Market Model SIBE

JANUARY 2018

S.I.B. Warrants, Certificates and other products Market Model

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TABLE OF CONTENTS

1. INTRODUCTION ________________________________________________________ 4

1.1. Institutional market configuration ____________________________________________ 4

1.2. Market model structure _____________________________________________________ 4

2. PRODUCTS _____________________________________________________________ 5

2.1. General product description _________________________________________________ 5

2.2. Warrants _________________________________________________________________ 6

2.3. Certificates _______________________________________________________________ 8

2.4. Turbos / Turbos Pro _______________________________________________________ 9

2.5. Bonus / Bonus Cap _________________________________________________________ 9

2.6. Inlines ___________________________________________________________________ 10

2.7. Discounts ________________________________________________________________ 10

2.8. StayHigh / StayLow _______________________________________________________ 11

2.9. Multi ___________________________________________________________________ 11

3. MARKET PHASES AND SCHEDULES _____________________________________ 11

3.1. Main Market _____________________________________________________________ 12

3.2. Trading on the block system ________________________________________________ 12

3.3. Special operations market __________________________________________________ 13

4. ORDERS _______________________________________________________________ 13

4.1. Standard order types ______________________________________________________ 13

4.2. Quote Order _____________________________________________________________ 14

5. TICK SIZES ____________________________________________________________ 15

6. AGENTS INVOLVED IN THE MARKET ___________________________________ 15

6.1. Issuers __________________________________________________________________ 15

6.2. Brokers-dealers, brokers and financial institutions _____________________________ 16

6.3. Specialists _______________________________________________________________ 16

6.4. Market makers ___________________________________________________________ fff


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7. BASIC TRADING RULES ________________________________________________ 17

7.1. Open market. Basic trading rules ____________________________________________ 17

7.2. Auctions. Equilibrium price fixing rules ______________________________________ 18

8. VOLATILITY AUCTIONS AND PRICE RANGES ___________________________ 19

8.1. Volatility auctions ________________________________________________________ 19

8.2. Dynamic Price and Dynamic Range __________________________________________ 19

9. INFORMATION DISSEMINATION ______________________________________ 20


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1. INTRODUCTION

1.1. Institutional market configuration

The Warrants, Certificates and Other Products segment is part of the Stock Exchange

Interconnection System, like the official stock market. On 3 March 2009, the SIBE-SMART

trading platform was put into operation. The segment of Warrants, Certificates and Other products

was the one that migrated in the first place.

Its institutional structure is composed of the traditional participants of the stock market

(market members in the form of Securities Brokers, Brokers/Dealers and Financial Institutions) as

well as two essential figures in this segment: Issuers and Specialists.

1.2. Market model structure

This document is divided into different sections with the intention of providing a general

view of the segment for Warrants, Certificates and Other products in the SIBE-SMART platform.

Below you will find a description of the content of each section:

The first section named PRODUCTS gives a general view of how the different

asset types included (or that may be included) in this module work with a

description of some basic concepts.

MARKET PHASES AND SCHEDULE describes the trading phases that this

segment has during a session and how it is structured as well as its schedule.

ORDERS describes the type of orders that may be entered in the system. There is

also a specific section for quote orders.


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TICK SIZES clarifies what the minimum price variation is for securities traded in

this segment.

AGENTS INVOLVED IN THE MARKET provides an unexclusive classification

of the main stakeholders involved in this module in its various phases. It

particularly goes into detail in the role that Issuers and Specialists play in this

market.

BASIC TRADING RULES section explains in detail the rules that govern the

market distinguishing between two very different periods: the open market (basic

trading rules) and the auctions (equilibrium price fixing rules).

VOLATILITY AUCTIONS AND PRICE RANGES is the section that explains

price variation management based on volatility auctions and price ranges. The

basic concepts of this management are defined.

INFORMATION DISSEMINATION explains the specialized information flow

content provided in detail taking into account that this is an anonymous market

(the information on the buyer and seller is not disclosed in order book or in trade

log).

