Taiwan’s stock market, characterised by high liquidity and a tech-dominated composition, has long attracted foreign institutional investors. According to Financial Supervisory Commission statistics at the end of February 2025, foreign institutional investors (FINIs, excluding Chinese investors) and Chinese qualified domestic institutional investors hold about USD287 billion in Taiwanese equities, representing about 42% of Taiwan’s total stock market capitalisation.

Hsin Lan Hsu
Hsin-Lan Hsu
Partner
Lee and Li
Taipei
Tel: +886 2 2763 8000 (ext. 2551)
Email: hsinlanhsu@leeandli.com

Short selling serves as an important measure for institutional investors, enabling risk management or hedging, enhanced return generation and flexible investment strategies. While short selling in Taiwan can generally be conducted through either margin trading or securities borrowing and lending, FINIs can only conduct short selling through securities borrowing and lending.

Margin trading for short selling, governed by the Regulations Governing the Conduct of Securities Trading Margin Purchase and Short Sale Operations by Securities Firms, instead of other securities borrowing and 小額借款 regulations and rules, is unavailable to FINIs.

This article examines how FINIs participate in short selling in Taiwan, and relevant restrictions, as well as providing a brief description of securities borrowing and lending mechanisms in Taiwan.

FINIs and market access

Under the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals (foreign regulations), which govern foreign investment in companies listed on the Taiwan Stock Exchange (TWSE) or the Taipei Exchange (TPEx) in Taiwan, a FINI must register with the TWSE to invest in Taiwan’s securities market. It must also appoint a qualified custodian in Taiwan to:

    1. Hold the securities and any cash proceeds for safekeeping;
    2. Make confirmation and settle any trades; and
    3. Report all relevant information.

Custodians typically assist FINIs in registering with the TWSE and obtaining FINI status. The custodian generally also serves as the FINI’s local agent to:

    1. Open a securities trading account with a local brokerage firm;
    2. Establish a bank account with a local bank;
    3. Pay Taiwan taxes;
    4. Remit funds;
    5. Exercise shareholders’ rights; and
    6. Perform other functions as designated by the FINI.

FINIs must also appoint a qualified agent in Taiwan for filing tax returns and making tax payments on their behalf.

To participate in short selling through the securities borrowing and lending system of the TWSE, a FINI must enter into a securities borrowing and lending authorisation agreement with a securities firm, in the form prescribed by the TWSE, and authorise and empower the securities firm to apply to the TWSE for opening a securities borrowing and lending account on its behalf.

Only after the TWSE reviews and approves the account opening application can the FINI authorise and empower its securities firm to submit any quotes or regulatory filings related to securities borrowing or lending transactions, and perform other relevant tasks.

For short selling through a securities firm’s securities lending mechanism, a FINI must open a securities borrowing and lending account with the same securities firm where it maintains a securities trading account.

SBL mechanisms

TWSE securities borrowing and lending system (SBL). FINIs may engage in securities lending and borrowing through the TWSE’s centralised securities lending and borrowing system. The TWSE securities borrowing and lending rules provide three transaction types under the TWSE SBL:

    1. Fixed-price transactions;
    2. Competitive bidding transactions; and
    3. Negotiated transactions.

Most FINIs conduct only negotiated transactions. The terms and conditions and procedures of fixed-price transactions and competitive bidding transactions have to follow TWSE rules. The stock exchange will guarantee the performance of contracts between the lender and the borrower by assuming both default and performance risks.

In contrast, in negotiated transactions, borrowers and lenders negotiate the terms and conditions of the transactions, including stock name, quantity, borrowing charge rate, term, collateral types and conditions, and compensation for the rights and interests.

Unlike the other transaction types, the parties assume their own default and performance risks. The TWSE’s role is limited to notifying the Taiwan Depositary and Clearing Corporation to effect a book-entry transfer for the delivery, return and compensation for any entitlements arising from the securities, after confirming consistency of the loan terms and conditions between the lending and borrowing transaction reports.

