NUMBER 5 DERIVATIVES OCTOBER 2018 05 A strong year page 2 for LSEG derivatives TOL Expo 2018: Borsa Italiana meets The first nine months of 2018 will be remembered for the strong performance of LSEG the online trading Derivatives Markets, thus it is worth highlighting some key achievements in terms of community initiatives and volumes. With respect to the IDEM market, the extension of trading hours of the FTSE MIB futures and FTSE MIB mini-futures is continuing to deliver: additional trading firms started to be page 4 active in the after hours sessions, setting a new all-time volume records in October 2018 with more than 15% of mini-futures volume traded in the evening session. Overall, FTSE Piazza Affari’s MIB futures volumes are up 15% and FTSE MIB mini-futures volumes are up 22% year Mid Caps to date, on the back of growing demand from institutional investors also overseas. Also options business has been sustained so far: FTSE MIB options have been growing by 38% year to date, while Mid Cap equity options business have been fast developing thanks to the commitment of the market making community and growing demand from asset page 7 managers: since beginning of the year circa 300,000 lots have been traded with most Derivatives on DR: of volume executed on the central limit order book. Increasing choice LSEDM volume to the end of September was up 79% with a particularly strong performance of IOB products where we continue to expand our product range with and opportunities the listing in the central order book of options on Phosagro PJSC and PJSC with options on Magnitogorsk Iron & Steel Works. We also continue our tradition of partnering with Samsung Electronics our clients in the launch of new instruments with the listing of options in Samsung Electronics DR in the central order book. Samsung is one of the most liquid DR in the IOB cash market and leading liquidity provider Susquehanna International are official market makers on the options of the South Korean giant offering investors the page 10 possibility to trade derivatives on the stock for the first time outside local market hours. Statistics Once again, thanks for your trust, interest and investments in LSEG Derivatives Markets. Events and initiatives Yours, Contacts Nicolas Bertrand Global Head of Derivatives and Commodities

London Stock Exchange Group Derivatives Newsletter TOL Expo 2018: Borsa Italiana meets the online trading community

IDEM Private investors represent a core segment Business for Borsa Italiana markets. Italian online trading Development community is indeed one of the most active Team in Europe, trading significant volumes on our markets.

Being a financial institution, Borsa Italiana pays particular attention to these clients, developing and promoting several educational activities, also in cooperation with Online Brokers.

Since 2003, Borsa Italiana organizes the Trading Online Expo, which is now one of the leading European conferences for private investors. The fair hosts market players, mainly online brokers, banks and issuers, with their booths, and includes more than 100 panels and workshops, held by experts in the field: from intermediaries to journalists, consultants, financial associations, researchers, financial advisors, analysts.

Every year TOL Expo renews itself, focusing on interested the industry such as Blockchain, or the a particular topic in line with the ever-changing development of new financial technologies within financial, regulatory, technological environment traditional business models. and with the evolution of customers’ needs. 2018 has been a turning point in the financial These patterns are deeply impacting private sector, for both professional clients and private investors: we can clearly see a shift of interest traders: Mifid II has impacted the way to trade from some products to others or changes in their and approach the market while new trends have trading methods.

02 London Stock Exchange Group Derivatives Newsletter The most significant Every year educational moments within TOL Expo renews the conference include:

itself, focusing Sessions dedicated to Borsa Italiana Markets on a particular (MTA, IDEM, ETFPlus, SeDeX)

topic in line with Analyses of risk management activities carried out by CC&G and of index management the ever-changing activities executed by FTSE Russell financial, regulatory, Panel discussions on the importance technological of financial education and literacy, with the involvement of Consob, Banca d’Italia, Foundation for Financial environment and Education and Savings with the evolution

The 1st day opening conference, with the of customers’ needs. participation of Online Brokers representatives giving their view on the industry and sharing 2018 edition their initiatives aimed at developing the sector The 2018 edition will be held at Palazzo Mezzanotte, Borsa Italiana headquarter, on Oct 24th and 25th. the speech of Alpesh Patel, special guest Participation is free; registration is necessary of this edition, who will assess global trends on the event website: in the online trading industry http://tolexpo.borsaitaliana.it/trading-online-expo-2018/

03 TOL Expo 2018: Borsa Italiana meets the online trading community Piazza Affari’s Mid Caps

Carlo Aloisio In the last few years, Piazza Affari’s investors brought Senior Broker their attention mainly on Mid Caps, attracting a considerable interest by, among others, international investors. Worldwide, the sector of medium capitalization has developed considerably in the United States, where it is considered the real engine of the economy; the Mid Caps are those companies with capitalization that varies, depending on the several Wall Street’s reference stock indexes (such as Russell Mid Cap index, S&P 400, MSCI), from a minimum of between 200 million and 2 billion dollars, to a maximum of 5 and 10 billion dollars.

