Date: 18/02/2019

ESMA70-146-19

OPINION OF THE EUROPEAN SECURITIES AND MARKETS AUTHORITY

of 18 February 2019

on a proposed emergency measure by BaFin under Section 1 of Chapter V of

In accordance with Article 44(1) of Regulation (EU) No 1095/2010, the Board of Supervisors
has adopted the following opinion:

I. Legal basis

1. According to Article 27(2) of Regulation (EU) No 236/2012 of the European Parliament and
of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps 1
(the Regulation), the European Securities and Markets Authority (ESMA) shall within 24
hours of the notification made by a competent authority under Article 26 of that Regulation,
issue an opinion on whether it considers the measure or proposed measure is necessary
to address the exceptional circumstances.

2. ESMA’s competence to deliver an opinion is based on Article 29(1) (a) of Regulation (EU)
No 1095/2010 (ESMA Regulation). In accordance with Article 44(1) of the ESMA
Regulation the Board of Supervisors has adopted this opinion.

II. Background

3. In accordance with Article 26 of Regulation (EU) No 236/2012, the Bundesanstalt für

4. The concerned emergency measure bans opening or increasing net short positions on
shares issued by Wirecard AG (ISIN DE0007472060, hereinafter ‘Wirecard’), either directly
or through related instruments relevant for the calculation of the net short position
determined in Annex I, part 1, Articles 5 and 6 of Commission Delegated Regulation (EU)

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OJ L 86, 24.3.2012, p. 1–24.
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 No 918/2012 and irrespectively of the trading venue or market in which the transactions
leading to those positions are conducted.

5. The measure applies to any natural or legal person domiciled or established within the
Union or in a third country.

6. The proposed measure will not apply to trading in index-related instruments. Furthermore,
BaFin specified that market making activities are exempt from the restrictive measure.

7. BaFin indicates in their notification that convertible bonds and subscription rights in shares
which are not yet issued should not be included in the calculation of the short or long side
for the purposes of calculating the net short positions, as foreseen in Article 7(b) of
Commission Delegated Regulation 918/2012.

8. The proposed measure is expected to enter into force on 18 February 2019 at 06:00 am
CET and to be applicable until close of day on 18 April 2019. The proposed measure may
be lifted before the deadline or extended depending on the market conditions.

9. BaFin justifies the proposed measure by the existence of specific adverse situations or
circumstances that constitute a serious threat to market confidence in appropriate price
determination in Germany.

10. Wirecard has experienced severe share price falls in the preceding two weeks: from 30
January 2019 to 15 February 2019, the price of the shares dropped from €167,00 (opening
on 30 January) to €99,90 (close on 15 February), reducing the market cap by 40 percent.
In particular, the prices of Wirecard shares fell after press reports about alleged fraud
committed by several employees of Wirecard subsidiaries in Singapore had been
published.

11. The negative press reports coincided with increased net short positions and with a
corresponding high level of price volatility of Wirecard’s shares.

12. Wirecard is a payment service provider with an international presence, headquartered near
Munich. It is admitted to trading on the Frankfurt Stock Exchange and is included in the
DAX 30, the most relevant German index that tracks the price development of the 30
largest and most actively traded German equities. Wirecard was included in the index on
24 September 2018. Its market capitalisation on 15 February 2019 was €12.6 billion with
123,5 million shares issued. The turnover was €897 million in the first half of 2018 and
€1.489 million in 2017.

13. Wirecard offers its customers electronic payment transaction and risk management
solutions, as well as the issuing and processing of physical and virtual cards, it has
connections to more than 200 international payment networks (banks, payment solutions,
card networks), which results in 34,000 customers from various industries, and offers its
services in over 100 transaction currencies. One of its subsidiaries is Wirecard Bank AG,

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 which holds a German banking license. Wirecard is also the parent company of Wirecard
Card Solutions Limited, a firm that received permission by the UK Financial Conduct
Authority to issue electronic money (e-money) and provide payment services. In March
2017, Wirecard acquired Citi Prepaid Card Services and created Wirecard North America,
thereby becoming active in the US market.

