• Procedures for Derivative Products Transactions

    Updated and resolved by the general meeting of
    shareholders held on June 6, 2014
    Article 1. Purpose
    Operational Procedures for the Derivatives Trading are amended in accordance with the “Regulations Governing the Acquisition and Disposal of Assets by Public Companies” for the purpose of protecting shareholders’ interest, implementing publication of information of the Company, establishing a risk management system and the basis criteria for derivatives trading to the Company.
    Article 2. Definitions
    Derivatives mean forward contracts, option contracts, future contracts, margin contracts, and swap contracts, and compound contracts combining the above products, whose value is derived from assets, interest rates, foreign exchange rates, prices of stocks, prices of commodities, indexes or other interests. The term "forward contracts" does not include insurance contracts, performance contracts, aftersales service contracts, long-term leasing contracts, or long-term purchase (sales) agreements.
    Article 3. Supervision and management of Board of Directors
    1.
    The Board of Directors shall strictly supervise and manage, in the following manners, the transactions of derivatives conducted by the Company:
    (1)
    Appoint high-rank officers to form the Financial Management Committee and pay attention to the supervision and control of risk over transactions of derivatives from time to time;
    (2)
    Periodically evaluate whether the performance of transactions of derivatives corresponds to the existing business strategies and whether the risk borne is tolerable by the Company;
    2.
    The Financial Management Committee authorized by the Board of Directors shall manage the transactions of derivatives in the following manners:
    (1)
    Periodically evaluate whether the risk management actions available presently are proper and strictly comply with the Operational Procedures for Derivatives Trading defined by the Company.
    (2)
    Supervise the transactions and profit-loss thereof, and if finding any unusual circumstances, take the response action and report them to the Board of Directors immediately. Independent directors, if any, should be present at the meeting and express their opinions.
    3.
    When Tatung Company(hereinafter referred to as “the Company”) enganges in derivatives trading, the Chairman of the Board of Directors shall authorize some members relative to deal with derivatives transactions in accordance with this procedures and ask these members to submit reports to the Board of Directors periodically.
    Article 4. Log book and audit report
    The Company shall prepare the Log book for transactions of derivatives recording the type, amount, the date of passage by the Board of Directors and the requirements to be evaluated under subparagraph (4) of Article 19, and Paragraph 1(2) and Paragraph 2(1) of Article 20 of the Regulations Governing the Acquisition and Disposition of Assets by Public Companies. The Company’s internal audit personnel shall periodically make a determination of the suitability of internal controls on derivatives and conduct a monthly audit of how faithfully derivatives trading by the trading department adheres to the procedures for engaging in derivatives trading, and prepare an audit report. If any material violation is discovered, all supervisors shall be notified in writing.
    Article 5. Transaction Principles and Guidelines
    The Company shall operate derivatives based on the following principles and strategies:
    1.
    Transaction Principles:
    In principle, the purpose for the Company’s operations of derivatives shall be to avoid or reduce various financial or commodities risks incurred from its operational activities.
    2.
    Operational or Hedging Strategies:
    (1)
    Hedging Transactions
    In consideration of the future market changes, asset or debt positions currently held by the Company and those required in the future will be use for hedging operations for the purpose of avoiding operational and financial risks and in order to lock in or reduce non-operating losses for the company.
    (2)
    Financial Transactions
    The purpose of financial transactions is to obtain financial profits. However, in order to control the limit of loss, the Company will demanded relevant members to obey regulations on a loss stop strictly.
    3.
    Types of Transactions:
    Derivatives acquired and disposed of by the Company are defined under Article 2 of the Procedures.
    4.
    Limit of transactions subject to authority levels:
    (1)
    Decentralized responsibility and decision making:
    Head of Finance Department: below US$ 10 million dollars(including US$ 10 million dollars) Senior General Manager: over US$ 10 million dollars (including US$ 20 million dollars).; President: over US$ 20 million dollars (including 60 million dollars).; Chairman: over US$60 million dollars.
    (2)
    Approval from the Competent Authority is required for the operation of trading

    5.
    Total contract amount and limit of loss.
    (1)
    Total amount of hedging transaction contracts
    (A)
    Two- thirds of the risk positions incurred from forecasted full year operations.
    (B)
    Two-thirds of the forecasted capital expenditure positions.
    (C)
    Two-thirds of the other forecasted income or expense positions.
    (2)
    Total amount of financial transaction contracts
    (A)
    The amount per transaction contract is limited to one hundred million US dollars.
    (B)
    Total amount of transaction contracts is limited to three hundred million US dollars.
    (C)
    If the transaction requirement exceeds the above limits, the Finance and Accounting General Division may submit a proposal to the President and Chairman and may proceed after their approvals.
    (3)
    Limit of loss
    (A)
    Hedging transactions
    The hedging transactions are conducted to meet the Company’s physical positions. Therefore, the loss of each individual contract shall be no more than 10% of the contract amount, and the limit of loss for all contracts shall be no more than 10% of the total contract amount. If the loss of the transactions of derivative products exceeds the limit, Financial Management Committee shall call a meeting to discuss in accordance with Article 6 of the Procedure to control the risk in a timely manner.
    (B)
    Financial transactions
    The limit of loss per contract is limited to 3 Million US Dollars and the ceiling of accumulated loss for all contracts is limited to 5 Million US Dollars. If the loss for derivatives trading exceeds the above loss limit, it shall be handled in accordance with Article 6 of the Procedures and the Financial Management Committee shall convene a meeting to discussion in order to control the risk in time.
    Article 6. Organization and performance appraisal
    1.
    Financial Management Committee:
    (1)
    The Financial Management Committee shall consist of the five persons including President, Executive Vice President and Senior General Manager of Finance and Accounting General Division, et al. appointed by the Board of Directors, which is responsible for appraising the performance and supervising the Procedure and other relevant financial management measures.
