Yesterday, the regulatory authorities in Spain and Italy re-issued bans on short-selling. Spain has instituted a three-month ban on the short sale of any security listed on a Spanish exchange through Oct. 23, 2012, and Italy has instituted a ban on the short sale of certain financial stocks listed below through July 27, 2012. The bans do not cover ordinary bonds but do cover bonds that convert into equity.

Clients and others who may be affected by the requirements below are encouraged to seek advice from local counsel.

Spain

The Spanish regulator, the Comisión Nacional del Mercado de Valores (“CNMV”), has instituted a three-month ban on the short sale of all stocks listed on Spanish exchanges. The CNMV said that it was putting a halt to “any transaction which might constitute or increase a net short position on stocks admitted to trading in a Spanish regulated market” over which it has authority.

The CNMV has defined a net short position as “any position resulting in a positive economic exposure to falls in the price of the [relevant] stock.” The Spanish government has urged caution when dealing with derivatives since both long and short positions in such instruments will be accounted for on a delta-adjusted basis.

Spain’s ban applies to “any trade on equities or indices, including cash equities transactions, derivatives in regulated markets or OTC derivatives, that has an effect of creating a net short position or increas[ing] a previous[ly held net short position], even if on an intraday basis.” Specifically, the CNMV has banned transactions in shares, GDRs, certificates representing shares and warrants, options, swaps, short-calls, puts, futures, contracts for difference (CFDs) and turbos, the result of which would be an increase in a net short position. In addition, shorts relating to baskets of financial instruments, ETFs or indexes that, at least in part, contain shares listed on a Spanish exchange are prohibited. Spain does, however, permit shorting of indices that contain Spanish stocks for bona fide hedging purposes. The burden rests on the investor to prove that its actions were not meant to circumvent the short sale ban.

According to the FAQ prepared by the CNMV, the short sale ban is intended to apply regardless of whether the trades take place outside of Spain, on a foreign exchange or over-the-counter.

The prohibition only refers to creating or increasing a net short position and, as a result, an investor who opened a short position prior to the institution of the ban may keep or reduce it. If an investor placed an order that will increase a net short position prior to the imposition of the ban but that has not yet been executed, it must cancel the order.

The Spanish ban will remain in effect until Oct. 23, 2012, and can be renewed or lifted as the CNMV deems necessary.

The CNMV's news release is available at: http://www.cnmv.es/portal/verDoc.axd?t={6feb9a4a-af0a-4bca-9405-bbba1370fd3d}

An FAQ issued by the CNMV discussing this latest ban is available at: http://www.cnmv.es/portal/verDoc.axd?t={3aad19cf-1277-41f3-bb93-5599a28e7638}

Italy

The Italian regulator, the Commissione Nazionale per le Società e le Borse (“CONSOB”), has reinstated its ban on the creation of any new net short position or the increase of any pre-existing net short position, including intraday, in relation to the capital of the following Italian financial companies: Azimut Holdings, Banca Carige, Banca Finnat, Banca Generali, Banca Ifis, Banca Intermobiliare, Banca Monte Paschi Siena, Banca Popolare Emilia Romagna, Banca Popolare Etruria e Lazio, Banca Popolare Milano, Banca Popolare Sondrio, Banca Profilo, Banco di Desio e Brianza, Banco di Sardegna Risp, Banco Popolare, Cattolica Assicurazioni, Credito Artigiano, Credito Emiliano, Credito Valtellinese, Fondiaria-Sai, Generali, Intesa Sanpaolo, Mediobanca, Mediolanum, Milano Assicurazioni, Ubi Banca, Unicredit, Unipol and Vittoria Assicurazioni.

The CONSOB resolution implementing the ban makes specific reference to the earlier ban on short sales instituted on Nov. 11, 2011. In relation to that ban, CONSOB issued an FAQ to provide guidance which specifically prohibited the use of derivatives to create or increase a net short position. In the same FAQ, CONSOB also stated that parties may only use index derivatives to short a relevant stock if it is done to hedge general market risk. Such actions, if done to circumvent the ban, are still illegal.

The Italian government has also stated that transactions involving ETFs, covered warrants and certificates are included in the calculation of the net short position and thus covered under the ban. Additionally, CONSOB has stated that “all purchases of financial instruments that entail a bearish position, such as the purchase of put options or of ‘reverse’ ETFs, shall be considered short positions.”

CONSOB’s ban will remain in effect until 6:00 p.m. local time on July 27, 2012 (unless extended).

The CONSOB resolution is available at: http://www.consob.it/mainen/documenti/english/resolutions/res18283.htm.