SERVICE MODEL FOR DURUM WHEAT FUTURES TO BE TRADED ON THE AGREX SEGMENT OF IDEM MARKET AND GUARANTEED BY CASSA DI COMPENSAZIONE E GARANZIA This document sets out the main features of the service model for the new DURUM wheat futures market that Borsa Italiana intends to bring into operation in collaboration with Cassa di Compensazione e Garanzia. This model provides for Borsa Italiana to create a new segment of IDEM market dedicated to trading of agricultural commodities derivative contracts with physical delivery, to be called AGREX (AGRiculture EXchange). The clearing and guarantee of the contracts negotiated during the trading phase will be performed by Cassa di Compensazione e Garanzia (CC&G); during the delivery phase CC&G will regulate and monitor the execution phases and guarantee counterparties a cash differential to cover the price risk in the event of one of them defaulting. To this end CC&G will create the new Agricultural Commodity Derivatives Section. 1
CONTRACTUAL SCHEME AND TRADING OF THE DURUM WHEAT FUTURES CONTRACT 1. Contract specifications for the durum wheat futures The futures contract with durum wheat as underlying is a financial instrument regulated by Borsa Italiana pursuant to Article 64 of the Consolidated Law on Finance. The clearing and guarantee functions for the above mentioned contract are performed by CC&G during the trading phase. Positions held open at maturity are settled by physical delivery of wheat following the procedures established by CC&G. Maturities Delivery months: March, May, September and December; Number of contracts traded: 5 maturities. Maturity date The contract will be traded until 17:40 on the trading day following the ninth calendar day of the delivery month. In the rest of this document the last trading day will be denoted by T. Size of the contract 50 tons. Price Prices will be expressed in euro per ton ( /t); market prices do not include VAT. Tick size 0.25 /t. Trading hours From 14:30 to 17:40 2
Settlement Physical delivery of the underlying, unless otherwise agreed by the parties. Delivery points Authorised silos (the first authorised delivery point is nearby Foggia). Settlement Price The Settlement Price is equal to the daily settlement price calculated by Cassa di Compensazione e Garanzia on the maturity day of the contract. Borsa Italiana may establish a different settlement price taking account of any other objective elements that may be available. Underlying quality ( standard quality ) Durum wheat of any origin, sound, fair and of marketable quality. Compliant with the EU's sanitary and hygiene regulations for durum wheat for human use, and according to the characteristics shown in the following table: Specific weight minimum 76.00 kg/hl Protein minimum 11.5% Moisture maximum 13.5% Impurities maximum 2% Vitreous grains minimum 62% Sprouted grains maximum 2% Mottled grains maximum 12% Broken grains maximum 6% Other cereals maximum 3% Grains affected with fusariosis maximum 0.5% The definitions of the characteristics and the analysis methods shown in the table can be found in the EU Regulation no. 1272/2009 and EU Regulation no. 742/2010, as amended. For vitreous grains, see UNI EN 15585. 3
Impurities refers to miscellaneous impurities (excluding grains affected with fusariosis) and to the following grain impurities: shrivelled grains, grains in which the germ is discoloured, grains damaged by pests, and grains overheated during drying. The quality of the delivered wheat will be checked by the A.G.E.R. laboratory in Bologna at the request of the buyer. 2. Trading methods Durum wheat futures are traded using the continuous trading method, whereby contracts are concluded by automatic matching of orders of the opposite sign on the book, processed according to price/time priority. Trading will be from 14:30 to 17:40. Types of order permitted Single order: buy or sell orders sent to the market with or without a limit price. Quotation: buy or sell offers entered by market makers, according to their obligations. Committed Cross orders: orders entered with the aim of concluding contract in which the counterparties are predetermined, provided that the price is between the best bid price and the best ask price, excluding such prices. Internal Cross orders: orders entered with the aim of concluding contracts where the counterparty is the intermediary itself, provided that the price is between the best bid price and the best ask price, excluding such prices. Block trades: committed cross and internal cross orders that are entered with the aim of concluding contracts at a price outside the range between the best bid price and the best ask price if the contract quantity is equal or greater than 100. Admission to trading Trading on the Agricultural Commodity Derivatives segment is possible via a financial intermediary that is a member of the market or by becoming a direct member. The following may be direct members: a) persons authorised to provide the services and engage in the activity of dealing for own account and/or executing orders on behalf of clients under the Consolidated Law on Finance, the Consolidated Law on Banking or other special provisions of Italian law; 4
