taxud/2414/08 - European Commission - Europa

physical, technical or administrative services, which do not alter the legal or financial
situation.
Article 20
The following shall be considered to be services having the specific and essential
character of the "supply of securities" as defined in point (8) of Article 135a of Directive
2006/112/EC:
(1) the issuance of options, futures and forward contracts for securities;
These are supplies of derivatives; in finance options are types of derivative contracts,
including call options and put options, where the future payoffs to the buyer and seller of
the contract are determined by the price of another security, such as a common stock.
More specifically, a call option is an agreement in which the buyer (holder) has the right
(but not the obligation) to exercise by buying an asset at a set price (strike price) on (for a
European style option) or not later than (for an American style option) a future date (the
exercise date or expiration); and the seller (writer) has the obligation to honour the terms
of the contract. A put option is an agreement in which the buyer has the right (but not the
obligation) to exercise by selling an asset at the strike price on or before a future date;
and the seller has the obligation to honour the terms of the contract;
The supply of futures for securities is specific to and essential for the "supply of
securities"; in finance, a futures contract is a standardized contract, traded on a futures
exchange, to buy or sell a certain underlying security at a certain date in the future, at a
specified price. The future date is called the delivery date or final settlement date. The
pre-set price is called the futures price. The price of the underlying security on the
delivery date is called the settlement price. The settlement price, normally, converges
towards the futures price on the delivery date. A futures contract gives the holder the
obligation to buy or sell, which differs from an options contract and which gives the
holder the right, but not the obligation. In other words, the owner of an options contract
may exercise the contract. Both parties of a "futures contract" must fulfil the contract on
the settlement date;
The supply of forward contracts for securities is the supply of a service containing an
agreement between two parties to buy or sell a security at a pre-agreed future point in
time. Therefore, the trade date and delivery date are separated. One party agrees to buy,
the other to sell, for a forward price agreed in advance. In a forward transaction, no
actual cash changes hands. If the transaction is collateralized, exchange of margin will
take place according to a pre-agreed rule or schedule. Otherwise no security of any kind
actually changes hands, until the maturity of the contract. The forward price of such a
contract is commonly contrasted with the spot price, which is the price at which the
security changes hands. The difference between the spot and the forward price is the
forward premium or forward discount. A standardized forward contract that is traded on
an exchange is called a futures contract;
(2) the issuance of equity swaps and other total return swaps in securities;
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