2. PRODUCTS

2.1. General product description

The Warrants, Certificates and Other products segment is designed in order to incorporate

various financial product types that have in common their evolution and valuation linked to an

underlying asset that may be a share, an index, a basket of shares or indexes, commodities,

exchange rates or interest rates among others. These products usually have an expiration date. In

addition, they are all traded, cleared and settled like shares. The features of each individual

product are defined in the following sections:


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2.2. Warrants

A warrant is a tradable security issued by an institution (Issuer, section 6.1) for a time

period that gives the right (and not the obligation) by paying a price to buy (call warrant) or to sell

(put warrant) a specific amount of an asset (underlying asset) at a specified price (strike) over the

duration of its life or on its expiration date depending on its style. From this short definition, some

basic concepts are taken and defined as follows:

Time period: This refers to the warrant’s expiration date, which indicates the date

from when the warrant no longer exists. The expiration date may or may not

coincide with the warrant’s last trading day in the Stock Exchange Interconnection

System.

Warrant price: This is the prime, that is to say, the effective price on which trades

are executed on the Stock Exchange Interconnection System. The prime will be

closely tied to the price of the underlying asset, the time to maturity, interest rates,

volatility and strike.

Call warrant: this is a purchase warrant, that is to say, it gives the right to buy the

underlying asset.

Put warrant: this is a sales warrant, which gives the right to sell the underlying

asset.

Ratio: This is the number of underlying asset units that a warrant gives the right to

buy (call) /sell (put).

Parity: number of warrants necessary to have the right to buy (call) / sell (put) a

specific number of underlying assets.


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Strike: Established by the Issuer, it is the price at which the holder has the right to

buy (call) / sell (put) the underlying asset at the time of exercising the warrant1.

Style: A warrant can be American-style or European-style. If the warrant is

American, it may be exercised during the warrant’s life. On the other hand, if it is

European, it can only be carried out on the warrant’s exercise date.

Settlement: The exercise of a warrant involves its settlement that can be "by

physical delivery" of the underlying or "by differences" of cash in euros. In the

SIBE this last modality is applied.

Below, the position of an investor in a warrant call and in a warrant put is graphically

illustrated, according to their expectations about the future evolution of the price of the

underlying.

Beneficios (+)

Pérdidas (-)

Comprador warrant call

Precio del subyacente

Prima 1)

Strike

The buyer of a warrant call pays a prime for acquiring the warrant (that right whose

exercise involves the acquisition of the underlying asset). The payment of that prime is reflected

1Exercising a warrant is when the warrant holder exercises his/her right to buy (call warrant)/ sell (put warrant) the underlying asset that the warrant refers to. Exercising a warrant involves its settlement, either by physical delivery of the underlying asset or cash (in euro). The S.I.B. applies the latter method.


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in the graph as a loss (in the sense that it involves a payment by the buyer). As the price of the

underlying increases above the strike, the holder of the warrant call is placed in an increasingly

advantageous position (its profits increase) since it has a right to buy the underlying asset at the

price of exercise, which is lower than the market price of the underlying asset (price (1) of the

chart).

Beneficios (+)Strike

1) Prima

Pérdidas (-)

Precio del subyacente

Prima

Comprador warrant put

The buyer of a warrant put pays a prime on acquiring the warrant (that right whose

exercise involves the sale of the underlying asset). The payment of that prime is reflected in the

graph as a loss (in the sense that it involves a payment by the buyer). As the price of the

underlying falls below the strike or exercise price, the holder of the warrant put is placed in an

increasingly advantageous position (its profits increase) since it has the right to sell the underlying

asset at the price of exercise, which is higher than the market price of the underlying asset (price

(1) of the chart)

2.3. Certificates

Certificates authorize their holder to receive from the issuer on the settlement date a

determined amount on the certificate nominal value in accordance with the underlying asset

variation. Specifically, the holder directly assumes the profit or loss in accordance with the

underlying asset evolution.


