Complaints against Fuh-Hwa Securities Finance Co., Ltd., concerning its excessive profitability and the abuse of its market position
Chinese Taipei
Case:
Complaints against Fuh-Hwa Securities Finance Co., Ltd., concerning its excessive profitability and the abuse of its market position
Key Words:
abuse of market position
Reference:
Fair Trade Commission Decisions of September 22, 1993 (the 103rd Commission Meeting) and November 24, 1993 (the 112nd Commission Meeting); Letter of (82) Kung Yi Tsu 54372
Industry:
The securities finance industry (6614)
Relevant Law:
Summary:
1. The complaints against Fuh-Hwa Securities Finance Co., Ltd. ("Fuh-Hwa Co.") are as follows:
(1) Fuh-Hwa Co. is suspected of abusing its monopoly position and earning huge profits;
(2) Under certain administrative orders, Fuh-Hwa Co. enjoys the privilege of access to funds possessed by the seven banking institutions subordinated to the Taiwan Provincial Government; and
(3) Was Fuh-Hwa Co. established under an order, the law, or a mandate? Is Fuh-Hwa exempt from the application of the Fair Trade Law pursuant to Article 46(1) of the same law?
2. This Commission's investigations reveal that:
(1) After comparing Fuh-Hwa's profitability and that of other financial institutions, it was found that the return on stockholder's equity that Fuh-Hwa Co. achieved in 1990 was lower than that achieved by most other financial institutions; the return that Fuh-Hwa Co. achieved in 1992 was equivalent to that achieved by most other financial institutions. In view of the broad business scope of the financial industry, Fuh-Hwa Co.'s profitability is not on the high side.
(2) With regard to Fuh-Hwa Co.'s privilege of access to funds possessed by the seven banking institutions subordinated to the Taiwan Provincial Government:
(i) In accordance with Article 7 of the Regulations Governing the Securities Finance Businesses, Fuh-Hwa Co. may receive funds for its revolving management in any of the following methods: (a) asking loans from any banks, or cooperative banks; and (b) issuing commercial papers or debenture bonds.
(ii) Article 73(1) of the Banking Law stipulates that "commercial banks may finance securities dealers and securities finance companies for the issuance and transaction of securities." Therefore, Fuh-Hwa Co. and any securities dealers may raise their funds through loans extended by any banks or cooperative banks or by issuing commercial papers or debenture bonds. However, with regard to the amount of credit extended, the Central Bank has issued an order by letter to banks in accordance with Article 30 of the Law Governing the Central Bank and Article 73 of the Banking Law specifying that "the maximum short-term loan a bank offers to any securities finance company shall not exceed 25% of the net worth of the lending bank, provided that the restriction, setting forth that the total amount of the unsecured loan extended to an individual borrower shall not exceed 5% of the net worth, does not apply to those short-term loans."
(iii) On the other hand, in accordance with the “Key Points” for the Call-Money Center of the Financial Industry Established by the Banking Association in Chinese Taipei, Fuh-Hwa Co. may receive funds through interbank loan, since it is a member of the Center However, no securities dealer may receive any funds through that channel.
(3) Fuh-Hwa Co. was established under an order issued by the authority. However, the fact that Fuh-Hwa Co. was established under that order and whether the provisions (governing acts performed in accordance with other laws) in Article 46 of the Fair Trade Law apply to that company are two separate issues. That is, Fuh-Hwa Co.'s business act should remain governed by the Fair Trade Law despite of the order under which it was established.
(4) Fuh-Hwa Co. and securities dealers respectively operate capital financing and securities financing businesses according to different laws and regulations. The roles they play and their bases of competition are not the same. Securities dealers are subject to more restrictions in obtaining and managing funds and in operating the business because the competent authorities have designed differently on the securities finance system for Fuh-Hwa Co. and that of securities dealers. Fuh-Hwa Co. prescribes its capital financing and securities financing interest rates mainly based on the interest rates of extended credits adopted by securities dealers which exclusively or concurrently operate securities business and banks, and depending on the quotations of the financial market and on the term of loans. Those prescribed interest rates are required to be filed with the Securities and Exchange Commission for recordation. However, according to the consolidated opinions of some financing businesses, scholars, and experts and the collected information, whether Fuh-Hwa Co. is suspected of abusing its market position can hardly be judged from whether its prescribed interest rates reasonably reflect the company's cost or from whether the company has earned excessive profits from differentials between the capital financing interest rate and the securities financing interest rate differentials.
3. In sum, it cannot be determined in this case that Fuh-Hwa Co. has abused its market position. However, for seeking a fair basis for operating the securities finance industry, this Commission has held meetings and discussed with the Central Bank and the Securities and Exchange Commission of the Ministry of Finance, from which the following three conclusions were drawn:
(1) The standard based on which a securities dealer is eligible for the operation of capital financing and securities financing businesses should be lowered so that the number of securities dealers will be increased in the hope that capital financing and securities financing businesses can be separately operated. Under the system, Fuh-Hwa Co. will focus on the business of refinancing securities dealers, while general securities dealers will engage in financing their customers with capital and securities.
(2) The authority in charge of securities should review the prescribed regulations to allow securities dealers to efficiently utilize the securities they obtain from financing business and to expand the sources where from the deficiency of securities as required for providing securities financing can be obtained.
(3) The authorities in charge of securities shall properly liberalize the restrictions imposed on securities dealers as set forth in Articles 13 and 14 of the Regulations Governing Securities Dealers' Providing Capital Financing and Securities Financing for Securities Trading such as: (i) the total capital financing amount that a securities dealer offers to its customers shall not exceed 150% of its net worth; in the case of the total securities financing amount, not exceed 75% of its net worth; and (ii) in consideration of the competition in the market, the total capital financing amount provided for each class of securities shall not exceed 10% of its net worth; in the case of the total securities financing amount, not exceed 5% of its net worth.
4. Current securities finance market:
Entie Securities Finance Co., Global Securities Finance Co. Ltd. and Fubon Securities Finance Co. Ltd. are the competitors of Fuh-Hwa Securities Finance Co., Ltd., in the current securities finance market.
Summarized by Wu, P. J.
Supervised by Hu, K. Y.
＆ : For information of translation, click here
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