Market making on the IDEM

Transcription

1 Market making on the IDEM

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3 Index 1. Market making on the IDEM 3 2. Application process 5 3. Market making performance evaluation 5 4. Risk-protection functionalities 6 5. FTSE MIB* index futures and mini-futures 8 6. FTSE MIB* index options 9 7. Stock options Stock futures Electricity futures 21 Appendix A - Epsilon indicator (ε) 22 Appendix B - Error handling procedure 23 Appendix C - Price divergence dynamic control 29

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5 1. Market making on the IDEM IDEM, the Italian Derivatives Market, is the third derivatives market in Europe. It trades more than 140,000 contracts daily corresponding to a notional amount of 4.5bn. Market makers play a relevant role on the IDEM improving market liquidity and the efficiency of the price discovery process through their intense quoting activity. More than 20 market making firms, displaying bids and offers on a continuous basis or responding to RFQs, are currently active on the IDEM. IDEM has flexible market making schemes linked to real market conditions. Effective market making schemes allow liquidity providers to further enhance the price discovery process for all market participants and benefi t from an effi cient tradeoff between risk and reward. This is one among several factors that make the IDEM one of the most attractive markets in Europe from a market making perspective. Three models for market making on FTSE MIB* index options, stock options and electricity futures are available: Primary Market Makers quote on a continuous basis with no obligation to answer to RFQs Liquidity Providers quote on a continuous basis with no obbligation to answer to RFQs Market Makers answer to RFQ sent by other members For FTSE MIB* index futures, FTSE MIB* index mini-futures and stock futures, only the Primary Market Maker status is available. IDEM members may also apply as specialists if they intend to use another company to perform market making activity. Specialists (PS, LPS and S) are provided with the same benefi ts and need to fulfi l the same set of obligations as market makers. Market makers are granted a reduction on trading fees up to 80% applicable to all contracts traded in own account (or on the transactions entered in agency account in order to fulfi ll obligations as specialists). Market makers are also provided with an upgrade of the API used for quotation, and with a mass quotation functionality which allows them to send up to 100 quotations simultaneously in just one transaction. MARKET MAKING ON THE IDEM 3

6 Table 1 - Reduction on trading fees applied to market makers and specialists. Product PMM (PS) MM (S) LP (LPS) FTSE MIB* index futures No reduction n.a. n.a. FTSE MIB* index mini-futures 40% n.a. n.a. FTSE MIB* index options 60% 60% 30% Stock futures 80% n.a. n.a. Stock options 80% 40% 20% Electricity futures 50% 25% 20% Market makers and specialists need to fulfi l a specifi c set of obligations depending on the product and the market making status selected, in terms of: Expiries and series: a specifi ed number of maturities and strikes need to be quoted. Quantity: minimum quotation size. Spread: maximum difference allowed between bid price and the corresponding ask price. Time: maximum time allowed to restore quotations or to answer to RFQs. 4 MARKET MAKING ON THE IDEM

7 2. Application process Any member of the IDEM may apply for the market making or specialist status provided that it has the necessary qualifi cation to fulfi l the obligations required: Professional requirements: the member needs to provide Borsa Italiana with contact details of the traders who will perform market making activity. These traders need to be qualifi ed and must pass an evaluation interview aimed at verifying the in-depth knowledge of Borsa Italiana s Rules and Instructions. IT requirements: the member needs to inform Borsa Italiana about the trading system used to perform quotation activity. The system must pass a conformance test and a specifi c check-list in order to verify its compatibility with market making activity and quoting functions management. Companies that are already members of the IDEM and that are interested in market making or specialist activity can apply by fi lling in an application form on which they specify which contracts they want to quote and the market making status (PMM/PS, MM/S, LP/LPS) they are interested in. Borsa Italiana verifi es whether the company meets all requirements for admission and confi rms the application within 30 days from the receipt of the application form. 3. Market making performance evaluation Markets Supervision calculates the epsilon indicator on a monthly and quarterly basis in order to assess market makers performances. Markets Supervision also sends every market making desk the epsilon indicator of the previous trading day, to provide them with track of recent past performance. The aim of the epsilon indicator is to measure the fulfi lment of market making obligations, being calculated as a weighted average of three ratios measuring time of prices availability, spread and quantity displayed on the orderbook (see Appendix A ). MARKET MAKING ON THE IDEM 5

