Germany May Broaden Its Ban on Naked Short Selling to All Domestic Stocks

Germany’s Finance Ministry proposed legislation extending a partial ban on naked short selling adopted last week to all German stocks and certain euro-currency derivatives.

The plan would ban naked short selling in stocks of all German companies listed on a domestic exchange and would also outlaw naked credit-default swaps on some euro-region bonds as well as certain euro currency derivatives, the ministry said in what it termed a “discussion paper,” distributed to banks and industry groups.

“The financial crisis has curbed confidence in the financial markets and has revealed the need for further substantial improvement of oversight rules,” according to the document. “The crisis has reached a new dimension with turbulence increasing on the European Union member countries’ bond markets and the volatility of the euro.”

Germany was criticized for issuing a temporary ban on naked short selling of some financial shares and sovereign debt securities as well as naked credit-default swaps through the BaFin regulator last week. Stocks around the world fell and Germany’s benchmark DAX Index has dropped more than 8 percent since the ban was announced.

The draft defines “naked” as a transaction where the seller doesn’t own the stock or doesn’t have an unconditional claim to get the stock in question.

German Stocks, Euro Decline

The benchmark DAX Index slid 2.3 percent to 5,670.04 in Frankfurt, a fifth day of declines for the longest falling streak since October. The U.S. dollar pared its gains against the euro, trading at $1.2258 per euro as of 5:06 p.m. in Berlin, according to data compiled by Bloomberg.

The proposed legislation would also introduce disclosure requirements on short-selling, according to the draft. The proposal would restrict currency derivative trades on the euro and credit default swaps on euro region government bonds to cases in which an underlying asset is to be hedged, the ministry said.

The ban is required because the forms of transactions put the stability of the financial markets at risk and set “economically damaging incentives” to market participants, the ministry said.

The Finance Ministry invited banks and industry groups to comment on the draft within the next two days. A hearing on the draft will take place on May 27 in Berlin.

Plan Lacks Coordination

The plan, like Germany’s temporary ban last week, lacks coordination within the European Union, Frank Dornseifer, chief of Bundesverband Alternative Investments e.V., a lobby group that has also been invited to comment on the draft, said in an interview today.

“The draft shows that the plan isn’t mature and hasn’t been really thought to the end,” Dornseifer said. “At the moment, the markets aren’t in turmoil because of speculative trading but because of actionism by regulators and politicians who come up with new rules that are hardly practical.”

Razeen Sally, an international political economist at the London School of Economics, said that extending the ban wouldn’t serve any concrete purpose.

“It plays to the domestic political gallery but further shreds the credibility of German, and by extension European, economic management,” Sally said in an e-mailed answer to questions.

To contact the reporter on this story: Karin Matussek in Berlin at kmatussek@bloomberg.net; Rainer Buergin at rbuergin1@bloomberg.net.