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 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 offexchange 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 are 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 are 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
Regulation1 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: IT0004604762) 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: IT0003007728) 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: IT0001976403) 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