8 Borsa Italiana also takes monthly and quarterly epsilon indicators into account in order to evaluate any violation of market making obligations. The minimum epsilon required is dependent on the derivatives product and the market making status. 4. Risk-protection functionalities The IDEM provides market makers and specialists with system-based risk-protection functionalities. Thanks to these tools, intermediaries who provide market liquidity are able to substantially reduce operational and market risk. 4.1 Market maker protection This functionality is a cutting-edge solution featured by a high level of granularity and fl exibility. Intermediaries are provided with the opportunity to set up to 4 parameters before market opening, with the ability to change them during the trading session: Volume protection quantity: is calculated as the amount of contracts traded-off on the quotes placed on derivatives based on the underlying. Delta protection quantity: absolute value of the sum of [(bought call options + sold put options) (sold call options + bought put options)]. Exposure limit time: time interval within which the thresholds mentioned above have to be exceeded. Frozen quotation time: the number of seconds during which the mass quotation and single quote transactions are not allowed. 6 MARKET MAKING ON THE IDEM

9 Delta and volume protection can be activated at the same time. Protection parameters are set at an underlying level (options and futures based on the same underlying) with day-validity and only traded quotes (not single orders) are counted for determining the protection threshold breach. Protection parameters can be set using both the Click Trade as well as API applications. When protection is triggered, a message is sent out notifying of the protection event and identifying the underlying on which the protection has been triggered. The market maker is temporarily inhibited to quote only on the derivatives based on the specifi c underlying on which the protection has been triggered. The protection effects are valid at Company level: when protection is triggered, all market making users belonging to the same Company are temporarily suspended from the quotation function on derivatives based on the underlying. However, market makers are allowed to override the temporary quotation suspension indicating a specifi c value within the quote messages. This functionality is activated only for the products for which the market maker is registered, upon request by the intermediary. 4.2 Market heartbeat A signal between the market making software application and the central system delivers protection against technical failure of either the customer software or the IDEM infrastructure. An interruption of the signal triggers immediate deletion of all quotes entered by market maker or specialist, if no further signal arrives within a preset period of time. MARKET MAKING ON THE IDEM 7

10 5. FTSE MIB* index futures and mini-futures Futures on the FTSE MIB* index with maturity up to 1 year and mini-futures on the FTSE MIB* index with maturity up to 6 months are listed on the IDEM. Table 2 - Obligations on the FTSE MIB* index futures and on the FTSE MIB* index mini-futures. Obligation type FTSE MIB* index futures PMM (PS) FTSE MIB* index mini-futures PMM (PS) Activity Continuous quotation Continuous quotation Expiries First expiry 1 First expiry 1 Minimum quotation size 10 contracts 15 contracts Maximum spread 45 index points 45 index points Time 2 min. after the quote is hit 2 min. after the quote is hit Quotation hours 9.30am pm 9.30am pm Minimum epsilon 90% 90% 1 Quotation obligations are valid on the nearest maturity until the fourth day before its maturity and, as of the day after, for the first subsequent maturity. 8 MARKET MAKING ON THE IDEM

11 6. FTSE MIB* index options Options on the FTSE MIB* index with maturity up to 5 years are listed on the IDEM. Table 3 - Obligations on the FTSE MIB* index options. Obligation type PMM (PS) MM (S) LP (LPS) Activity Continuous quotation Answer to RFQs Continuous quotation Expiry First 7 expiries (2 monthly, 4 quarterly and 1 half-yearly up to 18 months). 5 call and 5 put series in the group of nine series centred on the ATM series (Table 4). Between the ninth and fi fth trading day before the expiry day the obligations for the nearest maturity must be fulfi lled on 3 call and 3 put series (Table 5). The quotation obligations for the nearest maturity shall cease to apply on the fourth trading day before the expiry day. 15 contracts for the fi rst three consecutive expiries, 10 contracts for the fourth, fi fth and the sixth expiries, 5 contracts for the seventh expiry. All 12 expiries listed (up to 5 years). First 4 expiries (2 monthly and 2 quarterly up to 6 months). Series 2 The at-the-money, the fi rst 5 series out-ofthe-money and the fi rst 5 series in-the-money (Table 6). On the sixth and fi fth trading day before the expiry day the obligations for the nearest maturity must be fulfi lled for: the at-the-money series, the fi rst 2 in-the-money and the fi rst 2 outof-the-money series (Table 7). 5 call and 5 put series in the group of nine series centred on the ATM series (Table 4). Between the ninth and fi fth trading day before the expiry day the obligations for the nearest maturity must be fulfi lled on 3 call and 3 put series (Table 5). The quotation obligations for the nearest maturity shall cease to apply on the fourth trading day before the expiry day. Quantity 10 contracts for all listed expiries. 15 contracts for the fi rst three consecutive expiries, 10 contracts for the fourth expiry. 2 From 9.30am to 3.45pm the at-the-money series is determined with reference to the last value of the FTSE MIB* index of the previous trading day; subsequently, the at-the-money series is determined on the basis of the average value of the FTSE MIB* index in the last five minutes before MARKET MAKING ON THE IDEM 9

