Corporate Action Policy · Corporate action: there are several types of corporate actions: a)...

Corporate Action Policy

A guideline to adjustments on stock option and stock future contracts on the IDEM market

Derivatives Markets

Borsa Italiana S.p.A.

June 2006

1

Index

Preface page 2

Definitions page 2

Principles and conventions page 4

1. Adjustment principles 2. Object of the adjustment

a. Stock options b. Stock futures

3. Cases in which the adjustment can be applied 4. Types of adjustment interventions 5. Roundings 6. ISIN code 7. Minimum lots 8. Effective date of the adjustment 9. Early exercise 10. “ Avviso di Borsa Italiana ”

Types of corporate actions page 7

1. Stock grouping 2. Stock split 3. Pre-emptive offer 4. Free share capital increase 5. Merger 6. Demerger 7. Conversion of shares into another category 8. Payment of extraordinary dividend 9. Delisting of contracts

a. decline in liquidity of the contract b. delisting of the underlying stocks because of total-acquisition tender

offer

Communication page 29

2

Preface The document is of a purely informative nature. For a summary of the legislation in force, please refer to the Rules and Instructions of Borsa Italiana (in addition to the applicable law provisions and regulations), whose content will prevail in any case. The examples provided within the following text are merely for information purposes and cannot be regarded as a commitment by Borsa Italiana.

The purpose of this guide is to offer an overview on how to deal with corporate actions. The document, drawn up to offer support to the market, aims at helping you understand the potential impact that a corporate action may have on derivative contracts on single shares, i.e. stock future and stock option contracts.

The case studies illustrated and the examples provided, notwithstanding their informative nature, derive from the direct experience gained by managing adjustments over the years. The objective of this document is to minimise uncertainty around the way in which the adjustments were adopted by Borsa Italiana, in order to guarantee the utmost transparency of information and remove the distortion effects that may result from an erroneous interpretation of the adjustments adopted.

The Italian text of this brochure shall prevail over the English version.

Definitions Below is a concise definition of some of the terms used in this document, so that the text can be easily understood.

Avviso di Borsa Italiana: an official notice issued by Borsa Italiana that regulates interventions

Corporate action: there are several types of corporate actions:

a) grouping and splitting of the stock underlying the contract;

b) free share capital increase and pre-emptive offer through the issuing of new shares of the same categories as those underlying the stock option contract;

c) pre-emptive offer through the issuing of new shares of different categories than those underlying the stock option contract, of shares with warrants, convertible bonds and convertible bonds with warrants;

d) merger and demerger of companies issuing the shares underlying the contract;

e) conversion of shares into another category;

f) payment of extraordinary dividends

K adjustment factor: the K factor applied to strike prices (or daily

closing prices) and/or quantities of shares to be delivered (lot size)

3

Effective date: date in which the provisions on the adjustment intervention become effective

Lot: number of shares underlying each derivative contract

Cum-price: price of the security on the day before the start of the operation

Ex-price: price of the security after the adjustment intervention

Daily Closing Price: daily closing price calculated by the management body of the clearing and guarantee system referred to in the provisions implementing Article 70 of the Consolidated Law on Finance

4

Principles and conventions Following extraordinary corporate operations, which involve the detachment of rights, stock split or grouping, demerger operations and distribution of extraordinary dividends, the price of the shares can fluctuate so much that they are no longer comparable. In order to restore the continuity of historical price series, it is necessary to carry out appropriate adjustments through the use of the adjustment factor. These interventions on the share price have also an impact on their derivative contracts (futures and options) because the object itself of the contract changes (a different number of underlying shares, value of share, etc.).

Adjustment interventions on stock option or stock future contracts aim at guaranteeing the financial equivalence of the derivative contract following these corporate events, maintaining the rights of the buyer as well as the obligation of the option/future seller unchanged.

Therefore, thanks to adjustment interventions, stock option and stock future contracts keep their financial value unaltered following the corporate action on the share capital.

The guidelines on how to adopt the adjustments are indicated below, including the operational specifications that each intervention require.

1. Adjustment principles

The principle underlying all the adjustments on derivative contracts is maintaining the financial equivalence, i.e. the value of the position in stock options and/or futures following the corporate action.

