The Belgian options market, regulated by the Brussels Stock Exchange (BSE), comprises a wide range of derivatives such as:
- equity call and put options;
- index (CAC 40) call and put options;
- interest rate futures;
- Currency futures.
The BSE is the only stock exchange in Belgium that provides investors with single pricing for all its products. There is no need to adjust option prices because of dividends paid out by underlying stocks or other unique factors that affect an individual option’s value.
However, specific product characteristics may lead to different price formations between two or more stock exchanges. For instance, the CAC 40 index futures traded on LIFFE and Euronext Paris have an average daily volume of about 3,000 contracts.
Federation of European Securities Exchanges
The BSE is a member of the Federation of European Securities Exchanges (FESE) and uses the same standards as these other exchanges where applicable. The Brussels Exchange also tries to harmonise its activities with other stock exchanges to increase its usefulness for international investors.
In addition, Belgian regulatory authorities have coordinated rules on options trading across borders both within Europe and internationally.
The trend towards a single European Union financial market means that the future will probably see more harmonisation between exchanges regarding rights and responsibilities concerning derivatives trading, even though some national preferences may remain.
Index option pricing models(Black and Scholes model, Fong and Vasicek model, etc.) can be used to determine theoretical values for call and put options on the CAC 40 index. However, settlement variations (see section 2.3) often cause options traded in different markets to have different prices.
The BSE wants to harmonise trading conditions and net option premiums or discounts between individual contracts listed on its order book. Those quoted by other European exchanges based on internationally recognised methodologies represent the general market.
A recent example of this was when the BSE introduced a mechanism that enabled it to pin down foreign contracts whose theoretical value is within +/- 15% of their market price at a given time.
It also gave Belgium a mechanism to minimise the risk of significant price discrepancies arising from the different settlement procedures in each country.
Options can be broadly classified into two classes based on their method of execution:
Exchange-traded option
An exchange-traded option is an option contract traded exclusively on a stock exchange.
In other words, there are no contracts between a willing buyer and a willing seller outside of the organised marketplace; thus, all trades take place via open outcry on the trading floor after being submitted electronically by orders received from domestic or foreign investors.
The BSE is quite flexible in this type of transaction since several orders may be submitted simultaneously, such as conditional or firm limit orders.
Over-the-counter
An over-the-counter (OTC) option is an option contract traded directly between a willing buyer and a willing seller outside the organised marketplace.
In other words, there are no contracts between a willing buyer and a willing seller inside the organised market; thus, all trades take place via email after being submitted electronically by orders received from domestic or foreign investors.
Although OTC options trading is not accommodated directly on the BSE trading floor, brokers can facilitate transactions of OTC options by submitting orders to buy or sell such instruments to the BSE’s order book.
Over-the-counter derivatives transaction costs may be higher than those associated with exchange-traded derivatives since they have to be handled on a case-by-case basis.
Split into Trading options
The split between exchange and OTC trading of options is primarily a function of trading the derivative. This distinction can have significant consequences from both an economic and regulatory standpoint. It is specifically true in the case of index options because some market participants believe that you should only trade this type of instrument on exchanges.
In contrast, others feel it would work best as part of the over-the-counter markets. In addition, some market participants believe that certain types of index options products, which often involve exposure to financial instruments(e.g futures) other than indices (such as agricultural commodities), are most efficiently traded on an exchange rather than over-the-counter.
It is important to note that when options are traded on an exchange, the transactions occur through open outcry in front of other market participants.
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