R & P Consulting How will the financial transaction tax impact options trading in Europe? Amsterdam 9 April 2013 Luca Barillaro – Independent trader –

R & P Consulting

How will the financial How will the financial transaction tax impact transaction tax impact

options trading in Europe? options trading in Europe? Amsterdam 9 April 2013Amsterdam 9 April 2013

Luca Barillaro – Independent trader –

R&P Consulting

[email protected]

R & P Consulting

AgendaAgendaThe European Directive on FTTThe french and italian FTT Evidences on french and italian marketsThe impact of European FTT on options

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The race to the FTTThe race to the FTT

01/08/12 14/2/13 01/03/13 01/07/13 30-Sept-13 to

1-Jan-14

France FTT on

Equities

Italy FTT on Equities

FTT on

Derivatives

Europe

(11)

Euro FTT

Directive

Single nations laws

implementation

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The European DirectiveThe European Directive Principle: everybody pays on everything issued in a FTT related country Min. 0,01% on derivatives notional (art.9) Each counterpart is jointly liable (art.10) Anti-abuse rules vs. artificially reduced

notional with multipliers (art. 12-13-14) Exemptions (CCPs, Central Banks, EFSF,

Primary Market) (art. 3) Strong impact on financing costs (both

corporate and govies)

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Residence and Issuance principles (3.3.2)Residence and Issuance principles (3.3.2) In order to improve the resilience of the system against

relocation,by complementing the residence principle with the issuance principle, it will be less advantageous to relocate activities and establishments outside the FTT jurisdictions, since trading in the financial instruments subject to taxation under the latter principle and issued in the FTT jurisdictions will be taxable anyway. This concerns essentially shares, bonds and equivalent securities, money-market instruments, structured products, units and shares in collective investment undertakings and derivatives traded on organised trade venues or platforms. In the context of the issuance principle, which also underlies certain existing national financial sector taxes, the transaction is linked to the participating Member State in which the issuer is located. The persons involved in such transaction will be deemed to be established in that Member State because of this link, and the financial institution(s) concerned will have to pay FTT in that State. All the above mentioned criteria are subject to a general rule, regarding the case where the person liable to pay the tax proves that there is no link between the economic substance of the transaction and the territory of any participating Member State. In that case, the financial institution or other person shall not be considered established within a participating Member State.

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Reactions in Germany….Reactions in Germany….

FAZ – Frankfurter Allgemeine Zeitung Börsenhandel Heftiger Widerstand gegen FinanztransaktionssteuerDie „Süddeutsche Zeitung“ berichtete, das vor allem von Bundeskanzlerin Merkel (CDU)

vorangetriebene Projekt stehe schon wieder auf der Kippe, da sich Widerstand in der FDP rege.

Eine solche Abgabe belaste Kleinsparer und mittelständische Betriebe zu sehr, erklärte der

stellvertretende FDP-Fraktionschef Volker Wissing gegenüber dem Blatt.

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Sherwood or Fantasyland?Sherwood or Fantasyland?

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France and Italy : the pioneersFrance and Italy : the pioneers 0,2% on cash equities

purchase Derivatives exempt MM/LP exempt Intraday exempt Market cap <1 bn exempt Residence/Issuance

principle applies 0,01% on canc/mod orders

exceeding 80% total orders (only on France based firms and on their own account)

0,01% on naked CDS purchase issued by another EU State.

0,12 (0,22 OTC) on cash equities purchase

Fix sum on derivatives from 1st July on (both buyer and seller pay)

Tax on futures notional but on options premium

MM/LP exemptIntraday exemptMarket cap<500 mio. ExemptResidence/Issuance principle

applies0,02% on canc/mod orders

exceeding 60% total orders

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FTT on italian derivatives starting 1st JulyFTT on italian derivatives starting 1st July(in euros per lot)(in euros per lot)

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Cac40 volume decreaseCac40 volume decrease

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Cac40 underperformed Europe since 1-Cac40 underperformed Europe since 1-AugAug

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Cac40 volatilityCac40 volatility

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Empirical evidences on Cac40Empirical evidences on Cac40

Ftt deters market participation (B&H)Ftt favours volume reductionFtt creates underperforming conditionsIntraday liquidity is unaffected thanks to

Intraday trading and MM/LP exemptions Until MM/LP and intraday trading are excluded only

volumes and performance are affected. When the tax will be imposed on intraday and MM/LP then liquidity will shrink and volatility will increase dramatically

