Taiex futures face U.S. trading ban on 'narrow-based security index'

Taipei, May 2 (CNA) U.S. investors will be prohibited from trading futures on the Taiwan Stock Exchange (Taiex) by the U.S. securities regulator from as early as July 29 due to a classification of the Taiex as a so-called "narrow-based security index," according to Taiwan's Financial Supervisory Commission (FSC).

Heavy weighting of contract chipmaker Taiwan Semiconductor Manufacturing Co. (TSMC) has prompted the Taiex futures to hit criteria set by the U.S. Commodity Futures Trading Commission (CFTC).

The CFTC therefore is expected to ban U.S. investors from trading Taiex futures and mini-Taiex futures.

Taiex futures and mini-Taiex futures have different contract terms, including contract value and deposits, but their underlying index is the Taiex.

Between Feb. 15 and April 29, contract chipmaker 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.

What's next?

Due to TSMC's heavy weighting, Huang Hou-ming (黃厚銘), deputy director of the FSC's Securities and Futures Bureau, said earlier this week that the CFTC will soon be informed by the Taiwan Futures Exchange (Taifex) that the exchange has met the criteria to be classified as a narrow-based security index. It will then await a response from the CTFC regarding revoking trading permissions of Taiex futures and mini-Taiex futures.

Huang 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.

To alleviate concerns over the impact on the local stock market, Huang noted that U.S. investors make up only 0.7 percent of the transactions in Taiwan's futures markets.

Huang noted that many investors in the U.S. markets belong to multinational groups, allowing them to trade Taiex futures through overseas affiliates. He added that he expected the impact of the revoking on the local equity market to be minimal.

However, past experiences indicate the impact could be more serious.

Past examples

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.

Huang said it is unlikely that the FSC would impose a weighting ceiling on a single stock to avoid a CFTC ban.

However, Huang said more visits by the Taifex will be made to foreign institutional investors in a bid to encourage them to participate in the local futures markets.