    (2)
    Financial Management Committee shall prepare the log book for transactions of derivatives for the Board of Directors’ review pursuant to Article 4 herein.
    2.
    Operation team: Formed by the Finance and Accounting General Division and performing the operation within the limit defined in Paragraph 4 of Article 5 herein Financial Management Committee may ask the Finance and Accounting General Division in writing to make necessary adjustment subject to the circumstances of operation.
    3.
    Audit team: Formed by Auditing Committee and primarily engaged in the following:
    (1)
    Review the appropriateness of the internal control procedure for “transactions of derivatives” on a regular basis, and shall prepare audit reports on a monthly basis with regard to the compliance situations by the audit transaction department with these Procedures.
    (2)
    The audit personnel shall submit the audit report referred to in the preceding paragraph and the report about execution of the audit plan in the internal audit year to the authority at the end of February of the following year, and shall report the correction of any irregular circumstances to authority at the end of May of the following year at the latest.
    Article 7. Risk management actions
    1.
    Credit risk:
    The financial organizations with remarkable credit, large scale and able to provide professional information shall be the priority of correspondent banks.
    2.
    Market risk:
    In consideration of the fluctuation in the market price of financial products, it is likely to produce loss. Therefore, upon conclusion of the position, the transactions without physical settlement documents shall strictly comply with the stop-loss requirements.
    3.
    Liquidity:
    (1)
    Liquidity of products:
    It is necessary to consider whether the trading products are common and liquidity in the market.
    (2)
    Liquidity of cash:
    It is necessary to pay attention to the Company’s cash flow from time to time to ensure the complete settlement upon maturity of the various transactions.
    4.
    Operation:
    It is necessary to strictly comply with the authorized limit, operating procedure for transactions, and entry and control related to the transaction records.
    5.
    Legal compliance:
    Other than the regular transaction contracts, the master contracts related to transactions shall be informed to Legal Department to avoid any risk arising therefrom.
    6.
    Product risk:
    Operation personnel shall possess complete and correct professional knowledge about the derivatives to avoid misusing derivatives and causing any loss.
    Article 8. Internal audit system:
    The internal control is conducted in order to prevent any unauthorized transactions, transactions beyond the authorization, unrecorded transactions and unrecognized loss: Including the following requirements:
    1.
    The Company shall advise the correspondent banks officially in the name of the Company of the name of the Company’s trader. The same shall apply where the trader is changed.
    2.
    After completion of each transaction, the form about transaction shall be filled in after completion of each transaction and forwarded to the accounting department for entry. Besides, bank confirmation shall be subsequent ly provided to the accounting department for reference.
    3.
    The personnel engaged in transaction, confirmation and settlement shall not be the same person or act as the substitute or agent of each other.
    4.
    The personnel engaged in measuring, supervising and controlling risk shall come from the departments different from those of said personnel, and shall report to the Board of Directors or highrank officers who are not responsible for making policies for transactions or positions.
    5.
    The personnel engaged in confirmation shall check the transaction record strictly and control the positions.
    6.
    Accounting personnel shall check the account with the correspondent banks or ask for the statement of account periodically.
    7.
    Audit and accounting personnel shall check whether the total transaction amount exceeds the total contract amount under the Procedure from time to time.
    8.
    The audit personnel shall conduct a post-audit on the entire transaction procedure.
    Article 9. Approach to evaluate periodically and treatment of irregular circumstances
    1.
    Derivatives trading positions held shall be evaluated at least once per week; however, positions for hedge trades required by business shall be evaluated at least twice per month. Evaluation reports shall be submitted to the Senior General Manager of the Finance and Accounting General Division.
    (1)
    The “Operations Team” shall firstly ask the banks to provide the valuation about the statement of transactions prior to maturity.
    (2)
    The “Operations Committee” shall submit a report to the Senior General Manager of the Finance and Accounting General Division.
    (3)
    Accounting Department shall conduct re-check and confirmation based on the “operations team’s” evaluation report.
    2.
    If Financial Management Committee finds any irregular circumstances, it shall take immediate response action with due diligence and then submit the report for treatment of the irregular circumstances to the Board of Directors.
    Article 10. Announcement and report
    The contents to be announced under the requirements of Financial Supervisory Commission, Executive Yuan and TSEC shall be announced and reported externally via the information system.
    Article 11. Bylaw
    This Operational Procedures and its amendents shall be submitted to the independent directors and then be proposed to the shareholders’meeting for approval after Tatung Company’s board of directors passes it.
    If any director shows his objection which appears on the record or is expressed in writing on this Operational Procedures or its amendents, Tatung Company shall submit such objection to the independent directors.
    After Tatung Company has established the position of independent directors, the board of directors shall take opinions of independent directors into full consideration when this Operational Procedures are proposed to the board of directors for discussion by Tatung Company, pursuant to the preceding paragraph.
    When any independent director shows any dissenting opinion or qualified opinion, that shall be noted in the minutes of the board of directors’ meeting.
    After Tatung Company has established the position of audit committee, amendents or modifications to this Operational Procedures shall be approved with the consent of one-half or more of all audit committee members and then submitted to the board of directors for consideration and resolution. However, if amendents or modifications to this Operational Procedures have not been approved with the consent of one-half or more of all audit committee members, they may be undertaken with the consent of two-thirds or more of all directors and any resolution of the audit committee shall be recorded in the minutes of the board of directors’meeting.
    All audit committee members and all directors as referred in the preceding paragraph shall mean the actual number of persons currently holding those positions.
    After Tatung Company has established the position of independent directors, articles regarding supervisors in this Operational Procedures shall apply mutatis mutandis to the audit committee.