After the second board of the Over-the-Counter exchange launches next month, the maximum spread between bid and ask prices will be 7 percent for second board issues, according to the Securities and Futures Commission (SFC, 證期會).
In addition, mutual funds that focus on OTC stocks will be deregulated, the SFC said.
According to a recent SFC ruling, any broker that recommends a second board issue must place 2,000 shares on the buy and sell sides before the market opens. Also, the spread can be no greater than 7 percent.
Furthermore, an underwriter must ensure the inventory of the stock is at least 50 percent of the level of shares available when the issue had been underwritten. The rule will be in effect for three years after the shares begin initial trading.
The SFC's ruling was to ensure that brokers who recommend a second board issue also maintain a market for that issue.
SFC officials said it was the responsibility of brokers to create a market for stocks they recommends in order to prevent trading from coming to a halt. The 7 percent spread limitation is so that the broker doesn't reap an excessive profit, the officials said.
"The trading price of any second board stock on the first trading day will be based on the subscription price" when the stock was underwritten, said Chu Jaw-chyuan (朱兆銓), the SFC's deputy chairman. "And the daily price movement limit remains at 7 percent, as is the regulation for other stocks on the OTC's first board and the Taiwan Stock Exchange."
The SFC also has issued its preliminary guidelines concerning mutual funds that focus on OTC stocks.
"Since there will be about 120 OTC companies moving to the Taiwan Stock Exchange in the near future, about seven mutual funds that specialize in OTC stocks will be given a period of adjustment," said Lin Tzong-yeong (
"It's to avoid a rush of selling pressure by these OTC funds. And when the market scale of the second board reaches a certain level, mutual funds specializing in second board stocks will then be permitted."
So far, roughly 120 first board companies are thought to qualify for a listing on the Taiwan Stock Exchange, though the exact number won't be clear until after the annual reports of these companies have been disclosed next month.
"If hundreds of first board companies are transferred to the Taiwan Stock Exchange, it could create problems for those funds that invest only in OTC stocks," Lin said. "Therefore, we have to give these funds a period of time to adjust their portfolio, in order to avoid the selling pressure created by these funds selling at the same time."
In addition, Lin said, after the adjustment period passes, the SFC will determine its rules for mutual funds that want to invest in second board companies.
"When the second board market reaches a certain level, the agency will then permit the issuance of second board stock funds," Lin said.
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