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Latham & Watkins Capital Markets Practice May 3, 2019 | Number 2496
The measure is intended to align market practice with the principles laid down under the
European market abuse regulation.
Per visualizzare questo Client Alert in italiano, fare clic qui.
The Italian Securities and Exchange Commission (Commissione Nazionale per le Società e la Borsa, or
Consob):
ï‚· Approved the new accepted market practice on liquidity contracts
ï‚· Ordered the termination of market practices on the purchase of own shares to set up a share
warehouse position and for the buyback of bonds at predetermined conditions, as of June 30, 2019
ï‚· Announced the issuance of guidelines to regulate the set-up of share warehouse positions and bond
buybacks, which will no longer benefit from market practice safe harbor provisions
This Client Alert outlines the main steps Consob has taken to reform market practices, focusing on the
key features of the new accepted market practice on liquidity contracts (New Practice No. 1) as well as on
the main differences vis-Ã -vis Practice No. 1 previously in force.
Introduction
The market abuse provisions introduced by Regulation (EU) No 596/2014 (MAR) and Directive
2014/57/EU (MAD2) provide for an exemption from sanctions in case a transaction breaches the general
prohibition of market manipulation for transactions carried out for legitimate reasons and in line with
accepted market practices (AMPs) established by national competent authorities (NCAs). NCAs are
required to update the respective national AMPs adopted under formerly-in-force Directive 2003/6/EC
(MAD1), in accordance with the newer European framework.
On April 8, 2019, Consob, in its capacity as Italian NCA, notified the European Securities and Markets
Authority (ESMA) of New Practice No. 1 to enable ESMA to issue its assessment of the compatibility of
the new Italian AMP with the MAR1 provisions.
New Practice No 1 was notified following the conclusion of a public consultation procedure launched in
September 2018 regarding the proposal to amend the formerly-in-force market practices (the
Consultation), and in light of the comments some Italian market participants shared with Consob
(including Latham & Watkins, by letter dated October 22, 2018) in response to the Consultation.
Under MAD1, Consob established three market practices:
ï‚· Practice No. 1: relating to liquidity contracts
ï‚· Practice No. 2: relating to the purchase of own shares to set up a share warehouse position
ï‚· Practice No. 3: relating to the buyback of bonds at predetermined conditions
Practice No. 1 and Practice No. 2 were adopted in 2009,2 followed by Practice No. 3 in 20123 (together,
the Practices).
Following the Consultation, Consob updated and replaced Practice No. 1 with New Practice No. 1,
notified this new practice to ESMA, and ordered that both Practice No. 2 and Practice No. 3 be terminated
as of June 30, 20194. Therefore, starting from June 30, 2019, the purchase of own shares to set up a
share warehouse position and the buyback of bonds at predetermined conditions will no longer benefit
from the MAR safe harbor provisions applicable to transactions carried out in accordance with AMPs.
The Temporary Application of the Practices
On September 9, 2016, and November 4, 2016, Consob notified ESMA of its intention to temporarily
retain in force5 the Practices6, pending the completion of its ongoing revision process aimed at aligning
such Practices with the principles laid down under MAR. In light of the foregoing, ESMA suspended its
review of the Practices notified by Consob for the purpose of issuing the compatibility opinion that the
European Authority should have issued within two months from receiving the notification.
Therefore, the Practices were retained in force, pending amendments, for more than two and a half years,
until completion of the Consob revision process (which occurred in April 2019).
The Consultation
In December 2016, ESMA published a document providing common criteria addressed to NCAs (Points
for Convergence or Opinion)7 to facilitate the convergence of the national AMPs on liquidity contracts —
governed, in Italy, by Practice No. 1 — with the aim of promoting a uniform application of the principles
laid down under MAR8.
On September 21, 2018, Consob launched the Consultation regarding, among other things, the
amendments required to align Practice No. 1 with the Points for Convergence and, more in general, with
the principles laid down under MAR.
Consob also proposed to terminate Practice No. 2 and Practice No. 3, following the concerns raised by
ESMA’s Market Integrity Standing Committee regarding the integrity of the market as well as the
compatibility of those practices with the new legal framework on market abuse. Consob additionally
pointed out that, over the years, issuers had rarely used Practice No. 3.
