Germany first to introduce ban on naked short-selling


Germany today (19 May) became the first European country to ban naked short-selling in shares of the country's 10 most important financial institutions, marking the latest step in Europe's crackdown against speculators.

A spokesman for the German Finance Ministry said on Tuesday (18 May) that the ban on naked short-selling will also apply to credit default swaps (CDS) on euro government bonds, which some policymakers believe has fuelled the Greek debt crisis.

"The ban takes effect at midnight," the spokesman said.

The 10 financial institutions covered by the ban on naked short-selling include Allianz, Commerzbank, Deutsche Bank, Deutsche Postbank, Generali Deutschland and Munich Re.

Chancellor Angela Merkel is expected to formally announce the measure today (19 May). The ban will initially apply for one year.

In naked short-selling, a trader sells a stock or a bond – betting that it will fall – without owning it or ensuring that it can be borrowed, as would be necessary in a conventional short sale.

A naked CDS contract is typically a bet taken by investment firms like hedge funds that the bond's issuer will end up in trouble.

The move represents the latest attempt at shielding financial institutions from speculative attacks after the global financial crisis led European governments to inject hundreds of billions of euros to save ailing banks.

Germany becomes EU pioneer

In recent months, the German government has been working on a new law aimed at increasing protection for investors and improving the functioning of capital markets.

The draft rules, a response to the financial crisis, were expected to be approved by Merkel's cabinet by mid-July and become law after passing through parliament later this year.

Coalition sources said German Finance Minister Wolfgang Schäuble was enacting the ban with an executive order.

Under plans sketched out earlier this year, naked short-selling would be forbidden by law as a risk to the stability of financial markets. An electronic system for reporting and publishing short sale positions would be set up, with sanctions to ensure compliance by short sellers.

The German ban follows calls by Greece, Germany, France and Luxembourg in March, which called for speedy action to limit or even ban naked credit default swap (CDS) contracts (EURACTIV 11/03/10).

European Union finance ministers discussed possible action in the CDS market on 16 March after the bloc's executive said it would consider a ban on naked selling.

Britain, which is home to the vast majority of Europe's hedge funds, has expressed doubts about the effectiveness of the measure. 

"We need to think about it and think about it clearly but, given that, it is not the key driver of what has gone on with perceptions of Greek risk," said Britain's Financial Services Authority chairman, Adair Turner, in March.


Tim Ghriskey, chief investment officer at Solaris Asset Management in New York, said he had doubts about the effectiveness of the German move.

"The only problem is investors can go elsewhere to short sell, they can go anywhere, so unless it becomes a global restriction it's really without teeth as far as we can tell," he said. "I guess it makes a little bit more difficult but where there's a will there's a way."

Lawrence Glazer, managing partner of Mayflower Advisors in Boston, said: "The motive is probably more towards limiting volatility and trying to prevent some sort of a raid on debt, or equities as well. We have seen this before, but whenever you see any type of regulatory changes it is always worth paying attention to."

Robert Savage, chief executive officer of, added: "This is not a desperate measure. It's just another tool European policymakers are making use of trying to contain this crisis. The perception that naked-short selling is a destabilising force is not new in Europe but lately those concerns have been compounded by fears that their banks are being attacked and they are moving trying to protect banks' share prices."

Negative market reaction

Traders initially reacted with alarm. Shares fell sharply across Europe this morning (19 May) on the news and the euro hit a four-year low against the dollar.

The common European currency fell to below $1.215 before recovering to $1.2202.

The German move prompted some Japanese brokers to avoid selling European debt during Asian trading hours on Wednesday. "For today the situation is that it's hard for us to take orders on European bonds," said Yasutoshi Nagai, chief economist at Daiwa Securities Capital Markets. 

The day before, bund futures had risen 80 ticks, extending gains in late European trade on Tuesday after Germany said it would ban naked short-selling on eurozone government bonds and credit default swaps.

The June Bund future rose as high as 127.40 on the news, having settled at 126.86.

US Treasuries extended gains on the news. The 30-year long bond was last up 1-7/32 in price on the day, yielding 4.29%.

(EURACTIV with Reuters.)

The German initiative was described as "almost comic" by Eurointelligence, a euro commentary website run by associate FT editor Wolfgang Münchau. "The political idea is to show one's determination against the greedy speculators who are apparently destabilising the euro," the site writes.

"The problem, however, is that there is hardly any CDS trading in Germany. Most of it is in the UK." 

According to Münchau, "it is inconceivable" that the new Tory-Liberal government in Britain will support the ban, although the idea has the support of Lord Turner, the financial regulator.

Looking ahead, the FT associate editor believes there is more to come as Merkel is pressured by her party into accepting a new tax on the banking system.

EU Internal Market Commissioner Michel Barnier said he "fully understands" German concerns about the impact of CDS in the current context of volatile markets.

But he seemed to disapprove of Germany's unilateral move, saying a European response would have been preferable. "It is important that member states act together and that we design a European regime to avoid regulatory arbitrage and fragmentation both within the EU and globally," Barnier said in a statement issued late in the morning on Wednesday.

Barnier added that the issue of naked short-selling had been his "top priority" ever since he took his job in the Commission, saying he put up a task force to examine the issue.

"In particular we are focusing on the functioning of the credit default swap market and the relation to the sovereign debt obligation," Barnier said.

The Commission will publish a consultative document in the coming weeks covering draft rules on short selling. These could include disclosure requirements on net short positions or restricting naked short selling, Barnier explained.

New emergency powers could also be given to regulators to intervene on sovereign bond markets, he added.

A formal proposal should come out of the EU executive in October, the commissioner announced.

The European Commission said on 9 March it will consider banning 'naked' selling of derivatives contracts and Greece said curbs on speculators would be examined by the G20 powers (EURACTIV 10/03/10).

The measure was prompted by the dire economic situation of EU member Greece.

Commission President José Manuel Barroso said the EU executive would like the G20 to discuss speculation in credit default swaps (CDS), a form of insurance against default.

Some EU politicians accuse speculators of using these complex financial instruments to bet on a Greek bond default.

So-called 'naked' selling involves selling a CDS to a buyer who does not hold the underlying sovereign bond. A naked CDS contract is typically a bet taken by investment firms like hedge funds that the bond's issuer will end up in trouble.

  • June: Commission to launch consultation on draft rules to regulate short-selling in Europe.
  • October: Commission expected to table proposals to regulate naked short-selling across EU-27.

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