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Given the certificate’s nature, it is based on an initial underlying asset price and in

accordance with its evolution; the returns to be obtained for the certificate are produced upon its

expiration date or on the exercise dates.

The final returns on certificates depend on the investment strategy and performance of the

underlying asset.

2.4. Turbos / Turbos Pro

Turbo Warrants may have early termination in relation to the expiration date established in

the issue conditions. The early termination possibility is determined by a barrier level. When the

underlying asset price reaches or exceeds the barrier level, the Turbo Warrant is terminated early

(knocked-out).

In the case of Turbo Call warrants, early termination is produced if the underlying asset

level is “less than or equal to” the barrier established in the issue conditions.

In the case of Turbo Put warrants, early termination is produced if the underlying asset

level is “more than or equal to” the barrier established in the issue conditions.

When the aforementioned conditions are met, Turbo Warrants terminate early without any

value and are delisted.

Taking the previous information into account, Turbo Warrants are characterized by high

leverage that is reflected in the prime level (or Turbo Warrant price). Similarly, its price evolution

is mainly determined by the underlying asset price evolution and not so much by its volatility or

expiration term.

Within this same product category, we also find the so-called ‘Turbo Pro’. These

incorporate two thresholds (knock-in barriers) that form an activation price range. Therefore,

Turbo Pros will remain inactive in the market until the level of the underlying asset trades within

the mentioned range. Once activated, Turbo Pros act as any other Turbo.


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2.5. Bonus / Bonus Cap

Bonus warrants offer the performance of its underlying asset and, as long as the level of

the latter does not reach a determined lower barrier during the lifecycle of the product, the issuer

guarantees a minimum selling price or ‘bonus’. Therefore, if the level of the underlying asset

reaches this lower barrier, then the Bonus Warrant loses its ‘bonus’ guarantee but remains active

on the market.

Within this same product category, we also find the so-called ‘Bonus Cap’. These

incorporate a limit to the potential upside performance of the product that is placed at the same

level of the ‘bonus’ guarantee, whether it is still active or not at its expiration date.

2.6. Inlines

This type of warrant grants the right to receive a fixed amount of money on the expiration

date, assuming that the value of the underlying asset is still within the limits or established

barriers.

Inline warrants have both an upper and lower barrier between which the underlying asset’s

price must stay during its lifecycle. If the underlying asset’s price touches either of the barriers,

the inline warrant will expire automatically without value.

2.7. Discounts

The Discounts are investment products, with the characteristic of offering a maximum

return calculated from the difference between the upper and lower barriers. They can be either

bullish, Call Discount, or bearish, Put Discount.

The Call Discounts offer a maximum yield when the level of the underlying asset is equal

or higher than the upper barrier on the maturity date, or whenever it has remained above the lower

barrier during the entire life of the product. If it breaches the lower level the product will remain


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active in the market but it will no longer deliver the maximum yield unless the first previously

described circumstance occurs. If at maturity the underlying asset is below the lower barrier, the

Discount would be worth 0.

The Put Discount has a similar behaviour but in reverse.

2.8. StayHigh / StayLow

The StayHigh and StayLow Warrants incorporate a mechanism of knock-out that offers

the holder of the product a potential performance:

• The holder of the StayHigh will receive the maximum profit if during the life of the

product the price of the underlying asset is above the lower barrier predetermined. The warrant

will be deactivated if the price of the underlying asset reaches the lower barrier, in which case its

value will be 0.

• The behaviour of the StayLow is similar but in the opposite direction. The holder of the

warrant will receive the maximum settlement if the price of the underlying asset is below the

upper barrier. In case it exceeds this upper barrier, its value will be 0.

2.9. Multi

The Multi are products that allow to follow the evolution of strategy indexes with a daily

and constant leverage level (x3, x5, x8 and x10). They have a fixed expiration date, which results

in their automatic settlement. The greater the leverage, the greater the movement experienced with

the Multi with respect to the underlying, that is, the gains or losses are multiplied by a factor equal

to the leverage. The Multi do not have a barrier level.

