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

There are several types of BTP future depending on the notional maturity date of the underlying cash BTP. This case concerns a particular type of BTP future called a “Long-Term Euro-BTP Future” (“BTP Future”) where the underlying BTP cash bonds have a maturity of 8.5-11 years. BTP Futures are sold in standard sizes called “lots”. One lot of BTP Futures is the economic equivalent of €100,000 of underlying cash BTPs with a remaining term of between 8.5 and 11 years and a 6% coupon. The minimum movement in the market is a single basis point, ie 0.01%. The value of a single point in respect of one lot is therefore €10.

The exact number of lots of BTP Futures needed to hedge a cash BTP position will depend, inter alia, on both the notional value of the underlying cash BTPs being hedged, but also their maturity (ie a shorter maturity will require fewer lots and a longer maturity will require more lots). BTP Futures are traded electronically using the code “IK” on the EUREX market based in Frankfurt. The exception to this is that orders for 250 or more lots of IK can be privately negotiated bilaterally between counterparties off the exchange and when agreed will then be reported subsequently as “block trades” on the exchange.

To give an example of hedging a cash BTP position using BTP futures: if a trader is “long” the market in respect of cash BTPs (ie the trader has just bought cash BTPs through trading), the trader is exposed to directional risk that the price of bonds fall. The trader can hedge this by selling BTP Futures. Equally, if a trader is “short” the market because the trader has sold cash BTPs, the trader can seek to offset the risk by buying BTP Futures.

Trading in IK BTP futures on EUREX involves offers to both buy (known as the “bid” side) and sell (known as the “offer” or “ask” side) BTP futures. The best price available to buy or sell BTP futures is known as the “best bid” and “best offer” respectively and referred to as the “touch”. The difference between these two prices is known as the “bid-offer spread” or the “bid-ask spread”. When a buy or sell side trade is accepted by another market participant, it is described as being “filled” whether fully or partly.

There is a functionality available for trading which allows a trader on EUREX to display only a part of the order that they wish to trade. This is called “iceberging”. Iceberging is a feature of a trader’s systems, rather than a feature of the EUREX Exchange. Where an order has been iceberged, a trader can choose the number of lots to display. Each time that the displayed part of the iceberged order executes, the EUREX Exchange automatically sends a message to the trader’s systems that the order has been executed, and then the trader’s system automatically places an order for the next tranche. This process will repeat until the order has traded in full or the order is cancelled. A trader is able to cancel an order, or amend its price, at any time before it has fully filled. The use of iceberging is widespread and well known.