Termination of the shares warehouse position and bond buyback market practices (Practice No. 2 and Practice No. 3)
In the course of the Consultation, market participants (including Latham & Watkins) pointed out to Consob
the opportunity to retain in force Practice No. 2 in light of the fact that the practice is widely used by listed
companies; indeed, Practice No. 2 represents a useful tool to achieve purposes not otherwise covered by
the safe harbor provision provided by Article 5 of MAR, but which are justified by the need to ensure
market integrity, such as in the case of purchase of own shares in the context of certain M&A
Latham & Watkins May 6, 2019 | Client Alert Number 2496 | Page 3
transactions. This specific aspect was highlighted by Consob in its explanatory report on the results of the
Consultation issued on April 8, 2019 (the Explanatory Report).
In light of the criticisms expressed by ESMA on the retention of Practice No. 2 and also due to the fact
that none of the other NCAs have established similar practices, Consob ordered its termination, together
with Practice No. 3, as of June 30, 2019. In particular, the Italian Authority did not accepted the requests
received during the course of the Consultation to extend such term (June 30, 2019) for the benefit of
listed companies whose ordinary shareholders’ meetings have already been called to approve the
authorization to purchase own shares in accordance with Article 2357 of the Italian civil code and
pursuant to Practice No. 2 for a period subsequent to the termination of Practice No. 2 or to listed
companies that have already passed any such resolution.
In its Explanatory Report, Consob clarified that companies will still be able to operate substantially in line
with the operating procedures and purposes provided by the terminated market practices (even if they
can no longer benefit from the market practices’ safe harbor provisions following termination of Practice
No. 2 and Practice No. 3), by complying with the obligations set out in the Italian domestic regulations
(i.e., the obligation to disclose the purchase of own shares in line with the provisions set forth in
Schedule 3F of Regulation No 11971/1999).
Consob announced the release of guidelines to regulate the set-up of share warehouse positions and
bond buybacks at predetermined conditions in order to provide companies and investment firms with an
operative tool to help them continue to operate while reducing the risk of market manipulation.
Liquidity support activities according to New Practice No. 1
In line with Practice No. 1, New Practice No. 1 provides that issuers interested in supporting the liquidity
of their own shares may appoint an intermediary, on the basis of a contract, to independently carry out
liquidity support activities to facilitate trading activities and with the purpose to avoid misalignments
between price movements and market trends.
In performing the liquidity support activities, the intermediary shall:
ï‚· Act independently
 Have no access to issuers’ inside information
ï‚· Ensure that such activity is not affected by other interests, including those relating to the performance
of investment services
The remuneration of the appointed intermediary shall be structured so that it does not incentivize the
intermediary to influence prices or trading of the financial instruments.
The appointed intermediary shall close the open positions as soon as practicable, thus avoiding the
extension over time of the market liquidity conditions and of the comparison between current market
prices and the book value of the trading positions9.
Key features of New Practice No. 1
Distinction between “liquid†and “Illiquid†financial instruments
As recommended by the Points for Convergence, the New Practice No. 1 introduces different limits in
terms of resources that may be allocated to the performance of liquidity contracts and the number of
shares that may be purchased and sold by the intermediary, depending on whether the liquidity contract
refers to issuers of liquid or illiquid financial instruments.10
Latham & Watkins May 6, 2019 | Client Alert Number 2496 | Page 4
In particular, instead of the 2% limit on the value of the issued financial instruments set out in Practice
No. 1, New Practice No. 1 provides that the overall resources that may be allocated in terms of liquidity
and/or financial instruments must not exceed:
ï‚· For liquid financial instruments, 200% of the average trading volume associated to a resources cap of
maximum €20 million
ï‚· For illiquid financial instruments, 500% of the average trading volume, or 1%11 of the outstanding
issued financial instruments calculated as of the opening of the start of the liquidity support activities
associated to a resources cap of maximum €1 million
According to the Points for Convergence, NCAs shall on a voluntary basis be entitled to introduce in their
AMPs on liquidity contracts the distinction between issuers of liquid, illiquid, and “highly liquid†shares,
corresponding — in Italy — to the issuers listed on the FTSE MIB index. However, it is worth noting that
Practice No. 1 has been rarely applied by Italian issuers included in such group.
In light of this and of the inputs that most participants (including Latham & Watkins) provided to Consob
during the course of the Consultation , the Italian Authority introduced in New Practice No. 1 the only
distinction between issuers of liquid and illiquid financial instruments, without providing for any additional
special provision for issuers of “highly liquid†financial instruments.