12 Obligation type PMM (PS) MM (S) LP (LPS) Spread Spread dependent on the bid price and on maturity (Table 8). Spread dependent on the bid price and on maturity (Table 8-9). Spread dependent on the bid price (Table 8). Time Obligation to quote continuously with a maximum allowed time to restore quotations equal to 2 minutes. Obligation to respond to a request for quote within 2 minutes and keep the quote on the orderbook for at least 30 seconds. Obligation to quote continuously with a maximum allowed time to restore quotations equal to 2 minutes. Quotation hours 9.30am pm 9.30am pm 9.30am pm Minimum epsilon 90% 80% 90% Table 4 - PMM (PS) and LP (LPS) space on the FTSE MIB* index options. Call Put Call Put Call Put x +3 x +2 x +1 x ATM x x -1 x -2 x -3 x -4 x x +4 x +3 x +2 x +1 x x ATM x -1 x -2 x -3 x x +2 x +1 x ATM x -1 x x -2 x -3 x -4 x -5 x 10 MARKET MAKING ON THE IDEM

13 Table 5 - PMM (PS) and LP (LPS) space on the FTSE MIB* index options between the ninth and fifth trading day before expiry. Call Put Call Put Call Put x +1 x ATM x x -1 x -2 x x +2 x +1 x x ATM x -1 x x ATM x -1 x x -2 x -3 x -4-5 Table 6 - MM (S) space on the FTSE MIB* index options. Table 7 - MM (S) space on the FTSE MIB* index options between the sixth and fifth trading day before expiry. Call Put Call Put +5 x x +4 x x +3 x x +2 x x +1 x x ATM x x -1 x x -2 x x -3 x x -4 x x -5 x x x x +1 x x ATM x x -1 x x -2 x x MARKET MAKING ON THE IDEM 11

14 6.1 Spread obligations for the FTSE MIB* index options PMM (PS), LP (LPS) and MM (S) have to comply with the following spread tables in displaying bids and offers. Table 8 - Maximum spreads allowed on the FTSE MIB* index options with expiry up to 1 year. Bid price (index points) Max. spread (index points) From 1 to From 202 to From 505 to 1, From 1,005 to 2, From 2,005 to 4, More than 4, Table 9 - Maximum spreads allowed on the FTSE MIB* index options with expiry over 1 year. Bid price (index points) Max. spread (index points) From 1 to From 505 to 1, From 1,005 to 2, From 2,005 to 4, From 4,005 to 6, More than 6,000 1, MARKET MAKING ON THE IDEM

15 7. Stock options More that 40 stock options are listed on the IDEM, providing intermediaries with full coverage of FTSE MIB* constituents. The most liquid stock options are grouped into a Focus Group (Table 10). In order to assure and enhance liquidity on all listed stock options, market makers and specialists are required to undertake obligations on a minimum number of underlyings depending on the status selected 3. Table 10 - Focus Group composition. Focus Group - Composition Enel Eni Fiat Generali Assicurazioni Intesa Sanpaolo STMicroelectronics Telecom Italia UniCredit PMM (PS) and LP (LPS) need to fulfi l size obligations for a minimum number of contracts equal to one of the following values: 10, 20, 30, 40, 60, 80, 100, 120, 140 or 160 contracts. Borsa Italiana allocates stock options into size classes on the basis of the notional turnover of the underlying on the cash market, the size of the option contract and the historical volatility of the underlying. 3 With the sole exception of LP and LPS status. MARKET MAKING ON THE IDEM 13

