General comments We welcome the Commission consultation on an issue that has sparked so much public debate in recent times.

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1 International Regulatory and Antitrust Affairs INTESA SANPAOLO RESPONSE TO THE COMMISSION CONSULTATION ON SHORT SELLING 9 JULY 2010 REGISTERED ORGANIZATION N The Intesa Sanpaolo Group is one of the largest European banking groups active on different EU markets both through Banca IMI, its investment bank and through its subsidiaries based also in the new Member States. Intesa Sanpaolo is an active participant in European financial markets, both as a market maker and a trader. General comments We welcome the Commission consultation on an issue that has sparked so much public debate in recent times. First of all, we welcome the fact that the Commission acknowledges the beneficial positive role played by shortselling in making financial markets more efficient and that it is not considering banning altogether this trading activity, but restricting it only in crisis situations. We also support the idea of establishing an EU wide regime for short selling, thus overcoming the fragmented approach adopted by national regulators in the recent years. This will not only help market participants active across EU markets to be compliant with rules, but will also avoid possible regulatory arbitrages and ensure the efficacy of the measures, since they would be applied (consistently) at EU level. It is our genuine conviction that the current fragmentation of the settlement systems and the inefficient cross border settlement of securities account substantially for the problems that emerged in relation to shortselling. In our view there is an urgent need for a single settlement system in Europe. T2S will be able to overcome these problems. Pending that it becomes operational, we call on policy makers and on the market to remove all the remaining barriers that impede smooth and efficient securities clearing and settlement services. We have repeatedly emphasized the crucial role played by post trading infrastructures for the smooth and effectively functioning and for enhancing the stability of financial markets. We are convinced that some of the problems that emerged in relation to the naked short selling of some instruments could be easily addressed by requiring as much as possible for all classes of instruments where feasible - the use of a central counterparty, by requiring reporting to regulators of settlement failures and by enforcing the existing sanctions for failing to deliver the securities. Currently, the latter are loosely applied, hence in the end fostering this trading activity. We appreciate the choice of stand alone legislation for regulating the matter. Short selling not being per se an abusive activity, we believe that it would have not been appropriate to regulate it within the Market Abuse Directive. In drafting the new 1

2 legislation, we call on the Commission to craft it in a sensible and proportionate manner, on the basis of an assessment of the impact that the measures can have on the liquidity and volatility of the markets and on a thorough cost benefit analysis. A clear distinction should be made between normal market conditions and exceptional ones, as plainly suggested in the consultation paper. As to the legislative instrument, our preference would be for a regulation, in order to ensure a consistent and concomitant entry into force across the EU. We would also highlight that it is not clear to us how the regime would apply to multiple listing. Scope of financial instruments covered (1) Which financial instruments give rise to risks of short selling and what is the evidence of those risks? In general terms we believe that shortselling is a legitimate activity that is beneficial to the markets, because it is providing liquidity, improving the price discovery and facilitating hedging. As far as CDS are concerned, while we welcome centralized clearing to mitigate counterparty risk, we believe that a distinction can be made between CDS for hedging purposes and CDS as naked shorts. On Sovereign names, for example, we believe that buying CDS on Sovereign default should be allowed only at the expense of higher initial margins required in the clearing houses in order not to incentivize speculation. On the contrary, if a CDS is purchased for hedging purposes and centrally cleared through the posting of the hedged bonds as collateral, we believe that this activity should be absolutely preserved as useful for market participants and for the Sovereign Issuers. (2) What is your preferred option regarding the scope of instruments to which measures should be applied? We would prefer option B, i.e. application of different rules and requirements in relation to the different instruments, since it seems difficult to devise a regime that suits all classes of instruments. (3) In what circumstances should measures apply to transactions carried on outside the European Union? We believe that in order to be effective, transparency requirements on shortening instruments admitted to trading in the EU should be applied also to transactions carried out outside the EU at all times. However, we are aware that competent authorities could face problems in enforcing decisions against non EU resident market participants. In order to ensure an efficient enforcement and a level playing field among market participants irrespective of their country of incorporation it is crucial that supervisory authorities have cooperation arrangements in place with foreign jurisdictions that grant them all the necessary powers to fulfill their supervisory tasks and allow them to exchange information. As to other restrictive measures we believe that they should be applied in emergency situations also to transactions carried out outside the EU on instruments that are double listed. In this respect, the new legislation should provide clarity on this issue. 2

