Factbox: Germany announces short selling ban

(BestGrowthStock) – Germany has announced a ban with immediate effect on naked short selling of euro zone government bonds and in shares of the country’s 10 leading financial institutions. It also banned naked transactions of credit default swaps (CDS) linked to euro government debt.

Here are some details on the ban and its potential reach:

WHAT IS NEW ABOUT THE BAN?

There are already curbs on short selling of shares in several other European countries, but Germany is the first to introduce a ban on short-selling of euro zone government bonds and a ban on transactions of CDS linked to euro government debt.

WHY DID GERMANY INTRODUCE THE BAN?

The government’s financial watchdog, BaFin, said the bans were “due to the extraordinary volatility in government bonds in the euro zone.” It said massive short selling could have endangered the stability of the financial system.

HOW LONG WILL THE BAN RUN?

The bans took effect from midnight and will run through March 31, 2011, Bafin said.

WHAT CHALLENGES DOES THE NEW BAN FACE?

It was not clear how Germany could enforce the ban effectively in the debt and CDS markets, which stretch across national borders. Most European trade in CDS takes place in London.

Germany’s ban will not apply to branches of German institutions outside the country, Britain’s top financial regulator said.

WHICH FINANCIAL INSTITUTIONS WILL BE AFFECTED BY THE CURB ON

SHORT SELLING OF SHARES?

Bafin has listed the 10 financial institutions whose shares are covered by the ban: Allianz, Commerzbank, Deutsche Bank, Muenchener Rueck, Deutsche Boerse, Deutsche Postbank, Hannover Rueck, Aareal Bank, Generali Deutschland and MLP.

IS THIS PART OF COORDINATED EUROPEAN ACTION?

There was no immediate sign that other European nations would imitate Germany, or even that they had been consulted before the announcement, leaving Berlin open to criticism of a lack of coordination.

Banning CDS on sovereign debt was not on the agenda at this week’s meeting of European finance ministers, Austria’s finance ministry said.

Michel Barnier, the European commissioner in charge of an overhaul of financial services, said the German measures would be more efficient if coordinated at a European level and it would make sense to discuss the issue at Friday’s finance ministers’ meeting.

Barnier said it was important member states acted together and redesigned the European regime to avoid arbitrage.

CDS monitor Markit said that while the ban only applied to institutions operating under BaFin’s supervision, there were fears a European Union ban could come into effect in the autumn.

Regulators were slammed for confusing markets in late 2008 for unilateral share curbs in a supposed single capital market. Chancellor Angela Merkel said on Wednesday that although it was necessary to speed up work on European-wide financial supervision, Germany was also ready to act alone.

DO SHORT SELLING CURBS EXIST ELSEWHERE IN EUROPE?

There are already some curbs on short selling of shares and disclosure rules in place in several of these countries.

A short selling ban introduced in 2008 for shares of French financial institutions was still in place, a spokesman for France’s Ministry of Economy said. He did not comment on its intentions for the bond and CDS markets.

Dutch financial markets regulator AFM said it had no immediate plans to introduce bans on some risky transactions across different asset classes.

Belgium’s markets regulator said it was consulting with other European watchdogs about whether to restrict trading in securities such as bonds or CDS. [ID:nLDE64I0MB]

WHAT IS NAKED SHORT SELLING?

Naked short selling involves a short sale without first borrowing the instrument or ensuring that it can be borrowed as in a conventional short sale.

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Factbox: Germany announces short selling ban