Interventions are defined on the basis of the characteristics of the individual transaction. For this reason, the examples of past operations are just indications of the adjustments adopted but do not represent any limitation to the implementation of different solutions in the future.

Borsa Italiana reserves the right to evaluate every single corporate action and define the most appropriate interventions on derivative contracts on an individual basis, in compliance with the regulations included in the Instructions to the Rules of the Markets organised and managed by Borsa Italiana S.p.A..

2. Object of the adjustment

Adjustment interventions are applied to both stock option and stock future contracts.

a. Stock Options

With regards to stock option contracts, one or more of the following elements can be adjusted: strike price, number of underlying shares, type of shares to deliver and number of positions in contracts.

b. Stock Futures

With regards to stock future contracts, one or more of the following elements can be adjusted: number of underlying shares, type of shares to deliver, daily closing price and number of positions in contracts.

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3. Cases in which the adjustment can be applied

With reference to the Instructions to the Rules of Borsa Italiana (IDEM market section), stock option and stock future contracts can be adjusted when operations are carried out on the shares underlying their derivative contracts:

� free share capital increases;

� stock grouping and stock split;

� pre-emptive offer through the issuing of new shares of the same category, shares of a different category, shares with warrants, convertible bonds and convertible bonds with warrants;

� mergers and demergers;

� conversion of shares into another category;

� payment of extraordinary dividends.

Another important case is the intervention envisaged by Borsa Italiana in exceptional circumstances, i.e. when there is a decline in liquidity of the shares underlying derivative contracts.

Stock option contracts and/or stock future contracts subject to a total public purchase offer can significantly decrease their liquidity, up to the worst-case scenario represented by the delisting of the underlying stock.

The topic of delisting is dealt with in more detail in the last part of this overview.

4. Types of adjustment interventions

There are several types of adjustments, depending on the type of transaction.

In some cases (e.g. share capital increases, stock split, stock grouping, mergers, distribution of extraordinary dividends) the K coefficient is applied to the strike prices (in the case of stock options) or to the daily closing price (in the case of stock futures) and lot. In other cases (e.g. demergers) the coefficient is applied only to the lot, creating a basket and not changing the strike price (in the case of stock options) or daily closing price (in the case of futures). In any case, Borsa Italiana will act as soon as possible and will inform the market about the intervention through an “Avviso di Borsa Italiana”, in order to guarantee an immediate and correct disclosure of information.

5. Roundings

Sometimes, the application of the K coefficient implies the introduction of strike prices (daily closing prices) with decimals, just because the K coefficient can be a number with up to 6 decimal digits. In this case, the strike prices (daily closing prices) are always rounded to the fourth decimal digit, as indicated in the Instructions to the Rules of Markets organised and managed by Borsa Italiana S.p.A..

The lots are adjusted to the nearest whole number, i.e. rounded up if the value is greater or equal to 0.5 and rounded down if smaller than 0.5.

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6. ISIN code

When stock option and stock future contracts are adjusted, they are assigned new ISIN codes, while the new stock option and future contracts automatically generated by the trading systems keep the existing ISIN code.

In addition, all the series of option and future contracts that are traded from the effective date of the operation are created on the basis of the adjusted reference price.

7. Minimum lots

As a result of the application of the K coefficient, the lot must sometimes be amended to include the new series of option and future contracts, starting from the effective date of the operation. In this case, Borsa Italiana will specify the new minimum lot in an “Avviso di Borsa Italiana”.

8. Effective date of the adjustment

Interventions on the IDEM market are usually carried out on the effective date of the corporate action. In the case of share capital increases and distribution of extraordinary dividends, this date coincides with the first day in which the underlying share is traded “ex”, i.e. without the right to benefit from the operation underway (e.g. right to underwrite a share capital increase, dividend rights, etc.). When the adjustment involves replacing the underlying shares with new ones, the effective day of the intervention is the first day in which the new security is traded.

9. Early exercise

The early exercise for stock option contracts is not possible on the day before the operation becomes effective. Therefore, early exercises can only be made until the second day prior to the start of the operation.

