Short selling and credit default swap Financial Market

Short selling and credit default swap Financial Market Law and Regulation Paola Lucantoni

Short selling borrow (or not) a stock, sell the stock buy the stock back to return it to the lender (if borrowed; or to settle the position when the short seller sells without borrowing).

aim Short sellers make money by betting that the stock they sell will drop in price. If the stock drops, the short seller buys it back at a lower price and returns it to the lender.

Example an investor thinks XYZ is overvalued at $25 and is going to drop in price, The investor may borrow the stock and sell it for $25. If the stock goes down to $20, the investor, after buying it back and returning it, would make $5 per share. However, if the stock goes up to $30, the investor would lose $5 per share.

Risks are amplified Long position: when you buy a stock (or long position: the buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value) you can lose only the money that you've invested. So, if you bought one XYZ share at $25, the maximum you could lose is $25 because the stock cannot drop to less than $0. Short position: when you short sell, you can theoretically lose an infinite amount of money, because a stock's price can keep rising forever. So, for example, if you had a short position in XYZ (or short sold it) and XYZ ended up rising past $60 before you exited your position, you would lose $35 per share ($60 -$25) - even more than the stock's original price

Intermediary when the investor short sells a stock, a broker will lend it to the investor. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to the investor’s account. Sooner or later, the investor must "close" the short by buying back the same number of shares and returning them to the broker. If the price drops, the investor can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, the investor have to buy it back at the higher price, and lose money.

Why short selling? Speculate watching for fluctuations in the market in order to quickly make a big profit of a high-risk investment. a high loss if they use the wrong strategies at the wrong time, but they can also see high rewards. Probably the most famous example of this was when Soros "broke the Bank of England" in 1992. He risked $10 billion that the British pound would fall and he was right. The following night, Soros made $1 billion from the trade. His profit eventually reached almost $2 billion. Hedge
 very few sophisticated money managers short as an active investing strategy (unlike Soros).

Working in progress 14. 06. 2010 – Commission services launch public consultation on short selling 15. 09. 2010 – Commission adopts proposal for a Regulation on short selling and certain aspects of Credit Default Swaps 24. 11. 2011 – Request for ESMA technical advice on possible delegated acts concerning the Regulation on short selling and certain aspects of Credit Default Swaps 24. 03. 2012 – Regulation (EU) No 236/2012 of the European Parliament and the Council of 14 March 2012 on short selling and certain aspects of Credit Default Swaps (OJ L 86/1) 29. 06. 2012 – Commission adopts technical standards on short selling 05. 07. 2012 – Commission adopts delegated act and regulatory technical standards on short selling 13. 12. 2013 – Commission adopts the Report on the evaluation of the Regulation (EU) No 236/2012 on short selling and certain aspects of credit default swaps

14. 06. 2010 – Commission services launch public consultation on short selling The Commission services have launched a public consultation on short selling. Its purpose is to consult market participants, governments, regulators and other stakeholders on possible provisions to be considered in a forthcoming Commission proposal for stand alone legislation dealing with potential risks arising from short selling.

Definition of short selling of financial instruments: a person sells a security (typically a share) he does not own with the intention of buying back an identical security at a later point in time, is an established and common practice in most financial markets. 1. "Covered" short selling is where the seller has borrowed the securities, or made arrangements to ensure they can be borrowed, before the short sale. 2. "Naked" or "uncovered" short selling is where the seller has not borrowed the securities at the time of the short sale, or ensured they can be borrowed. A Credit Default Swap (CDS) is a derivative which is sometimes regarded as a form of insurance against the risk of credit default of a corporate or government (or sovereign) bond. In return for an annual premium, the buyer of a CDS is protected against the risk of default of the reference entity (stated in the contract) by the seller. If the reference entity defaults, the protection seller compensates the buyer for the cost of default. In addition to short selling on cash markets, a net short position can also be achieved by the use of derivatives, including Credit Default Swaps (CDS). For example, if an investor buys a CDS without being exposed to the credit risk of the underlying bond issuer (a so-called "naked CDS"), he is expecting, and potentially gaining from, rising credit risk. This is equivalent to short selling the underlying bond.

Risks it can be used in an abusive fashion to drive down the price of financial instruments It can contribute to disorderly markets and, especially in extreme market conditions, can amplify price falls and have an adverse effect on financial stability. It can also result in information asymmetries. In the case of uncovered short sales there may be an increased risk of settlement failures and price volatility.