3 Transparency (4) What is your preferred option in relation to the scope of financial instruments to which the transparency requirements should apply? Option A, which is meant to cover all financial instruments admitted to trading on an EU trading venue would entail high compliance costs for intermediaries, both for monitoring the positions and for calculating the delta equivalent every day. Collecting data across the different desks in large institutions every day would be a highly complex task. Regulators would also have the daunting task of analyzing a massive volume of data. Should the two tier transparency regime be applied, intermediaries could be adversely hit by being required to disclose to the market every day their delta equivalent. Therefore, we suggest mandating the disclosure only to the regulator. Moreover, we acknowledge that this option would have the benefit of helping regulators to carry out their supervisory tasks and would offer them a comprehensive view of all instruments traded. No regulatory arbitrage could be possible. Option B would be more affordable for the intermediaries to put in place, also in terms of costs and procedures, but would offer regulators a selective view of the market. We believe that the choice among the proposed options should be driven by a thorough impact analysis of the costs to be borne by market participants and the benefits for market stability and integrity. (5) Under Option A is it proportionate to apply transparency requirements to all types of instruments that can be subject to short selling? In our opinion all types of instruments should be subject to transparency requirements, in order not to foster regulatory arbitrage. However, we note that it would be cumbersome and onerous to apply transparency to derivatives, because it should be calculated every day on a delta equivalent basis across all positions taken within the legal entity. (6) Under Option B do you agree with the proposals for notification to regulators and the markets of significant net short positions in EU shares? As already said in our response to the CESR consultation on a pan European short selling disclosure regime, we agree with the proposal for notification to the regulators, since it would enable them to monitor the building up of positions and detect possible reprehensible market behaviors. On the contrary, we have serious concerns on the proposed disclosure to the market, since it could generate unintended effects such as herding behavior, short squeeze and implicit and explicit costs for investors and intermediaries. (8) Do you agree with the methods of notification and disclosure suggested? We support the idea of using the transaction reporting channel for notification purposes. However, we note that this is currently used by intermediaries and wonder whether the current system could cope with an increased volume of reporting. As to the equity market, we would like to highlight the need to establish thresholds for short positions that take into account the market capitalization of the companies. No one size fits all approach should be adopted in this respect. 3

4 (9) If transparency is required for short positions relating to sovereign bonds, should there be an exemption for primary market activities or market making activities? Yes, certainly there has to be an exemption for market making activities because of the benefits they generate for the liquidity in the markets. In our view, there should be no transparency to regulators for short positions on sovereign bonds so as to ensure that no political interference is exerted on market participants. (10) What is the likely costs and impact of the different options on the functioning of financial markets? Establishing a two tier reporting requirement for shortselling will inevitably generate high compliance costs for firms that will depend on their internal structure, on the option chosen and on the level of the threshold. As to the latter, the lower the level of the threshold, the more costs it will generate for firms. As to their likely impact on the financial markets, evidence has shown that restrictive measures on shortselling have generated a decrease of the liquidity on the lending market and a higher volatility. (11) What are the risks of uncovered short selling and what is the evidence of those risks? 12) Is there evidence of risks of uncovered short sales for financial instruments other than shares (e.g. bonds or sovereign bonds), which would justify extending the requirements to these instruments? Excessive volatility of an instrument and settlement failures are risks generated by shortselling. As already said in our opening remarks, we believe that this risk could adequately be addressed by enforcing the sanctions provided for by the settlement systems. Currently, sanctions are not applied or seldom applied and this does neither encourage market discipline, nor make shortselling expensive. According to our experience on the German ban on shortselling, we would suggest the regulation to clearly state that the obligation to borrow the shares should be set at the end of the trading day, so as to calculate the net position of the market participant. Therefore, it should not be set before any transaction is entered into. Moreover, pre-location facilities through prime brokers or all exclusive locations should be provided for in the regulation. Buy-in procedures and securities lending arrangements in place should be provided for also for bonds and sovereign bonds. (13) Do you agree with the proposed rule setting out conditions for uncovered short selling? Do you consider that more stringent conditions could be put in place? If so please indicate which ones? Do you agree that arrangements other than formal agreements to borrow should be permitted if they ensure the shares are available for borrowing at settlement? If so, why? As already mentioned in our response to question 11, we believe that the pre-locate requirement of securities and the existence of a security lending arrangement, combined with tougher enforcement procedures for settlement fails and mandatory reporting to 4