14. BaFin reports that the price movements mentioned above need to be considered in the
context of past experiences in German markets, where several German issuers have been
the targets of increased short-selling activity, which in BaFin’s opinion endangered market
integrity and the trust of investors in an appropriate and efficient price determination.

15. BaFin reports that Wirecard specifically experienced this in 2008 and 2016, which led
BaFin and the public prosecutor’s office to investigate whether market manipulation took
place. The public prosecution office has recently applied at the court for a penalty order
because of market manipulation in the context of the event in 2016.

16. The recent events once again prompted the public prosecutor of Munich to launch an
investigation regarding possible market manipulation. The public prosecution office also
confirmed that currently no investigation has been opened against Wirecard.

17. BaFin indicates that the current situation may lead to reduced confidence of investors
active in the German market for the investors active in the German market, as reliable price
determination may no longer be taken for granted. An additional problem identified by
BaFin is the potential contagion risk, with the lack of confidence regarding an appropriate
price determination extending to other issuers, including DAX issuers and financial
institutions.

III. Opinion

18. ESMA considered the information provided by BaFin and is adopting the following opinion
on the notified measure, on the basis of Article 27(2) of the Regulation:

On the adverse events or developments

19. ESMA considers that the circumstances described above are adverse events or
developments which constitute a serious threat to market confidence in Germany, as
described in Article 20(1)(a) of Regulation (EU) No 236/ 2012 and as further specified in
Article 24 of the Commission Delegated Regulation No 918/ 2012.

20. First, as indicated above, Wirecard is among the 30 largest and most actively traded
German equities, with connections to more than 200 international payment networks.
Moreover, a subsidiary of Wirecard, Wirecard Bank AG, holds a German banking license,
and another subsidiary, Wirecard Card Solutions Limited, received permission by the UK
Financial Conduct Authority to issue electronic money (e-money) and provide payment
services.

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21. Wirecard was already the target of increased short selling activities in 2008 and 2016.

22. In particular, a 40% decrease in the Wirecard share price occurred between 30 January
and 15 February 2019. In this time-period, the share price movements followed a pattern
of suddenly dropping a the few minutes after the news reports in the media. Concomitantly
to the news reports (taking place on 30 January, 1, 7 and 8 February) BaFin observed a
steep increase in the net short positions in Wirecard shares, particularly evident from 7
February onwards.

23. ESMA agrees with BaFin that the increase in the volatility observed in Wirecard shares is
noteworthy. In particular2:

a. In the three-months period preceding 30 January 2019, the historical volatility was
quite stable, with a decrease of approximately 15 points at the beginning of January
2019 and reaching the minimum value of 49.13% on 29 January 2019. The
historical volatility considerably increased from 30 January to 14 February 2019. In
particular, it reached 57.45% on 30 January, decreased to 55.73% on 31 January,
reached 82.09% on 1 February, 93.94% on 7 February, 97.52% on 8 February and
99.07% on 14 February 2019.

b. As regards the implied volatility, it closely follows the pattern of the historical one
until 1 February 2019: it was quite stable in the three months preceding 30 January
2019, reaching the minimum value of 38.66% on 22 January 2019 and 40.81% on
29 January 2019. The implied volatility considerably increased from 30 January to
14 February 2019. In particular, it was 46.36% on 30 January, reached 80.20% on
1 February, decreased in the following days, reaching 61.26% on 5 February and
then increased again, reaching 77.96% on 7 February, 100.15% on 8 February and
then decreased in the coming days, reaching 81.50% on 14 February 2019.

24. ESMA believes that the price drop, the sharp increase in the net short positions and the
high volatility observed in the prices of Wirecard shares constitute a threat to the orderly
markets and to market confidence if those circumstances have not been caused by the
release of fundamental information related to Wirecard. ESMA also notes that BaFin
reports a risk of contagion to other shares of the DAX.

25. The possibility that the large short positions and the severe declines in price observed over
the last weeks might correspond to manipulative practices constitutes in ESMA´s view a
clearly adverse scenario for market confidence, as it risks undermining investors’ trust in
the price formation mechanism.

