Short selling banned in Germany
EU arm calls for joint action in aftermath of German bans
U.K. regulator says steps don't cover German institutions outside of Germany
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By Polya Lesova, MarketWatch
FRANKFURT (MarketWatch) -- The European Commission called on Wednesday for coordinating regulatory actions across the union, a day after Germany unilaterally banned naked short-selling of certain assets in a bid to reduce financial volatility.
Separately, German Chancellor Angela Merkel urged adoption of Europe-wide rules, saying there is an "existential threat" facing the euro. "If we don't avert this danger then the consequences for Europe are inevitable, because if the euro is failing, than Europe is failing," she said.
Michel Barnier, the European Union's internal market commissioner, said he fully understood German concerns about the impact of naked short-selling -- the practice of selling shares or other assets that aren't owned or borrowed.
Reuters
German Chancellor Angela Merkel delivers a government statement on the handling of the European debt crisis in the Bundestag lower house of parliament in Berlin May 19, 2010.
"These measures will be even more efficient if they are coordinated at the European level," Barnier said, referring to the German ban.
"It is important that member states act together and that we design a European regime to avoid regulatory arbitrage and fragmentation both within the EU and globally," he said.
Germany's decision late Tuesday to ban certain trading practices caught financial markets off guard as analysts questioned the timing and effectiveness of the move.
"It was certainly a surprise and it's just showing exactly the reason the euro is that weak," said Heino Ruland of Ruland Research in Eppstein, Germany. "The European monetary union is not able to communicate and is not able to work together."
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Along these lines, EU finance ministers are due to meet on Friday -- yet already divisions are forming.
Christine Lagarde, the French finance minister, said France doesn't plan to ban naked credit-default swaps, since it's a very narrow market, according to media reports.
And in the U.K., the Financial Services Authority said that Berlin's actions don't relate to branches of German institutions outside of Germany -- good news for Deutsche Bank /quotes/comstock/13*!db/quotes/nls/db (DB 57.99, -2.20, -3.66%) /quotes/comstock/11e!fdbk (DE:DBK 46.04, -1.37, -2.88%) , whose main trading floor is based in London.
The measures announced by Germany late come as investors have been spooked by the high levels of sovereign debt in the euro zone and Greece in particular.
The German move rattled markets across the globe Wednesday, sending the euro /quotes/comstock/21o!x:seurusd (CUR_EURUSD 1.2222, -0.0122, -0.9885%) and commodities prices into gyrations as stock markets in Europe and Asia fell.
Strategists at Deutsche Bank captured the mood in the markets: "Just when markets were slowly regaining some poise, yesterday saw a strange political announcement that sapped strength from a still fragile market."
The ban
Late Tuesday, Germany's Federal Financial Supervisory Authority, known as BaFin, announced that it has prohibited so-called "naked" short-selling of some assets -- measures that will remain in force through March 31, 2011.
BaFin banned naked short-selling in shares of 10 German financial institutions, including Allianz SE /quotes/comstock/11e!falv (DE:ALV 78.70, -1.87, -2.32%) , Commerzbank AG /quotes/comstock/11e!fcbk (DE:CBK 5.71, -0.17, -2.81%) , Deutsche Bank and Deutsche Boerse AG /quotes/comstock/11e!fdb1 (DE:DB1 50.51, -1.26, -2.43%) . See analysis of impact on stock prices.
The regulators also banned naked short-selling of euro-zone bonds and barred the purchase of credit-default swaps without owning the underlying security.
A CDS contract can be used as an insurance policy against the default of a bond or loan, but German regulators believe that speculators have been using CDS contracts to place bets on the creditworthiness of a country, thus triggering volatility and market disruption.
BaFin cited "the extraordinary volatility" in debt securities issued by euro-zone countries, adding that euro-zone CDS spreads have widened significantly. These "excessive price movements" could threaten the stability of the whole financial system, BaFin said.
Analysts noted the decision comes as Germany's parliament debates its contribution to the 750 billion-euro bailout plan announced by the European Union and the International Monetary Fund.
"In view of getting parliamentary approval for the legal act covering Germany's 148 billion euro financial contribution to the 750 billion euro support package, the BaFin announcement seems likely to help to shore up support in the Bundesrat [upper house]," said analysts at Barclays Capital.
Polya Lesova is reporter for MarketWatch, based in Frankfurt.