Reference period for the calculation of the average trading volume
The reference period for the calculation of the average trading volume for the purpose of defining the
resources that can be allocated for liquidity support activities is 30 days.12
According to the Italian Authority’s intentions, such a timeframe — which is in line with the timeframe set
forth for stabilization transactions pursuant to Article 5 of Commission Delegated Regulation (EU)
No 1052/2016 — should foster the recourse to liquidity contracts by issuers who have been admitted to
trading for only one month.
In response to the Consultation, on one side our firm recognized the adequacy of the 30-day timeframe
introduced while at the same time expressing concern about the fact that a fixed time limit might
discourage the recourse to that measure if not backed up by a residual (and exceptional) provision
allowing for the application of different terms whenever market conditions do not permit to usefully apply a
general 30-day term.
In its Explanatory Report, Consob expressly acknowledged our request for flexibility and, therefore, set
out that, wherever the 30-day period does not apply,13 the issuer may refer to any different period,
provided that such term is prior to the launch of the liquidity support activities.
Remuneration of the intermediary appointed by way of the liquidity contract
New Practice No. 114 specifies that the fixed component of the remuneration of the intermediary must
prevail over the variable component, if any, which in any event must not exceed 15% of the total
remuneration.
Such a remuneration mechanism is aimed at ensuring the independence of the intermediary with respect
to the issuer’s interests and at discouraging any trading activities not strictly required.
Operational limits
New Practice No. 1 sets forth the following limits in term of volumes exchangeable by intermediaries on a
daily basis:
Latham & Watkins May 6, 2019 | Client Alert Number 2496 | Page 5
ï‚· For liquid financial instruments, 15% of the daily average trading volumes in the preceding 20 trading
days
ï‚· For illiquid financial instruments, 25% of the daily average trading volumes in the preceding 20 trading
days
Such percentage values shall be calculated as the sum of all sale and purchase transactions carried out
against the total number of trades, and not independently15 as provided for by Practice No. 1. No
derogations are allowed.
Performance of liquidity contracts during auction phases
New Practice No. 1 introduces restrictions with respect to transactions carried out during auction phases16
with the aim of avoiding that the placed orders impact the final price of the auction itself and of granting to
the other participants enough time to react. In particular:
ï‚· For purchase transactions, the price of the trade proposals must be lower than the theoretical auction
price
ï‚· For sale transactions, the price of the trade proposals must be higher than the theoretical auction
price
Block trades
In line with Practice No. 1, New Practice No. 1 does not cover block trades.
ESMA’s Points for Convergence allow NCAs to introduce the possibility to carry out block trades in certain
exceptional circumstances. During the course of the Consultation, Consob considered this option, but the
Italian Authority thought it preferable to retain, as a conservative measure, the prohibition set forth under
the previous regime, considering that block trades may allow the extension of long positions on financial
instruments, thus enhancing market prices and potentially entailing the manipulation thereof.
Transparency
In addition to the information required under Practice No. 1, both issuers and intermediaries are required
to provide the following:
ï‚· Prior to the start of the liquidity support activities, the issuer must disclose to the public, among
others, whether the financial instruments fall within the category of liquid or illiquid instruments, the
markets where the liquidity support activities will be performed, the duration of the liquidity contract,
and the conditions that may determine the suspension or termination of the activity
ï‚· During the performance of the liquidity support activities, the intermediary must disclose, within the
first 15 days of the month following the end of each quarter, among other things, details of the daily
activities carried out during the relevant quarterly period by means of the form provided by Consob on
its website.
The issuer must produce the relevant publication on a quarterly basis and send the communication to
Consob by certified email (PEC).
Conclusion
Consob’s interpretation of the guidance provided by ESMA in its Opinion is substantially in line with the
purpose of ensuring the uniform application of the principles laid down in Article 13 of the MAR with
Latham & Watkins May 6, 2019 | Client Alert Number 2496 | Page 6
respect to the choices made by other Member States that already comply with the new regulatory
framework. Moreover, Consob gave great importance to the specific features of the Italian domestic
market to facilitate (compared with Practice No. 1) the recourse to liquidity contracts by issuers listed on
the FITSE MIB index and by newly listed SMEs.
The indications arising from the use of New Practice No. 1 over the coming months will help demonstrate
whether market participants recognize the full worth of the measures introduced by Consob or whether
the level of detail, including with respect to the EU measures, will discourage the recourse to liquidity
contracts for the benefit of other instruments fulfilling similar purposes that had greater success (i.e.,
specialist contracts). Consob’s efforts to provide clarification in outlining the operational limits for
intermediaries are, however, remarkable.