Securities firm SBL. Licensed securities firms, acting as lenders or borrowers, may enter into direct securities and lending transactions with their clients (including individuals, unlike the TWSE SBL). A securities firm SBL offers only negotiated transactions, with processes substantially similar to the TWSE SBL negotiated transactions except for the deadline for providing additional collateral.

In 2023, the overall market trading value of SBL reached NTD7.51 trillion (USD30.8 billion), of which 76% (3% by auction and 73% by negotiation) was through the TWSE SBL, while 24% was by securities firm SBL. In terms of SBL and selling, the overall market lending and selling trading value reached NTD2.39 trillion in 2023. FINIs accounted for more than 90% of the overall market trading value of SBL.

Eligible securities for SBL

Securities eligible for SBL (excluding those listed on the TWSE’s Taiwan Innovation Board) must meet specific criteria and be recognised by the securities exchange where they are listed. The eligible securities for SBL include:

  1. Securities eligible for margin trading for short:
    1. TWSE-listed and TPEx-listed common stock and Taiwan depository receipts that meet certain conditions; and
    2. Beneficiary certificates (fund) listed on the TWSE or TPEx for six months (passive exchange-traded funds (ETFs), active ETFs, futures-based ETFs, and offshore ETFs are exempt from this requirement).
  1. Securities eligible as the underlying securities for call (put) warrants;
  2. Domestic component securities of ETFs; and
  3. TWSE-listed or TPEx-listed securities on which any of the following derivative instruments have been issued:
    1. Single-stock options or single-stock futures;
    2. Domestic and overseas convertible or exchangeable corporate bonds; or
    3. Overseas depositary receipts.

The TWSE publishes and updates the list of loanable securities daily on its website.

Selling requirements and limits

Taiwan prohibits naked short selling; only covered short selling is permitted. FINI sellers must first borrow the stock or ensure that the stock can be borrowed before selling. All short sell orders are normally marked at the time of order submission.

To prevent market disruption, the Financial Supervisory Commission (FSC) imposes volume-based limits on short selling:

    1. Maximum of the total short selling amount. The total amount of a specific eligible security borrowed and sold under the SBL transactions and margin short selling shall not exceed 25% of the listed shares and beneficiary certificates of such security. When this level is reached, new direct short selling of such securities will be suspended until the level drops below 18%.
    2. Maximum short selling via SBL. The total amount of a specific eligible security borrowed and sold through SBL transactions shall not exceed 10% of the listed shares and beneficiary certificates of such security.
    3. Daily maximum of total short selling amount. Daily maximum short selling of borrowed securities cannot exceed 30% of their average daily trading volume over the previous 30 trading sessions (an exception exists for securities firms and futures dealers for hedging or market-making). On 2 April 2025, amid global market volatility, the FSC temporarily lowered this daily limit to 3% initially for one week, later extended for another week until 18 April 2025.

The TWSE calculates short sale volume market-wide rather than by individual investor. Available short sale volumes appear on the TWSE’s website in the “stock loans section” daily, with real-time available volumes for short sales in the market information system. FINIs may request their securities firms to check such information for them through computer linkage to the TWSE. Once the ceilings are reached, the short sale order will be rejected automatically.

ID-based account aggregation

Neither the “prime broker” nor “locate” concept exists in Taiwan. In Taiwan, when a FINI borrows securities for short selling from its securities broker under the securities firm SBL, it does not matter whether the source of the borrowed securities is from the securities broker’s own holdings or borrowed by the broker.

In Taiwan, investors in securities are identified by unique ID numbers. Each FINI is assigned an ID number, allowing them to open trading accounts with various securities brokers. Trades conducted under the same ID – whether long or short positions – will be consolidated.

This ID-based structure enables multiple accounts to share the same ID, allowing proprietary trading units or books to be aggregated, even if they have different trading accounts with brokers and sub-accounts with custodians. Such aggregation helps determine net long or short positions across accounts associated with the same ID, provided that all accounts comply with relevant laws and regulations, and the custodian bank supports this arrangement.