16 Borsa Italiana defi nes the underlying to be included in the Focus Group (up to a maximum of 10) on the basis of liquidity of the underlying, also taking into account the existence of option contracts with maturities over 1 year. The composition of the Focus Group and the allocation of stock options into size classes is revised at least once a year and announced with an offi cial notice. Table 11 - Obligations on stock options. Obligation type PMM (PS) MM (S) LP (LPS) Activity Continuous quotation Answer to RFQs Continuous quotation Number of underlying Minimum 20 underlyings, of which all constituents of the Focus Group. Expiry First 4 expiries (2 monthly and 2 quarterly up to 1 year). For underlying belonging to the Focus Group also the fi fth and the sixth expiries need to be quoted. At least 5 underlyings. All 6 expiries (up to 1 year) plus the 4 half-yearly expiries for listed long options (up to 3 years). No minimum number of underlyings required. First 4 expiries (2 monthly and 2 quarterly up to 6 months). 14 MARKET MAKING ON THE IDEM

17 Obligation type PMM (PS) MM (S) LP (LPS) Series Quantity Spread Time 4 call and 4 put series in the group of nine series centred on the ATM series (Table 12). Between the ninth and fi fth trading day before the expiry day the obligations for the nearest maturity must be fulfi lled on 3 call and 3 put series (Table 13). The quotation obligations for the nearest maturity shall cease to apply on the fourth trading day before the expiry day. Depending on the underlying. For constituents of the Focus Group size obligations are halved on the fourth, fi fth and sixth maturity. Different spread tables according to the underlying stock price and dependent on bid price (Table 16). Obligation to quote continuously with a maximum allowed time to restore quotations equal to 2 minutes. The at-the-money, the fi rst 5 series outthe-money and the fi rst 5 series in-the-money for expiries up to 1year, the at-the-money, the fi rst 5 series outthe-money and the fi rst 2 series in-the-money for expiries from 1 year up to 3 years (Table 14) On the sixth and fi fth trading day before the expiry day the obligations for the nearest maturity must be fulfi lled for: the at-the-money series, the fi rst 2 in-the-money and the fi rst 2 outof-the-money series (Table 15). The quotation obligations for the nearest maturity shall cease to apply on the fourth trading day before the expiry day. 40 contracts for constituents of the Focus Group, 20 contracts for all other underlyings and for options with maturity over 1 year. Different spread tables according to the underlyings stock price and dependent on bid price and maturity (Table 16 and Table 17). Obligation to respond to RFQs within 2 minutes and keep the quote on the orderbook for at least 15 seconds. 4 call and 4 put series in the group of nine series centred on the ATM series (Table 12). Between the ninth and fi fth trading day before the expiry day the obligations for the nearest maturity must be fulfi lled on 3 call and 3 put series (Table 13). The quotation obligations for the nearest maturity shall cease to apply on the fourth trading day before the expiry day. Depending on the underlying. For constituents of the Focus Group size obligations are halved on the fourth maturity. Different spread tables according to the underlying stock price and dependent on bid price (Table 16). Obligation to quote continuously with a maximum allowed time to restore quotations equal to 2 minutes. Quotation hours 9.30am pm 9.30am pm 9.30am pm Ref. epsilon 85% 80% 85% MARKET MAKING ON THE IDEM 15

18 Table 12 - PMM (PS) and LP (LPS) space on stock options. Calls Puts Calls Puts Call Puts x +2 x +1 x ATM x x -1 x -2 x -3 x x +3 x +2 x +1 x x ATM x -1 x -2 x x +1 x ATM x -1 x x -2 x -3 x -4 x Table 13 - PMM (PS) and LP (LPS) space on stock options between the ninth and fifth trading days before expiry. Call Puts Calls Puts Calls Puts x +1 x ATM x x -1 x -2 x x +2 x +1 x x ATM x -1 x x ATM x -1 x x -2 x -3 x MARKET MAKING ON THE IDEM

19 Table 14 - MM (S) space on stock options. Table 15 - MM (S) space on stock options on the sixth and the fifth trading day before expiry. Calls Puts Calls Puts +5 x x +4 x x +3 x x +2 x x +1 x x ATM x x -1 x x -2 x x -3 x x -4 x x -5 x x x x +1 x x ATM x x -1 x x -2 x x Spread obligations for stock options PMM (PS), LP (LPS) and MM (S) have to comply with the following spread tables in displaying bids and offers. Table 16 - Spread tables for stock options with expiry up to 1 year. Spread table A Bid Price (euro) Max. spread (euro) More than or equal to MARKET MAKING ON THE IDEM 17