Particularly useful are the guidelines the Authority provided in response to the market participants’
concerns about termination of Practice No. 2, which has been broadly used over the years by Italian-
listed companies to set up share warehouse positions, including for purposes not covered by MAR’s safe
harbors but equally deserving protection. At the same time, Consob showed remarkable commitment to
provide the market participants with guidelines to continue to operate while reducing the risk of abuse in
the absence of an accepted market practice.
Latham & Watkins May 6, 2019 | Client Alert Number 2496 | Page 7
If you have questions about this Client Alert, please contact one of the authors listed below or the Latham
lawyer with whom you normally consult:
Antonio Coletti [email protected] +39.02.3046.2061 Milan
Maria Cristina Storchi [email protected] +39.02.3046.2044 Milan
Isabella Porchia [email protected] +39.02.3046.2078 Milan
Marco Bonasso [email protected] +39.02.3046.2055 Milan
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Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the lawyer with whom you normally consult. A complete list of Latham’s Client Alerts can be found at www.lw.com. If you wish to update your contact details or customize the information you receive from Latham & Watkins, visit http://events.lw.com/reaction/subscriptionpage.html to subscribe to the firm’s global client mailings program.
Endnotes
1 Pursuant to Article 13(3), (4) and (5) of the MAR, NCAs are required to notify their intention to establish a new AMP to ESMA at
least three months before such AMP is intended to take effect. Such notification shall provide the details of the assessments
made by the NCA on the possibility of establishing the new market practice. Within two months following the receipt of the
notification, ESMA shall issue an opinion assessing the compatibility of the practice with the market abuse provisions. ESMA
shall also assess whether the establishment of the AMP would not threaten the market confidence in the Union’s financial
market. Where a NCA establishes an AMP contrary to the opinion of ESMA, it shall publish on its website within 24 hours of
establishing the AMP a notice setting out in full its reasons for doing so.
2 See Resolution No 16839 of March 19, 2009.
3 See Resolution No 18406 of December 13, 2012.
4 See Resolution No 20876 of April 3, 2019.
5 Pursuant to Article 13(11)(2) of the MAR.
6 Besides Consob, NCAs in France, Spain and Portugal notified ESMA of their intention to retain in force a number of AMPs on
liquidity contracts established prior to the entry into force of MAR.
7 ESMA’s Opinion sets out, among other things, that: (i) AMPs should provide for the liquidity contract to be entered into in a written
form, (ii) the person performing the liquidity contract should be a supervised firm providing investment services and executing
the contract as member of the relevant trading venue, (iii) AMPs should gradate between liquid and illiquid instruments (and, if
relevant, highly liquid instruments), (iv) AMPs should set forth trading conditions for the performance of liquidity contracts in
terms of price limits, volume limits, requirements to operate during tender phases without impacting the final price of the tender.
Latham & Watkins May 6, 2019 | Client Alert Number 2496 | Page 8
8 Following the disclosure of ESMA’s Opinion, the NCAs in France, Spain and Portugal aligned their respective market practices and
notified such practices to ESMA. Upon obtaining the favorable opinion of the European Authority, those AMPs entered into force
in the relevant Member States.
9 The scope of this provision is to avoid that liquidity contracts will turn into instruments to enhance financial instruments’ price
(instead of their liquidity). Moreover, trading of predetermined volumes of financial instruments at predetermined prices with
selected counterparties shall not be permitted.
10 See Paragraph 7 of New Practice No 1.
11 The 1% limit shall be calculated at the beginning of the day in which the activity is initiated and shall be updated upon each
significant variation of the issued financial instruments.
12 France adopted the same reference timeframe.
13 For example, to suspend the financial instrument from trading or admitting it to trade on a different market segment characterized
by a lower liquidity.
14 See Paragraph 14.
15 In order to clarity how such mechanism operates, Consob provided the following example in its consultation document dated
September 21, 2018: “if, therefore, the intermediary carries out purchase transactions on illiquid instruments amounting to 20%
of the average trades, such intermediary may not carry out sale transactions in excess of 5% of that same average value;
whereas, in accordance with current practice (editor’s note: i.e., Practice No 1), it may reach 25%â€.
16 See Paragraphs 17-bis and 18-bis.
