How will the financial transaction tax impact options trading in Europe? Amsterdam 9 April 2013

1. R & P Consulting Luca Barillaro – Independent trader – R&P Consulting l.barillaro@raimondi-partners.it How will the financial transaction tax impact options trading in Europe? Amsterdam 9 April 2013

2. R & P Consulting Agenda The European Directive on FTT The french and italian FTT Evidences on french and italian markets The impact of European FTT on options

3. R & P Consulting The race to the FTT

4. R & P Consulting The 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)

5. R & P Consulting 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.

6. R & P Consulting Reactions in Germany…. FAZ – Frankfurter Allgemeine Zeitung Börsenhandel Heftiger Widerstand gegen Finanztransaktionssteuer Die „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.

7. R & P Consulting Sherwood or Fantasyland?

8. R & P Consulting France 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 exempt Intraday exempt Market cap<500 mio. Exempt Residence/Issuance principle applies 0,02% on canc/mod orders exceeding 60% total orders

9. R & P Consulting FTT on italian derivatives starting 1st July(in euros per lot)

10. R & P Consulting Cac40 volume decrease

11. R & P Consulting Cac40 underperformed Europe since 1-Aug

12. R & P Consulting Cac40 volatility

13. R & P Consulting Empirical evidences on Cac40 Ftt deters market participation (B&H) Ftt favours volume reduction Ftt creates underperforming conditions Intraday 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

14. R & P Consulting Statistical evidences on French 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!)

15. R & P Consulting Statistical evidences on Italian markets (March 2013 – in/excluding 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

16. R & P Consulting Volume change March vs Jan/Feb 13

17. R & P Consulting -12% Volume in Milan FTSEMIB since 1st March

18. R & P Consulting Italian equity index skew (April)

19. R & P Consulting Italian equity index skew (Sept)

20. R & P Consulting Italian equity index skew (Dec) but..

21. R & P Consulting What happened to single stocks IV? We investigated the behaviour of IV in 3 different groups 1) First 5 large cap stocks 2) Near FTT threshold stocks 3) FTT exempt large cap stocks And we discovered that....

22. R & P Consulting Unicredit IV June(red puts, green calls)

23. R & P Consulting Intesa San Paolo IV June

24. R & P Consulting ENI IV June

25. R & P Consulting Mediolanum IV June

26. R & P Consulting Luxottica IV June

27. R & P Consulting Mediobanca IV June

28. R & P Consulting Tenaris IV June

29. R & P Consulting We discovered Indeed there is a delivery risk priced in ATM options spreads on first 5 large cap stocks are unaffected ATM 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

30. R & P Consulting Death of American style options.ITM AND ATM CALLS and the delivery risk

31. R & P Consulting ITM AND ATM PUTS and the delivery risk

32. R & P Consulting European vs Italian FTT: possible outcomes on european 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

33. R & P Consulting Common problems deriving from FTT 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

34. R & P Consulting Thank you! Thank you for your attention!Questions?