World Business

German Cabinet supports naked short-selling ban

By Tony Czuczka and Rainer Buergin (China Daily)
Updated: 2010-06-03 10:05

BERLIN - Chancellor Angela Merkel's Cabinet backed a ban on naked short-selling of credit-default swaps on euro-area government bonds and stocks of German companies, as the government stepped up efforts to combat speculators.

The proposal, backed by ministers meeting in Berlin on Wednesday, also gives Germany's Finance Ministry and the BaFin regulator leeway to ban euro-related derivatives trades without seeking further approval by lawmakers, according to the text of the bill e-mailed by the Finance Ministry.

The draft, which now goes to parliament, obliges investors to inform BaFin of naked short positions on shares in German companies.

"The financial crisis has shattered confidence in financial markets and has revealed the need for further substantial improvement of oversight rules," the bill says. "The crisis has reached a new dimension with turbulence widening to include European Union member countries' bond markets and volatility of the euro."

Merkel has said the measures are needed to fight speculation and preserve the euro's stability during the biggest crisis since the shared currency made its debut in 1999. She's urging the Group of 20 to tighten financial rules when leaders meet in Canada at the end of this month.

The draft grants BaFin discretion to temporarily ban the trading of stock and euro-currency derivatives in certain circumstances. An earlier discussion proposal had included a strict ban by law of these instruments.

"It certainly makes sense to move the decision on these steps back into the hand of BaFin," said Okko Behrends, a capital markets lawyer at Allen & Overy LLP in Frankfurt.

"That makes it more flexible than an outright legislative ban and moves the powers to those who have the technical expertise for it."

Related readings:  Germany bans naked short-selling, swaps speculation  Margin trading, short selling tops 600m yuan  Initial impact of margin trading, short selling to be limited  China announces rules on margin trading, short selling

Germany was criticized for its initial May 19 ban on naked short-selling of some financial shares and sovereign debt securities as well as naked credit-default swaps, which sent stocks around the world sliding and caused anxiety among investors about increasing government regulation.

Kurt Lauk, who heads a business lobby within Merkel's Christian Democratic Union party, criticized the government bill as too far-reaching, telling reporters in Berlin on Wednesday that it risks "causing economic damage" if passed as drafted.

The German 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.

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