b) banks and investment firms authorised to provide the services and engage in the activity of dealing for own account and/or executing orders on behalf of clients under laws of other EU countries or of non-eu countries; c) firms set up in the legal form of a società per azioni or a società a responsibilità limitata or equivalent: in which the persons performing administrative, management and supervisory functions and those responsible for trading activity and the internal control function satisfy integrity and experience requirements equivalent to those applying to intermediaries that deal in financial instruments; this requirement does not apply to firms authorised by the competent Authority of an EU country to provide an investment service or activity or collective portfolio management; which have established an internal audit function that does not depend hierarchically on any person with operational responsibilities and that makes periodic checks on the activity of trading in financial instruments; Borsa Italiana may exempt intermediaries from this requirement after evaluating their size (proportionality principle); which have adequate shareholders equity as shown by their latest audited annual financial statements. In cases of direct membership to the market, operators must also be (direct or indirect) members of the Agricultural Commodity Derivatives Section of Cassa di Compensazione e Garanzia. Market Makers Primary Market Makers: intermediaries required to quote all maturities until the last trading day ; Liquidity Provider: intermediaries required to quote all maturities up to and including the sixth trading day prior to the last trading day. Quotation obligations for Primary Market Makers and Liquidity Providers: Prices to be displayed on a continuous basis from 14:30 to 17:40; Minimum quantity: 3 contracts; Maximum spread: 8 for the first 4 maturities and 10 for the fifth maturity. Position limits Borsa Italiana sets a limit on the number of open positions that each member of the market and each of its clients can hold during the trading phase. The position limits 5
apply at three levels (to the current maturity, the following maturities and all the maturities considered together) and the values are given in the Guide to the Parameters of Borsa Italiana. The single market member must monitor its clients compliance with the position limits. If a client exceeds the limits, the market member must ask it to close the excess positions or close them on the client s behalf within the time limits established in Borsa Italiana s Instructions. If an operator exceeds its limits and is slow to close the excess positions, Borsa Italiana may ask CC&G to close some or all of the positions. 6
CC&G S GUARANTEE SERVICE FOR DURUM WHEAT FUTURES 1. Membership of the Agricultural Commodity Derivatives Section The futures traded on the AGREX segment of IDEM market will be guaranteed by CC&G in relation to the new Agricultural Commodity Derivatives Section. All direct market members will have to be members of CC&G s Guarantee System. Depending on their operational choices and/or capital, market members can be Direct (General or Individual) Clearing Members or Non-Clearing Members and must comply with the following membership requirements. Membership requirements and procedures Eligible operators and capital requirements Banks and investment firms that satisfy the following minimum capital requirements may participate directly as General or Individual Clearing Members of the Agricultural Commodity Derivatives Section: General Clearing Members: 25,000,000, increased by a variable amount related to the total number of Non-Clearing Members ( 5,000,000 from two to five Non-Clearing Members, 10,000,000 from six to ten Non-Clearing Members and 15,000,000 for more than ten Non-Clearing Members); Individual Clearing Members: 10,000,000. Operators that have signed a clearing agreement with a General Clearing Member may participate indirectly as Non-Clearing Members. Operational requirements Direct members must: hold a PM account with the TARGET2 payment system in order to make payments in euros, deriving from membership to the Guarantee System; have joined Monte Titoli if they intend to fulfil the obligation to deposit Margins by using Financial Instruments. 7
unless they use, permanently and by way of replacement, the services of a Settlement Agent in the manner specified by CC&G. Technological and Organizational Requirements Direct Members must install the BCS technological infrastructure; 1 if they are already Members of other Sections, they may use the infrastructure they are already using. Non-Clearing Members, if duly authorised by their General Clearing Member, may also install the BCS technological infrastructure. Admission to the Service Banks and Intermediaries already admitted to Central Counterparty services in other Sections must use the Bit Club system 2 to send the simplified Request for Services Form and the additional documentation specified or the Request for Services Form if they are not Members of any Central Counterparty service. 