Role in fm Most studies conclude that short selling contributes to the efficiency of markets. It increases market liquidity (as the short seller sells securities and then later purchases the identical securities to cover the short sale). Also, by allowing investors to act when they believe a security is overvalued it leads to more efficient pricing of securities, helps to mitigate price bubbles and can act as an early indicator of underlying problems relating to an issuer. It is also an important tool that is used for hedging and other risk management activities and market making.

Fragmented approach with short selling during financial crisis During the financial crisis and more recently in the context of market volatility in Euro denominated sovereign bonds, Member States have reacted differently to short selling issues, with a variety of measures being put in place using differing powers. A fragmented approach can create additional costs and difficulties, lead to regulatory arbitrage and limit the effectiveness of measures imposed.

April 2009 In April 2009 the Commission asked questions in its review of the Market Abuse Directive about the possibility of a new European short selling regime. The responses gave some support for a new regime. Many respondents argued however that any proposals should not be in the Market Abuse Directive but in separate stand alone legislation. This was on the basis that it was generally considered that most short selling is not market abuse and raises different issues and risks.

2010 In March 2010 the Committee of European Securities Regulators (CESR) published a report recommending a Pan-European model for the disclosure of short positions in EU shares. In the Commission Communication of 2 June 2010 on "Regulating Financial Services for Sustainable Growth" the Commission indicated that it would propose appropriate measures relating to short selling and credit default swaps (CDS). The Communication also highlighted other initiatives, such as new legislation on market infrastructure, the review of the Markets in Financial Instruments Directive and the review of the Market Abuse Directive, which will also affect the regulatory framework applicable to derivatives and credit default swaps.

The Commission believes that working towards a more harmonised regime for short selling issues will increase the resilience and stability of financial markets in the European Union. The purpose of this public document was to consult market participants, regulators and other stakeholders on possible provisions to be considered as part of the finalisation of the forthcoming proposal for stand alone legislation dealing with potential risks arising from short selling.

Application The approach would apply to all persons who engage in short selling whether regulated or unregulated and across all market sectors. The requirements will in most cases apply to the person who enters into the short sale or has a net short position rather than an intermediary executing a transaction for that person.

Aims The policy options can be grouped into three types: Rules to increase transparency related to short sales. Rules to reduce risks of uncovered short selling. Emergency powers for Competent Authorities to impose temporary short selling restrictions (subject to coordination by ESMA).

Intention The intention is that the new measures on short selling should: harmonise rules across the EU relating to short selling; harmonise tools that Member States may use in an emergency situation; facilitate co-ordination between Member States and by ESMA in emergency situations.

high level options and questions relating to the scope of the proposal 1/3 The consultation document sets out two different options for greater transparency of short positions held by investors. The first option would be to apply the transparency regime to all types of financial instruments that are admitted to trading on a trading venue in the EU. The second option would be to apply the regime only to EU shares and to EU sovereign bonds. Both options would include not only short positions obtained by short selling the financial instrument itself but also positions obtained through the use of derivatives relating to the financial instrument.

high level options and questions relating to the scope of the proposal 2/3 The policy options relating to transparency are largely based on the two tier model for EU shares recommended by CESR (the Committee of European Securities Regulators) in its report in March 2010. The CESR model provides that at a lower threshold notification of a short position should be made only to the regulator and at a higher threshold short positions should be disclosed to the market. Notification to regulators would enable them to monitor and, if necessary, investigate short selling that may pose systemic risks or be abusive. Publication of information to the market would provide useful information to other market users.

high level options and questions relating to the scope of the proposal 3/3 policy options to restrict "naked" or uncovered short selling The first option would be to place conditions on uncovered short selling so that at the time of the sale the seller must either have borrowed the share, have entered into an agreement to borrow the share or have evidence of other arrangements which ensure that it will be able to borrow the shares at the time of settlement The second option would be to require trading venues to have in place measures for the buying in of shares in certain situations if a short sale results in a settlement failure.

emergency powers for competent authorities The options in the consultation document would provide for competent authorities to be given powers to impose temporary restrictions on short selling and CDS transactions in an emergency. The options attempt to harmonise the conditions under which emergency action may be taken, the procedures for taking action and the scope of powers themselves (while still allowing flexibility in emergency situations). the new European Securities Market Authority (ESMA) could perform a key coordination and facilitation role.

"naked CDS” 1/2 A "naked CDS" refers to the situation where the CDS is used by the buyer not to hedge a risk but to take a position (take risk). The seller of the CDS would gain if the credit risk did not materialise; whereas the buyer of the CDS would gain if the price of the CDS subsequently increases due to a perception by the market of an increased risk of default of the issuer.