In Piazza Affari, the benchmark index is the Ftse willing to accept greater price volatility. Italia Mid Cap Index, which differently form the US As far as is concerned, it goes without saying does not have a minimum capitalization, but that medium-capitalization companies trust the simply includes the greatest 60 companies, given Italian industrial and manufacturing sector (but not some liquidity prerequisites, not considering those only), believing in the attractiveness of the “made that make up the Ftse Mib. The review of the basket in Italy” also by international investors. Among the is on a quarterly basis, in which the companies that most significant and important Italian Mid Caps, we are part of it can move to the main index if their can recognize brands such as , Brunello capitalization increase, as well as exit the Ftse Mid Cucinelli, De’ Longhi, Parmalat, Tod’s, Technogym, Cap to leave room for some other title with better but also companies such as Erg, Hera and Acea. performances. Some of these firms have successfully participated in some competitions, even with the sponsorship of In recent years Mid Caps have gone through a the Italian Stock Exchange, for their ability to period that has experienced growing investment attract private savings. inflows due to a number of reasons, among which As aforementioned, Mid Caps are characterized, the most important may be that one of diversifying even if with a lower magnitude than Small Caps, risk. In fact, while the Small Cap securities offer the by a significant volatility. In fact, in the last 12 greatest growth potential, due to their high months (August 2017 to August 2018, Bloomberg volatility, on the other hand the Large Cap source) the percentage change of the value of the securities guarantee higher stability, but stocks ranges from Amplifon, which experiences an significantly lower returns. In the middle of the two, increase by more than 60%, and Brunello Cucinelli, Mid Cap securities represent an hybrid, offering the over + 61%, to the collapses of , possibility of investing in a financial instrument with -84%, and Astaldi, -67%, with an average of with potentially attracting returns, but at the same the 60 Italian companies equal to around -5%. time limiting implicit risks. For investors, in the medium and long run, it may therefore become Another remarkable figure, when mid-cap companies reasonable to invest in small and medium-sized are taken into consideration, concerns the payment companies given that they diversify and they are of dividends. In Italy, over 85% of the companies

04 London Stock Exchange Group Derivatives Newsletter Name CHG PCT 1YR Brunello Cucinelli 61.69% that make up the Ftse Italia Mid Cap Index paid Amplifon 60.83% regular dividends in the last year. However, the ERG 40.83% payout ratio, i.e. the percentage of earnings Fincantieri 37.36% distributed to shareholders as dividends and, as a Diasorin 31.58% consequence, that one reinvested in the company, Technogym 31.86% Inwit 25.79% vary widely from one security to another. In most Juventus FC 25.56% cases, the dividend payout remains significant, with Vittoria Ass 23.69% peaks that exceed even 100%, as those firms seek to Reply 21.23% identify and collect new investors.

A great advantage to the sector came in 2017 thanks to the introduction of the so-called Pir, namely individual development plans, allowing private individuals to invest up to 150 thousand euros with limits of 30 thousand per title, giving tax advantages if the securities were to be kept in a time frame of 5 years. The wave of Pir has been ridden by many financial instruments such as ETFs and Funds with the characteristic of being “marked Pir”, having injected renewed liquidity into the sector. Below, there is an example of a chart (Bloomberg source) of an ETF on the Mid Caps, where it is possible to note the strong expansion phase that began at the end of 2016 (when the Pir legislation was approved). Among the stocks that performed the most since the introduction of the new legislation, Juventus, ASTM, Fincantieri, Technogym and Biesse are to be found.

Fig.1 Bloomberg Source

Another reason that led many investors towards this sector, and not towards the main index, is represented by its strong industry diversification with respect to the Ftse Mib, where the financial component is predominant. In fact, in the years of crisis, the financial sector has strongly affected the Ftse Mib’s performance, as shown in the graph below (Bloomberg source) in which the two indices are compared starting from 2008.

