How will the financial
transaction tax impact
options trading in Europe?
Amsterdam 9 April 2013
Luca Barillaro – Independent trader –
R&P Consulting
l.barillaro@raimondi-partners.it
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
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The race to the FTT
01/08/12
France
14/2/13
01/07/13
FTT on
Equities
FTT on
Derivatives
30-Sept-13 to
1-Jan-14
FTT on
Equities
Italy
Europe
(11)
01/03/13
Euro FTT
Directive
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Single nations
laws
implementation
The European Directive
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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)
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….
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
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Wissing gegenüber dem Blatt.
Sherwood or Fantasyland?
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France and Italy : the pioneers
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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
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FTT on italian derivatives starting 1st July
(in euros per lot)
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Cac40 volume decrease
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Cac40 underperformed Europe since 1Aug
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Cac40 volatility
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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
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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
market (August-January)
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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
markets (March 2013 – in/excluding
OTC)
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-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
Jan/Feb 13
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-12% Volume in Milan FTSEMIB
since 1st March
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Italian equity index skew (April)
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Italian equity index skew (Sept)
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Italian equity index skew (Dec) but..
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What happened to single
stocks IV?
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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....
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Unicredit IV June
(red puts, green calls)
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Intesa San Paolo IV June
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ENI IV June
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Mediolanum IV June
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Luxottica IV June
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Mediobanca IV June
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Tenaris IV June
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We discovered
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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
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Death of American style options.
ITM AND ATM CALLS and
the delivery risk
10
20
30
40
50
60
70
80
90
30
25
IV
20
15
10
27
26
25
25
24
24
24
24
24
18
19
20
21
22
22
23
23
23
Serie1
Serie2
5
0
0
20
40 STRIKE 60
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80
100
ITM AND ATM PUTS and the
delivery risk
35
30
IV
25
20
Serie1
15
Serie2
10
5
0
0
20
40
60
STRIKE PUT
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80
100
European vs Italian FTT: possible outcomes on
european option markets
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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
FTT introduction
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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
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Thank you for your attention!
Questions?
Thank you!
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