Germany to Ban Naked Short-Selling: Report

Germany to Ban Naked Short-Selling: Report

Market Features

The German press is reporting that the country's BaFin financial services regulator will ban naked short-selling of shares and eurozone government bonds as of midnight tonight, and will reportedly include CDSs as well. No official confirmation. This has been done before on stocks by BaFin on a temporary basis, but not on bonds or CDSs, so the report is probably causing a bigger ripple.

More Related Stories Recall that the U.S. issued first issued a temporary ban on naked short-selling first in July 2008 on 19 financial stocks. Then in September 2008, the SEC widened that list to 799 financial companies and banned all short-selling for two weeks.

At around the same time, the U.K.'s FSA also instituted a ban on all short-selling of 32 financial companies, while BaFin banned only naked short-selling with regards to 11 companies in the German financial sector. Indeed, bans of some sort were also seen in France, Switzerland, Ireland, Australia, and Canada.

In a proper short sale, the investor is supposed to borrow the stock, sell it and then repay the borrowed stock that's bought (hopefully) cheaper. When it's naked, the short-seller never borrows the stock in the first place, and so it is never delivered.

A big question if this story comes to pass is whether other countries follow suit. Of course, the other eurozone members would most likely go along with Germany on this. But given that this most recent leg of the crisis is centered on the peripheral eurozone, we can't see why the U.S. or the U.K. would get involved in this move.

And given the global nature of the financial world, couldn't a German investor simply use a U.S. counterparty to get around this ban? The report raises more questions than it answers.

Meanwhile, the euro has taken it on the chin after Europe closed, with the cycle low against the dollar from Monday only a hair's breadth away. Our near-term target of 1.18 remains in play (low from early 2006).

We think the momentum was to the downside even before the short-selling news, but critics could say that the Europeans continue to fret about the symptoms rather than the actual illness and so could have accelerated this latest move in the euro.

thestreet.com
By BBH FX Strategy  05/18/10 - 02:13 PM EDT1