5 regulators for settlement fails should be sufficiently deterrent to avoid uncovered short selling. (14) Do you consider that the risks of uncovered short selling are such that they should be subject to an upfront ban/permanent restrictions? If so, why? We do not believe that naked shortselling should be banned permanently. We would rather suggest that in case of emergency, restrictions are taken on a pan European level, are targeted to specific instruments, are limited in time, i;e. shorter than 3 months and timely taken. (15) Do you agree with the proposal requiring buy in procedures for settlement failures due to short sales? If so, what is an appropriate base period that could be specified before buy in procedures are triggered (e.g. T + 4)? Yes, we do agree with requiring buy-in procedures for settlement failures due to short sales. Many settlement systems already provide for such mechanisms. We would like to highlight that each settlement system has its own buy-in procedure, which is subject to its own rules with different times. This does not help intermediaries that have to cope with different rules and has a material impact on the efficiency of settlement systems. (16) Do you consider that there should be permanent limitations or a ban on entering into naked credit default swaps relating to EU sovereign issuers? If so, please explain why, including if possible any evidence relating to the use of naked CDS. We do not support permanent limitations or bans on naked CDS sovereign, since they would be easily circumvented as experience has shown. We would rather suggest as explained in question 1 that naked CDS sovereign could be purchased only at the expenses of higher initial margins required by the CCP. (17) Do you consider that in addition to the measures described above there should be marking of orders for shares that are short sales? We do not believe that a marking of orders system is necessary for the reasons stated in our response to questions 11 and 13. (18) What is the likely costs and impact of the different options on the functioning of financial markets? While it is difficult at this stage to assess the likely costs that a transparency system will generate, because they will depend upon the options that will be chosen and the thresholds, it can certainly be said that if the measures are not well calibrated, they can have a serious impact on the liquidity of the different markets, make hedging more expensive and making financial markets less efficient. (19) Do you agree with the proposed exemption for market making activities? Which requirements should it apply to? Yes, we agree with the proposed exemption for market making activities, because of the important role that they play in providing liquidity in the markets. In particular, the definition of market makers should be wide and not including only primary dealers for the fixed income market. Market makers should be designed according to criteria defined by 5

6 trading venues. Moreover, for some instruments, such as sovereign CDS, there are no primary dealers. (20) Do we need any exemption where the principal market for a share is outside the European Union? Are any other special rules needed with regard to operators or markets outside the European Union? As mentioned under question 3, we believe that EU rules should encompass all financial instruments or where the underlying is an EU instrument. (21) What would be the effects on the functioning of markets of applying or not applying the above exemptions? Not applying the a.m. exemptions would have a disruptive impact on market liquidity. Emergency powers On a general note we welcome the Commission s intention to harmonize the conditions for adopting emergency measures, the procedures for taking actions and the scope of regulators powers. As regards the role of ESMA, we believe there is potentially damaging ambiguity as regards the interaction between the emergency powers foreseen under the shortselling regime and those provided under the general framework applicable to the new authorities. Clear allocation of responsibilities and hierarchy between rules (lex specialis vs lex generalis) should be warranted. (22) Should the conditions for use of emergency powers be further defined? We believe that sectoral legislation should clearly specify the cases and lay down the conditions when certain types of financial activities may be temporarily prohibited or restricted. We understand that the Commission consultative document only specifies the cases for prohibition or restrictions on shortselling. However, in our view, the conditions for the use of emergency powers are not specified at all. The shortselling regime should spell out criteria defining when there are adverse developments which constitute a serious threat to financial stability or to market confidence in a Member State or in the EU. We would also suggest adding in the sub-titles the word Prohibition to Restrictions [ ], given the different meaning of the two concepts. (23) Are the emergency powers given to Competent Authorities and the procedures for their use appropriate? No comment. (24) Should the restrictions be limited in time as suggested above? Yes, we believe that measures should be restricted to one month period. In our view, in order to be effective, restrictive measures should be targeted, limited in time and timely. 6

7 (25) Are there any further measures that could ensure greater coordination between competent authorities in emergency situations? ESMA should be entrusted with all necessary powers to ensure appropriate coordination between competent authorities in emergency situations. (26) Should competent authorities be given further powers to impose very short term restrictions on short selling of a specific share if there is a significant price fall in that share (e.g. 10%)? We do not believe that competent authorities should be given further powers to impose restrictions unless in very circumscribed exceptional cases, not limited to significant price falls. (27) Should the power to prohibit or impose conditions on short-selling be limited to emergency situations (as set out in the previous section)? We believe that bans or restrictions on shortselling should be limited to emergency situations and limited in time. (30) Do the definitions serve their intended purpose? We do not have any specific comment on the glossary. For any further comments or questions, please contact: Alessandra Perrazzelli Francesca Passamonti Head of International Affairs Regulatory Advisor Intesa Sanpaolo S.p.A. Intesa Sanpaolo S.p.A. Square de Meeûs, 35 Square de Meeûs, 35 B 1000 Brussels B Brussels alessandra.perrazzelli@intesasanpaolo.com francesca.passamonti@intesasanpaolo.com 7