There are Multis to invest both up (Multi Bullish) and down (Multi


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3. MARKET PHASES AND SCHEDULES

There are no opening nor closing auctions. Open market goes from 9.00h to 17.35h.

During which there may be Volatility Auctions (one or several securities) that originate from the

actual market (depending on prices introduced in the market, see section 8) or those exceptionally

generated from the Supervision Department if deemed necessary due to circumstances of a

security or group of securities. On the other hand, during the same schedule as Continuous

Trading, (from 09:00 to 17:30) blocks can be executed. In addition to this Ordinary session

period, there is the Special Trading phase that occurs from 17:40 until 20:00h (see section 3.3).

9:00h 17:30h

9:03h 17:30h 17:40h 20:00h

HORARIO DE CONTRATACIÓN

Mercado abiertoCONTRATACIÓN GENERAL

BLOQUES/ OPERACIONES ESPECIALES: Todos los

productos

Operaciones especialesBloques

3.1. Open Market

The Open Market is the general trading phase. This deals with carrying out ordinary

trading and it is structured by the order book that is continuously updated in accordance with

order entries, trades, modifications and cancellations.

From 9:00 a.m. to 5:30 p.m., the period of continuous hiring takes place, which may be

interrupted temporarily by auctions of volatility in one or more securities.

During the open market period, the order book is public (the best bid and ask prices can be

seen), however it remains anonymous (neither buyer nor seller participating in each side can be

identified nor the trades that take place). With regard to auction periods, the order book only


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shows the balance price calculated at all times.

The open session ends without auction at 17.30h, being the closing price of the session the

midpoint between the best bid and ask positions held by the specialist of the security, rounded up.

In the absence of these positions or if the closing price is outside the security’s dynamic range or

the security is suspended from trading, the closing price shall be the price of the last trade in the

session. In the absence of the above, the closing price shall be the reference price of the session.

4.2. Trading on the block system

This form of contracting is intended for the execution of operations at an agreed price, provided

that the cash is at least 60,000 euros

4.3. Special Trading

The special trading market has a schedule that runs from 17:40 to 20:00h. During this

period, trades (or cross trades) are executed at a set price. Special trading needs to meet price and

volume requirements for their execution, although these requirements are different to those for the

block system.

4. ORDERS

4.1. Standard order type

The Warrants, Certificates and Other products segment only allow limit orders.

Limit orders: on the open market, these are orders to be executed at their limit price or

better. Buy orders are executed at this price or at a lower price on the opposite side of

the order book. Ask orders are executed at their limit price or at a higher price on the


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opposite side of the order book.

These orders allow:

- To express the wish to trade up to/ from a certain price.

- To execute an order against existing orders on the market at a price that is not

worse than the limit price and to leave the rest on the market at the limit price.

These orders may be entered both on the open market and during auctions.

Limit orders, on the open market are executed at the best opposite-side prices on the

order book (provided that these prices are equal to or better than the price of the

incoming limit order). Once in the order book, the limit order is always executed at its

limit price (unless it is included in an auction and the auction price is better than its

limit price).

They all have a one day validity period, so they are all valid until the end of the session

that is taking place. This means that non-traded or partially traded orders are automatically

removed from the system after the session ends.

The orders can be entered by the market member or participant of the trading venue

negotiating on its own account (DEAL) or in another quality (AOTC). In addition, they can be

entered within the framework of a market making strategy or as liquidity providers, based on the

contract subscribed by the members and with a specific indicator (flag) in the order.

5.2. Quote Order

The quote order is an instrument provided to the specialists so that they can give liquidity

to the market more easily and efficiently than through simple orders.

The SMART quote order is made up of two individual orders, each one with its own


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identity.

Each user may only have one quoted order active per security.

Quoted orders can be traded at all times against simple orders and may activate auctions

just like any other order.

5. TICK SIZES

Price units or tick size (minimum variation between two different prices on the same

security) in the Warrants, Certificates and Other products module is 0.01 euro irrespective of the

price that the security has. Any price expressed with maximum 4 whole and 2 decimal numbers is

accepted.

