Germany set to extend ban on speculative trading to include all shares

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Written by Ray Clancy

Friday, 04 June 2010 08:15

The government in Germany it to widen the country’s ban on speculative trading by expanding restrictions on naked short selling to include all shares.

The planned legislation, which must pass both houses of parliament, adds to regulations set up last month in a campaign by Chancellor Angela Merkel’s government to curtail financial speculation, which it blames for intensifying the euro zone debt crisis.

Naked short selling, which Germany had originally banned only for shares in its biggest banks, Euro government bonds and related credit default swaps (CDS), involves selling securities without owning or borrowing the underlying assets in the hope of buying them back at a lower price.

The extension of the ban is expected to pass through both houses of parliament by early July, according to German Finance Minister Wolfgang Schaeuble. He added that the previous narrower ban remained in place in the meantime.

Other proposed rules included in the bill were watered down at the last minute. Earlier plans that had included an outright ban on euro currency derivatives were dropped, according to a copy of the bill obtained by Reuters.

The Finance Ministry will instead be authorised to ban Euro currency derivatives by decree if it would serve to ‘avoid or dispel serious drawbacks to the stability of the financial markets, or faith in (their) operational capability’.

Earlier versions of the bill which called for an outright ban came up against stiff resistance. Critics had warned that it could have had damaging effects and be hard to implement.

Berlin’s unilateral move last month to impose an immediate but partial ban on naked short selling sent shockwaves through financial markets and ruffled the feathers of some partners.

At the moment there is no agreement among European Union securities regulators for introducing German style regulations, but Schaeuble downplayed this, saying other countries already had similar rules in place and that Germany’s new rules would help expedite the EU process.

‘My view is that European rules will be introduced faster because of a German law than if there were no law. Several countries in Europe, like France for example, already have similar bans on naked short selling,’ said Schaeuble.

The German bill now heading to parliament also takes aim at the trading of CDS, essentially insurance against default of a particular asset. It will distinguish between hedging and speculation with CDS linked to sovereign bonds, banning their purchase out of pure speculative interest but allowing it when the purchaser owns the underlying asset.

While several national regulators including France have signalled they will not follow suit, the head of its financial watchdog has called on the European Commission to come up with its own proposals in order to avoid member nations following diverging routes.

Jean-Pierre Jouyet, head of French financial markets regulator AMF, has called for urgent Franco-German initiatives to combat short selling.
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