2. Clearing of contracts and maintenance of positions Positions deriving from trading in futures will be entered in the Member s house account or client account. In order to permit the segregation of any transactions carried out by different organizational units/companies belonging to a Member, it will be possible to add sub-accounts to the Member s house account. In relation to client accounts, Members will have to enter the Contractual Positions of their clients 3 in sub-accounts. The sub-accounts will have to be opened before the start of trading on behalf of the unit/company in question or the client in question, using the related BCS function. Each sub-account will be identified by a unique code. Exclusively for the purpose of managing the phases involved in the possible physical delivery of wheat, immediately after opening a sub-account with the BCS application, Members are required to notify the details of the unit/company or the 1 BCS is the electronic application that CC&G makes available to Members of the Derivative Sections in the manner specified in the BCS Manual and that makes it possible to access the clearing system to carry out operations related to Contractual Positions and download reports and data files. 2 BIt Club is a communications system designed to streamline procedures and make communications between CC&G and intermediaries more direct and effective, thus permitting the electronic management of information concerning membership of CC&G that is normally managed in paper-based form. 3 Client means the legal person that gives a mandate to a Member of the guarantee system to negotiate and/or settle contracts concluded on the market without establishing any contractual relationship with CC&G, e.g. a party that trades via a financial intermediary. 8
client for which the sub-account has just been opened to CC&G, by sending the appropriate form by fax or certified mail. 3. Daily Settlement Prices The daily settlement price of futures contracts is determined on the basis of the weighted average of the prices of the contracts concluded or the bid and offer prices observed on the market in a significant period of the trading day. 4. Margining and Default Fund Margining Members are required to deposit margins, as indicated below: Variation Margins: whose purpose is the daily settlement of losses and gains deriving from the valuation of positions at the Daily Settlement Prices (Settlement-to-the-Market). These margins will be calculated until the last trading day (the maturity day of the futures contract); Ordinary Initial Margins: whose purpose is the valuation of the maximum possible loss in the event of settlement of futures positions with a reasonably worst price scenario. These margins will be applied until the eighth trading day prior to the maturity day of the futures contract; Initial Margins on Positions in Delivery: whose purpose is the valuation of the maximum loss in the Delivery Period. For Member making delivery these margins are applied from the end of the seventh trading day prior to the last day of trading, T, until the final settlement day. For Member taking delivery they are calculated on the outstanding positions at the end of trading on the seventh trading day prior to the last day of trading, T, until the second CC&G trading day after T; on the third CC&G trading day after T and until the final settlement day they will be put equal to 100% of the value of the contract increased by a percentage; Increase in Initial Margins on Positions in Delivery: applied to Members making delivery for positions not covered by a Certificate of Deposit from the fourth trading day before T until possession of the Certificate of Deposit is attested (it should be noted that for this purpose the time limit is 12:00 on T+1). 4 4 See Section 5 for information on the management of Certificates of Deposit. 9
Mark-to-Market Margins: whose purpose is to carry out, in the Delivery Period, a possible revaluation of Positions in Delivery by considering a new Daily Settlement Price determined for those positions. Margins will be calculated during the trading phase and until the eleventh trading day prior to the maturity of the futures contract on the net positions of each Members account (net margining); from the tenth trading day prior to the maturity day of the futures contracts margins will be calculated, instead, separately for the positions in each sub-account (gross margining). Eligible assets Eligible assets for meeting margin requirements will be those currently accepted for all the existing Sections, i.e. for initial margins, euros and Italian, French and German government securities traded on MTS and, for variation margins, exclusively euros. Default Fund For the Agricultural Commodity Derivatives Section a special Default Fund (a guarantee fund consisting exclusively of payments made by the Direct Members of the Section) will be set up to cover losses arising from the default of any such Direct Member of the Section. At the start of operations of AGREX market each Member s initial contribution to the Default Fund will be equal to a fixed amount, regardless of the type of membership. Subsequently to the start of operations and once a sufficiently large data base has been built up to permit stress tests to be carried out, the amount of the Default Fund will be determined, as for the other Sections, on the basis of the results of such stress tests and divided among the Members in relation to the average of their initial margins in an earlier period. 5. Procedure for the physical delivery of wheat Certificates of Deposit The authorised silos will issue Certificates of Deposit to parties depositing the wheat underlying the Positions in Delivery entered in Members sub-accounts. The Certificates of Deposit issued by the silos (which, among other things, will contain information identifying the party making the delivery and the related Member, the quantity of wheat deposited, the declaration of conformity of durum wheat with the standard quality, and the restriction on the wheat s availability) 10