20 Spread table B Bid Price (euro) Max. spread (euro) More than or equal to Spread table C Bid Price (euro) Max. spread (euro) More than or equal to Table 17 - Spread tables for stock options with expiry over 1 year. Spread table A Bid Price (euro) Max. spread (euro) More than or equal to Spread table B Bid Price (euro) Max. spread (euro) More than or equal to Spread table C Bid Price (euro) Max. spread (euro) More than or equal to MARKET MAKING ON THE IDEM

21 8. Stock futures More that 40 stock futures are listed on the IDEM, providing intermediaries with a full coverage of FTSE MIB* constituents. The most liquid stock futures are grouped into a Focus Group (Table 10). In order to assure and enhance liquidity on all listed stock futures, market makers and specialists are required to undertake obligations on a minimum number of underlyings. PMM and PS need to quote all constituents of the Focus Group for which quantity obligations are higher than for other underlyings, and then select the remaining contracts. PMM and PS need to fulfi l size obligations for a minimum number of contracts equal to one of the following values: 5, 15 or 25 contracts. Borsa Italiana allocates stock futures into size classes on the basis of trading volume of the underlying on the cash market, the size of the stock futures contract and the historical volatility of the underlying. Borsa Italiana specifi es the underlyings included in the Focus Group (up to a maximum of 10) on the basis of liquidity of the underlying. The composition of the Focus Group and the allocation of stock futures into size classes is revised at least once a year and announced with notice. Table 18 - Obligations on stock futures. Obligation type PMM (PS) Activity Number of underlying Continuous quotation At least 20 underlyings. It is required to cover all underlyings composing the Focus Group (most liquid underlying). Expiry First expiry 4 Minimum quotation size 25, 15 or 5 contracts depending on the underlying. 4 Quotation obligation is valid on the nearest maturity until the fourth day before its maturity and, starting on that day, for the first subsequent maturity. MARKET MAKING ON THE IDEM 19

22 Obligation type PMM (PS) Maximum spread Depending on bid price and which size class the underlying belongs to (table 19). Time 2 min. after the quote is hit Quotation hours 9.30am pm Minimum epsilon 90% 8.1 Spread obligations for stock futures PMM and PS have to comply with the following spread tables in displaying bids and offers. Table 19 - Spread Tables. Bid price (euro) Table A Max. spread (euro) Table B Max. spread (euro) Table C Max. spread (euro) From 0.00 to From 4.01 to From 8.01 to From to From to More than MARKET MAKING ON THE IDEM

23 9. Electricity futures Electricity futures with monthly, quarterly and yearly delivery periods are listed on the IDEX segment of the IDEM. Table 20 - Obligations on electricity futures. Obligation type PMM (PS) MM (S) LP (LPS) Activity Continuous quotation Answer to RFQs Continuous quotation Delivery period Monthly futures, quarterly futures and the fi rst expiry of the yearly futures. Monthly futures, quarterly futures and yearly futures. Monthly futures and/or quarterly futures and/or yearly futures. Quantity Spread Time 10 contracts for the monthly futures, 5 contracts for the quarterly futures and 5 contracts for the fi rst yearly futures. 2.5 for the monthly futures, 3 for the quarterly futures and 3 for the yearly futures. Obligation to quote continuously with a maximum allowed time to restore quotations equal to 2 minutes. 10 contracts for the monthly futures, 5 contracts for the quarterly futures and 5 contracts for the yearly futures. 2.5 for the monthly futures, 3 for the quarterly futures and 3 for the yearly futures. Obligation to respond to RFQs within 2 minutes and keep the quote on the orderbook for at least 15 seconds. 10 contracts for the monthly futures, 5 contracts for the quarterly futures and 5 contracts for the yearly futures. 2.5 for the monthly futures, 3 for the quarterly futures and 3 for the yearly futures. Obligation to quote continuously with a maximum allowed time to restore quotations equal to 2 minutes. Quotation hours 9.30am pm 9.30am pm 9.30am pm MARKET MAKING ON THE IDEM 21

