Germany bans short-selling

19 May 2010

Germany has introduced a surprise ban on the practice of short-selling, as well as clamping down on credit default swaps.

The measure, which took effect from midnight today (May 19th 2010), is applicable to shares in ten of the country's top banks, including Deutsche Bank, Allianz and Commerzbank.

German financial regulator BaFin said the temporary ban, which applies to the debt securities of eurozone countries held by the banks, is set to remain in force until April 1st 2011.

As part of the regulation, certain forms of credit default swaps have also been prohibited, "in which the reference liability is … also a liability of a eurozone country and is not used to hedge default risks".

A statement from the financial regulator said the move is justified by the "extraordinary volatility" in the pricing of debt securities linked to countries which are part of the eurozone.

The financial regulator said it had judged that these risks, along with the ones being caused by credit default swaps, were resulting in excessive price movements that, if left unchecked, "could jeopardize the stability of the financial system as a whole".

But the move, and the surprise manner in which it was announced, has come under fire from many investors and financial sector experts.

Keith Wirtz, chief investment officer at Fifth Third Asset Management, told Bloomberg: "It represents an escalation of regulatory risk for the investing community.

"The German action suggests the drama in Europe [will continue] to unfold and escalate."

Sebastian Barbe, head of emerging-market research for Credit Agricole, said investors had been left with two primary concerns by the measures.

He said they were firstly worried about other countries introducing similar measures, while another issue is the fact that Germany had announced the measure alone, suggesting that economic regulation in the eurozone is not being properly co-ordinated.

By Claire Archer

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