FEBRUARY 2002

Italian Derivatives Markets

Valentina Sidoti Borsa Italiana SpA October 2002

Table of contents
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Borsa Italiana in the European landscape The IDEM market IDEM strategic development

Table of contents
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Borsa Italiana in the European landscape The IDEM market IDEM strategic development

Borsa Italiana in the European Landscape Exchange corporate structure

Shareholders: Italian and International financial institutions, quoted companies

65%

100%

59%

99%*

ICT project management services

Facility management

Clearing (derivatives); Guarantee (cash); CCP (forthcoming)

Central Securities Depository and Settlement

* Acquisition under completion

Borsa Italiana in the European Landscape Products and Network

EQUITY PRODUCTS 295 349 22 6 577 Companies Shares Warrants Covered warrants (25 issuers) DISTRIBUTION NETWORK
129 Intermediaries in Italy 30 Remote members

FIXED INCOME PRODUCTS 118 Government bonds 412 Bonds 20 Convertible bonds DERIVATIVE PRODUCTS 3 1 35 5 4 Index Futures Index Options Stock Options Stock Futures Interest rate contracts

* as of 31st August 2002

Borsa Italiana in the European Landscape One Exchange - Many Markets

Equity Instruments
Shares Warrants Pre-emptive rights Shares of Collective Investment Units (CIUs) Convertible bonds

Covered Warrants
After Hours Market
MIB30 and MIDEX shares Nuovo Mercato shares Covered warrants

Fixed Income

Derivatives

Electronic share market

Ristretto
-Covered Warrants on: Shares Government securities Interest rates Currencies Indices Commodities

MOT
Government bonds Corporate bonds Eurobonds Asset Backed Securities (ABS) Equity derivatives: MIB30 futures MIDEX futures miniFIB MIB30 index options Stock options IDEM stock futures

- MTA -

Blue-Chips

Ordinary Segment MTF Segment

(ETFs & funds)

-Certificates

Borsa Italiana in the European Landscape Growth of market capitalisation

euro million
1 000 000 900 000

as % of GDP
80% 70%

800 000
700 000 600 000 500 000 400 000 300 000 200 000 100 000 0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

60%
50% 40% 30% 20% 10% 0%

Source: Borsa Italiana

Last update: September 2002

Borsa Italiana in the European Landscape Equities: a European comparison

European Exchanges - market capitalisation of domestic shares, December 2001, euro million
London Euronext Deutsche Brse

Domestic shares turnover on electronic matching trading systems Jan-Dec 2001 daily average, euro million
Euronext London Deutsche Brse Borsa Italiana

Borsa Italiana
Swiss Exchange Madrid Stockholm Helsinki Exchange Athens Copenhagen Irish Exchange Oslo Bors Vienna Luxembourg Iceland 0
Source: FESE

Swiss Exchange + Virt X Madrid Stockholm Helsinki Exchange Oslo Bors Athens Copenhagen Vienna

Warsaw
Irish Exchange Luxembourg Ljubljana Iceland 500 000 1 000 000 1 500 000 2 000 000 2 500 000 0 1 000 2 000 3 000 4 000 5 000 6 000 7 000

Borsa Italiana in the European Landscape Covered Warrants: a European comparison

Electronic Order Book
0 1 500 3 000 4 500 6 000 7 500 9 000

Total turnover ( m)
Borsa Italiana

Negotiated Deals
10 500 12 000 13 500

Deutsche Brse SWX

Euronext

Bolsa de Madrid Helsinki

Source: FESE

Period: Jan - July 2002

Borsa Italiana in the European Landscape The last born: MTF segment
MTF is a Regulated Market for:
Index ETF (Exchange-Traded Funds) Index traditional Funds Index Sicav Closed-end Funds Those can be Italian, Foreign, UCITS compliant or non UCITS compliant.

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The MTF market is a segment of the equity trading platform (MTA) Every operator already linked to the MTA platform is allowed (for free and automatically) to trade on the MTF market.

Borsa Italiana in the European Landscape Indices: new developments

Co-operation agreement with Standard & Poors covering the indices of Borsa Italiana to:

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Enhance the visibility of Borsa Italiana worldwide by cooperating with a global partner
Design indices that are more representative of the Italian market Allow Borsa Italiana to launch new index related products

Table of contents
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Borsa Italiana in the European landscape The IDEM market

The growth of the market IDEM products IDEM trading platform & microstructure Role of the Clearing House

IDEM strategic development

The IDEM market - The growth of the market Definition

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IDEM is a regulated market managed by

IDEM is an electronic market

The Italian clearing house Cassa di Compensazione e Garanzia is the central counterparty of all deas executed in the market

The IDEM market - The growth of the market History of the market

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1994-1995

1996-1997

1998-1999

2000-2001

2002...