26. ESMA also notes that the coincidence in time of the building up of significant net short
positions, the publication of the news reports and the abrupt price declines described by

2
Source: Bloomberg data.
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 BaFin deserve further investigations, in particular since similar situations took place in 2008
and 2016, that were subject to scrutiny by BaFin and German public prosecutors.

On the appropriateness, necessity and proportionality of the measure

27. ESMA considers that the emergency measure under Article 20(2)(a) and (b) of Regulation
(EU) No 236/2012 and Article 24(1)(c) of Commission Delegated Regulation 918/2012 in
relation to Wirecard shares is appropriate, necessary and proportionate to address the
existing threat to market confidence in the German market.

28. Wirecard has experienced severe share price falls (40%) and a sharp increase in net short
positions in its shares over the last two weeks. Whereas there have been a number of
press reports over that period that might justify increasing selling pressure on the Wirecard
shares and the opening and increase of net short positions, the circumstances identified
(namely, the short timeframe within which the building of net short positions, the publication
of the different press reports and the corresponding price declines took place and the
concurrence of similar events back in 2008 and 2016) raise reasonable questions about
the possibility of a coordinated action aimed at manipulating the market in Wirecard’s
shares.

29. Given the circumstances highlighted by BaFin and explained in the background section,
substantial selling pressure and unusual volatility in the price of shares issued by Wirecard
could continue to occur, as market participants may be pushed to take out new short
positions in order to profit from further price falls, which may in turn exacerbate the falls
experienced in past weeks.

30. ESMA notes that in case such downward spirals continue there might be further
implications both for the level of the confidence in the German market and potentially for
the wider financial system.

31. As regards the overall confidence in the price formation process in German market, ESMA
agrees that it is necessary to address the intensified short-selling activity in Wirecard
shares and the surrounding events, in particular since similar events have been identified
in the past, in order to limit the risk of possible contagion to other issuers.

32. The potential impact on the financial system are based on Wirecard’s status as a payment
service provider with a network of connections to customers in multiple economic sectors,
among them the banking sector. Moreover, ESMA notes that Wirecard operates through
subsidiaries in the US market (Wirecard North America), Brazil (Wirecard Brasil) and Asia
(Wirecard Asia Pte Ltd.), and is the parent company of Wirecard Card Solutions Limited, a
firm that received permission by the UK Financial Conduct Authority to issue electronic
money (e-money) and provide payment services. ESMA notes as well that BaFin has
expressed concerns about the possibility of similar practices (in case the suspicions of
market manipulation were confirmed) extending to other DAX 30 issuers some of which
are financial institutions and market infrastructure providers.
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33. ESMA considers that the measure is necessary because it appears to be the least stringent
of all the measures that could adequately address the threat to confidence in the German
market. A temporary restriction on short selling according to Article 23 of the Regulation
(EU) No 236/2012 would not address the threat to market confidence as it would remain
applicable for a few days only (i.e. a maximum of three trading sessions if renewed). A
mere prohibition of short sales would not cover activities concerning derivatives leading to
the build-up of net short positions.

34. The measure will not in ESMA’s view have a detrimental effect on the financial markets
that is disproportionate to its benefit. The reason is that the measure would mitigate and
prevent substantial selling pressures and the unusual volatility causing a significant
downward spirals in Wirecard’s share prices having an impact on overall market confidence
in the German market at the expense of only limiting the ability of market participants to
enter into new short positions or increase existing net short positions for a certain period
of time.

35. ESMA considers that BaFin also limits the impact of the ban, and any potential detrimental
effects on financial markets by not extending the prohibition to index-related instruments
and to market making activities, and by allowing covered short sales that do not increase
a market participant’s net short position.

On the duration of the measure

36. ESMA considers that the two months duration of the measure, instead of the maximum
period of three months allowed by the Regulation, is adequate, also considering that BaFin
may lift the measure ahead of its expiry, taking into account market conditions.

37. In light of the above, ESMA recommends BaFin to closely monitor the market conditions
and to consider lifting the measure before the initial deadline if the situation so permits, to
ensure that the restrictions remain in place for the shortest possible time.

This opinion will be published on ESMA’s website.

Done at Paris, 18 February 2019

For the Board of Supervisors

Steven Maijoor

Chair