Guidelines regarding stock borrowing and lending which Taiwan's regulator--the Securities and Futures Commission--plans to publish in April, are expected to open the door to the development of a local equity derivatives market, according to traders. After the initial outline, the SFC will look to draft detailed regulations on securities lending in the coming months, said Wang Hung Rui, an official at the regulator in Taipei.
Indeed, Taiwan Cement Corp., the country's largest cement maker with TWD98.92 billion (USD2.85 billion) in assets, is interested in selling calls on shares of its subsidiaries. "We'll be studying this," said Eric Tsay, deputy manager in the finance department in Taipei, noting that it is awaiting regulatory changes and hopes to enter the market by year-end.
The main stumbling block at present is that derivative houses are not allowed to enter short cash equity positions to hedge over-the-counter equity derivative trades. "Corporates and shareholders selling calls over their holdings could become a much bigger business than at present where some form of synthetic borrowing is required," said Justin Kennedy, managing director of Asia Pacific equity derivatives at Salomon Smith Barney in Hong Kong. "Access to regular borrowing would vastly simplify the process," he added.
Equity professionals said they are closely watching market developments and will likely begin preparations once the regulations are enacted. "It'll probably start off slow, like any new market," said an equity head in Hong Kong, adding that once permitted there will likely be a handful of trades per month.
The SFC has also been gearing up to permit onshore equity-linked notes in the coming months (DW, 11/24). "Clearly the whole regulatory environment has changed in the last year: from the regulators being somewhat afraid to open the market to it becoming a question of survival as China's capital market emerges as a competitor in the Greater China region," said SSB's Kennedy.