"naked CDS” 1/2 Greater transparency so that persons with significant net short positions in sovereign bonds would have to notify regulators of their positions. This would include such positions obtained through the use of CDS. This would enable regulators to monitor whether such positions are creating disorderly markets or systemic risks or being used for abusive purposes. Powers for regulators to obtain information in individual cases about CDS transactions. Powers in an emergency for a competent authority to temporarily prohibit or restrict the use of CDS. Such emergency measures would be temporary in nature and subject to coordination by ESMA.

exemptions discussed Limited exemptions are discussed in the consultation document, notably for market making, which is important to the efficiency of markets and where the requirements could severely inhibit their ability to provide liquidity to European markets.

15. 09. 2010 – Commission adopts proposal for a Regulation on short selling and certain aspects of Credit Default Swaps Short selling of financial instruments being used as part of an abusive strategy, for example the use of short sales in connection with the spreading of false rumours to drive down the price of a security, is already prohibited under the Market Abuse Directive 2003/6/EC

volume of short selling It is difficult to obtain reliable data on the extent of short selling of shares in Europe in the absence of marking of transactions, or of disclosure of short selling transactions. Most regulators consulted by the Commission were unable to provide reliable data on the volume of short selling transactions in their jurisdictions. However, the level of securities lending can be used as a proxy and according to this data, short selling in Europe could be estimated to represent between 1 and 3% of market capitalisation. Using the data on disclosures of net short positions available from some Member States (e. g. UK and Spain) it could be estimated to be less than 1% of the total share capital of the issuer. According to data obtained from Greece, which has a system of flagging in place, the volume of short selling is in a range of 0 to 3. 33% of the total volume of shares traded.

Who trades in CDS and why? There are four main groups of market participants in the CDS market: dealers, nondealer banks, hedge funds and asset managers. CDS can be used for the following purposes: hedging: CDS can be used to neutralise or reduce a risk to which the CDS buyer is exposed from another position. An example of such an "insurable interest" would be a bondholder's exposure to the credit risk of the issuer of the bond; by buying a CDS he can reduce that risk by passing it on to the CDS seller; arbitrage: The typical arbitrage operation that involves CDS is the combination of buying a CDS and entering into an asset swap where the fixed coupon payments of a bond are swapped against a stream of variable payments; or speculation: CDS can also be used to take a position in order to exploit price changes by trading in and out. For example, a CDS seller has taken on risk (in exchange for the regular payments he receives from the CDS buyer); he will gain from the contract if the credit risk does not materialise during the contract's term or if the compensation received will exceed a potential payout.

volume of CDS transactions At the end of May 2010, the gross notional amount of the total CDS market was estimated at USD 14. 5 trillion, with about 2. 1 million contracts outstanding. The sovereign CDS market, which includes both sovereign indices and sovereign single names, reached USD 2. 2 trillion, with about 0. 2 million contracts outstanding. The outstanding gross notional amount of the Itraxx Sovereign Index Western Europe was USD 140 billion (and USD 10 billion in net terms).

aims While reducing the scope for regulatory arbitrage and compliance costs arising from a fragmented regulatory framework, the three main risks of short selling which the Commission is seeking to address in these proposals are: transparency deficiencies: the current lack of transparency in relation to short selling prevents regulators from being able to detect at an early stage the development of short positions which may cause risks to financial stability or market integrity. Greater transparency to the market on short selling would deter aggressive short selling and give useful information to the market about how short sellers view the performance and prospects of companies. the risk of negative price spirals: many regulators have expressed concerns about the risks of short selling amplifying price falls in distressed markets, and that this could lead to systemic risks. It was due to these concerns that a number of Member States introduced emergency measures to restrict or ban short selling in some or all shares in autumn 2008. Concerns have also been expressed by some Member States that short positions through CDS transactions could in some circumstances contribute to a decline of sovereign bond prices. the risks of settlement failure associated with naked short selling : when a short seller sells a financial instrument short without first borrowing the instrument, entering into an agreement to borrow it, or locating the instrument so that it is reserved for borrowing prior to settlement ("naked short selling"), there is a risk of settlement failure. Some regulators consider that this could endanger the stability of the financial system, as in principle a naked short seller can sell an unlimited number of shares in a very short space of time.