6. AGENTS INVOLVED IN THE MARKET

There are several types of agents involved in this market, particularly if we look at the

different market stages, starting when a new security is issued until a trade is crossed on it. We

can make four main categories of agents in accordance with the functions that each one does:

Issuers.

Brokers-dealers, brokers and financial institutions

Specialists.

Market makers.

All of these agents are subject to supervision, inspection and control by the Comisión

Nacional del Mercado de Valores (CNMV) in everything related to securities market

performance. The CNMV is the public agency whose purpose is the regulation, supervision and

inspection of the securities market and of the activities of all individuals and legal entities that

participate in it.


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6.1. Issuers

Issuers provide the securities that will trade in the Warrants, Certificates and Other

products segment once authorized by CNMV provided that all formal requirements are met:

1. Issue notification to the CNMV.

2. Previous delivery and registration of documents accrediting issue agreement, characteristics of securities to be traded, and holders’ rights and obligations.

3. Verification and registration of issuer’s audited annual reports and prospectus on projected issue.

6.2. Brokers-dealers, brokers and financial institutions

Brokers-dealers, brokers and financial institutions are the traditional participants in the

equity markets of the Spanish Stock Exchanges Governing Bodies.

These market participants are the link that the final investor can use to enter orders in the

SIBE-SMART platform. The main difference between these institutions is that brokers can only

trade on behalf of third parties while broker-dealers and financial institution can trade on behalf of

third parties and on their own behalf.

6.3. Specialists

Specialists carry out an essential role in the Warrants, Certificates and Other products

module, especially regarding the daily quotation of bid and ask prices and volumes. Each security

is required to have a specialist and there can only be one specialist per security.

With regard to the role of these Specialists, it is necessary to point out that while this

segment is similar in its trading method to the typical order book, being an order-driven one, its

liquidity is guaranteed by these Specialists in such a way that this order book is complemented


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with their role. On the other hand, as previously mentioned, these Specialists have a dynamic and

simple tool for quoting bid and ask prices on the market: the quoted order. The Specialists must

comply with the applicable regulation on specialists at all times2.

6.4. Market makers

Market members who, during half of the trading days of a month, publish simultaneous

quotes for buy and sale whose magnitude does not differ by more than 50% and at competitive

prices3; and trade on their own account at least one financial instrument in a trading center, for at

least 50% of the daily trading hours of the corresponding trading venue, excluding the opening

and closing auctions, they must sign a market making contract with Sociedad de Bolsas.

Notwithstanding the foregoing, Sociedad de Bolsas may establish market making

contracts with those members with whom it agrees, even if the above conditions are not met,

pursuant the section 6.3.

Market members that have signed a market making contract will have to comply with

spread and effective amount parameters, which will be set by Operating Instruction.

The Trading and Supervisory Committeewill permanently supervise the effective

compliance of the market making agreements by the relevant members.

7. BASIC TRADING RULES

7.1. Open market. Basic trading rules

During the open market, orders are entered, modified and cancelled; and when applicable

traded.

2 The applicable regulation on specialists in the Warrants, Certificates and Other products modules is contained in the Circular 1/2002 of Sociedad de Bolsas (“Operations Regulations of the negotiation segment of Warrants, Certificates and Other products in the Stock Exchange Interconnection System”) and in the Trading Instruction No. 53/2002 (“Special presence parameters in the negotiation segment of Warrants, Certificates and Other products”). To be concise, the regulation speaks about requirements for maximum range, minimum effective amount and reaction time.

3 Competitive prices are those that are within the range of purchase and sale prices established by Sociedad de Bolsas through

Operational Instruction.


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The open market situation in the Warrants, Certificates and Other products segment is

going to be the most usual situation (unless there is an extremely volatile situation where many

volatility auctions take place on several securities or there is an auction on a determined security

for exceptional reasons). During this period, there are several basic rules to follow (same as in the

equity market) and these are summarized in the following points:

Price-time priority of orders: orders with the best price (highest bid and lowest ask)

have priority in the book. When prices are the same, those orders entered first have

priority.

