The Financial Supervisory Commission (FSC) yesterday published draft guidelines that would allow securities brokerages to issue exchange-traded notes (ETNs), paving the way for the instrument to be listed on local bourses before the end of this year.
It would take at least seven to eight months for brokerages to update their back-end systems to accommodate the new type of unsecured, unsubordinated debt security, the commission said at a news conference.
An ETN is an instrument that combines aspects of bonds and exchange-traded funds (ETFs), as they have a maturity date and provide investors with a relatively easy way to access returns from a wide variety of market segments, such as commodities, it said.
While ETNs and ETFs share many similarities, an ETN does not own the underlying assets it tracks, providing the advantage of lower expense ratios, as well as lower tracking error compared with ETFs.
Due to this distinction, ETNs would provide issuing securities brokerages greater flexibility in investment strategies as long as they are able to match the level of returns of the underlying assets over the term of the instrument, the commission said.
For example, a brokerage could issue an ETN tracking the TAIEX and meet its obligation to investors by profiting from US stocks, it said.
However, similar to other debt securities, ETNs carry greater credit risk, as they are only backed by the credit of the underwriting issuers, it added.
To contain credit risk, the commission said that ETNs can only be issued by brokerages with net value exceeding NT$10 billion (US$342.1 million) and a capital adequacy ratio of no less than 250 percent.
The commission added that it would evaluate each ETN application based on its risk hedging design and the underwriting brokerage’s investment prospectus.
The assets or indices tracked by an ETN must have adequate turnover and the issuer has to be ready to meet investors’ requests to redeem, as well as allow investors access to pricing information of the instrument, the commission said.
ETNs tracking the strength of the New Taiwan dollar are to be prohibited, it added.
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