the transparency of short selling 1/2 - for shares: For EU shares the proposals to enhance transparency are largely based on the two tier model recommended by CESR (the Committee of European Securities Regulators) in its report in March 2010. At a lower threshold (0. 2% of the issued share capital) notification of a short position would be made only to the regulator and at a higher threshold (0. 5%) short positions would be disclosed to the market. Notification to regulators would enable them to monitor and, if necessary, investigate short selling that may pose systemic risks or be abusive. Publication of information to the market would provide useful information to other market users and act as a disincentive to aggressive short selling strategies. The disclosure regime for shares is complemented by a system of flagging: all share orders on trading venues would be marked as 'short' by persons executing orders if they involve a short sale, so that regulators can obtain additional information about short selling

the transparency of short selling 1/2 A specific regime for notification to regulators only of significant net short positions in EU sovereign bonds is proposed. This would also include notification of significant credit default swap positions relating to sovereign debt issuers. Disclosure to regulators of significant net short positions relating to EU sovereign bonds could provide important information to assist regulators to monitor whether such positions are creating disorderly markets or systemic risks or are being used for abusive purposes. The proposals on sovereign bonds provides for information to be disclosed only to regulators rather than to the market as public disclosure could have negative consequences for the operation of sovereign bond markets, notably in terms of liquidity. The evidence from the short selling disclosure regimes for shares at national level is that these have not had an undue impact on the liquidity of share markets. In order to avoid any circumvention of the short selling disclosure rules through off- exchange derivative transactions, the transparency regimes for EU shares and EU sovereign bonds also cover the use of derivatives to obtain a net short position relating to the shares or bonds. The proposals also require that short positions should be subtracted (or 'netted off') from long positions, as notification of a net short position provides more meaningful information to regulators and/or the market.

powers are proposed for regulators in exceptional situations In distressed markets when short selling can amplify a downward price spiral, transparency alone may not be enough. The proposal provides that in exceptional situations, competent authorities (i. e. financial regulators) should have powers to impose temporary measures such as to require further transparency or to restrict short selling and credit default swap transactions. These powers extend to a wide range of instruments. The proposal seeks to harmonise the powers and define the conditions and procedures that must be complied with if the powers are to be exercised. Currently, some Member States have powers to act on short selling in exceptional situations and have used these powers, whereas others do not. ESMA is given a central role in coordinating action in exceptional situations and ensuring that powers are only exercised where necessary

role is proposed for ESMA to ensure coordination in exceptional situations ESMA is given an important role in coordinating action in exceptional situations. Competent authorities must notify ESMA of the measures they propose to take (or renew) in such a situation, not less than 24 hours before the entry into force of the measures (this period may be shorter in exceptional circumstances). ESMA shall consider the information received and issue an opinion (within 24 hours) on whether the measure or proposed measure is appropriate and proportionate to address the threat, and whether measures by other competent authorities are necessary. Where a competent authority takes action contrary to ESMA's opinion it shall publish a notice giving its reasons for doing so.

ESMA is given an important role in coordinating action in exceptional situations. Competent authorities must notify ESMA of the measures they propose to take (or renew) in such a situation, not less than 24 hours before the entry into force of the measures (this period may be shorter in exceptional circumstances). ESMA shall consider the information received and issue an opinion (within 24 hours) on whether the measure or proposed measure is appropriate and proportionate to address the threat, and whether measures by other competent authorities are necessary. Where a competent authority takes action contrary to ESMA's opinion it shall publish a notice giving its reasons for doing so.

Regulation (EU) No 236/2012 of the European Parliament and the Council of 14 March 2012 on short selling and certain aspects of Credit Default Swaps According to Regulation (EU) No 236/2012, short selling of shares can only happen if sellers either have borrowed the shares, have a binding agreement to borrow the shares, or have an arrangement with a third party that means they can reasonably expect to deliver the shares they are selling. The technical standards adopted today set out the technical details of how this Regulation will apply in practice, notably the types of agreements, arrangements and measures that adequately ensure that the shares sold short are available for settlement. They will apply from 1 November 2012.

Restrictions provided for in the Short Selling Regulation on naked short selling For shares: In order to enter a short sale, an investor must have borrowed the instruments concerned, entered into an agreement to borrow them, or have an arrangement with a third party under which that third party has confirmed that the share has been located and has taken measures vis-à-vis third parties necessary for the investor to have reasonable expectation that settlement can be effected when it is due. This is known as a 'locate rule'. ESMA shall develop a draft implementing technical standards to determine the types of agreements, arrangements and measures that adequately ensure that the share will be available for settlement. In determining what measures are necessary to ensure a reasonable expectation that settlement can be effected when it is due, ESMA shall take into account among others intraday trading and the liquidity of the shares. To deter settlement failures, trading venues must also ensure that there adequate arrangements in place for the buy-in of shares where there is a settlement failure, as well as for fines.

