UT (Tax & Chancery) UT-2022-000134 UT-2022-000135 UT-2022-000137 - [2025] UKUT 00214 (TCC)

“BTP” stands for “Buoni del Tesoro Poliennali” (literally multi-year treasury bonds) which are long term bonds issued by the Italian Government. Alongside bonds issued by Spain, Portugal and Greece, they are classified as “Peripheral” European Government Bonds or “EGBs” as distinct from “Core” EGBs, including German, French, Dutch, Belgian and Finnish government debt.

A bond is a debt instrument typically issued by governments and companies by which the borrower agrees to repay the sum which it has borrowed to the holder of the bond at a specified future date called the “maturity date”. The face value of the bond, referred to as its “nominal” or “par” value, is the amount to be repaid at the maturity date. Each bond will also have a fixed interest rate attached to it, expressed as a percentage of its face value. This is called the “coupon”.

Bonds, including BTPs, are issued in two ways: (i) via auctions to financial institutions permitted to participate in them; and (ii) syndicated issues to consortiums of investors. In each case, only certain entities are entitled to acquire the bonds from the issuer. These entities are known as “Primary Dealers”. Primary Dealers, amongst other things, underwrite syndicated primary issues of bonds and also sell bonds which they have acquired in “primary” auctions onto the secondary market.

The bonds may then trade on the secondary market. Bonds trading on the secondary market are referred to as “cash bonds” (and cash BTPs in the case of BTPs) and trades in cash bonds as “cash trades”. The price of a particular bond may, over the course of its term, fluctuate according to a variety of factors, including supply and demand, bond credit rating, interest rates, performance of the Italian economy (in the case of BTPs), market sentiment and the proximity of the maturity date. This may result in it being sold at a premium or discount to its par value.

The “yield” on a bond is calculated by reference to its price and its coupon. The coupon is fixed so if the price of the bond increases, the yield (ie the return on the purchase price) declines and vice versa.

There were relatively few Primary Dealers in BTPs during the Relevant Period (20 or fewer). Due to the significant obligations incurred by Primary Dealers, including in relation to the provision of liquidity to secondary markets and supporting scheduled “secondary” auctions (ie the sale of bonds onto secondary markets by the Primary Dealer), and the costs associated with being a Primary Dealer, Primary Dealers tend to be large banks and financial institutions. However, smaller banks such as MHI traded on the secondary market and acted as “market makers”. Accordingly, whilst Primary Dealers engage in market making activities, not all market makers are Primary Dealers.

The process of clients seeking quotes and placing orders is dealt with further below. A market maker typically trades from the fixed income desk of an investment bank and seeks to service their clients and provide liquidity to the market by the provision of quotes to clients and subsequently transacting if the client accepts the quote. They will win business by quoting the most competitive prices.

Providing competitive prices involves traders continuously assessing what prices they are prepared to offer by reference to their own book and market conditions.