12/05/2017
The Italian bond market is a crucial component of the European financial landscape, offering a diverse range of debt instruments for investors. At its heart lies the Mercato Telematico delle Obbligazioni (MOT), Italy's primary regulated electronic marketplace for bonds and other debt securities. Established in 1994, the MOT has evolved significantly, aiming to facilitate access for private investors while enhancing the efficiency for professional operators through a fully automated trading system.
What is the MOT?
The MOT, managed by Borsa Italiana S.p.A., is a sophisticated electronic trading platform where a wide array of debt instruments are bought and sold. It serves as a retail market, meaning it caters to smaller transaction sizes and individual investors, differentiating itself from wholesale markets like MTS (Mercato Telematico dei Titoli di Stato) which deals with much larger minimum lot sizes.
The MOT facilitates the trading of various securities, including:
- Italian Government Bonds: Such as BOT (Buoni Ordinari del Tesoro), BTP (Buoni del Tesoro Poliennali), CCT (Certificati di Credito del Tesoro), and CTZ (Certificati del Tesoro Zero Coupon).
- Non-convertible Bonds: Corporate bonds that cannot be exchanged for shares.
- Eurobonds: Bonds issued in a currency other than that of the issuer's home country.
- Foreign Issuer Bonds: Debt securities issued by entities outside of Italy.
- Asset-Backed Securities (ABS): Securities backed by a pool of assets, such as mortgages or loans.
- Other Debt Securities: A broad category encompassing various forms of debt.
Market Structure and Operation
The MOT operates on an order-driven market structure. This means that prices are formed through the direct interaction of buy and sell orders submitted by market participants. Both retail investors, typically through their banks, and professional traders can place their orders, directly influencing price discovery. To bolster market liquidity, the MOT also allows for the optional presence of specialist operators who actively support trading by providing bid and ask quotes.
Borsa Italiana actively monitors and supervises trading activities on the MOT to ensure fairness and transparency. This oversight includes employing automated systems to check prices and trading proposals.
Trading Phases
Trading on the MOT typically occurs in two main phases:
- Auction Phase: This initial phase, usually from 8:00 AM to 9:00 AM, allows participants to submit orders. Contracts are executed at a theoretical price determined at the end of the auction, which aims to maximise the volume of trades.
- Continuous Trading Phase: From 9:00 AM to 5:30 PM, trading continues with automatic matching of buy and sell orders based on a price-time priority. Orders are executed sequentially, with those at better prices taking precedence, and among orders at the same price, the older ones are executed first.
Order Types
Investors can place various types of orders on the MOT:
- Orders with a price limit (or 'at best'): These orders can only be executed at a price equal to or better than the specified limit.
- Orders without a price limit: These are executed at the prevailing market price.
- Iceberg Orders: Orders that are only partially visible to the market, with the full size of the order revealed gradually.
- Time-based Validity: Orders can be set to be valid until a specific date, until cancelled, or only during a particular auction phase (e.g., opening auction).
- Execution-based Validity: Orders can be set to 'fill and kill' (execute immediately and cancel any remaining quantity) or 'fill or kill' (execute the entire order immediately or cancel it).
Pricing Conventions
Understanding how bond prices are quoted is crucial for investors. On the MOT, securities are generally quoted relative to a nominal value of €100.
Clean Price vs. Dirty Price (Current Price)
A key distinction in bond trading is between 'clean price' and 'dirty price' (or 'tel quel' in Italian markets).
- Clean Price (Corso Secco): This is the price of the bond excluding any accrued interest. When a bond is traded at 'corso secco', the buyer must also pay the seller the interest that has accumulated since the last coupon payment date. This convention is typically used for fixed-rate and variable-rate bonds where the interest rate is known before the start of the coupon period.
- Dirty Price / Current Price (Corso Tel Quel): This price includes the accrued interest. Therefore, the quoted price already reflects the portion of the coupon that has been earned by the seller up to the settlement date. This convention is used for zero-coupon bonds and structured bonds where the return is linked to underlying assets like stocks or indices.
