Taiex 'narrow-based security index' inclusion could hurt trading: analyst

Taipei, Aug. 3 (CNA) The classification of the Taiex, the benchmark weighted index on the Taiwan Stock Exchange (TWSE), as a so-called "narrow-based security index," which has led to a ban on U.S. investors from trading Taiex futures, could hurt the performance of the local stock market, according to a market analyst.

As one of the analysts who expressed worries over the impact of the inclusion, Chairman of Capital Futures Vice President Hsu Chi-ching (許績慶) said when the Taiex was previously classified as a narrow-based security index, the local market suffered from greater volatility with the Taiwan dollar depreciating against the U.S. dollar.

Under such circumstances, the willingness of foreign institutional investors to trade on the local equity market was undermined, so Hsu said he is afraid the latest reclassification will impact trading and lower turnover again.

Hsu's comments came after the Taiwan Futures Exchange (Taifex) said it was informed by the U.S. Commodity Futures Trading Commission (CFTC) on July 30, U.S. time, that the Taiex had been reclassified as a narrow-based security index.

The reclassification came as the heavy weighting of contract chipmaker Taiwan Semiconductor Manufacturing Co. (TSMC) ensured the Taiex hit criteria set by the CFTC.

As a result, the Taiex Futures (TX), Mini-Taiex Futures (MTX) and Mini-Taiex Flexible Futures (MXFFX), which use the Taiex as an underlying index, have also become narrow-based security indexes so U.S. investors, including qualified institutional buyers (QIB) are barred from trading these Taiwan futures indexes, the Taifex said.

In April 2021, the TX and MTX were classified as narrow-based security indexes also due to TSMC's heavy weighting and a similar ban was imposed by the CFTC until late October 2022.

During that period, foreign institutional investors recorded net sales of 876 million TSMC shares with the stock plunging 33.5 percent, market statistics show. The selling also reflected selling sparked by the COVID-19 pandemic.

From Feb. 15 to April 29 this year, TSMC, the most heavily weighted stock on the local market, 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 again and led to the latest reclassification.

After a grace period of about three months, the Taifex was informed on July 30 by the CFTC about the reclassification of the Taiex, TX, MTX and MXFFX as narrow-based security indexes and that a trading ban has gone into effect.

As of Friday, TSMC's market cap totaled NT$23.41 trillion, accounting for almost 34 percent of the total market value of the local main board.

Hsu said the impact of the narrow-based security index classification will not be removed until the ratio of TSMC's market cap to the Taiex's falls to below 30 percent.

However, the Financial Supervisory Commission (FSC), the top financial regular in Taiwan, said individual TSMC shares on the spot and futures markets will not be affected by the narrow-based security index classification.

In addition, the FSC cited data compiled by the Taifex as saying investors from the U.S. accounted for only 0.7 percent of the total turnover of the local futures market in 2023, so the impact could be limited.