must be sent by parties making delivery, if different from the Member, to their Member in the Agricultural Commodity Derivatives Section. Notification of covered positions to CC&G After receiving a Certificate of Deposit, Members must notify CC&G, from the tenth trading day prior to maturity (T-10) and until the end of the fourth trading day prior to the maturity day of the futures contract (T-4),the number of Positions in Delivery entered in each account/sub-account covered by Certificates of Deposit. The notification must be sent on the proper form by fax or certified mail. The above-mentioned notification may also be made up to 12:00 on the day after the last day of trading of the maturing futures contract (T+1), but in that case from T-4 onwards CC&G will apply the Increase in Initial Margins referred to in Section 4 to the Positions in Delivery not yet covered. Alternative Delivery and assignment procedure Without prejudice to CC&G guaranteeing the physical delivery of wheat (so-called Guaranteed Delivery), parties making/taking delivery may agree on delivery outside the CC&G s guarantee system (so-called Alternative Delivery). First phase of Alternative Delivery Exclusively on the trading day after the maturity of the futures contract (T+1) Members may verify the intention of their Clients making/taking delivery to opt for Alternative Delivery. In cases of a positive reply, Members must notify CC&G, at the latest by 15:00 on T+1, of the matches of positions for delivery/withdrawal under Alternative Delivery. The notification must be sent on the proper form by fax or certified mail. On the same day, upon receiving the notification, CC&G will close the matched positions in the accounts/sub-accounts of the Members making/taking delivery. On the morning of the next CC&G trading day (T+2) Members will receive the information on the positions for delivery/withdrawal under Alternative Delivery. On the same morning the margins previously deposited against the above-mentioned positions, now closed, will be returned to Members. 11
Assignment procedure On the evening of T+1 CC&G applies the assignment procedure to the positions in the accounts/sub-accounts of the Members (therefore not including the positions under Alternative Delivery that have been closed in the meantime). This procedure matches the positions for delivery with those for withdrawal in such accounts/subaccounts using a methodology designed to optimise the matches. On the morning of the second CC&G trading day after the maturity of the futures contract (T+2) CC&G will announce, using the BCS application, the matched positions for delivery/withdrawal. Second phase of Alternative Delivery From the morning of the second CC&G trading day after the maturity of the futures contract (T+2) and until the third CC&G trading day after the maturity of the futures contract (T+3) Members will be able to opt for additional Alternative Delivery. Since such possible Alternative Delivery agreements concern different Members positions in delivery/withdrawal, once agreement has been reached, the withdrawing Members will send the delivering Members the proper form, duly signed, specifying the matched positions to be delivered under Alternative Delivery. This form must also be signed by the withdrawing Members and sent to CC&G at the latest by 15:00 on T+3 by fax or certified mail. On the same day, upon receiving the notification, CC&G will close the matched positions referred to by both Members in the accounts/sub-accounts of the parties making/taking delivery. On the morning of the next CC&G trading day (T+4) Members will receive, via the BCS application, the information on the positions for delivery/withdrawal to be delivered under Alternative Delivery. On the same morning the margins previously deposited against the above-mentioned positions to be delivered under Alternative Delivery, now closed, will be returned to Members. Guaranteed Delivery On the morning of the fourth CC&G trading day after the maturity of the futures contract (T+4) CC&G will send Members, via the BCS application, a list of the positions in delivery/withdrawal to be delivered under Alternative Delivery 12
