Will First-Time Settlement Default Trigger Immediate Fund/Stock Blocking? FSC Considers Strengthening Risk Controls

Taiwan's stock market has rapidly surpassed the 30,000 and 40,000-point milestones this year, with daily trading volumes frequently exceeding one trillion TWD. Consequently, both the amount and number of settlement defaults have been steadily increasing. Market rumors suggest the Financial Supervisory Commission (FSC) is planning to strengthen investor risk management: even first-time defaulters who promptly settle their outstanding amounts may be required to implement 'pre-collection and blocking' (circle deposit) for future trades in the short term. However, officials from the Securities and Futures Bureau stated that these measures are still under discussion, with no implementation timeline set.

Under current rules implemented by the Taiwan Stock Exchange on October 12, 2021, investors committing their first default receive only a notification letter and regulatory guidance from their brokerage. Only upon a second default within one year do all brokers impose a restriction requiring full pre-deposit of funds or securities for 10 consecutive trading days over a three-month period starting from the case closure date.

However, this year’s significantly expanded market volume, coupled with media reports of teenage trading prodigies defaulting on small amounts like 3,000 or 5,000 TWD, highlights inadequate risk assessment and liquidity management among some young, retail, or novice investors.

To further enhance investor risk awareness and maintain settlement order, regulators are considering shortening the response period by advancing the threshold from 'second default triggers pre-collection' to apply even after a single default. Even if investors settle the shortfall within days, they may still be required to pre-secure sufficient funds or shares before placing orders for a specified period or number of transactions, losing the convenience of the 'T+2' deferred payment system.

When questioned whether recent spikes in minor or day-trading defaults prompted emergency revisions, FSC officials clarified that the surge in trading volume naturally leads to higher default amounts due to statistical base effects. Daily default data is publicly available on dedicated sections of the TWSE and TPEx websites.

Officials emphasized that this policy review is part of routine market order optimization, covering multiple aspects such as broker management and risk control education, all of which require further evaluation. The mechanism remains under discussion, with specific parameters and rollout schedules to be finalized after formal proposals from the exchange.

Officials also noted that a new leverage information disclosure section (Taiwan Stock Dashboard) will soon launch, aiming to improve market transparency and foster a healthier trading environment.