10. “Avviso di Borsa Italiana”

The official nature of the adjustments is guaranteed by the communications of Borsa Italiana through its notices, published free of charge on the page

http://www.borsaitalia.it/derivatives

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Types of corporate actions This section illustrates the main types of adjustments related to share capital operations and payment of an extraordinary dividend. Whenever possible, the examples have been taken from real cases.

1. Stock grouping

The stock grouping is the reduction in the number of shares in circulation, which are replaced by new shares according to a set ratio. At the same time, the price must increase in an inversely proportional way to the decrease in the number of shares.

For example, with a 1 for 2 stock grouping each shareholder is allocated 1 “new” share for each 2 “old” ones held: as a result, the number of shares in circulations for that company will be halved.

Borsa Italiana calculates the adjustment coefficient according to formula 1. This value, always with 6 decimal digits, is multiplied by the strike prices (daily closing prices) and divided by the lot size.

Consequently, stock option (stock future) contracts subject to a stock grouping will see a change in their strike prices (daily closing prices) and lot size.

Formula 1.

NVK =

where:

V = number of old shares

N = number of new shares

Impact on derivative contracts

a. Adjustment of the strike (daily closing price):

KEE cumex ×=

where:

Ecum = strike price (daily closing price) before the adjustment

Eex = strike price (daily closing price) after the adjustment

b. Adjustment of the number of underlying shares (lot):

KlotAex

1×=

8

where:

Aex = number of underlying shares (lot) after the adjustment

Example: Stock grouping of the Finmeccanica shares, official notice n. 9253 of 7/13/2005

Description of the adjustment

Stock grouping of 1 new share for each 20 old shares.

Impact on derivatives contracts

With exclusive reference to the stock option contracts (futures) on Finmeccanica shares, the adjustment affected both the strikes (daily closing price) and the number of shares (lot) underlying the stock option contracts (futures).

This intervention was on the basis of the adjustment coefficient K, rounded off to the 6th decimal digit, as per the following example:

20==NVK

where:



a. Adjustment of the strike price (daily closing price):

20×= cumex EE

where:




500201000,10 =×=exA

where:


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2. Stock split

The stock split is the opposite of a stock grouping. It involves an increase in the number of shares in circulation, which are replaced by new shares according to a set ratio. At the same time, the price must decrease in an inversely proportional way to the increase in the number of shares.

With a 3 for 1 stock split, each shareholder is assigned 3 “new” shares for each “old” one handed back.

Borsa Italiana calculates the adjustment coefficient according to formula 2. This value, always with 6 decimal digits, is multiplied by the strike prices (daily closing prices) and divided by the lot.

Consequently, stock option (stock future) contracts subject to a stock split will see a change in their strike prices (daily closing prices) and lot size.

Formula 2.

NVK =

where:




a. Adjustment of the strike price (daily closing price):

KEE cumex ×=

where:




KlotAex

1×=

where:


10

3. Pre-emptive offer (through the issuing of new shares and/or bonds and/or warrants and/or any other category of shares).

Several types of pre-emptive offer can be identified:

• pre-emptive offer through the issuing of shares of the same category;

• pre-emptive offer through the issuing of shares with warrants;

• pre-emptive offer through the issuing of convertible bonds with warrants;

• pre-emptive offer through the issuing of securities of a different category.

When a share capital increase is resolved, each shareholder is entitled to underwrite: this right can be exercised during the underwriting period set by the company, which starts from the right detachment day (“ex” date).

Borsa Italiana calculates the adjustment coefficient according to formula 3. This value, always rounded to 6 decimal digits, is applied to strike prices (daily closing prices) and to the lot.

Consequently, stock option (stock future) contracts subject to a pre-emptive offer will see a change in their strike prices (daily closing prices) and lot size.