containing the identification codes of the matched sub-accounts and the information on the organizational units/companies and clients and on the quantity and value of the wheat to be settled and the delivery point. On the basis of the information received from CC&G on the matches under Alternative Delivery, Members will give confirmation to parties with positions for delivery/withdrawal of the identity of their counterparties for the settlement of the contract. Wheat may be withdrawn by parties with positions for withdrawal from authorised silos starting from T+4 and until the tenth CC&G trading day after the maturity of the contract (T+10). The withdrawal must be preceded, with sufficient advance notice, by a notification to the silos of the time and manner of the withdrawal. The delivery of wheat will be in minimum quantities of 50 t, with a tolerance of ± 20 kg for each loaded truck. Withdrawing parties may request SGS ITALIA SPA (hereinafter: SGS) to take and finalise 5 samples of wheat from each loaded truck, which may be used for laboratory analyses aimed at verifying the quality of the wheat. As specified below, the quality of the wheat may only be contested on the basis of analyses carried out by the A.G.E.R. laboratory. 5 Requests by withdrawing parties for SGS to take samples and for A.G.E.R. to carry out analyses are optional, at the requester s expense, and must be made promptly and notified to CC&G. The withdrawing party may withdraw the wheat without taking samples, but this will entail accepting the quality of the wheat withdrawn and renouncing the right to contest its quality in the future. 6 At the time the wheat is withdrawn, the silos will issue the withdrawing parties with a Certificate of Withdrawal, which they must send to their Members. The Members of parties with positions in withdrawal that have requested SGS to take samples of the wheat and the A.G.E.R. laboratory to carry out analyses must promptly inform CC&G that A.G.E.R. has been asked to carry out the analyses for the purpose of contesting the quality of the wheat. Failure to notify the intention to contest the quality of the wheat within the time limits referred to above entails full acceptance of the quality of the wheat withdrawn and amount, for the delivering party, and renouncement of the guarantee referred to in Article 1495 of the Civil Code. 5 See the next section Contesting the quality of the wheat 6 Partial withdrawal without sampling the wheat does not entail renouncing the right to take samples and contest the quality of the wheat not yet withdrawn. 13
In cases where the quality of the wheat is accepted, the withdrawing party must pay for the wheat withdrawn and the taxes due (VAT) to the delivering party in the manner that has been agreed between the parties and that allows the seller to receive the payment by 12:00 of the third day after that on which the wheat was withdrawn/accepted. The settlement of contracts must be promptly notified to CC&G by Members by sending the proper form by fax or certified mail. On the morning of the CC&G trading day following reception of the confirmation of settlement CC&G returns the margins to the Direct Members involved. In exceptional cases in which it is not possible to store the wheat at the authorised silos for space or other reasons, CC&G may indicate alternative sites for the delivery, specifying the procedure to be followed as well. If a contract cannot be executed for reasons of force majeure, CC&G may arrange for its cash settlement. Cash settlement Positions deriving from futures that have matured without being covered by a Certificate of Deposit by 12:00 on T+1 and positions for which the final settlement has failed owing to the substandard quality of the wheat are closed by means of cash settlement in the manner described in the default procedure. In cases in which a Member has withdrawn the wheat but not paid for it within the time limits provided for in the contract, CC&G will apply the default procedure. Default Direct Members are considered to be in default: a) in the event and at the time of failure in whole or in part to fulfil the obligations associated with the deposit of Margins, payments into the Default Fund, the cash settlement of positions, or failure in whole or in part to cover Positions in Delivery by means of Certificates of Deposit, or failure to make final settlement of Positions (delivery of wheat of substandard quality and/or failure to pay for the wheat withdrawn). b) if they are the subject of a declaration of market insolvency or insolvency proceedings are initiated against them. 14
Non-Clearing Members are considered to be in default not only when they are the subject of a declaration of market insolvency or insolvency proceedings are initiated against them but also when the General Clearing Member notifies CC&G of their having failed in whole or in part to deposit Margins or to make cash settlement of Positions, or of their having failed in whole or in part to cover Positions in Delivery by means of Certificates of Deposit or to make final settlement of Positions. Default procedure In order to close the futures positions of Direct Members in default, an attempt will be made to transfer the client account positions to other Members and, if this is not possible, the client account positions and the house account positions will be liquidated on the market. In exceptional cases in which CC&G is unable to