November 1994: IDEM market was founded. Trading started with the introduction of the MIB30 futures contract FIB30

February 1996: trading started on 5 stock options contracts

Now on the IDEM market stock options are November 1995: available on 35 launch of the MIB30 underlying shares option contract (MIBO).

March 1998: trading started on the Midex futures contract

July 2000: launch of miniFIB, the mini-futures contract on the MIB30 index targeted to retail investors (product size 1/5 of the FIB30 size)

April 2002: launch of the new trading platform OM click July 2002: launch of the IDEM Stock Futures contracts, futures on individual shares of the Italian market

Source: Borsa Italiana,

The IDEM market - The growth of the market Products

The futures contracts on MIB 30 index, the Minifib, the MIB30 index option contract and the stock options contracts listed on the IDEM market may be offered and sold in the United States pursuant to no action relief granted by the U.S. Commodity Futures Trading Commission and by the U.S. Securities and Exchange Commission.

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Launch date

Underlying

Avg daily volume in 2002

November 1994 July 2000 March 1998 July 2002 November 1995

MIB30 Index
MIB30 Index Midex Index

19,358 contracts
8,106 contracts 3 contracts

5 Stocks
MIB30 Index 35 Stocks

365 contracts
10,096 contracts 29,459 contracts

February 1996
Source: Borsa Italiana, last update: 17 october 2002

The IDEM market - The growth of the market IDEM growth

Standard Contracts Daily Average
90.000 85.000 80.000 75.000 70.000 65.000 60.000 55.000 50.000 45.000 40.000 35.000 30.000 25.000 20.000 15.000 10.000 5.000 0 1995
Source: Borsa Italiana,

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Stock Options MIB30 options miniFIB FIB

1996

1997

1998

1999

2000

2001

2002

last update: september 2002

The IDEM market - The growth of the market IDEM competitive position in Europe
MIB30 Index futures:
5th most traded contract in Europe 11% market share

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MIB30 Index options:

5th most traded contract in Europe 6% market share

Eurex Liffe IDEM Euronext Others

European Index Futures

(Turnover) 100% = 7 738 bn

European Index Options

(Turnover) 100% = 4 354 bn MIB30 IBEX35 Other 2% OMX 0% AEX 6%
CAC40 12% 6% 1%

IBEX35 OMX Other 5% 1% MIB30 2% AEX 4%

DAX 26%

DAX 29%

11%

CAC40 15% FTSE100 14% SMI 3% Eurostoxx50 (eurex) 19% FTSE100 24% SMI 3%

Eurostoxx50 (eurex) 17%

Source: FESE, Eurex, Monep, Borsa Italiana

Last update: December 2001

The IDEM market - The growth of the market An international market

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UK 10 members 3 market makers

82 Members in Italy 16 Remote members

Netherlands 1 member FRANCE 5 members 3 market makers

16 Remote members: AOT, BNP Paribas Arbitrage, Crdit Lyonnais, Crdit Suisse First Boston, Deutsche Bank, Exane, Fimat International Banque, Goldman Sachs International, Hull Trading UK, Merrill Lynch, Morgan Stanley & co. International, Marquette Partners UK, Oddo Options, Socit Gnrale, Timber Hill UK, Tullet & Tokyo Liberty 4 Remote clearing members: Merrill Lynch, Fimat International Banque, Fortis Clearing, Goldman Sachs International

ITALY 82 members 11 market makers

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Borsa Italiana in the European landscape The IDEM market

The growth of the market IDEM products IDEM microstructure Role of the Clearing House

IDEM strategic development

The IDEM market - IDEM Products Complete range of products

IDEM market offers a complete range of products and price discovery process.

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FIB e miniFIB

Stock Futures

Mibo

Shares

Stock options

Shares

The IDEM market - IDEM Products FIB and miniFIB

Underlying Quotations Value of index point Tick Size Expirations Expiration date Last trading day Trading hours Settlement Settlement day MIB30 Index In index points 5 for the FIB contract, 1 for the miniFIB contract 5 index points (25 for the FIB contracts, 5 for the miniFIB contract) Quarterly expiries (March, June, September, December) Third Friday of Expiration month Expiries day at 9.30 am (Milan time) 9.15am-5.40pm Cash T+1

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The IDEM market - IDEM Products MIB30 options

