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Legal Update

TAIFEX And TFEX Sign Memorandum Of Understanding

April 2007
Mayer Brown JSM Legal Update


The Taiwan Futures Exchange (TAIFEX) and Thailand Futures Exchange (TFEX) signed a Memorandum of Understanding (MoU) on 9 April 2007 to strengthen cooperation for their mutual market development.

Full Update

The MoU aims to establish a channel for information exchange in various areas of operations and to enable a close relationship between the two Futures Exchanges. It also allows both exchanges to explore business cooperation opportunities which will enhance the liquidity, efficiency and integrity of both markets.

Both Futures Exchanges have agreed to work closely together to launch SET50 Index Options on TFEX in the third quarter of 2007. TFEX anticipates a daily average turnover of 5,500 - 6,000 contracts on such options. The Index is composed of the top 50 companies listed on The Stock Exchange of Thailand (SET). SET50 Index Options should be well-received by investors, as they are useful for both trading and hedging purposes. In overseas markets, index options are very popular as investors use them for loss limitation. A brief description of the TFEX follows.


The Thailand Futures Exchange Public Company Limited is a wholly-owned subsidiary of the SET and was established in 2004 as the central marketplace for derivatives trading in Thailand. TFEX is licensed to offer various products whose underlying assets include or relate to equities, fixed income instruments, interest rates and related indices, foreign currencies and non-agricultural commodities such as gold and crude oil. TFEX is a fully electronic exchange with an integrated trading and clearing platform developed by OMX Technology.

Products Traded On The TFEX

SET50 Index futures were the first product listed on the TFEX in April 2006. The underlying index is weighted according to market capitalisation. The calculation is based on the share prices of the top 50 listed companies on the SET. The underlying securities have the largest market capitalisation and highest levels of liquidity. The SET50 is highly correlated to the full SET Index, the composite index of the Thai capital market. The SET50 covers approximately 70 percent of the SET's capitalisation, and accounts for about 58 percent of the total volume traded on the SET. Please see our previous Legal Update "Thailand: Thai Derivative Exchange Plans To Commence Operations And To Launch SET 50 Index Futures Contract in November 2005 (15 Apr 2005)".    

TFEX plans to launch SET50 Index Options in the third quarter of 2007. An Index Option is a call or put option based on the movements of a financial index. If exercised, settlement is made by cash payment, since physical delivery is not possible. Investors trading index options are essentially betting on the overall movement of the stock market as represented by a basket of stocks. So, what is the difference between index futures and index options, one may ask? The main differences between index futures and index options include:

  • Index futures are legally binding obligations to settle on a specified future date. In other words, both parties have a contractual obligation. Both buyers and sellers have significant exposure should the market move against them.



  • Index options, on the other hand, confer on the holder the right, but not the obligation, to exercise. This means that the option holder's maximum loss is limited to the premium paid.



  • Both the buyer and the seller of index futures are required to post margin, whereas margins are posted only by the seller of an index option.



  • There is no exercise price for index futures - buying or selling with the maturity date of one's choice at the market price at the time.



  • No premium is paid when trading index futures - instead payment of a small deposit or initial margin.


Let's take a look now at TAIFEX.


TAIFEX was established in 1998. According to statistics from Futures Industry Association (FIA), TAIFEX ranked 18th globally on trading volume at the end of 2006.

Products Traded On The TAIFEX

TAIFEX launched its first product, TAIEX Futures, in 1998.  The TAIEX Options, TAIFEX's flagship product, is the fourth-most actively traded stock Index options contract in the world. TAIFEX currently offers 14 products, including futures and options on major Taiwan stock indices, government bond futures, 30-day commercial paper interest rate futures, equity options and gold futures. To further expand the market, TAIFEX has actively taken measures to facilitate internationalisation and to boost foreign participation. On 27 March 2006, TAIFEX launched three US dollar-denominated products, including TAIFEX Gold Futures, TAIFEX MSCI Taiwan IndexSM Futures and TAIFEX MSCI Taiwan IndexSM Options. In conjunction with the launch of these new products, TAIFEX has taken several market liberalisation measures to attract foreign participation. Among other measures, it now allows trading for non-hedging purposes by foreign investors, has introduced omnibus accounts, and accepts US dollars as a margin deposit to keep in line with international practices.

As TAIFEX is one of the leading markets with an impressive performance in recent years and is one of the world leaders in index options products, the MoU will be beneficial, allowing TFEX to learn from TAIFEX's successful experience to promote such products in the Thai market. The collaboration between the two Futures Exchanges provides a platform for TFEX and TAIFEX to share their experiences, explore opportunities for cooperation and meet recent challenges to Futures Exchanges.

The SET plans to review its memorandum of understanding with the Taiwan Stock Exchange (TSE) in October this year to encourage dual listings. The two exchanges would first promote exchange-traded funds (ETFs) for dual listing. The Taiwan market has three ETFs already, while the first ETF on the SET will be launched in the third quarter of this year. Please see our previous Legal Update "Thailand: Exchange-Traded Funds - Alternative Investment Option (29 May 2006)".

For further information, please contact:

Name: Sathaporn Jumsuk
Phone: +66 2 677 7555 x140
Fax: +66 2 677 7599

Name: Carolin Rost
Phone: +852 2843 2593
Fax: +852 2103 5184

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