Germany Planning Sharp Curbs On Some Kinds of Short Selling
Published: Tuesday, 18 May 2010 | 3:22 PM ET
By: CNBC.com with AP and Reuters
Germany's market regulator announced a ban on so-called naked short-selling of eurozone government debt certificates and shares of major financial companies, a move aimed at upholding financial stability amid the debt crisis.
The regulator, BaFin, said the ban—which was to take effect at midnight Tuesday and run through March 31 next year—also would apply to some credit default swaps.
Naked short-selling involves a trader selling shares or investments he doesn't own and hasn't actually borrowed, which is the case in a regular short sale. Credit default swaps are a type of insurance against a borrower going bankrupt that have become a lucrative market for traders.
European leaders have complained that speculators used credit default swaps on Greek government debt to bet the country would default on its borrowings—raising pressure on the country to the point where it was forced to ask for a bailout.
BaFin cited the "extraordinary volatility" afflicting eurozone countries' debt certificates and the widening of spreads on credit default swaps for several nations.
"Against this background, massive short-selling of the affected debt certificates and the conclusion of naked CDS on loan default risks of eurozone states would have as a consequence further excessive price movements," BaFin said in a statement.
Those could lead to "significant detriment for the financial market and could endanger the stability of the whole financial system," it added.
The ban on naked short-selling of financial companies' shares applies to several banks—Aareal Bank AG, Commerzbank AG, Deutsche Bank AG and Deutsche Postbank AG. It also covers insurer Allianz SE; reinsurers Hannover Re AG and Munich Re AG; Generali Deutschland Holding AG, MLP AG and Frankfurt stock exchange operator Deutsche Boerse AG.
US stocks fell further on the news, while the dollar surged against the euro. US Treasurys extended gains.
Tim Ghriskey, chief investment officer of Solaris Asset Management in New York, said he had doubts about the effectiveness of the German move.
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"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 Track.com, added: "This is not a desperate measure. It's just another tool European policymakers are making use off 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 bank's share prices." |
