Germany may extend ban on short selling

Germany may widen a ban on speculative trades in financial stocks to cover all shares, a draft finance ministry document showed yesterday (25 May).

The draft said a raft of measures aimed at stabilising financial markets would include a "ban on naked short selling of shares, including derivatives referring thereto."

The document did not state whether the proposals were aimed at all shares or specific companies, and finance ministry officials were not immediately available for comment.

Government sources told Reuters that it was intended to apply to all shares traded in Germany.

A week ago, Germany caught markets and its European Union partners unawares when the government's financial watchdog announced a ban on naked short-selling of shares of Germany's top 10 financial institutions, and of euro government bonds and related credit default swaps.

Tuesday's news, by contrast, had little market impact, and traders and economists questioned the efficacy of such a ban.

"This is an isolated step in a globalised world," said Christoph Schmidt, the head of Germany's RWI economics institute. "Hence it could simply have no impact."

The finance ministry draft did not list specific shares to be affected.

But it said there was also a proposal to introduce a "transparency system for naked short-selling positions," and the ban would also cover euro currency derivatives not used for hedging.

Naked short selling involves selling securities without owning or borrowing the underlying assets in the hope of buying them back at a lower price.

In contrast to the sharp fall in the euro and shares prompted by last week's announcement, a share trader in Frankfurt said the news was having a limited impact. "As long as Germany is doing this alone, I really see it as very questionable. The G20 countries would need to act together, but there would always be a chance to find a hole," he said. "Too much regulation is also not going to help."

Regulatory activity is picking up internationally, which German financial watchdog Bafin cited on Tuesday as a reason for postponing its annual news conference for a second time. This one had been scheduled for 1 June, but Bafin cancelled it due to "many international meetings organised at short notice".

The head of Spain's stock market regulator CNMV, Julio Segura, said Germany's crackdown on short selling was ill-judged.

"The regulatory changes […] encouraged by the German government are heading in the wrong direction," Segura said during an address to parliament.

"If what we are trying to do is just ban or hamper every kind of bet on the downside […] then we would have to ban selling debt futures, or call options, which would be ridiculous," he added.

A second trader in Hanover said: "As long as other European countries don't go along, such a ban is really meaningless."

(EURACTIV with Reuters.)

On 19 May, Germany became the first European country to ban naked short selling of shares in the country's 10 most important financial institutions, marking the latest step in Europe's crackdown against speculators (EURACTIV 19/05/10).

Short selling – betting on falls in value of borrowed securities, commodities or currencies - has been in the political limelight since the crash in financial markets showed that aggressive short selling had weakened investor, banker and lenders' trust in assets that were being shorted.

The European Commission said on 9 March it would 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 EU executive has been working on pan-European disclosure rules for short selling, with a consultation vaguely scheduled for the summer of 2010.

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