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Statistical evidences on French Statistical evidences on French market (August-January)market (August-January)

French market share in European trading back to 2008 levels (11.8% Jan-13 vs 17.3% in 2011) (source MarketPrizm)

Trading in ftt affected stocks decreased by an avg 21%, while trading in ftt exempt stocks increased by an avg 19% (source Credit Suisse)

Among ftt affected stocks the strongest volume decrease has been registered in the 1-2 bln capitalization stocks (mid cap are the most penalized) (near threshold) (R&P)

Overall volumes decreased by an avg 24% (ftt affected stocks weigh more than the rest) (Rest of Europe decreased by 16% with no major difference btw small, mid and large caps)

CFD and OTC stock derivatives volumes increased dramatically (european schizophrenia , ftt against emir scope!)

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Statistical evidences on Italian Statistical evidences on Italian markets (March 2013 – in/excluding markets (March 2013 – in/excluding

OTC)OTC) -14% Volume on Milan listed FTT affected stocks

(excluding expiration date) , -42% OTC, -34% overall avg (Source CS, MS, R&P)

-12% Volume on FTSEMIB stocks (confirms french experience – greater impact on near threshold stocks)

+20% volume on index future (FTSEMIB future) Volume on FTT exempt stocks increased by 9% Italian market share in Europe down from 22% (pre

election) to 15% (march) Etf volume unaffected

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Volume change March vs Volume change March vs Jan/Feb 13Jan/Feb 13

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-12% Volume in Milan FTSEMIB -12% Volume in Milan FTSEMIB since 1st Marchsince 1st March

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Italian equity index skew (April)Italian equity index skew (April)

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Italian equity index skew (Sept)Italian equity index skew (Sept)

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Italian equity index skew (Dec) but..Italian equity index skew (Dec) but..

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What happened to single What happened to single stocks IV?stocks IV?

We investigated the behaviour of IV in 3 different groups

1) First 5 large cap stocks2) Near FTT threshold stocks3) FTT exempt large cap stocksAnd we discovered that....

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Unicredit IV JuneUnicredit IV June(red puts, green calls)(red puts, green calls)

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Intesa San Paolo IV JuneIntesa San Paolo IV June

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ENI IV JuneENI IV June

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Mediolanum IV JuneMediolanum IV June

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Luxottica IV JuneLuxottica IV June

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Mediobanca IV JuneMediobanca IV June

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Tenaris IV JuneTenaris IV June

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We discoveredWe discovered

Indeed there is a delivery risk priced inATM options spreads on first 5 large cap

stocks are unaffectedATM options spreads on “second row”

stocks are wider (confirms liquidity shrinking on swaps, otc and listed books)

ATM options spreads on “second row” FTT exempt stocks are unaffected

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Death of American style options.Death of American style options. ITM AND ATM CALLS and ITM AND ATM CALLS and

the delivery riskthe delivery risk10 18 2720 19 2630 20 2540 21 2550 22 2460 22 2470 23 2480 23 2490 23 24

0

5

10

15

20

25

30

0 20 40 60 80 100STRIKE

IV

Serie1

Serie2

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ITM AND ATM PUTS and the ITM AND ATM PUTS and the delivery riskdelivery risk

0

5

10

15

20

25

30

35

0 20 40 60 80 100

STRIKE PUT

IV

Serie1

Serie2

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European vs Italian FTT: possible outcomes on European vs Italian FTT: possible outcomes on european option marketseuropean option markets

European FTT on notional brings us:

End of OTM and ATM calls, and ITM ATM puts

Only OTM puts and deep ITM calls remain

Strategies zeroed

Italian FTT on premium (% or fix sum):

Generally better

Options may become more interesting than futures

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Common problems deriving from Common problems deriving from FTT introductionFTT introduction

Options strategies and trading become too expansive Hedging costs soar FTT affected cash markets liquidity shrinks, bid/ask

on corresponding options widens Liquidity shrinks as FTT on options and potential

underlying delivery cripple market partecipants IV increases as a result FTT markets cannot be hedged due to costs (tax,

illiquidity and raising IV) and lack of counterparts Liquidity abandons FTT markets FTT markets become more fragile, unstable and more

subject to sudden moves Remember 1987

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Thank you for your attention!Thank you for your attention!Questions?Questions?

Thank you!