More specifically, the K coefficient is calculated as follows:

Formula 3.

off

theorex

PPK =

where:

theorexP = theoretical price ex rights = [(Poff * V)+(Psub * N)] / (V+N)

offP = official price cum rights

subP = subscription price of 1 new share


N = number of new shares issued

Naturally, Borsa Italiana calculates the ex rights theoretical price taking into account the bond (or warrants) value should these be part of the pre-emptive offer.


a. Adjustment of exercise price (daily closing price):

KEE cumex ×=

11

where:




KlotAex

1×=

where:

Aex = number of underlying shares after the adjustment

Example: Pirelli & C. pre-emptive offer, official notice n. 1322 of 2/2/2005


Pirelli & C. S.p.A. approved a capital increase with the issuance of a maximum of 1.5 billion ordinary shares to offer as stock options to ordinary shareholders and savings shares by issuing 2 new ordinary shares for every 5 shares of any category already in possession at the unit price of 0.70 Euro per share, of which 0.18 Euro as share premium. The cum price was equal to 1.105 Euro.

Impact on Pirelli stock options

With reference to the capital increase of Pirelli & C., Borsa Italiana informed that it would have adjusted the Pirelli stock option contracts.

The coefficient (K) was rounded to the 6th decimal digit and was determined as such:

( ) ( )[ ] ( ) 895281.0

105.125/270.05105.1 =+×+×=K

a. Adjustment of exercise price:

895281.0×= cumex EE

where:

Ecum = exercise price before the adjustment

Eex = exercise price after the adjustment

12


117,1895281.0

1000,1 =×=exA

where:


13

4. Free share capital increase

With a free share capital increase, each holder of shares included in the operation will receive new shares free of charge according to a ratio communicated by the issuer without having to exercise any right. The theoretical value of the right is therefore null by definition. This corporate action is a particular instance of the previous one. The formula 4 is worked out directly from the formula 3 illustrated above, because the underwriting price of the new shares is null.

Borsa Italiana calculates the adjustment coefficient according to the formula 4. This value, always rounded to 6 decimal digits, is applied to strike prices (daily closing prices) and to the lot.

Consequently, stock option (stock future) contracts subject to a free share capital increase will have both their strike prices (daily closing prices) and lot changed.

More specifically, the coefficient (K) is calculated as follows:

Formula 4.

NVVK+

=

where:




a. Adjustment of exercise price (daily closing price):

KEE cumex ×=

where:

Ecum = exercise price (daily closing price) before the adjustment

Eex = exercise price (daily closing price) after the adjustment


KlotAex

1×=

where:


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Example: Free attribution of ordinary shares for Banca Monte dei Paschi di Siena, official notice n. 5086 of 5/16/2001


Allocation of 1 new Banca Monte dei Paschi di Siena ordinary share for every 10 owned Banca Monte dei Paschi di Siena ordinary shares.

Impact on the Banca Monte dei Paschi di Siena stock options

With reference to the Banca Monte dei Paschi di Siena shares, the adjustment intervention affected both the exercise price and the number of shares underlying the option contracts. The adjustment coefficient K was applied according to the following method of intervention.

The K coefficient hereafter determined was rounded to the 6th decimal digit.

909091.0=+

=NV

VK

where:



a. Adjustment of the exercise price:

909091.0×= cumex EE

where:

Ecum = exercise price before the adjustment

Eex = exercise price after the adjustment


100,1909091.0

1000,1 =×=exA

where:

Aex = number of shares after the adjustment.

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5. Merger

With a merger operation between two or more companies, the merged companies cease to exist and converge into one merging company, which may already exist or be newly established. As a result of the merger, the shareholders of the companies involved hand in the shares they hold and receive shares of the merging company according to the exchange ratio approved by the company.

Let us assume, for example, that the companies “A” and “B” merge, with “B” merging into “A”, and the exchange ratio is 1 share of “A” every 3 shares of “B”. All the “B” shareholders hand in the shares held and receive 1 share of company “A” for every 3 shares of the company “B” handed in. As a result of the operations only “A” will survive, the company that merged “B”.

When the shares involved in a merger also underlie derivative instruments, stock options and stock futures, these are adjusted to take into account the effect of the corporate action. In this case, both the strike prices (daily closing prices) and the lot size of the contracts are modified according to the exchange ratio of the merger operation.

Borsa Italiana applies the exchange ratio indicated by the merging company according to formula 5, rounded up to the sixth decimal digit.

Consequently, stock option (stock future) contracts subject to a merger will see a change in their strike prices (daily closing prices) and lot size.