24 Appendix A - Epsilon Indicator (ε) Once a month Borsa Italiana shall calculate the ε indicator, defi ned as follows: ε (%) = 0.4 * P_RATIO * S_RATIO * Q_RATIO where the calculation coeffi cients are: a) for Primary Market Makers, Primary Specialists, Liquidity Providers and Liquidity Provider Specialists: P_ratio is calculated on the basis of the number of minutes of compliance with the continuous quotation obligations. S_ratio is calculated on the basis of the number of minutes of compliance with the spread obligations. Q_ratio is calculated on the basis of the number of minutes of compliance with the minimum quantity obligations. b) for Market Makers and Specialists: P_ratio is calculated on the basis of the number of alarms triggered by failure to comply with the obligations to respond to requests for quotations. S_ratio is calculated on the basis of the number of alarms triggered by failure to comply with the spread obligations. Q_ratio is calculated on the basis of the number of alarms triggered by failure to comply with the minimum quantity obligations. A.1 Exemption from quotation obligations Borsa Italiana may temporarily exempt market makers from obligations for derivative instruments traded in the IDEM Equity segment in the following circumstances: Suspension from trading of the underlying fi nancial instrument or suspension from trading of a signifi cant percentage of the fi nancial instruments included in the index where the underlying is an index. Anomalous movements in the volatility of the price or bid-ask spread of the underlying fi nancial instrument or anomalous movements in the volatility of the underlying index. Any other circumstances preventing the regular performance of market makers. 22 MARKET MAKING ON THE IDEM

25 Borsa Italiana may temporarily exempt market makers from the obligations for derivative instruments traded in the IDEX segment in the following circumstances: anomalous movements in the volatility of the derivative instrument any other circumstance preventing the regular performance of market makers. Appendix B - Error handling procedures An intermediary that makes a mistake in entering orders may ask for the activation of the error handling procedure when: 1. The request is submitted to Markets Supervision of Borsa Italiana as promptly as possible by telephone and by sending a written request to the following address: ms@borsaitaliana.it and to fax number The mistake is evident. If there is no agreement between counterparties, Borsa Italiana may implement the extraordinary procedure if also conditions 3 and 4 are met: 3. The loss exceeds an amount of 5,000, 12,500 or 25,000 according to the instrument and the kind of mistake (see Table A ). 4. The price is above (buyer mistake) or below (seller mistake) a level determined by adding (buyer mistake) or subtracting (seller mistake) the maximum divergence established in Table A to the theoretical reference price. If a mistake occurs on options, the level price of condition (4) is determined on the basis of the expiry and the parameter M, where M CALL = SPOT / STRIKE M PUT = STRIKE / SPOT MARKET MAKING ON THE IDEM 23

26 Table A - Minimum loss amounts and maximum divergence thresholds. Mistake deriving from the entry of a single order Multiple mistake * Product Stock Futures FTSE MIB* Index Futures FTSE MIB* Index Options and Stock Options Stock Futures FTSE MIB* Index Options and Stock Options Min. loss amount 12,500 12,500 5,000 12,500 25,000 25,000 Max. divergence threshold 5% 1.5% Depending on m value and expiry (if the loss is > 5,000 and < 12,500 refer to Table B) Depending on m value and expiry (if the loss is > 12,500 refer to Table C) 5% Depending on m value and expiry (Table C) (*) Mistake resulting from the entry of more than one order or quotation that led to the conclusion of a number of contracts on a single underlying on the same contract type. In this case the interval between the conclusion of the first and the last contract must be < 60 seconds. 24 MARKET MAKING ON THE IDEM

27 Table B - Maximum price divergence for mistakes on options (loss > 5,000 and < 12,500 euro). Values of M First 3 listed maturities From the fourth up to the sixth listed maturity Over the sixth maturity m < % 30.0 % 25.0 % < m < % 27.5 % 22.5 % 0.95 < m < % 27.5 % 22.5 % < m < % 25.0 % 20.0 % < m < % 22.5 % 15.0 % 1.05 < m < % 20.0 % 15.0 % m > % 15.0 % 10.0 % Table C - Maximum price divergence for mistakes on options (loss > 12,500 euro or multiple mistake). Values of M First 3 listed maturities From the fourth up to the sixth listed maturity Over the sixth maturity m < % 20.0 % 15.0 % < m < % 17.5 % 12.5 % 0.95 < m < % 17.5 % 12.5 % < m < % 15.0 % 10.0 % < m < % 12.5 % 7.5 % 1.05 < m < % 10.0 % 7.5 % m > % 7.5 % 5.0 % MARKET MAKING ON THE IDEM 25

