Risk warnings

In order to appreciate the risk of an investment/disinvestment in equities, the following have to be taken into account:
    1) the variability of the price;
    2) its liquidity;
    3) the currency in which it is denominated;
    4) other factors of general risk.

Price variability
The price of a share depends on numerous factors. Buying equity securities means becoming a member of the issuer company and participating fully in its economic risk; investors in shares are entitled to receive the dividend distributed each year out of the profits made during the reference period as decided by the shareholders' meeting. The shareholders' meeting may, however, decide not to distribute any dividend. Other things being equal, an equity security is riskier than a debt security because the remuneration payable to its holder is tied more closely to the profitability of the issuer. The holder of debt securities, by contrast, risks not being remunerated only if the issuer is in a state of financial distress. Furthermore, in the event of bankruptcy of the issuer, holders of debt securities may participate with the other creditors in the allotment of the proceeds from the sale of the company's assets -- although such allotment usually takes place after a long delay -- whereas holders of equity securities are virtually certain not to be repaid any of their 

Specific risk and generic risk
The risk for equity can be ideally divided into two components: specific risk and generic (or systematic) risk. Specific risk depends on the characteristics of the issuer and can be substantially reduced by investors spreading their investments over securities issued by different issuers (portfolio diversification), whereas systematic risk represents the portion of the variability in the price of a security that depends on the fluctuations of the market and cannot be eliminated through diversification. Systematic risk on equity securities traded in an organized market stems from the variations in the market as a whole, which can be identified with the movements in the market index.

Issuer risk
For investments in financial instruments it is essential to evaluate issuers' financial soundness and business prospects, taking account of the characteristics of the sectors in which they operate.
It is necessary to consider that the prices of equity securities always reflect an average of market participants' expectations regarding their issuers' earnings prospects.

Liquidity
The liquidity of an equity consists in the possibility of converting it promptly into cash without losing value. It depends in the first place on the characteristics of the market in which it is traded. As a rule, other things being equal, securities traded in organized markets are more liquid than securities not traded in such markets. This is because the demand for and supply of equities is largely channeled into such markets, so that the prices recorded in them are more reliable indicators of financial instruments' effective value.
Nevertheless, it must be borne in mind that disposing of equities traded in organized markets which are hard to access because they are located in distant countries or for other reasons may make it difficult for investors to liquidate their investments and force them to incur additional costs. 

Foreign currency
Where equities are denominated in currencies different from that of investors' reference currency, in order to measure the overall risk of investments, investors have to take account of the volatility of the exchange rate between the reference currency and the foreign currency the investment is denominated in.
Investors need to consider that the exchange rates with the currencies of many countries, especially those of the developing countries, are highly volatile, and that the behaviour of exchange rates may influence the overall result of the investment.

Other factors of general risk

Commissions and other charges
Before starting to invest, clients should obtain detailed information regarding all the commissions, expenses and other charges that will be payable to the SIM. Such information must in any case be stated in the investment service contractsignes between the client and the SIM. Clients must always remember that such charges will be subtracted from any gains on transactions whereas they will be added to any losses.

Transactions carried out in markets located in other jurisdictions
Transactions carried out in markets located abroad, including transactions in financial instruments that are also traded in domestic markets, may expose clients to additional risks. The regulation of such markets may provide investors with fewer guarantees and less protection. Before carrying out any transaction in such markets, clients should find out about the rules governing the transactions. 
They should also bear in mind that, in such cases, the supervisory authorities will not be able to ensure compliance with the rules in force in the jurisdiction where the transactions are carried out. Clients should therefore find out about the rules in force in such markets and the actions that can be taken with respect to such transactions.

Electronic trade support systems
Most electronic and call-auction trading systems are supported by computerized systems for order routing and trade checking, recording and clearing. Like all automated procedures, these systems are subject to stoppages and malfunctioning.
The possibility for clients to be indemnified for losses deriving directly or indirectly from the abovementioned events could be impaired by liability limitations established by system providers or markets. Clients should ask the SIM about any such limitations of liability bearing on the transactions they are preparing to carry out.