Formula 5.

ratioExchangeK 1=


a. Adjustment of the exercise price (daily closing price):

KEE cumex ×=

where:




KlotAex

1×=

where:


16

Example: Merger of TIM in Telecom, official notice n. 8341 of 06/24/2005


Merger of TIM S.p.A. into Telecom Italia S.p.A.

Exchange ratio following the merger: 1.73 new Telecom Italia S.p.A. ordinary shares for each old TIM S.p.A. ordinary share.

a. Adjustment on stock options

With reference to the stock option contracts on TIM S.p.A. ordinary shares, the adjustment affected both the strike price as well as the number of shares underlying the stock option contracts.

This intervention was on the basis of the adjustment coefficient K in the following manner:

578035.073.11 ==K

b. Adjustment of strike prices:

578035.0×= cumex EE

where:

Ecum = strike price before the adjustment

Eex = strike price after the adjustment

c. Adjustment of the number of underlying shares (lot):

730,173.1000,1578035.0

1000,1 =×=×=exA

where:

Aex = number of shares (lot) after the adjustment

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6. Demerger

Through a demerger operation, a company transfers a part of its corporate structure to a beneficiary company, either an existing or newly-established one. The shareholders of the demerged company hand in the shares held and receive new shares of the demerged company as well as shares of the beneficiary company.

Let us assume, for example, that the company “A” has demerged in favour of the beneficiary “B” with an allocation ratio of 3 shares of the company “A” and 2 shares of “B” every 5 shares of “A” held. Therefore, the shareholder of company “A”, for every 5 shares handed in will receive 3 new shares of “A” and 2 shares of “B”, the beneficiary.

Stock option (future) contracts subject to demergers will only change the deliverable (lot), while the strike price (daily closing price) remains unchanged. In other words, what will be delivered (or collected) upon expiry will be a basket of securities, whose valuation is made considering the value of the entire basket.

Example: demerger of Seat Pagine Gialle in Seat Pagine Gialle and Telecom Italia Media, official notice n. 7968 of 08/01/2003

Description of the operation

• Name change of Seat Pagine Gialle S.p.A. into Telecom Italia Media S.p.A.;

• Partial spin-off of Telecom Italia Media S.p.A. (formerly Seat Pagine Gialle) in favour of the new company Seat Pagine Gialle S.p.A.;

• Assignment ratio: for every 40 ordinary shares of the company effecting the spin-off that were withdrawn and cancelled, 11 ordinary shares of the company effecting the spin-off Telecom Italia Media (formerly Seat Pagine Gialle) and 29 new ordinary shares of the spin-off company were attributed.

a. Adjustment on stock options

Stock options on Seat Pagine Gialle ordinary shares with lot equal to 2,500 stocks were adjusted in the following manner:

• Strike prices: no adjustments;

• Underlying of adjusted stock option series: creation of a basket consisting of 1,812 new Seat Pagine Gialle ordinary shares + 688 Telecom Italia Media ordinary shares (formerly Seat pagine Gialle).

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7. Conversion of shares into another category

When a company converts its shares into another category (e.g. conversion of saving shares into ordinary shares), the exchange ratio must be communicated.

In this context, stock option (stock future) contracts have both the strike price (daily closing price) and the quantity of shares to be delivered changed on the basis of the exchange ratio.

As in the case of merger operations, Borsa Italiana applies the exchange ratio indicated by the company according to the formula 6, rounded up to the sixth decimal digit.

Formula 6.

ratioExchangeK 1=



KEE cumex ×=

where:




KlotAex

1×=

where:


19

8. Extraordinary dividend

On January 2nd 2006, a review of the rule and an amendment in the way derivative contracts are adjusted following the distribution of extraordinary dividends were introduced in the Rules of the Markets organised and managed by Borsa Italiana S.p.A..

According to the adjustment method in effect, a “K” factor is applied to the strike price and lot size – in case of stock option contracts – or to the daily closing price and lot size – in case of stock future contracts.

