Domestic houses in Taiwan have shut the tap on the warrants market in protest to an outstanding tax on premiums. "It's been a nightmare," said Jerry Wu, head of equity derivatives at KGI Securities in Hong Kong. The dispute stems from taxation on the full premium of a warrant issue, whereas market officials noted that much of the money received in issuing warrants is used for trading shares to delta hedge the position. As a result, domestic houses have had to issue warrants at a loss just in order to keep the market going in the past few years. "In terms of strategy, you need to continue to play a roll and keep the customers involved," said Wu.
The market went on strike over the matter for almost five months in 2004, and resumed issuance after talks with tax authorities moved forward although there was no final resolution. While last year was a record year in terms of issuance with 878 offerings, it was decided by a group of more than 20 financial institutions to strike again, which kicked off last month. Equity participants said the warrant market will remain on hold until the dispute is settled.
The matter is expected to be on the agenda of a committee comprised of national legislators when they next meet in March and participants have their fingers crossed a ruling in their favor will be reached. "We hope that in keeping with the trend of market de-regulation, this tax will be changed," said a trader at a domestic house. Officials at the Ministry of Finance declined to comment.