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, options contracts, futures contracts, leverage 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 products, 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 derivative financial products 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 derivative financial products from time to time;
(2)
Periodically evaluate whether the performance of transactions of derivative financial products 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 derivative financial products in the following manners:
(1)
Periodically evaluate whether the risk management actions available presently are proper and strictly comply with the Procedure for Handling Derivative Products defined by the Company.
(2)
Supervise the transactions and income 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 relevant members to deal with derivatives trading in accordance with this procedures and ask these members to submit reports to the Board of Directors periodically.
Article 4. Memorandum book and audit report
The Company shall prepare the memorandum book for transactions of derivative financial products 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 review the appropriateness of the internal control procedure for transactions of derivative financial product 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. If any material breach is discovered, each Supervisor shall be informed in writing.
Article 5. Transaction Principles and Guidelines
The Company shall operate derivative financial products 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 product 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 the hope of locking in or reducing non-operating losses for thecompany.
(2)
Financial Transactions
The purpose of financial transactions is to obtain financial profits. However, in order to control the ceiling 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:
Head of Finance Department below US$ 10 million dollars(including US$ 10 million dollars)
Financial Department Asistant Manager /Vice President over US$ 10 million dollars (including US$ 20 million dollars)
President over US$ 50 million dollars (including 60 million dollars)
Chairman over US$60 million dollars

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 combined transaction contracts is limited to three hundred million US dollars.
(C)
If the trans action requirement exceeds the above limits, the Finance Department 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 actual needs. 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 ceiling 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 Highest Level Supervisor of Financ i a l Depa r tment , e t a l .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 memorandum book for transactions of derivative financial products for the Board of Directors’ review pursuant to Article 4 herein.
2.
Operation team: Formed by Finance Department and performing the operation within the limit defined in Paragraph 4 of Article 5 herein Financial Management Committee may ask the Finance Department 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 derivative financial product” 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 governing authority at the end of February of the following year, and shall report the correction of any unusual circumstances to governing 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 substantial settlement documents shall strictly comply with the relevant stop-loss requirements.
3.
Liquidity:
(1)
Liquidity of products:
It is necessary to consider whether the traded products are common and universal 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 successful 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 record.
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 derivative products to avoid misusing derivative products and causing any loss.
Article 8. Internal audit system:
The internal control is conducted in order to prevent any unauthorized transactions, transactions beyond the scope of 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 position of the transaction.
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 unusual 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 highest level supervisor of the Finance Department.
(1)
The "operation team" shall firstly ask the correspondent banks to provide the pricing and valuation about the statement of transactions of the various products prior to maturity.
(2)
The "Operations Committee" shall submit a report to the highest level supervisor of the Financial Department.
(3)
Accounting Department shall conduct re-check and confirmation based on the "operating team's" evaluation report.
2.
If Financial Management Commission finds any unusual circumstances, it shall take immediate response action with due diligence and then submit the report for treatment of the unusual 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 supervisors and then be proposed to the shareholders’meeting for shareholders’ 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 supervisors. 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.