Principles and conventions

Following extraordinary corporate operations, which involve the detachment of rights, stock splitting 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.

• Definitions
• Principles and Conventions
• Brochure
• Rules and Instructions

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

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..
 

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
 

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 splitting;
• 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 cases marked by illiquidity of the shares underlying derivatives contracts as a consequence of a complete-acquisition tender offer or of a procedure for the revocation of listing or exclusion from trading of the shares in question.
 

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). Finally, there are some exceptional circumstances (illiquidity of the shares underlying derivatives contracts) in which the closure and the cash settlement of all the open positions on the basis of the theoretical fair value is applied. In any case, Borsa Italiana will act as soon as possible and will inform the market about the intervention through an "Avviso di Borsa", in order to guarantee an immediate and correct disclosure of information.
 

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.
 

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 options and future contracts that are traded from the effective date of the operation are created on the basis of the adjusted reference price.
 

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".
 

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.
 

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.
 

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/quotazioni/derivati/primopiano/comunicatiidem.en.htm