Electronic trading systems
There may be differences between electronic trading systems. Orders to be executed in markets that use electronic trading systems may not be executed in accordance with clients’ instructions or may remain unexecuted where a trading system suffers a malfunctioning or stoppage due to its hardware or software.

Transactions executed outside organized markets
The SIM may execute transactions outside organized markets. In transactions for execution outside organized markets it may prove difficult or impossible to liquidate a financial instrument or measure its effective value and the effective exposure to risk, especially if the instrument is not traded in any organized market. For these reasons such transactions involve higher risks. Before engaging in such activities clients should collect all the relevant information about the transactions, the applicable rules and the consequent risks.

These are securities with predetermined earning (government bonds, bonds issued by private banks or other issuers). Buying debt securities means becoming a lender to the company or entity that issued them and being entitled to receive the periodic interest payments stipulated in the issue rules and to repayment of the principal at maturity.

Main risks connected to debt securities are:

Price risk
The holder of debt securities risks not being remunerated only if the issuer is in a state of financial distress. In the event of bankruptcy of the issuer, holders of debt securities may participate with the other creditors in the allotment of the proceeds from the sale of the company's assets - although such allotment usually takes place after a long delay - whereas holders of equity securities are virtually certain not to be repaid any of their investment.

Specific risk and generic risk
Specific risk depends on the characteristics of the issuer and can be substantially reduced by investors spreading their investments over securities issued by different issuers (portfolio diversification), whereas systematic risk represents the portion of the variability in the price of a security that depends on the fluctuations of the market and cannot be eliminated through diversification.
Systematic risk on debt securities stems from fluctuations of market interest rates. The longer the residual life of securities, the greater the repercussions of such fluctuations will be on their prices (and thus on their yields). The residual life of a security at a given date is the length of time that must elapse from that date until its redemption.

Issuer risk
For investments in financial instruments it is essential to evaluate issuers' financial soundness and business prospects, taking account of the characteristics of the sectors in which they operate.
The risk that issuer companies or financial institutions may not be able to pay interest or repay principal is reflected in the rate of interest investors receive. The greater the perceived riskiness of the issuer, the higher the rate of interest the issuer will have to pay.
In order to evaluate the appropriateness of the interest rate paid by a security, one needs to bear in mind the interest rates paid by the issuers that are considered to be the least risky and in particular the yield offered by government securities of equal maturity.

Interest rate risk
Investors need to consider that the effective rate of interest adjusts continuously to market conditions as a result of movements in the prices of the securities. The yield of debt securities will approach that incorporated in the security at the time of purchase only if investors hold them to maturity.
If investors should have to dispose of their investments before the security matures, the effective yield may be different from that offered by the security at the time it was purchased.
In particular, for securities for which the interest to be paid is predetermined and not modifiable during the life of the loan (fixed-rate securities), the longer the residual maturity, the greater the variability of the security's price with respect to changes in market interest rates. 
For example, in the case of a zero-coupon security - a fixed-rate security that provides for payment of interest in a lump sum at the end of the period - with a residual maturity of 10 years and a yield of 10% per annum, an increase of 1 percentage point in market rates will cause the price of the security to fall by 8.6%.
Thus, in order to assess the appropriateness of an investment in debt securities, it is important for investors to consider whether, and at what stage, they may need to disinvest.

Foreign currency risk
Where securities are denominated in currencies different from that of investors' reference currency, tipically euro for Italian investors, in order to measure the overall risk of investments, clients have to take account of the volatility of the exchange rate between the reference currency and the foreign currency the investment is denominated in.
Investors need to consider that the exchange rates with the currencies of many countries, especially those of the developing countries, are highly volatile, and that the behaviour of exchange rates may influence the overall result of the investment.

Liquidity risk
It depends on the characteristics of the market in which it is traded. As a rule, other things being equal, securities traded in organized markets are more liquid than securities not traded in such markets. This is because the demand for and supply of equities is largely channeled into such markets, so that the prices recorded in them are more reliable indicators of financial instruments' effective value.
Nevertheless, it must be borne in mind that disposing of securities traded in organized markets which are hard to access because they are located in distant countries or for other reasons may make it difficult for investors to liquidate their investments and force them to incur additional costs. 