The pricing convention applied depends on the type of bond:
| Bond Type | Pricing Convention | Explanation |
|---|---|---|
| Zero Coupon Bonds (e.g., BOT, CTZ) | Corso Tel Quel | Quoted price includes accrued interest (which is effectively the entire value for zero coupon bonds until maturity). |
| Fixed Rate Bonds | Corso Secco | Quoted price excludes accrued interest. Buyer pays clean price + accrued interest. |
| Variable Rate Bonds (known index) | Corso Secco | Quoted price excludes accrued interest, provided the index is known before the coupon period begins. Buyer pays clean price + accrued interest. |
| Structured Bonds | Corso Tel Quel | Quoted price includes accrued interest, as their return is linked to external factors. |
If a price is below 100, it's quoted 'sotto la pari' (below par). If it's exactly 100, it's 'alla pari' (at par), and if it's above 100, it's 'sopra la pari' (above par).
Market Segments
The MOT is further divided into two segments based on the settlement system used:
- DomesticMOT: This segment primarily trades Italian government bonds and other domestic debt instruments. Settlement is handled through the Italian national settlement system, Euronext Securities Milan.
- EuroMOT: This segment focuses on foreign government bonds, supranational debt, and Eurobonds. Settlement is managed through international systems like Euroclear and Clearstream Banking Luxembourg.
Price References
Borsa Italiana disseminates key price indicators for each instrument traded on the MOT:
- Reference Price (Prezzo di Riferimento): Calculated as the volume-weighted average of trades executed in the last hour (for DomesticMOT) or the last three hours (for EuroMOT) of the continuous trading phase. If no trades occur during this period, it's based on the best bid and ask orders in the book, with more recent orders given higher weight. If even that is not possible, the previous day's reference price is used.
- Official Price (Prezzo Ufficiale): This is the daily volume-weighted average price of all trades executed for that instrument during the trading session.
- Control Price (Prezzo di Controllo): This price is used during the auction phases. It is the previous day's reference price during the opening auction and the opening auction price itself during the continuous trading phase.
Before June 2004, the reference price was not calculated, and the control price only applied to the opening auction, coinciding with the official price.
Minimum Lot Sizes and Tick Sizes
The minimum lot size for trading is set by Borsa Italiana, generally aligning with the minimum denomination of the bond issue and considering market functionality, accessibility for retail investors, and execution costs. The 'tick' size, the minimum price increment, is typically one-thousandth of a euro for securities with a residual maturity of two years or less, and one centesimo for those with a longer maturity.
Frequently Asked Questions
Q1: What is the main difference between MOT and MTS?
A1: The MOT is primarily a retail market for smaller transaction sizes, while MTS is a wholesale market dealing with significantly larger minimum trade volumes, typically for institutional investors.
Q2: What does 'corso secco' mean when trading bonds?
A2: 'Corso secco' means trading at the clean price, excluding accrued interest. The buyer must pay the clean price plus the interest earned by the seller since the last coupon payment.
Q3: Which types of bonds are traded 'tel quel'?
A3: Zero-coupon bonds and structured bonds are typically traded 'tel quel', meaning the quoted price includes accrued interest.
Q4: How are prices determined during the auction phase on MOT?
A4: During the auction phase, contracts are executed at a theoretical price that maximises the traded volume, determined at the conclusion of the auction based on the submitted orders.
Q5: What is the role of specialist operators on the MOT?
A5: Specialist operators are optional participants who help increase market liquidity by providing bid and ask quotes, ensuring smoother trading.
Conclusion
The MOT provides a transparent, efficient, and accessible platform for trading a wide range of debt instruments in Italy. Understanding its structure, trading mechanisms, and pricing conventions is essential for any investor looking to participate in the Italian bond market. Whether you are a retail investor or a professional, the MOT offers a regulated environment for managing your fixed-income investments.
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