28 The result of the extraordinary procedure may consist of one or more of the following actions: Cancellation of contracts. Re-pricing of transactions. Cash adjustment. Transfer of positions. Entry of transactions of the opposite sign offsetting the original transaction. Table D - Maximum price divergence for mistakes on electricity futures (IDEX) Single order mistake Contract Min. Loss Amount Max Divergence Threshold Monthly >25,000 euro 3.00% Quarterly >50,000 euro 2.00% Yearly >100,000 euro 1.00% Mistake resulting from the entry of more than one order or quotations (loss >100,000 euro) ** Contract Max Divergence Threshold Monthly 1.50% Quarterly 1.00% Yearly 0.50% (**) Mistake resulting from the entry of more than one order or quotation that led to the conclusion of a number of contracts on a single underlying on the same contract type. In this case the interval between the conclusion of the first and the last contract must be < 60 seconds. 26 MARKET MAKING ON THE IDEM

29 Table E - Examples of error handling procedures on IDEM. Example Product Call option Put option Call option Stock future FTSE MIB* index future Strike Expiry Third Sixth First First Second Quantity of the mistrade Price of the mistrade ,500 Spot price Side of the mistrade BUY SELL BUY BUY SELL Contract size 1,000 1, Loss (euro) 8,000 16,000 7,500 7,500 20,000 Parameter M Theoretical price *** ,000 Max divergence allowed 27.5% 17.5% 30.0% 5.0% 1.5% Condition 3 (minimum loss) YES YES YES NO YES Condition 4 (price divergence) YES YES NO YES NO Extraordinary procedure? YES YES NO NO NO (***) Determined as the average of prices supplied by at least two market makers selected from among those not directly or indirectly affected by the error, or estimated by Borsa Italiana on the basis of theoretical models. MARKET MAKING ON THE IDEM 27

30 Table F - Example of error handling procedure on IDEX. Example Electricity Futures Initial price 106 /Mwh Quantity of the mistrade 2 Price of the mistrade 116 /Mwh Side of the mistrade BUY Number of hours in the delivery period 8,760 Bid-ask prices provided by an intermediary /Mwh Loss (euro) 131,400 Max divergence allowed 1.00% Condition 3 (minimum loss) YES Condition 4 (price divergence) YES Extraordinary procedure? YES 28 MARKET MAKING ON THE IDEM

31 Appendix C - Price Divergence Dynamic Control In order to automatically control the regularity of the trading session, Borsa Italiana shall apply the following parameters: X - maximum variation of the price of orders with respect to the control price. Y - maximum variation of the price of contracts with respect to the control price. Z - maximum price variation between two consecutive contracts. Borsa Italiana may change price variation limits or temporarily disable them in accordance to the Borsa Italiana s Rules. Table G - Price variation limits for products listed on IDEM. Product Parameter X maximum variation of the price of order with respect to the control price Parameter Y maximum variation of the price of contract with respect to the control price Parameter Z maximum price variation between two consecutive contracts FTSE MIB* 7.5% 3.5% 0.5% index futures FTSE MIB* 7.5% 3.5% 0.5% index mini-futures Stock futures 20% 7.5% 3.5% FTSE MIB* N.A. According to strike and maturity (Table H) index options Stock options N.A. According to strike and maturity (Table I) Electricity futures 20% 10% 5% (monthly) Electricity futures 20% 10% 5% (quarterly) Electricity futures (yearly) 20% 10% 5% MARKET MAKING ON THE IDEM 29