Mid Cap securities represent an hybrid, offering the possibility of investing in a financial instrument with potentially attracting returns. Fig.2 - Bloomberg Source

05 Piazza Affari’s Mid Caps Other Companies with options on IDEM Name Open Call Open Put 318717 698054 The graph highlights that until 2012 the two indices Generali 227,119 437,919 have had similar performances, but starting from 182,972 365,221 the middle of the year, Mid Caps have experienced Telecom Italia 57,766 480,238 a peculiar rise, culminated in the (relative) peak at 115,030 150,441 the beginning of 2018. As far as liquidity and Fiat Chrysler Autompbiles 52,661 77,938 volumes of trade are concerned, options listed of Unicredit 11,761 103,863 the Italian Stock Exchange are relevant; today, 74 Banco BPM 22,403 77,757 titles benefit from this product, among which 30 are UBI Banca 13,267 39,943 part of the Mid Cap segment. Telecom Italia RSP 26,133 20,016 It may be worth and interesting to note that on 12,614 32,097 a statistical base, many Mid Cap companies Leonardo 18,996 22,765 exchange on IDEM more than some other securities 16,681 13,753 of the main index Ftse Mib. In a general ranking, Prysmian 11,823 11,517 analyzing the call and put open positions in the 10,363 10,862 middle of August, it should be highlighted that Mid 11,731 7,333 Caps such as , Inwit, Erg, Hera and Tod’s, 6,977 10,775 have significant positions that place them with Bper Banca 6,723 10,763 volumes close to the half of the overall ranking. Banca Monte Paschi Siena 7,043 8,888 Unipolsai 7,272 8,040 Luxottica 3,174 11,285 MID CAP with options on IDEM Terna 5,132 6,780 Name Open Call Open Put CNH Industrial 5,936 5,280 Autogrill Spa 2,312 1,735 STMicroelectronics 6,856 4,162 Inwit 2,522 5 3,689 7,265 ERG 283 1,952 5,013 4,555 Hera 388 1,356 & C. 4,539 3,371 Anima Holding 915 657 3,926 3,564 Saras 552 765 6,994 244 Tod’s 487 432 3,689 2,866 Iren 801 25 2,604 2,426 Tamburi Investment Group 552 33 Bazzi Unicem 2,781 1,975 Acea 241 289 1,642 2,782 Geox 226 217 1,311 3,038 OVS 228 214 2,294 1,212 Amplifon 356 47 1,568 1,421 De’ Longhi 86 238 1,003 1,103 Sias 239 83 Salvatore Ferragamo 976 815 Juventus FC 265 11 Brembo 567 773 Banca Popolare di Sondrio 136 129 Finecobank 178 630 Safilo Group 146 100 Recordati 270 290 Brunello Cucinelli 33 208 Mondadori Editore 204 314 148 87 Campari 256 166 Credito Valtellinese 74 154 Prima Industrie 8 6 Danieli & C. 144 70 Diasorin 88 114 I.M.A. 92 102 By way of conclusion, it would be beneficial if in the Piaggio 84 89 next few months the interest of local as well as Cir 53 19 foreign investors continued, further increasing Technogym 8 36 trading volumes. Therefore, the role that the IDEM Ei Towers 7 21 market will be able to exercise will be crucial, helping Ansaldo Sts 0 16 an increasing number of companies to list options Cerved Group 5 1 and supporting market makers to this purpose.

06 Piazza Affari’s Mid Caps Derivatives on DR Increasing choice and opportunities with options on Samsung Electronics

LSEDM The International Order Book (IOB) in recent through the issuance of Depository Receipts (DR). Business years has been one of the most dynamic The Average Value Traded on the IOB reached $400 Development segments of London Stock Exchange’s equity million between January and September 2018, Team markets. Launched in 2001, the IOB has been making the IOB one of the leading DR markets. one of the preferred venues for global companies who want to gain access to global capital markets There are currently 245 instruments listed from and raise money from international investor 140 issuers, representing more than 30 countries.

Based on the success of the cash market and its global reach, in December 2006 LSEDM launched derivatives on selected DR of companies listed on the IOB and now lists products on 38 underlying stocks representing 4 countries.

On 23 July this year, LSEDM listed standard options on one of the most active DRs, Samsung Electronics, in the Central Order Book (COB). Options on the South Korean DR have been available for trade reporting since 2012 but now, with the support of Susquehanna International, the exchange has been able to transition them to a live screen market. “As part of Susquehanna’s liquidity provision in a broad range of European based derivatives, we are pleased to support new listings on the IOB segment on LSEDM and provide prices both in the COB and directly via our options sales desk.” commented Daniel Mannion, Sales Trader at Susquehanna International in Dublin. (Fig 1)

07 London Stock Exchange Group Derivatives Newsletter Fig.2 - Samsung Eletronics DR - 30 day IV - 90% moneyness By completing the product palette of instruments 30 day implied Volatility 30 day IV - 100% moneyness available on Samsung, the launch of options offers 30 day IV - 110% moneyness investors a liquid tool to hedge risk and have 0.4 exposure in one of the twenty largest global companies, outside Asian and US time zones. 0.3 “With on-book turnover of $5billion during January 0.2 to September 2018, Samsung is one of the most traded DRs on the IOB and we are delighted that 0.1 investors can now trade Samsung options on our

