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According to Italian legislation, it is possible to strip and afterward reconstitute both fixed rate (BTP) and inflation-linked (BTP€i linked to the euro area inflation-excluded tobacco) Government bonds, which are not redeemable in advance and are deposited in a centralized depository of Government securities.
The reference regulation is the Decree of the Minister of Economy and Finance of 28 December 2007 (Attachment n. 1), published in the Official Gazete of the Republic of Italy n. 6 of 8 January 2008.
"Principal" is the redemption value of the security at maturity excluding coupons; in the case of inflation-linked bonds, "principal" is the redemption value of the security excluding coupons and net of the inflation-indexed component;
"Coupon components" (also known as Coupon Strips and Coupon iStrips - in case they are stripped from inflation linked issues) are the coupons representing interests payable on the bond;
The "inflation-indexed component" (hereafter Uplift) is the part of the redemption value of an inflation-linked bond deriving from the inflation accrued from the starting accrual date until the maturity date of the security; in case of deflation its value is equal to 0 and therefore cannot be negative;
"Stripping" is the process of separating coupons from the principal of the security (i.e. the par value of the issue) and, for inflation-linked bonds, of the inflation-indexed component too;
The "Reconstitution of securities" is the process of reuniting the principal with the previously stripped coupon components, even if the coupons originate from different bonds, in order to obtain new securities; for inflation-linked bonds the reconstitution of a security also includes reuniting the inflation-indexed component;
"Reference inflation" is the level of the reference consumer-price index at a given date, calculated as indicated in the Issuance Decrees (Attachment n.2) of inflation-linked bonds;
The "adjustment coefficient" is the ratio of 100 to the reference inflation on the initial accrual date of the bond (base index or inflation);
The "annual real rate" is the annual coupon rate, as defined in the issuance decrees of inflation-linked bonds.
A coupon bond guarantees that the holder will receive a stream of coupons, maturing between the purchasing and selling/redemption date, and the redemption value of the issue, the latter being the par value increased by the Uplift in the case of inflation linked bonds.
If an investor, for example, wants to have a Government bond maturing on a specific date (for example 1st February 2018) in their portfolio but is not interested in intermediate coupon cash flows, they can buy stripped components (that is zero coupon bonds) on the secondary market with that maturity date (therefore principal stripped from the BTP 1st February 2018 and/or Coupon Strips maturing on 1st February 2018, stripped from BTPs with coupon cycle February/August and maturity date on 1st February 2018 or later). The investor can also strip the BTP 1st February 2018, take only the principal (as well as the last coupon) and sell the other stripped coupons on the secondary market.
Requests for stripping and reconstituting Government bonds have to be sent to Monte Titoli S.p.A. (sending a 7A7 message for a stripping and a 7A8 for a reconstitution request) through the Rete Nazionale Interbancaria) by investors that hold an account at its centralized depository. On these, lieu tax is not levied, under Legislative Decree n. 239 of 1st April 1996 (the so-called “gross subjects”, please refer to the paragraph on tax treatment below).
In accordance to the above mentioned Ministerial Decree 28 December 2007 (Attachment n.1):
requests for stripping and reconstituting Government bonds are admitted for a minimum or multiple nominal amount of 1.000.000 Euro;
the minimum denomination of the components originated from a stripping process is:
The minimum trading size on the wholesale markets of the stripped components are:
Stripping and reconstituting processes are accounting entries, made upon request by entities adhering to the centralized depository system of Government securities.
The stripping process gives rise to distinctly tradable Government bonds that can circulate only within the centralized depository of Government securities.[1].
Coupons having the same maturity are fungible, irrespective of which initial coupon bond they are stripped from, and therefore have the same ISIN code (i.e. they are zero coupon bonds that will pay one Euro cent at maturity).
Coupons stripped from inflation linked-bonds (Coupon iStrips) are not fungible with coupons stripped from fixed rate interest bonds.
An ad hoc adjustment mechanism at stripping is required in order to achieve fungibility between Coupon iStrips with the same maturity but originated from different bonds and having a different inflation base index: the so called "adjusted value" of the iStrips is obtained multiplying the semi-
annual real coupon by the adjustment coefficient (see the definitions above). At the settlement date of a reconstitution operation and/or at maturity of the coupon component, the nominal amount of the Coupon iStrips is multiplied by the reference inflation index divided by 100; in this way consistency in the cash flows of Coupon iStrips with the same date but originated by different underlying bonds and with a different inflation base index is guaranteed.
Here below, the adjustment mechanism of inflation linked bonds at stripping is described:
C = annual real coupon rate
TM = minimum strippable nominal amount, i.e. €1.000.000.
P = nominal amount being stripped (multiple of TM - minimum strippable amount)
Base Index = euro area HICP ex-tobacco at the initial accrual date (Base Index or initial reference index)
Coeff.R = Adjustment coefficient = 100/Base Index
AV = Adjusted Value of the coupon iStrips =
= Round[Round(C/2*TM*Coeff.R;10)*P/1.000.000;2]
At maturity, the cash amount paid on Coupon iStrips is obtained multiplying the coupon component’s “adjusted value” by the reference index at the maturity date divided by 100.
The principal component is redeemed at par.
The cash amount payed at maturity on the Uplift is obtained multiplying the nominal amount of the component by the maximum between 0 and the Indexation Coefficient at maturity date minus 1.
Components originated from stripping processes are new Government bonds and can circulate only within the centralized depository of Government securities: therefore, fiscal provisions under the Legislative decree n. 239 of 1st April 1996, and subsequent amendments[2] also apply to the separated components.
Provided that stripping and reconstitution of Government bonds are admitted for a capital amount equal or multiple of 1.000.000 Euros and that these processes can only be carried out by investors that are not levied with the lieu tax (as stated in art. 2 paragraph 3 of the new decree), the tax treatment as of Legislative Decree 1st April 1996, n. 239 applies to the book-entry Government securities, even when the original components have been stripped, if and only if these components, without any interruption, are deposited on accounts with authorized intermediaries - who are entitled to possibly levy the lieu tax under the above mentioned decree, when needed - and continuously registered to lieu tax exempt entities, both resident or non resident.
To summarize, the lieu tax, under art. 2 of the Legislative Decree 239/96, is not levied on negotiations of stripped components among lieu tax exempt entities that have a deposit with the centralized depository, if those stripped components are deposited, without interruption, with authorized intermediaries. On the contrary, for any other case, and for lieu tax non-exempt entities, that can buy and sell stripped components once originated by a lieu tax exempt entity, provisions on tax treatment as stated in Circular n. 306/E of 23-12-1996 apply.
[1] Please note that the official figures on the outstanding Public Debt refer to the original issuance of the bonds and therefore do not take into account the stripping operations made on the bonds.
[2] The Legislative Decree 239/96 defines two kinds of fiscal subjects: “net taxpayers” resident in Italy (typically, private individuals and non-commercial entities) that are subject to a lieu tax, currently 12.50%, and “gross taxpayers” (limited companies and non resident qualified entities, currently the great majority of international investors) to whom no withdrawal at source is made. For a more comprehensive description of fiscal regime for Government Bonds please refer to the documentation available at the following link: fiscal regime
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| 1 February | 2 February | 3 February | 4 February | 5 February | ||
| 6 February | 7 February | 8 February | 9 February | 10 February | 11 February | 12 February |
| 13 February | 14 February | 15 February | 16 February | 17 February | 18 February | 19 February |
| 20 February | 21 February | 22 February | 23 February | 24 February | 25 February | 26 February |
| 27 February | 28 February | 29 February |
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