For sovereign debt: In order to enter a short sale an investor must have borrowed the instruments concerned, entered into an agreement to borrow them, or have an arrangement with a third party under which that third party has confirmed that the share has been located or has otherwise reasonable expectation that settlement can be effected when it is due. The restrictions do not apply if the transaction serves to hedge a long position in debt instruments of an issuer, the pricing of which has a high correlation with the pricing of the given sovereign debt. In addition, the competent authority may temporarily (for 6 months, renewable) suspend these restrictions where the liquidity of the sovereign debt falls below a pre-determined threshold, to be set by the Commission in a delegated act. ESMA shall develop a draft implementing technical standards to determine the types of agreements, arrangements and measures that adequately ensure that the sovereign debt will be available for settlement.

Practical Effect The new Regulation means that in relation to the short selling of shares and of sovereign debt instruments and the taking of sovereign credit default swaps positions the following requirements apply: All those entering into short sales of shares must be covered by either having borrowed the instruments concerned, have arranged to borrow them; or have an arrangement with a third party who has confirmed that the share has been located i. e. naked short selling in shares is now banned; All those entering into short sales of sovereign debt instruments must have borrowed the instruments concerned, have an agreement to borrow them, or have an arrangement with a third party who has confirmed that the share has been located or expects that the trade can be settled when due i. e. naked short selling in sovereign debt is now banned All those entering into credit default swaps positions related to a sovereign issuer must have an underlying exposure to the risk of default of that sovereign issuer or of a decline in the value of the sovereign debt of that issuer i. e. naked sovereign CDS are now banned. Central counterparties providing clearing services must ensure that there adequate arrangements in place for buy-in of shares as well as fines where there is a settlement failure

Mandatory transparency of net short positions: significant net short positions in shares must be reported to the relevant competent authorities when they at least equal to 0. 2% of company issued share capital and every 0. 1% above that; disclosed to the publich when they at least equal to 0. 5% of company issued share capital and every 0. 1% above that. significant net short positions in sovereign debt should be reported to the relevant competent authorities when reaching or crossing one of the thresholds published by ESMA for sovereign issuers– notification thresholds, Exemptions are available for market making activities and authorised primary dealers;

According to the provisions of the Regulation, ESMA will have to provide for public access to certain types of information: Significant net short position notification thresholds for each sovereign issuer (Article 7(2)); Links to central websites operated or supervised by competent authorities where the public disclosure of net short positions is posted (Article 9(4)); The list of shares for which the principal trading venue is located in the third country (Article 16(2)); A list of market makers and authorised primary dealers (Article 17(3)); A list of existing penalties and administrative measures applicable in Member States (Article 41).

ESMA’s coordination role in exceptional circumstances ESMA has been given the role of coordinating the scope and implementation of any proposed emergency measures by national competent authorities (NCA). The system will function as follows: The NCA notifies ESMA of its intention to take emergency measures, setting out the reasons for the action and the type of measures to be taken; ESMA has 24 hours in which to issue an opinion on whether it considers the measure appropriate and proportionate to address the threat and also if the time duration is justified; The opinion shall be published on ESMA’s website; If a NCA takes measures despite a negative ESMA opinion it must then publish, within 24 hours, of the ESMA decision an explanation for doing so; ESMA will regularly review emergency measures taken under the Regulation, at least every 3 months.

29. 06. 2012 – Commission adopts technical standards on short selling The technical standards adopted lay out in detail: the different types of agreements, arrangements and measures that adequately ensure that the shares sold short are available for settlement; the functioning of the "locate rule" for shares and sovereign debt; the mechanisms of information disclosure, to increase transparency in short selling; requirements on the types of third parties that can be involved in short selling; and the method for determining which shares have a principal trading venue outside the EU and are therefore outside the scope of the Short Selling Regulation.

What are the different kinds of agreements that adequately ensure settlement for short selling of shares and sovereign debt? The types of agreements are: futures and swaps; options; repurchase agreements; standing agreements or rolling facilities; agreements relating to subscription rights; and other claims or agreements that lead to the delivery of shares or sovereign debt for the purposes of short selling.