Structured Notes (debts securities with a derivative component)
Structured notes are structured product involving derivatives. These instruments differ from normal debt securities in the calculation of the remuneration, both for periodical payments (coupons) and for repayment at maturity. In fact the client is entitled to receive both a fixed and a variable remuneration.
Upon maturity you may receive the underlying securities which may be worth substantially less than the principal amount and worst still, lose the entire principal. If you dispose of the product prior to maturity or if it is early redeemed, you may receive a sum less than the amount invested. Depending on whether the product is principal protected in nature, it may only be principal protected if it is held till the maturity date.
Variable remuneration is determined in a very complex way and it may be linked to the market value of underlying instruments (ex. a basket of shares, an index, a basket of funds) or subject to an event linked to the underlying instruments (ex. the level of the spread reached between two different interest rates or the level of the price reached by an index or a currency).
Nevertheless, during the life of the instrument price movements may be wider than those of a normal debt security, with heavy losses risk in case of disinvestment before the maturity date. The main risk is therefore the remuneration at maturity.
In this category can be included convertible bonds, which attribute to investors the faculty to convert bonds into shares. Therefore evaluation of the risks should also take into account those specific to the shares.  

ETFs are investment funds, traded like shares, which hold assets such as shares, commodities or bonds. They normally closely track the performance of a financial index, and as such, their value can go down as well as up and investors may get back less than they invested. Some ETFs rely on complex techniques, or hold riskier underlying assets, to achieve their objectives. Therefore investors should always read the documentation provided by the issuer to ensure to fully understand the risks they are taking on before they invest. When purchasing ETFs investors will be exposed to similar risks as detailed in respect of equity securities and collective investment schemes.

ETC are securities without expiry, issued by a vehicle company that invests in commodities and in derivatives on commodities. ETC price is linked directly or indirectly to that of the underlying. Exactly as ETF price is linked to the price of the underlying index. ETC are like derivatives, listed on a stock exchange, whose price reflect the price of the underlying commodity. For this reason the main risks are the market risk of the commodity and the issuer risk.

A warrant is a time-limited right to subscribe for shares, debentures, loan stock or government securities and is exercisable against the original issuer of the underlying securities. A relatively small movement in the price of the underlying security could result in a disproportionately large movement, unfavourable or favourable, in the price of the warrant. The prices of warrants can therefore be volatile.
The right to subscribe for any of the underlying which a warrant confers, is invariably limited in time, with the consequence that if the investor fails to exercise this right within the pre-determined time-scale, the investment becomes worthless.
If subscription rights are exercised, the warrant holder may be required to pay to the issuer additional sums (which may be at or near the value of the underlying assets). Exercise of the warrant will give the warrant holder all the rights and risks of ownership of the underlying investment product.
A warrant is potentially subject to all of the major risk types.
You should not buy a warrant unless you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges.
Some other instruments are also called warrants but are actually options (for example, a right to acquire securities which is exercisable against someone other than the original issuer of the securities, often called a covered warrant). 
Warrants are different from options because they are securities (not contracts) and because they have a longer life and they do not have a margin call system.
A covered warrant is an evolution of the warrant itself. Main differences are: (i) underlying assets may be whatever product for which it is possible to have an official price (ex. commodities, indexes, interest rates, currencies,…),
(ii) covered warrant are not issued by the same issuer of the underlying asset,
(iii) a warrant gives the right to receive the underlying share while the covered warrant give the right to cash a percentage difference between the strike price and the price of the underlying asset. 

