Introduction section Ten useful tips to protect citizens who invest in government bonds
Ten useful tips to protect citizens who invest in government bonds
A decree of the Ministry of Economy and Finance lists 10 articles on transparency in public placement of Government Bonds, namely BOTs, CTZs, CCTeus, BTPs, BTPs Italia e BTP€is. It is a “decalogue” that banks and other financial intermediaries must strictly comply with when clientele underwrite or purchase Government Bonds. Investors should be aware of its details to understand if their intermediary is conducting business fairly (read the decree).
In simple terms, the decree states:
1. Management expenses
Expenses that the client incurs for the management and administration of the securities account to which Government Bonds are credited cannot exceed 10 euros per semester. It is thus a “ceiling”, not a fixed amount, and nothing prevents intermediaries from proposing clients lower expenses. The ceiling is valid without regard to the amount, the maturity and the type of Government Bonds held. It is not valid if the account contains securities other than Government Bonds. Besides, the semiannual expenses applied must be adequately publicised on the intermediary’s premises and must be present in the periodic communications that clientele receive by mail.
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2. Bond reaching maturity
The intermediary must inform clientele well in advance of the bond's imminent maturity and the booking deadline to renew the investment in Government Bonds.
3. Auction information
Banks must clearly display the dates when auctions of the various types of Government Bonds take place and, above all, the dates within which investors can book them. Therefore, being well-informed, clients make more conscious investment choices.
4. Value dates
Coupon interest accrued on Government Bonds is credited with the value date coinciding with that provided by the issuance decree for the relevant payments. The same is true for the reimbursement of the principal of matured bonds. The intermediary credits the client the sums owed according to the European TARGET system's calendar.
5. BOT price
The subscription price of a BOT is the auction’s “average weighted” price. It must be publicised by intermediaries in announcements placed in venues open to the public. Announcements must always be up-to-date and include gross yield at maturity.
6. BOT fees
Remember that there are no fixed fees for BOT subscription. The Ministry sets “ceilings” for the amount that intermediaries can apply to their clientele. For every 100 euros of capital subscribed these are: 3, 5, 10 and 15 eurocents according to residual maturity (equal to or less than 80 days, between 81 and 140 days, between 141 and 270 days, equal to or greater than 271 days, respectively).
Furthermore, the fee’s maximum amount is reduced, even down to zero, according to the auction's average weighted price. Thus the total purchase price, including the fee and substitute tax, is no greater than 100 euros for each 100 euros of subscribed capital.
7. BOT communications
Clients should carefully check the content of the communication relevant to the purchase of BOTs. It must indicate, along with the nominal principal of bonds subscribed: the auction's average weighted price, substitute tax paid on interest (as a percentage and as an absolute value), fees applied (as a percentage and as an absolute value), the total sale price (including the substitute tax and fees) and the corresponding annual yield.
8. No fees for CTZs, CCTeus, BTPs, BTPs ITALIA E BTP€is
No fees are due for clients who subscribe Government Bonds other than BOTs, i.e. CTZs, CCTeus, BTPs, BTPs Italia and BTP€is. In fact, the Ministry has already paid the banks the placement fee. This is true even if the intermediary did not participate directly in the auction.
9. CTZ, CCTeu, BTP, BTP ITALIA and BTP€i prices
As with BOTs, intermediaries must adequately publicise the allotment price of CTZs, CCTeus, BTPs, BTPs Italia and BTP€is via announcements placed in places open to the public. These announcements must detail all elements of the subscribed bonds: allotment price, allotment price net of tax, net accrued interest, total sale price and corresponding annual yield.
10. Bond taxation
Interest earned on Government Bonds is subject to a 12.5% lieu tax. This is applied both on the coupon interest and on the difference between the redemption value and the issue price below par (100). Any tax applied to a client’s securities account or current account must explicitly indicate the article of the Law to which it refers. Subscription of Government Bonds through auction is not subject to any tax or fee, other than those for BOTs specified in this decalogue.