Underlying Quotations MIB30 Index In index points

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Value of index point 2.5 Option Style Expirations Expiration date Last trading day Trading hours Settlement Settlement day European Quarterly expiries (March, June, September, December) and monthly expiries Third Friday of Expiration month Expiries day at 9.30 am (Milan time) 9.15am-5.40pm Cash T+1

The IDEM market - IDEM Products Stock Options

Underlying Quotations Minimum lots Option Style Expirations Expiration date Last trading day Trading hours Premium settlement Settlement Settlement day 35 shares of the MTA and Nuovo Mercato In euros Depending on the underlying American Quarterly expiries (March, June, September, December) and monthly expiries Third Friday of Expiration month Day before expiries 9.15am-5.40pm Cash, T+1 Delivery of financial instruments T+3

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The IDEM market - IDEM Products 35 Stock Options

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The IDEM market - IDEM Products IDEM Stock Futures

Subject Underlyings Tick size Minimum lot Adjustments Expiration date Last trading day Maturities Currency Daily settlement price Settlement Trading hours Types of orders Give-up Description Enel, Eni, Telecom Italia, TIM, Unicredito Set in accordance with the price of the order The same as for the stock options The same as for the stock options Third friday of each expiration month Expiration day until 9:30 (Milan time) Always four expirations: two quarterly expirations plus the two nearest monthly expirations In euro, with 4 decimal digits Calculated by the Clearing House (Cassa di Compensazione e Garanzia) Physical shares delivery 9:15 AM 5:40 AM As set by the Rules for other IDEM contracts Available

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The IDEM market - IDEM Products IDEM Stock Futures

Provide the Market with an attractive product for trading and hedging with interest from market makers, traders and funds

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Directional Trading

Hedging
Equities Options Covered Warrants

Arbitrage
against Equities between expiries options

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Borsa Italiana in the European landscape The IDEM market

The growth of the market IDEM products IDEM trading system Role of the Clearing House

IDEM strategic development

The IDEM market - IDEM microstructure Trading system

The IDEM service is based on the OM electronic trading system version16.6 Borsa Italiana provides complete connectivity to the IDEM market from the

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primary site of the member as an integral part of the service itself.

Number of Instruments Daily Number of Orders/Quotations (with block orders/mass quotation) Daily Number of Orders/Quotations (without block orders/mass quotation) Average Daily Number of Contracts/Sec Numbers of Orders/Quotations in the Peak 30 Min. (with block orders/mass quotation) Numbers of Orders/Quotations in the Peak 30 Min. (without block orders/mass quotation) Numbers of Orders/Quotations/Sec in the Peak 30 Min. (with block orders/mass quotation)
15,000 30,000,000 4,200,000 5.69

4,500,000

540,000

2,500

The IDEM market - IDEM microstructure The OM Click Trade

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The IDEM market - IDEM microstructure Market Microstructure

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Distinction between Primary Market Makers (continuous quotes) and Market Makers (answers to RFQ)
New obligations for market makers
PMM MM

Market Makers space

Out

PMM 20 Underlyings 15 Size for Mibo 20 Size for Stock Options 2 min Refresh rate Permanency of quotation 9:45-17:20 Hours

MM 2 10 10 2 min 30 sec 9:45-17:20

At

In
I II III IV V VI Expiries

Furthermore:

Schedules of Bid/Ask spreads more consistent with the market

Simplified management of the list of market makers Mass Quotation functionality for market makers, changes in the use of Stop Orders

The IDEM market - IDEM microstructure Trading hours

8:00 9:15 9:30 9:45 17:20 17:25 17:40 18:00 20:30

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Blue Chips Nuovo Mercato

IDEM Opening auction Continuous trading Market Maker obligation Closing auction After Hours

The IDEM market - IDEM microstructure Orders book

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Table of contents
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Borsa Italiana in the European landscape The IDEM market

The growth of the market IDEM products IDEM microstructure Role of the Clearing House

IDEM strategic development

The IDEM market - Clearing house Activities of the Clearing House

Financial Derivatives Centralized netting and clearing facility for financial derivatives traded on the Italian regulated markets Financial backing by taking on the role of a fully liable central counterparty Cash Equity Markets

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Management of the Guarantee Funds that ensures the execution of contracts concluded on the electronic cash equity market (MTA) and on Nuovo Mercato (NM) for high-growth stocks
Resources provided to the Funds exclusively by participants according to their volume of business without any liability falling upon CC&G

The IDEM market - Clearing house Margining system

In order to preserve the market's integrity, CC&G performs a "risk management function" by means of a risk based guarantee system called TIMS (Theoretical Intermarket Margins System developed by The Options Clearing Corporation - OCC - Chicago) TIMS uses advanced portfolio theory to margin all positions relating to the same underlying product and combines the risk of closely related products into integrated portfolios Initial margins are applied on the net positions for each account (House account and Client omnibus account)