Certificates (also known simply as certificates) are securities that enable investors to benefit from the performance of an underlying instrument. Underlying instruments can be equities or indices, but also commodities, bonds or other securities. However, certificates may also be linked to themes or strategies, with investment in several equities or underlying instruments. These may be selected by sector or by other criteria. Certificates enable investors to speculate not only on rising or falling prices, but also to benefit from various stock market trends. Investment Certificates are instruments without leverage. They are appropriate for investors aiming to diversify their portfolio with complex but conservative strategies and medium-long term objectives. Leverage certificates are very similar to futures. The investor participates with a leverage to the price changes. Only investors with a very good knowledge of the market and the specific instrument, aiming to speculate and with short term investment objectives should consider these instruments

OTC derivatives (over-the-counter or off-the-regulated markets) are potentially taylor-made derivatives. They are derivative contracts traded bilaterally and outside regulated markets. Unlike listed derivatives, which have standard features, OTC derivatives are fully customizable based on the specific needs of customers. The instrument is characterized as illiquid, given its nature and it may not be possible to divest in advance. The actual risk may vary significantly if the position is closed early. You may find it difficult to close your position before the deadline, or you may have to sell at a price that significantly reduces the result of the investment. Other relevant risks:

• Credit and counterparty risk: Trading OTC derivatives involves increased counterparty risk due to the lack of a clearing house. This results in a higher risk for each OTC contract linked to the possible default of the counterparty.
• Market risk: The market risk inherent in OTC derivatives does not differ from that inherent in a regulated market. It consists of possible losses resulting from the general performance of the financial markets.
• Reputational risk: In the absence of a market, the counterparties find themselves negotiating directly, consequently increasing the risk of legal disputes. This could undermine the reputation of the parties involved.

Decrees 180 and 181 of November 16, 2015 transposing directive 2014/59/EU have introduced limitations to public intervention supporting a failing intermediary.
In case “crisis” management procedures are started, securities (i) subject to capital instruments reduction or conversion procedures or (ii) additional securities (as well as derivatives contracts) issued by intermediaries (ex. banks, investment companies), - as a result of their different nature - might be subject to (regardless of their date of issue):

• reduction of conversion of capital instruments, starting from November 16, 2015, the date in which the above-mentioned legislative decrees enter into force, and/or,
• bail-in, after January 1, 2016.

About bail-in
Applying the “Bail-in” means that in the event of a failing bank, its shareholders and creditors might be involved to absorb losses, thus avoiding that the cost of saving the institution is borne by the State and subsequently by Italian citizens. Households and businesses depositing their savings with a bank also become its creditors and might therefore be involved according to a specific hierarchy.

Bail-in hierarchy
Those holding riskier financial instruments support any losses or conversions into shares before others. The interests of the bank “owners”, i.e. its shareholders, are sacrificed first – by reducing or bringing down to zero the value of their shares. Only after using up the means of the riskiest category is the following category taken into account and then the other creditors are considered. Those holding bank bonds could have their credit converted into shares and/or reduced (fully or only partially), but only if the means of shareholders and holders of subordinated (i.e. riskier) debt instruments have turned out to be insufficient to cover for losses and recapitalise the bank and provided that the authority does not decide to exclude certain credits at its discretion in order to avoid contagion and preserve financial stability.
Shareholders and creditors shall in no case incur in higher losses than they would bear in case the bank was wound up through normal insolvency proceedings. 
The order of priority for the bail-in is the following: (i) shareholders; (ii) holders of other non-equity securities; (iii) other subordinated creditors; (iv) ordinary creditors; (v) natural persons and small and medium-sized enterprises holding deposits for the amount exceeding 100,000.00 €; (vi) the deposit guarantee fund, contributing to the bail in in place of covered depositors in insolvency.

The Bail-in does not apply to the following situations
All deposits up to 100,000.00 € can never be subject to “Bail-in”. Unsecured liabilities and payables to employees, suppliers, tax authorities and social security institutions are also safeguarded.

Powers of the Bank of Italy
The Bank of Italy holds specific resolution powers on the intermediary subject to Bail-in. For example, it can reduce, including to reduce to zero, the principal amount of the liabilities of the institution under resolution, the cancellation of the debt securities issued, it can change the maturity of the debt securities and the conversion of liabilities into shares.

For an unabridged version of the bail-in document go to:
http://www.bancaditalia.it/media/approfondimenti/documenti/changes_in_the_way_bnking_crises_are_managed.pdf?language_id=1