"locate rule" The "locate rule" is a term used to describe the arrangement whereby a broker confirms to a short seller that they have located the shares which the short seller needs to borrow to cover their short sale, taking into account the amount required and market conditions. It is thanks to this arrangement and the subsequent measures to be taken vis-à-vis third parties that the short seller is able to have the reasonable expectation that he can deliver the shares he is short selling. The locate rule is an essential part of EU law on short selling: without location of the shares to be sold short, and the subsequent measures vis-à-vis third parties, short selling of shares is not permissible. There are three different ways that the locate rule can work which are detailed in the technical standards: The broker confirms he has located the shares to be sold, and he at least puts them on hold. This is the standard functioning of the locate rule. In the case of short selling that is to take place within the same day, known as intraday short-selling, the short seller needs first to inform the broker that this is his intention. The broker then confirms he has located the shares to be sold. The broker then has to either confirm that the share is easy to borrow or purchase, or if not that he has at least put the required amount of shares on hold. The short seller must monitor the market, and if he finds he risks not being able to deliver, he must then give an instruction to the broker to buy the shares needed to cover his short sale. In the case of liquid shares, the broker confirms he has located the shares to be sold, and that either the shares are easy to borrow or purchase in the required amount, or that he has at least put them on hold. The short seller gives the broker a commitment that he will give him an instruction to buy or borrow the shares needed to cover his short sale if it transpires that he is not able to buy them in the market.

uncovered short selling of sovereign debt The requirements for uncovered short selling of sovereign debt in the Short Selling Regulation are different than those for shares, to reflect the specificities of the sovereign debt markets. The key difference is that unlike for shares, for sovereign debt there is no requirement on the third party to put the sovereign debt on hold. According to the technical standards, for short sales of sovereign debt there are four different kinds of arrangements that make short selling permissible: A third party (broker) must confirm that the sovereign debt has been located, that is to say that it considers that it can make the sovereign debt available for settlement in due time; In the case of intra-day short selling of sovereign debt, the short seller has to confirm to the broker that this is his intention; the third party (broker) then confirms to the short seller that it has a reasonable expectation that the sovereign debt can be purchased in the relevant quantity, taking into account the market conditions and other information available to it. The short seller goes through a third party which participates in a structured arrangement, such as one organised by a central bank, that gives it unconditional access to the sovereign debt to be sold short in the amount required for settlement, and can therefore confirm that it has a reasonable expectation that settlement will take place when due. A third party (broker) confirms that the sovereign debt being sold short is easy to purchase in the relevant quantity taking into account market conditions.

the detailed technical rules on information disclosure In order to improve transparency of short selling, the Short Selling Regulation requires information on significant short sales of shares and sovereign debt to be notified to the regulator, once a reporting threshold has been crossed. For shares, the threshold represents a short position of 0. 2% or more of that company's share capital. For sovereign debt, the thresholds are to be set by the Commission in the delegated act to be adopted shortly. For shares only, if the short position represents 0. 5% or more of the issued share capital, information on the sale needs to be disclosed to the public.

05. 07. 2012 – Commission adopts delegated act and regulatory technical standards on short selling The Commission is empowered by the Short Selling Regulation 1 to adopt delegated acts by 31 March 2012 (which can be extended by 6 months) specifying certain technical elements of the Regulation, to ensure its consistent application and to facilitate its enforcement. The technical issues to be addressed in these delegated acts are set out in the Regulation and are explained further below.

procedure for adopting this Delegated Regulation The Delegated Regulation is a delegated act of the European Commission. This is an autonomous act of the Commission which is drafted and adopted by the Commission. While the Commission has requested and taken into account the technical advice of the European Securities and Markets Authority (ESMA) on the technical issues covered by this delegated act, the Commission is not bound in any way by this advice. Prior to issuing its final technical advice, ESMA consulted stakeholders on draft technical advice. The Commission has also prepared an impact assessment accompanying the Delegated Regulation which considers the impacts of the different options, as well as the technical advice of ESMA and the views of stakeholders. In its preparatory work the Commission has also consulted the expert group of the European Securities Committee, the European Parliament, and the European Central Bank. Following adoption by the Commission, this Delegated Regulation is subject to a three month objection period during which either the European Parliament or the Council can object to the Delegated Regulation; this period can be extended by a further three months. If neither of the colegislators objects during this period, the Delegated Regulation is published in the Official Journal and enters into force. Provided that the co-legislators do not exercise their right to object, the Delegated Regulation is therefore expected to be published in the Official Journal by mid-October and to enter into force on 1 November 2012, the date of application of the Short Selling Regulation.

