The Taiwan Futures Exchange Marks 25 Years: From Local to Regional and International

It has been a quarter of a century since the Taiwan Futures Exchange (TAIFEX) launched its first product – the TAIEX Futures contract. With Taiwan being the nexus of global supply chains, TAIFEX has grown from a local to a regional and international exchange, offering a wide range of equity, commodity and foreign-exchange futures and options trading around the clock. Over the past three years, over 300 million contracts have been traded annually on TAIFEX.

Mr. Tzu-Hsin Wu, chairman of TAIFEX, talks about the exchange’s recent triumphs and how these successes can further power the exchange’s development in the coming years.

You took up the role of chairman of TAIFEX in 2020 in the middle of the global pandemic, following 30 years in Taiwan’s public sector. How has your experience supported TAIFEX’s development? 

Before joining TAIFEX, I served as the deputy minister at the Ministry of Finance (MOF). During my tenure at the MOF, I was heavily involved in implementing tax reforms, including lowering the futures transaction tax, which played a pivotal role in stimulating the growth of Taiwan’s futures market. At the MOF, I also gained valuable insights into the management of government shareholdings, corporate governance supervision, and the sustainable development of state-owned financial enterprises. My experience at the Fair Trade Commission further enhanced my understanding of fair trade regulations and customer rights protection.

Upon assuming the position of TAIFEX chairman, I emphasised the significance of the derivatives market in mitigating price risk and improving capital efficiency, and acknowledged TAIFEX’s commitment to maintaining a fair and secure marketplace for traders. My experience in the public sector has been invaluable in guiding TAIFEX's development during these challenging times, and I remain committed to leading TAIFEX towards greater success, ensuring its continued role as a vital player in the global financial landscape.

What changes have you been seeing in the local and global futures industry? How have you been addressing them since you took office?

In recent years, the futures and options industry has undergone significant changes both locally and globally, driven by various factors. TAIFEX, as one of the leading futures exchanges in Asia, has been actively catering to these changes to ensure our continued relevance and competitiveness in the marketplace.

Greater demand for small-sized and flexible products

The Taiwan futures market is largely driven by retail traders, who account for close to half of the market’s overall volume. To effectively serve this segment, it is imperative to introduce small-sized contracts as well as contracts with shorter and more frequent expiry dates to enable them to implement more precise, cost-effective and margin-efficient strategies.

We have been proactive in expanding our product suite to meet the needs of retail traders. In fact, TAIFEX launched Mini TAIEX Futures, one of Asia’s pioneering small equity index futures, back in 2001. Since I took office, TAIFEX has further introduced new small-sized equity index contracts such as Mini Electronics Sector Futures and Mini Finance Sector Futures, both in 2021, as well as bi-weekly contracts for TAIEX Options and Mini-TAIEX Futures last year, to provide market participants with a wider range of strategic trading and hedging tools.

Increased cross-border trading activities

Globally, we have witnessed an increasing trend of cross-border trading and connectivity among exchanges. To adapt to this changing landscape, TAIFEX has been actively seeking collaborations with other exchanges worldwide. Previous partnerships on offshore equity index futures included TOPIX of JPX, and Dow Jones, S&P 500 and Nasdaq-100 of CME Group and Nasdaq. These U.S. products are also supported by our night trading session, where the number of contracts traded overnight represents close to 90% of their total volumes. In addition, TAIFEX launched FTSE-100 Futures in collaboration with LSEG, further extending our reach to the European market and broadening our international product offerings.

TAIFEX’s night session facilitated a great amount of cross-border trading flow, where foreign traders on average have accounted for over a quarter of the nightly volume this year. Together with our night session, the linkages that we established with major exchanges have enabled our market participants, both local and international, to access our products and liquidity, while also facilitating the internationalisation of TAIFEX.

The need for optimised collateral management

In parallel with global regulatory norms, TAIFEX started to offer central clearing services of OTC derivatives last year for market participants to lower capital requirements and improve capital efficiency. The launch was a response to the urgent needs of our participants such as commercial banks to manage their interest-rate swaps (IRSs) and non-deliverable forwards (NDFs) exposures, at a time when central bankers across the world had begun the quantitative tightening program and raised interest rates to combat inflationary pressures, and they were dealing with the further implementation of uncleared margin rules (UMR) and Basel III requirements.

Our efforts in the clearing business also earned recognition from U.S. and European regulators. Before the end of last year, the U.S. Commodity Futures Trading Commission granted a No-Action Relief allowing TAIFEX to clear proprietary swap transactions for U.S. persons or their affiliates, while the European Securities and Markets Authority recognised us as a Tier 1 third-country central counterparty. These validations help reinforce our capability to facilitate an even greater client base.

Broader involvement in ESG

The last key trend is the growing importance of ESG factors in investment decision-making. As more investors prioritise sustainability and ethical concerns, we can expect to see greater demand for products that are tied to ESG-compliant assets and investment strategies.

Adapting to market needs, TAIFEX launched FTSE4Good TIP Taiwan ESG Index Futures (ticker symbol: E4F), Asia’s first ESG Index futures, as well as ESG ETF Futures, such as Cathay MSCI Taiwan ESG Sustainability High Dividend Yield ETF Futures (ticker symbol: RI), to align with this trend and to add a new component to the ecosystem of Taiwan’s ESG investment products.

What is the future market outlook and what are the projects that TAIFEX is working on in 2023 and beyond?　

As the chairman of TAIFEX, I envision a promising future for the global derivatives market, which is expected to continue its growth trajectory. For TAIFEX, continuing the themes of flexible contract design and cross-border collaborative products, we are currently in talks with major exchanges to roll out new Taiwan dollar-denominated and small-sized semiconductor index futures as an additional tool for traders to manage their sector exposure in semiconductors, as well as flexible Mini TAIEX Futures and TAIEX Options, to offer greater flexibility and precision in the execution of trading strategies, by the end of the year.

TAIFEX remains committed to strengthening cross-border collaboration and expanding its foreign customer base. We will actively interact with international exchanges, fostering a knowledge exchange and exploring collaborative opportunities. Additionally, we will continue to conduct overseas roadshows and engage with international institutional investors, showcasing the edges of our market. These efforts will drive increased foreign participation and ensure the continued global integration of Taiwan’s futures market.

We also want to extend night sessions to more of our products. The number of contracts outside regular trading hours account for 30% of the market’s total volume – a testament to the growing interests of both domestic and international traders for using our after-hours facility to timely speculate or hedge their positions in reaction to global events.

On the ESG front, we recently launched an integrated ESG information platform to promote sustainable development in our futures Industry. The platform discloses the FTSE Russell ESG rating, corporate governance evaluation indicators, as well as volume and open interest information on products covering E4F, RI, and equity futures and options of which underlying assets are the constituent stocks of E4F.

In terms of central clearing of OTC derivatives, we provided clearing services for inter-bank dealers’ TWD-denominated IRS transactions on a voluntary basis in the first phase. This year, the OTC clearing service is extended to USD/TWD NDFs and TWD IRSs for clearing members’ proprietary and client transactions, further expanding our services to a wider range of market participants.

In information technology, TAIFEX is actively exploring the implementation of emerging technologies and ultra-low latency trading to enhance system performance, and the use of AI in market surveillance. Through these initiatives, we aim to propel TAIFEX into a marketplace that thrives on enhanced efficiency and advanced technology.

Our mission is to continue driving the expansion of the Taiwan derivatives market, while meeting the ever-changing needs of our participants, and we will continue to do this in the next 25 years and beyond.