According to the Instructions accompanying the Rules of the markets organised and managed by Borsa Italiana S.p.A., the following shall be considered ordinary dividends:

a) those whose payment is approved by the annual meeting and any interim dividends that are paid under a policy of paying such dividends announced by the issuer within the time limits provided for in Title IA.2, Section IA.2.1, Article 21. Borsa Italiana reserves the right, in exceptional cases and when the announcement of payment is made at least 3 months in advance with respect to the payment date, to consider interim dividends that are not provided for in the dividend payment policy as ordinary. Borsa Italiana will promptly notify the market;

b) those that do not exceed 8% of the average of the official prices of the five trading days preceding the day the Board of Directors of the company approved the payment of an interim dividend or the day the Board of Directors of the company approved the draft annual accounts and proposed the distribution of the dividend.

Where dividends do not meet even only one of the conditions specified in points a) and b), they shall be considered extraordinary.

To limit the distortionary effects derived from the distribution of extraordinary dividends, Borsa Italiana calculates the adjustment coefficient according to formula 7. This value, always rounded to 6 decimal digits, is applied to strike prices (daily closing prices) and lot.

More specifically, the K coefficient is calculated as follows:

1 Article 2: Dividend payment disclosure requirements Companies whose shares are in the S&P/MIB index or are the underlying of options or stock futures contracts traded on the IDEM market shall announce, before the end of the month subsequent to the closing date of their financial year:

a) the month planned for the payment of the dividend, if any, based on the results for the financial year just closed, where this is different from the month in which the previous dividend was paid;

b) the intention, if any, to adopt a policy of distributing interim dividends in the current financial year with an indication of the months in which the interim dividends and the final dividend are to be paid.

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Formula 7.

off

off

PamountdividendaryExtraordinP

K−

=

where:

Poff: official price on the day prior to the detachment of the extraordinary dividend

Extraordinary dividend amount: value of extraordinary dividend

The amount of the extraordinary dividend is taken to be: a) the entire amount of the dividend where the condition referred to in paragraph

2(a) is not met;

b) the excess amount if the dividend exceeds the threshold specified in paragraph 2(b). For the calculation of the excess amount the payments of interim dividends, based on the results for the financial year and not previously adjusted, must be added to the dividend; the adjustment is applied from the first distribution that implies the breaching of the threshold specified in paragraph 2(b).



KEE cumex ×=

where:




KlotAex

1×=

where:


Impact on stock option and stock future contracts

In order to give a more in-depth review of how to apply the adjustments in case of distribution of extraordinary dividends, 4 examples are provided below. The first 3 regard point a) of the rule, whereas the fourth example regards point b).

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In-depth review of point a)

With regards to point a), Borsa Italiana defines as “extraordinary dividend” the further payment that was not included in the dividend distribution policy communicated by the company within the month following the closure of the financial year.

However, if a company resolved to distribute advances on dividend not included in the payment policy and if the announcement was made 3 months ahead of the actual payment, this dividend can be considered ordinary.

Example No. 1: amendment of the payment policy in the course of the year, with payment of a dividend advance based on the results of the current financial year.

Overview of the operation

On July 31st 2005, the company Alpha informs that the Board has agreed to pay an advance on the dividend for 2005 equal to 0.50 Euro per share to be distributed in December.

Impact on Alpha’s stock options and stock futures

The company has amended its dividend payment policy in the course of the year and deliberated the distribution of an advance on dividend. The remaining part of the dividend will be distributed in the following year. Borsa Italiana will consider this payment as ordinary, despite not being included in the payment policy communicated by the company in accordance with art. 2, section IA.2.1, item IA.2 of the Instructions, because the time period between the communication of the payment date and the actual payment of the dividend is longer than three months.

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Example No. 2: amendment of the payment policy in the course of the year, with payment of a dividend advance based on the results of the current financial year.


On July 31st 2005, the company Alpha informs that the Board has agreed to pay an advance on the dividend for 2005 equal to 0.50 Euro per share to be distributed in October. The minimum lot size of Alpha’s stock option and stock future contracts is 500, whereas the official price of the security in the day prior to the detachment is 23 Euro.


Alpha has amended its dividend payment policy in the course of the year and deliberated the distribution of an advance on dividend.

This advance has to be considered as extraordinary because it is not included in the payment policy communicated by the company in accordance with art. 2, section IA.2.1, item IA.2 of the Instructions, and also because the time period between the communication of the payment date and the actual payment of the dividend is less than three months.