the objectives of the delegated regulation increase the transparency of short positions held by investors in certain EU securities; ensure Member States have clear powers to intervene in exceptional situations to reduce risks to financial stability and market confidence arising from short selling and credit default swaps, ensure co-ordination between Member States and the European Securities and Markets Authority (ESMA) in adverse situations; reduce settlement and other risks linked with uncovered or naked short selling; and reduce risks to the stability of sovereign debt markets posed by uncovered ("naked") CDS positions, while providing for the temporary suspension of restrictions where sovereign debt markets are not functioning properly.

the key issues addressed by the Delegated Regulation The delegated regulation specifies: certain key terms in the Short Selling Regulation, such as what it means to "own" or "hold" a share for the purposes of the Regulation, are further specified; the technical details of how to calculate significant short positions in shares or sovereign debt, which are to be notified to the regulator or disclosed to the public; how net short positions are to be calculated and reported by funds managing several funds and by different entities within a group company, in order to avoid circumvention of the transparency rules in the Short Selling Regulation; the details of the cases in which a sovereign CDS is considered to be legitimate hedging and therefore deemed "covered" for the purposes of the ban on uncovered sovereign CDS; the thresholds at which significant short positions in the sovereign debt of Member States and other sovereign and EU issuers (the German Länder, the European Financial Stability Facility (EFSF), the European Stability Mechanism (ESM) and the European Investment Bank (EIB) have to be notified to regulators; the threshold for the significant decline in the liquidity of a sovereign debt market which allows a regulator to temporarily suspend restrictions on short selling of sovereign debt; the thresholds for significant price falls for financial instruments other than liquid shares that can trigger a short term suspension of short selling by national regulators; and the meaning of adverse events, threats, and developments that can trigger temporary restrictions on short selling by national regulators and, in cross-border exceptional situations, by ESMA.

Mps Short sales of Banca Mps shares were temporarily prohibited in the stock exchange session held on 17 October 2014, on the MTA market of Borsa Italiana. The prohibition was adopted in application of Article 23 of the European Community regulation on short selling, considering the price change (above the 10% threshold) recorded by the security on 16 October 2014. The prohibition regards short sales backed by available securities. This extended the scope of the prohibition of "naked" short selling, already in force from 1 November 2012 for all shares, by virtue of the aforementioned Community Regulation.

Safilo Temporary prohibition of short selling in shares issued by Safilo Group S. p. A. (Safilo), pursuant to Article 23 of the Regulation (EU) of the European Parliament and of the Council no. 236 of 14 March 2012 LA COMMISSIONE NAZIONALE PER LE SOCIETA' E LA BORSA HAVING REGARD TO Law no. 216 of June 7, 1974, as subsequently amended and integrated; HAVING REGARD TO Regulation (EU) no. 236/2012 of the European Parliament and of the Council of March 14, 2012; HAVING REGARD TO Article 4 -ter(2) of Legislative Decree no. 58 of February 24, 1998, according to which Consob is appointed with the task to implement the measures and exercise the functions and powers provided by Regulation (EU) no. 236/2012 of the European Parliament and of the Council of March 14, 2012 with reference to shares, among others; HAVING REGARD TO Article 12 of Regulation (EU) no. 236/2012 of the European Parliament and of the Council of March 14, 2012, imposing restrictions on uncovered short sales in shares; HAVING REGARD TO Article 23 of the above-mentioned Regulation (EU) no. 236/2012, which defines the power to temporarily restrict short selling of financial instruments in the case of a significant fall in price; TAKING INTO ACCOUNT THAT the relevant threshold in the case of the Safilo share is equal to 10%; TAKING INTO ACCOUNT THAT the fall of the price of Safilo share during September 3, 2014 compared to the closing price on the previous trading day, was greater than 10%; CONSIDERING THAT the information background does not completely validate the above-mentioned price fluctuation and, therefore, downward speculation phenomena shall not be excluded; RESOLVES AS FOLLOWS: 1. The prohibition of short selling in Safilo shares (ISIN code: IT 0004604762) on the MTA, a regulated market organised and managed by Borsa Italiana S. p. A. , under Article 23 of the above-mentioned Regulation, for the entire trading day of September 4, 2014. 2. It is clarified that, pursuant to Article 23(3), the above-mentioned prohibition does not apply to the activity of market making, as defined by Article 2(1)(k) of the aforementioned Regulation. This resolution is transmitted to ESMA and published on the Consob website and bulletin. September 3, 2014 THE CHAIRMAN