32 Table H - Price variation limits for FTSE MIB* index options. Parameter Y Parameter Z FTSE MIB* options strike Front month (% increase - % decrease) All subsequent expiries (% increase - % decrease) All expiries (% increase - % decrease) Over 8 th OTM 900% - 80% 890% - 70% 450% - 50% 7 th OTM 700% - 80% 690% - 70% 350% - 50% 5 th and 6 th OTM 500% - 80% 490% - 70% 200% - 50% 3 rd and 4 th OTM 250% - 80% 240% - 70% 100% - 50% 2 nd OTM 200% - 80% 190% - 70% 70% - 50% 1 st OTM 150% - 80% 140% - 70% 50% - 50% ATM 100% - 80% 90% - 70% 40% - 40% 1 st ITM 80% - 80% 70% - 70% 30% - 30% 2 nd ITM 70% - 70% 60% - 60% 30% - 30% 3 rd and 4 th ITM 60% - 60% 50% - 50% 25% - 25% 5 th and 6 th ITM 40% - 40% 30% - 30% 15% - 15% From 7 th to 11 th ITM 35% - 35% 25% - 25% 10% - 10% Over 12 th ITM 25% - 25% 15% - 15% 5% - 5% Table I - Price variation limits for stock options. Parameter Y Parameter Z FTSE MIB* options strike Front month (% increase - % decrease) All subsequent expiries (% increase - % decrease) All expiries (% increase - % decrease) Over 8 th OTM 900% - 80% 890% - 70% 450% - 50% 7 th OTM 700% - 80% 690% - 70% 350% - 50% 5 th and 6 th OTM 500% - 80% 490% - 70% 200% - 50% 3 rd and 4 th OTM 400% - 80% 390% - 70% 100% - 50% 2 nd OTM 350% - 80% 340% - 70% 70% - 50% 1 st OTM 250% - 80% 240% - 70% 60% - 50% ATM 150% - 80% 140% - 70% 50% - 50% 30 MARKET MAKING ON THE IDEM

33 Parameter Y Parameter Z FTSE MIB* options strike Front month (% increase - % decrease) All subsequent expiries (% increase - % decrease) All expiries (% increase - % decrease) 1 st ITM 80% - 80% 70% - 70% 40% - 40% 2 nd ITM 70% - 70% 60% - 60% 35% - 35% 3 rd and 4 th ITM 60% - 60% 50% - 50% 30% - 30% 5 th and 6 th ITM 50% - 50% 40% - 40% 20% - 20% From 7 th to 11 th ITM 45% - 45% 35% - 35% 15% - 15% Over 12 th ITM 30% - 30% 20% - 20% 10% - 10% On the expiry day of derivative contracts, members need to enter their orders in the cash market for stocks constituting the FTSE MIB* index or for those which are underlyings for stock options or stock futures, at least 10 minutes before the end of the opening pre-auction phase (until 8:50am) for orders related to: The closing of arbitrage transactions on FTSE MIB* index futures, FTSE MIB* index mini-futures and stock futures. Volatility trading or hedging transactions based on FTSE MIB* index futures, FTSE MIB* index mini-futures, stock futures, FTSE MIB* index options and stock options. Members may enter and modify the orders during the last 10 minutes of the opening pre-auction phase only if their characteristics with regard to price, quantity and execution type are such that they do not increase the absolute value of the difference between the theoretical opening price and the control price of the stocks. MARKET MAKING ON THE IDEM 31

34 * FTSE MIB takes effect from 30 March and replaces the S&P/MIB The publication of this document does not represent solicitation, by Borsa Italiana S.p.A., of public saving and is not to be considered as a recommendation by Borsa Italiana as to the suitability of the investment, if any, herein described. This document has not to be considered complete and it is meant for information and discussion purposes only. Borsa Italiana accepts no liability, arising, without limitation to the generality of the foregoing, from inaccuracies and/or mistakes, for decisions and/or actions taken by any party based on this documents. Trademarks Borsa Italiana and Borsa Italiana s logo, IDEM and IDEX, are owned by Borsa Italiana S.p.A. London Stock Exchange and the coat of arms device are registered trade marks of London Stock Exchange plc. The above trademarks and any other trademark owned by the London Stock Exchange Group cannot be used without express written consent by the Company having the ownership of the same. FTSE is a registered trademark of London Stock Exchange plc and The Financial Times Limited and is used by FTSE International Limited under licence. Trademark S&P is owned by The MCGraw-Hill Companies Inc. No part of this brochure may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieve system without prior permission from the copyright owners. Borsa Italiana S.p.A. is subject to direction and coordination of London Stock Exchange Group Plc. Borsa Italiana s subisidiaries are subject to its direction and coordination.

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36 February 2009 Borsa Italiana. All rights reserved. For further information about market making business on IDEM please contact: IDEM - Italian Derivatives Market Borsa Italiana London Stock Exchange Group Piazza degli Affari Milano - Italy T IDEM.market-making@borsaitaliana.it