liquidate positions on the market (pronounced illiquidity and exoneration of the market makers) recourse will be made to cash settlement. Futures positions associated with contracts that have already matured at time T and that are awaiting settlement will be settled by cash settlement as described above. In order to close the futures positions of the clients of Non-Clearing Members in default, an attempt will be made to transfer them to other Members; if such transfer is not possible, and for the house positions of Non-Clearing Members in default, it will be up to the General Member to take the action needed to close the positions and then inform CC&G of the action taken. Contesting the quality of the wheat In cases where a withdrawing Member/party intends to contest the quality of the wheat being delivered by the delivering party, 7 CC&G must be promptly informed by the Member involved sending the proper form by fax or certified mail and declaring that it/its client intends not to accept the delivery. Delivery may be contested in this way only on the basis of analyses performed by the A.G.E.R. laboratory in Bologna, which participants in the market recognise as the only one accepted in the system guaranteed by CC&G. 7 Provided they have previously requested SGS to take samples of the wheat. 15
If for reasons of force majeure, the A.G.E.R. laboratory should be unable to perform the requested analyses within 7 business days of the delivery of the samples by the withdrawing Member/party, CC&G may arrange for recourse to be made to another laboratory. If the results of the analyses that the A.G.E.R. laboratory in Bologna sends to CC&G and the Member show that the quality of the wheat does not conform with the minimum standard indicated in Borsa Italiana s contractual scheme, CC&G will arrange for cash settlement of the position in favour of the withdrawing Member/party. The withdrawing Member/party has the right to ask to return the wheat withdrawn that is found to be substandard, but the return of this wheat takes place on a bilateral basis outside the system guaranteed by CC&G. Relations with the silos The silos will be responsible for issuing the Certificates of Deposit for the quantities of wheat deposited by delivering Members or their clients. On the morning of the fourth CC&G trading day after the maturity of the futures contract (T+4), CC&G will send the silos, by certified mail, the lists of the matches of withdrawing and delivering Members/parties involved in guaranteed delivery. At the time wheat is withdrawn, the silos will issue a Certificate of Withdrawal to the withdrawing Member/party, Reporting The information on the activity involving durum wheat futures contracts will be included in the reports and data files of the Agricultural Commodity Derivatives Section and, more generally, of the central counterparty service, which will be made available via the BCS application on the CC&G trading day after the CC&G trading day referred to. 16
Transitional Rules In order to allow operators to make appropriate technical investments which may require a longer period than the date for the start of the market, CC&G deemed it necessary to introduce a transitional regime with regard to the following: as a replacement for the compulsory registration in the "sub-accounts", Participants will send CC&G a list of the clients positions, after the last trading day of the futures contract. This is aimed at the assignment procedure in the delivery phase; into the arrears of the entry into force of the "sub-accounts", it is expected that the margins will be calculated net until the last trading day of the futures contract (rather than gross per account and sub-account from the tenth day before the expiry date); in addition, into the arrears of the entry into force of the "sub-accounts", in order to monitor the position limits by Borsa Italiana, it is expected that traders, temporarily, inform Borsa Italiana of the exceeded limits, also by its customers. Moreover, Borsa Italiana reserves the right to ask them any information and documentation, including documentation related to the operation of customers, to the end of the above monitoring. The conclusion of the transitional period will be established by CC&G on the basis of a consultation with the Participants. To this end, CC&G will start the consultation at the same time of the operational start of the market. 17
Annex to the Service Model Margins Starting verification of covered positions + margining of positions from net to gross Deadline for notifying CC&G of covered positions (except for possibility of increased margins) Matching + 1 st phase of alternative delivery 2 nd phase of alternative delivery Contract settlement T-n T-10 T-7 T-4 T Last day of trading Expiry T+1 T+2 T+3 T+n End of the month Ordinary Initial Margins Delivery Margins for Positions in Withdrawal Delivery Margins for Positions in Delivery Variation Margins Increased Margins for uncovered Positions in Delivery Return of Margins to those who agree on alternative delivery Return of Margins (except when quality is contested) Margins equals to 100% + a percentage for Positions in Withdrawal until the contract is settled 18