSUL GUANGZHOU 0169

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