0 markets too. The IOB is a dedicated order-book 06/08/18 20/08/18 03/09/18 17/09/18 01/10/18 15/10/18 offering cost efficient, secure and transparent access to invest in some of the world’s fastest growing markets utilizing world-leading technology and

Fig.3 - Samsung Eletronics DR - 90 day IV - 90% moneyness central counterparty clearing” according to Lida 90 day implied Volatility 90 day IV - 100% moneyness Eslami, Head of IOB Business Development. 90 day IV - 110% moneyness Using the LSEDM listed contracts, market 0.4 participants can also trade the divergence 0.3 of Samsung DR volatility against the volatility of other technology giants, such as Apple and 0.2 Google. (Fig. 2, 3, 4) 0.1

0 06/08/18 20/08/18 03/09/18 17/09/18 01/10/18 15/10/18

Fig.4 - Samsung DR vs Apple & Google Samsung DR - 30 day ATM IV Google - 30 day ATM IV Apple - 30 day ATM IV

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These options can also be used to modify the exposure of broad-based portfolios containing Samsung without buying or selling the stock. For instance, long calls could be used to increase the exposure to the stock or puts to reduce it in a portfolio benchmarked against FTSE All World Index, of which Samsung is one of the largest components. (Fig. 5, 6)

08 Derivatives on DR - Increasing choice and opportunities with options on Samsung Electronics Fig.5 - 1 Year normalized performance Samsung Electronics DR Fig.6 - Samsung Electronics DR - FTSE All World

FTSE All World Index 0.02

1.30 0.01

1.20 0 -0.06 -0.04 -0.02 0 0.02 0.04 0.06 0.08 1.10 -0.01

1.00 -0.02

0.90 -0.03 R2= 0.1576 0.80 -0.04 06/08/18 20/08/18 03/09/18 17/09/18 01/10/18 15/10/18

“The Listing of Samsung DR options in the COB highlights LSEDM as a leading derivatives trading venue, aimed at investors looking for liquidity in emerging markets products or derivatives instruments trading outside the original time zone of the underlying. It complements our offering of Russian based products and allows participants to leverage on the liquidity of the DR in the IOB cash market” commented Massimo Butti, Head of Business Development at LSEDM. (Fig. 7)

Fig.7 01:00 07:35 08:00 14:30 16:30 21:30 00:01

Seoul London Market Closed New York

In focus - LSEDM Derivatives on DRs 38 18 4 7 Standard and Options on Countries Dividend futures Flex Options 18 DRs available represented: available on 7 DRs and Futures in the Central Russia, South on 38 DRs Order Book Korea, India, Kazakhstan Contract specifications IOB DR options IOB DR futures Multiplier 100 100 Currency USD USD Expiry Day 3rd Friday at 15:30 London time 3rd Friday at 15:30 London time

09 Derivatives on DR - Increasing choice and opportunities with options on Samsung Electronics Statistics — IDEM Equity — LSEDM

Events and initiatives The group derivatives markets will attend/organize the following events: — Borsa Italiana Trading Online Expo – 24-25 October 2018 — Annual Forum AIPB - Milan 16 November 2018 — FOW Derivatives World London: The Debates 2018 4 December 2018 Contacts — LSEDM [email protected] — IDEM [email protected]

The materials presented by the London Stock Exchange Group plc and its group undertakings (to be construed in accordance with s.1161 of the Companies Act 2006) (“LSEG”) to illustrate its products or services do not constitute, nor purport to effect an offering or sale of securities, the provision of investment or trading advice or an intermediation in activities pertaining to the marketing of securities, futures contracts, options on futures, swaps or other commodities. The prospective use of products and services offered by LSEG, including but not limited to the use of any materials made available by LSEG in connection with the presentation of any products and services to audiences in the US, is subject to all applicable US Federal securities and commodities laws and regulations. This document is not to be considered complete and it is meant for information and personal purposes only. LSEG accepts no liability raising, 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 document. “London Stock Exchange” and the coat of arms device and “FTSE” are registered trade marks of London Stock Exchange plc. The trademarks “Borsa Italiana” and “IDEM” are owned by Borsa Italiana S.p.A. The above trademarks and any other trademark owned by LSEG cannot be used without express written consent by the company having the ownership of the same.

© October 2018 Borsa Italiana S.p.A. – London Stock Exchange Group All rights reserved. Borsa010 Italiana S.p.A. – PiazzaLondon degli Affari, Stock 6 –Exchange 20123 Milano Group (Italia) Derivatives Newsletter