US investors would be prohibited from trading TAIEX futures by the US securities regulator from as early as July 29 due to a classification of the TAIEX as a so-called “narrow-based security index,” the Financial Supervisory Commission (FSC) said on Tuesday.
The heavy weighting of contract chipmaker Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) has prompted the TAIEX futures to hit criteria set by the US Commodity Futures Trading Commission (CFTC).
Therefore the CFTC is expected to ban US investors from trading TAIEX futures and mini-TAIEX futures.
Photo: CNA
TAIEX futures and mini-TAIEX futures have different contract terms, including value and deposits, but their underlying index is the TAIEX.
From Feb. 15 to Monday, TSMC, the most heavily weighted stock in the local market, had accounted for more than 30 percent of the local main board’s total turnover for 45 trading sessions in a row, which led the TAIEX to meet one of the criteria set by the CFTC defining it as a narrow-based security index.
Due to TSMC’s heavy weighting, the CFTC would soon be informed by the Taiwan Futures Exchange that the exchange has met the criteria to be classified as a narrow-based security index, Securities and Futures Bureau Deputy Director-General Julian Hwang (黃厚銘) said on Tuesday, adding that the exchange awaits a response from the CTFC regarding revoking trading permissions of TAIEX futures and mini-TAIEX futures, he said.
The CFTC’s revoking of the trading permission for TAIEX futures and mini-TAIEX futures would likely be implemented on July 29 because of a three-month grace period, Huang said.
US investors make up only 0.7 percent of the transactions in Taiwan’s futures markets, Huang said.
Many investors in the US markets belong to multinational groups, which allow them to trade TAIEX futures through overseas affiliates, he said.
The impact of the revoking on the local equity market is expected to be minimal, he added.
However, past experiences indicate the impact could be more serious.
In April 2021, the CFTC revoked TAIEX futures and mini-TAIEX futures trading permissions, also because TSMC’s heavy weighting led the TAIEX to be classified as a narrow-based security index.
The trading permissions were not regranted until October 2022. During the period, the TAIEX fell from 16,571 to 12,856.
It is unlikely that the FSC would impose a weighting ceiling on a single stock to avoid a CFTC ban, Huang said.
However, Taiwan Futures Exchange officials would make more visits to foreign institutional investors to encourage them to participate in the local futures markets, he said.
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