Best opposite side price: orders entered in the system are executed at the best opposite

side price. In other words, a buy order which can be executed will do so at the price/s

of the first order/s on the sell side of the order book. Equally, an ask order entered in

the system which can be executed at that moment will be executed at the price/s of the

first order/s on the buy side of the order book. In addition, it is necessary to point out

that orders may be fully executed (in one or several trades), partially executed, or may

not be executed. Therefore, each new incoming order may generate several trades.

7.2. Auctions. Equilibrium price fixing rules

Auctions are periods when orders are entered, modified and cancelled but trades do not

take place until their end. During this period, and in real time, an equilibrium price is calculated in

accordance with the supply and demand leading to trades at the end of the auction at the last

equilibrium price calculated (securities allocation).

With regard to equilibrium price fixing rules that govern in auctions, there is no difference

to those that govern the equity market, and they are established in accordance with the following

four rules:

1) The price that would produce the trade of the highest number of securities is chosen.

2) If there are two or more prices at which the same number of securities can be traded,


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the auction price shall be that which leaves the smallest surplus. The surplus is defined as the

difference between the volume offered and the volume in demand to be traded at the same price.

3) If the two above conditions are met, the price on the side with higher volume (more

weight) will be chosen.

4) If the three above conditions are met, the one closest to the last one traded will be

chosen as the auction price. In the event that this price is within the auction potential price range

(highest and lowest limit), the last one traded will be taken. If there is no last price, or it is not

within the price range of the dynamic range, the price closest to the reference price will be taken

as the last price.

8. VOLATILITY AUCTIONS AND PRICE RANGES

8.1. Volatility auctions

The duration of volatility auctions in the Warrants, Certificates and Other products

segment is 5 minutes plus a random end of 30 seconds during which the auction ends at any time

and without prior notice, and the securities allocation process takes place (cross trading at the

equilibrium price in the auction sale). If upon market closing, there is one or several securities in

auction, the system will automatically allocate them at session closing (17:30).

Volatility auctions will take place due to dynamic range rupture.

8.2. Dynamic Price and Dynamic Range

In the Warrants, Certificates and Other products segment, only a range type called

dynamic is established.

At the start of the session, the updating of the dynamic price with which the dynamic

range is applied is the reference price. During the session, the dynamic price and range is applied


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regarding the last price traded; whether the execution of the incoming order is in the open market

or the result of a volatility auction.

The dynamic range is defined as the maximum variation permitted (symmetric) with

regard to the dynamic price and it is expressed as a percentage.

For warrants, the dynamic range levels are determined by the warrant price as follows:

Securities with price less than 0.10 euro: 500% Securities with price more than or equal to 0.10 euros and less than or equal to 1.00 euro: 50% Securities with price more than 1.00 euro: 15%

In the case of certificates and Structured Bonds, the range will be 15%.

For Turbo warrants, the dynamic range applicable will be 500%.

For Multi, the dynamic range applicable will be 100%.

For Other products, the dynamic range applicable will be 500%.

The volatility auction takes place when there is an attempt to trade a security outside of

the limits defined by the dynamic price range.

If the price from a volatility auction is not within the dynamic range, the auction will be

automatically extended and the Supervision Department will be in charge of taking the necessary

measures to resolve the matter.

9. INFORMATION DISSEMINATION

The SMART platform that supports the Warrants, Certificates and Other products segment

disseminates detailed information in real time, both trades that are going on and the system’s

order book.

In this way, this information flow informs the recipient institutions of each trade that is

taking place in the market in real time and of the order book evolution during the session.

The following content is offered:


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Trades: a message is issued each time there is a trade in the system. Information regarding

the price, volume and trade time is given (buyer and seller of this trade do not appear).

Order Book: a message is issued each time there is a change in the best five (5) bid and/or

ask positions.

Date post:	12-Feb-2017
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