However, the adjustment is made on all the expiries up to the one in which the following dividend is paid. If this expiry is not indicated, the payment date of the last dividend distributed during the year will be considered instead.

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Therefore, in relation to stock option contracts, the adjustment operation affects both the strike price and the number of securities included in the contract (lot size), and is applied until the May expiry2.

Similarly, in relation to stock future contracts, the adjustment operation affects both the daily closing price and the number of securities included in the contract (lot size), and the adjustments is applied until the May expiry.

The adjustment is made on the basis of the coefficient (K), calculated as follows:

978261.023

50.023 =−=K

a. Adjustment of strike prices (daily closing prices):

978261.0×= cumex EE

where:



b. Adjustment of the number of shares included in the stock option and stock future contracts (lot):

511978261.0

1500 =×=exA

where:

Aex = number of shares after the adjustment

Example No. 3: the company Beta, after distributing a dividend as per its payment policy, pays an additional dividend before the end of 2005.


On January 10th 2005, the company Beta informs that in accordance with its dividend policy, will pay a dividend in May 2005.

However, during the year, the company decides to distribute another dividend equal to 0.25 Euro which was not indicated in the dividend payment policy.

The minimum lot size of Beta’s stock option and stock future contracts is 1,000, whereas the official price of the stock in the day prior to the payment is 14.20 Euro.

2 In our example, the company paid the previous dividend in May.

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Impact on Beta’s stock options and stock futures

This dividend is not included in the company’s distribution policy but can be considered as a one-off, not an advance to the dividend expected in the following year. For these reasons, the dividend is considered extraordinary.

Therefore, in relation to option contracts on Beta’s shares, the adjustment operation affects both the strike price and the number of securities included in the contract (lot size), and is applied to all the existing expiries.

Similarly, in relation to stock future contracts, the adjustment operation affects both the daily closing price and the number of shares included in the contract (lot size), and is applied to all the existing expiries.


982394.020.14

25.020.14 =−=K


982394.0×= cumex EE

where:



25

Adjustment of the number of shares included in the stock option and stock future contracts (lot):

018,1982394.0

1000,1 =×=exA

where:


In-depth review of point b)

With reference to point b), Borsa Italiana considers as “extraordinary” the part of dividend that exceeds 8% of the average official share price in the five open trading days prior to the date in which the company’s Board of Directors approves the payment of an interim dividend or the day in which the Board of Directors of the company approves the draft annual accounts and proposes the distribution of the dividend. For the calculation of the excess amount the payments of interim dividends, based on the results for the financial year and not previously adjusted, must be added to the dividend; the adjustment is applied from the first distribution that imply the breaching of the threshold specified.

This way, the amount of a dividend with a value of more than 8%, as indicated in point b), must be considered extraordinary.

Example: payment of a dividend whose amount exceeds 8%.


On January 22nd 2006, the company Alpha informs in its dividend payment policy that the dividend will be distributed in May. In April, the Board of Directors approves the Financial Statements and proposes the distribution of a dividend equal to 0.8 Euro, whereas the average official price of the Alpha share in the five days prior to the Board of Directors meeting is 2.5 Euro. The minimum lot size of Alpha’s stock option and stock future contracts is 100; the official price prior to the payment date is equal to 2.55 Euro.


As the dividend amount (0.80 Euro) is equal to 32% of the average official prices, only the part exceeding the 8% is considered as “extraordinary dividend”.

In the specific case, the part of ordinary dividend amounts to 0.20 Euro (8% of the average official price of the security in the five days prior to the Board of Directors meeting) whereas the remaining, i.e. 0.60 Euro, is considered extraordinary and so must be adjusted.

Therefore, Alpha’s stock option and stock future contracts are adjusted only for the amount of 0.60 Euro.

In relation to stock option contracts on Alpha’s shares, the adjustment operation affects both the strike price and the number of securities included in the contract (lot size) for all the existing expiries.

26

Similarly, in relation to Alpha’s stock future contracts, the adjustment operation affects both the daily closing price and the number of securities included in the contract (lot size) for all the existing expiries.