Tods’ Temporary prohibition of short selling in shares issued by TOD's spa (TODS), pursuant to Article 23 of the Regulation (EU) of the European Parliament and of the Council no. 236 of 14 March 2012 LA COMMISSIONE NAZIONALE PER LE SOCIETA' E LA BORSA HAVING REGARD TO Law no. 216 of June 7, 1974, as subsequently amended and integrated; HAVING REGARD TO Regulation (EU) no. 236/2012 of the European Parliament and of the Council of March 14, 2012; HAVING REGARD TO Article 4 -ter(2) of Legislative Decree no. 58 of February 24, 1998, according to which Consob is appointed with the task to implement the measures and exercise the functions and powers provided by Regulation (EU) no. 236/2012 of the European Parliament and of the Council of March 14, 2012 with reference to shares, among others; HAVING REGARD TO Article 12 of Regulation (EU) no. 236/2012 of the European Parliament and of the Council of March 14, 2012, imposing restrictions on uncovered short sales in shares; HAVING REGARD TO Article 23 of the above-mentioned Regulation (EU) no. 236/2012, which defines the power to temporarily restrict short selling of financial instruments in the case of a significant fall in price; TAKING INTO ACCOUNT THAT the relevant threshold in the case of the TODS share is equal to 10%; TAKING INTO ACCOUNT THAT the fall of the price of TODS share during August 8, 2014 compared to the closing price on the previous trading day, was greater than 10%; CONSIDERING THAT the information background does not completely validate the above-mentioned price fluctuation and, therefore, downward speculation phenomena shall not be excluded; RESOLVES AS FOLLOWS: 1. The prohibition of short selling in TODS shares (ISIN code: IT 0003007728) on the MTA, a regulated market organised and managed by Borsa Italiana S. p. A. , under Article 23 of the above-mentioned Regulation, taking effect immediately till the end of the trading day of August 11, 2014. 2. It is clarified that, pursuant to Article 23(3), the above-mentioned prohibition does not apply to the activity of market making, as defined by Article 2(1)(k) of the aforementioned Regulation. This resolution is transmitted to ESMA and published on the Consob website and Bulletin. 8 August 2014 THE CHAIRMAN

Fiat Temporary prohibition of short selling in shares issued by Fiat S. p. A. (FIAT), pursuant to Article 23 of the Regulation (EU) of the European Parliament and of the Council no. 236 of 14 March 2012 LA COMMISSIONE NAZIONALE PER LE SOCIETA' E LA BORSA HAVING REGARD TO Law no. 216 of June 7, 1974, as subsequently amended and integrated; HAVING REGARD TO Regulation (EU) no. 236/2012 of the European Parliament and of the Council of March 14, 2012; HAVING REGARD TO Article 4 -ter(2) of Legislative Decree no. 58 of February 24, 1998, according to which Consob is appointed with the task to implement the measures and exercise the functions and powers provided by Regulation (EU) no. 236/2012 of the European Parliament and of the Council of March 14, 2012 with reference to shares, among others; HAVING REGARD TO Article 12 of Regulation (EU) no. 236/2012 of the European Parliament and of the Council of March 14, 2012, imposing restrictions on uncovered short sales in shares; HAVING REGARD TO Article 23 of the above-mentioned Regulation (EU) no. 236/2012, which defines the power to temporarily restrict short selling of financial instruments in the case of a significant fall in price; TAKING INTO ACCOUNT THAT the relevant threshold in the case of the FIAT share is equal to 10%; TAKING INTO ACCOUNT THAT the fall of the price of FIAT share during May 7, 2014 compared to the closing price on the previous trading day, was greater than 10%; CONSIDERING THAT the information background does not completely validate the above-mentioned price fluctuation and, therefore, downward speculation phenomena shall not be excluded; RESOLVES AS FOLLOWS: 1. The prohibition of short selling in FIAT shares (ISIN code: IT 0001976403) on the MTA, a regulated market organised and managed by Borsa Italiana S. p. A. , under Article 23 of the above-mentioned Regulation, for the trading day of May 8, 2014. 2. It is clarified that, pursuant to Article 23(3), the above-mentioned prohibition does not apply to the activity of market making, as defined by Article 2(1)(k) of the aforementioned Regulation. This resolution is transmitted to ESMA and published on the Consob website and bulletin. 7 May 2014 THE CHAIRMAN