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The IDEM market - Clearing house Clearing on the IDEM market

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Client A A Cliente

Client B B Cliente

Bank X Operatore X

Bank Y Operatore Y

General Clearing Aderente Member Generale Z

Aderente Clearing member Individuale Y

Clearing Direct Aderente Member Indiretto X

Trading Clearing

Table of contents
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Borsa Italiana in the European landscape The IDEM market IDEM strategic development

The market strategy Client base diversification: retail case study Client base diversification: hedge fund case study

The IDEM Strategic Development Strategy

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Products

Business Development

Marketing

The IDEM Strategic Development Strategy

CLIENT

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FINAL CLIENT
DIRECT MEMBER

BASE DIVERSIFICATION

- retail - hedge fund - mutual fund - pension fund - corporate

NEW

PRODUCTS AND SERVICES

OBJECTIVES: volumes and liquidity

The IDEM Strategic Development Drivers for volume increase

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Increase of hedging activities from investors High volatility Sensibility towards counterpart risk Credit line contraction in the OTC business Developed OTC market in Italy

The IDEM Strategic Development Advantages of listed derivatives contracts

Reliability: Transactions are executed on the IDEM market where Cassa di Compensazione e Garanzia is the central counterparty and acts as the sole guarantor for all contracts executed Standard contracts and transparency: Clear rules set by Borsa Italiana Liquidity: The big number of intermediaries and market makers present in the market guarantees competitive prices

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Table of contents
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Borsa Italiana in the European landscape The IDEM market IDEM strategic development

The market strategy Client base diversification: retail case study Client base diversification: hedge fund case study

The IDEM Strategic Development - retail The IDEM market towards retail investors 3 July 2000
Product targeted to retail investor Main distribution channel : online First minifutures contract in Europe

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Why online?
Autonomy of decision
Time to market Reduction of execution errors

The IDEM Strategic Development -retail The example of the e-mini contracts in US

44

E-mini S&P 500 passed from 11.000 to 340.000 daily contracts in 4 years E-mini S&P 500 volumes +125% in 2002 S&P 500 volumes +9% in 2002

350 000

Daily average volumes

300 000 250 000 200 000 150 000 100 000 50 000

Sep-97

Sep-98

Sep-99

Sep-00

Sep-01

Jan-98

Jan-99

Jan-00

Jan-01

May-98

May-99

May-00

May-01

Jan-02

May-02

The IDEM Strategic Development -retail Development of online trading in the IDEM
Online brokers offering miniFIB contract
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Directa Sim Millennium Sim Sivori & Partners Sim Banca dellAlta Padovana Gestrade Eptatrading Banca Mediolanum

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IDEM products offered online by the online brokers

Product FIB miniFIB Mib30 options Stock Options N. of brokers 12 12 10 7

10

5
Banca della rete Banca Sella Nuovi Investimenti Sim Twice Sim

IMIWeb Bank

0 jun-00 dec-00 jun-01 dec-01 jun-02 sep-02

IDEM stock futures 5

The IDEM Strategic Development -retail Development of online trading in the IDEM
Other Online
19%

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41%

59% 81% FIB volumes Jan-Sept 2002 9%

miniFIB volumes Jan-Sept 2002

91% Mibo volumes Jan-Sept 2002 Source: Borsa Italiana estimation

The IDEM Strategic Development -retail Initiatives towards the individual investors

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Development of initiatives and services in collaboration with the online brokers

IDEMagazine: new educational newsletter Event for individual investors Data vending ad hoc Web site section for individual investors

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Borsa Italiana in the European landscape The IDEM market IDEM strategic development

The market strategy Client base diversification: retail case study Client base diversification: hedge fund case study

The IDEM Strategic Development -hedge fund 49 Objectives

ATTRACT MORE BUSINESS FROM HEDGE FUNDS TO THE ITALIAN MARKET

Diversify the customer base Increase liquidity Capture new ideas for product development Offer new services for the hedge fund community Enhance the internationalisation

Create new opportunities for the development of the Italian financial market and institutions

The IDEM Strategic Development -hedge fund Start Up up the Italian Hedge Funds industry 50

Asset Manager: 21 Speculative SGR authorized, belonging to italian banks,foreign banks and entrepreneurs

August 2002

Around 2 bln euro

Funds available: 41 funds of funds 5 single manager hedge funds (long/short and fixed income)

Asset under management

First fund of fund authorized April 2001

First single manager fund authorized July 2002