0.76470655.2

60.055.2 =−=K


764706.0×= cumex EE

where:



b. Adjustment of the number of shares included in the stock option and stock future contracts (lot):

131764706.0

1100 =×=exA

where:


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9. Delisting of contracts

Stock option and stock future contracts can be delisted for two reasons:

a. decline in liquidity of the contract

b. delisting of the underlying stock because of total-acquisition tender offer

a. Decline in liquidity of the contract

It may occur that the liquidity of stock options and stock futures may decrease to such a point to cause a disruption in the regular and continuous performance of trading. In such an event, Borsa Italiana may decide to delist the stock option and/or stock future contracts, inhibiting the generation of new strikes and/or contracts starting from a determined date. After verifying the existence of the conditions referred to in Article 4.7.2, paragraph 5, Borsa Italiana shall inform Consob and the market, at least 20 days in advance, of the start of the exclusion procedure. The procedure shall start on the first trading day following the first upcoming maturity. The time limits referred to in paragraph 1 may be modified by Borsa Italiana in the event of a total-acquisition tender offer where this significantly reduces the free float.

From the first day of the effectiveness of the exclusion of a contract:

• market makers for the contract shall be exonerated from the quotation obligations referred to in Article IA.9.2.9;

• series for which the open interest is nil shall cease to be tradable;

• new series and maturities shall not be created;

• series for which the open interest is positive shall continue to be traded until they mature or until the open interest is nil.

b. Delisting of the underlying stock because of total-acquisition tender offer

In exceptional cases marked by illiquidity of the shares underlying options contracts as a consequence of a complete-acquisition tender offer, Borsa Italiana, in order to ensure the orderly performance of trading, of clearing and guarantee and of settlement of contracts may order the closure and settlement of open positions in options on shares in one of the three following ways, according to conditions in the market:

• the cash settlement of all the open positions;

• the substitution of the security to be delivered with that of the bidder where this is listed in the markets managed by Borsa Italiana;

• the bringing forward of the maturity of the contract.

If a company listed on the markets managed by Borsa Italiana launches a Public Tender Offer (PTO) on the share capital of another company whose underlying stock has derivative contracts (options and/or futures) and the payment is made in shares of the company launching the PTO, the adjustment intervention is the same as the one in case of mergers, i.e. strike price (daily closing price, for stock futures) and lot size are adjusted on the basis of the offer. In this scenario, therefore, the second operational way applies, i.e. the substitution of the security to deliver with the security of the company launching the PTO.

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In other cases (for example if the underlying was delisted) Borsa Italiana may demand that all the existing positions be peremptorily closed by the last trading day of the security underlying the derivative contracts.

Example: delisting of stock options on Italgas shares, official notice n. 1108 of 04/02/2003

In accordance with Avvisi di Borsa n. 759 dated January 28th and n. 1106 February 4th, which referred to the delisting of stock option contract on Italgas shares, Borsa Italiana announced that Italgas stock option contracts was subject to early exercise by February 6th, the last trading day for Italgas shares. The stock option contracts on Italgas not exercised by February 6th was subject to expiry.

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Communication The communications related to the impact of corporate actions on derivative contracts, options and futures on single shares are published via an “Avviso di Borsa Italiana” and distributed through the Net Information Systems (NIS) of Borsa Italiana.

1) Website

All the IDEM notices since 2003 are published free of charge on Borsa Italiana’s website, in the Derivative section, at the address

http://www.borsaitalia.it/quotazioni/derivati/corporateactions/corporateactionshome.en.htm

Available in this section is a web page dedicated to adjustment operations.

2) Mailing list

By signing up for the free “Corporate Actions Calendar” mailing list available from Borsa Italiana’s website, it is possible to receive the notices regarding the IDEM market every time these are published, and take advantage also of a weekly information service. This service consists in a weekly e-mail that summarises the corporate actions in the pipeline, so that the user can be constantly and fully up-to-date with corporate actions.

3) Contacts

For any other information on the adjustment of stock option and future contracts on single shares, please contact the IDEM Market of Borsa Italiana S.p.A. at:

• Tel. number: +39 02 72426 231

• Email: [email protected]

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