Germany bans Naked short selling.

[Skink]

Germany Bans Naked Short-Selling, Default Swap Speculation

May 19 (Bloomberg) -- Germany prohibited naked short- selling and speculating on European government bonds with credit-default swaps in an effort to calm the region’s financial markets, sparking anxiety among investors about increasing government regulation.

The ban, which took effect at midnight and lasts until March 31, 2011, also applies to the shares of 10 banks and insurers, German financial regulator BaFin said late yesterday in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, BaFin said.

Chancellor Angela Merkel’s coalition is seeking to build momentum on financial-market regulation, with lower-house lawmakers due to begin debating a bill today authorizing Germany’s contribution to a $1 trillion bailout to backstop the euro. U.S. stocks fell, Treasuries soared and the euro extended its decline as the announcement, made after Europe markets closed, caught traders by surprise.

“It represents an escalation of regulatory risk for the investing community,” said Keith Wirtz, who oversees $18 billion as chief investment officer at Fifth Third Asset Management Inc. in Cincinnati. “The German action suggests that the drama in Europe continues to unfold and escalate.”

Allianz SE, Deutsche Bank AG, Commerzbank AG, Deutsche Boerse AG, Deutsche Postbank AG, Muenchener Rueckversicherungs AG, Hannover Rueckversicherungs AG, Generali Deutschland Holding AG, MLP AG and Aareal Bank AG are covered by the short-selling ban.

BaFin didn’t provide details on how it will enforce the ban, or whether it would extend to trades outside Germany. The majority of credit-default swap trading takes place in New York and London.

The Standard & Poor’s 500 Index tumbled 1.4 percent at 4 p.m. in New York, erasing an early rally of 1 percent. The 4.375 percent Treasury bond due in May 2040 climbed 2 points, or $20 per $1,000 face amount, to 102 1/4,as its yield fell 12 basis points, or 0.12 percentage point, to 4.24 percent.

The announcement came the same day that a report showed German investor confidence plunged in May as Europe’s deepening debt crisis stoked concern about the euro’s future. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations dropped to 45.8 from 53 in April, the biggest decline since the collapse of Lehman Brothers Holdings Inc. in September 2008.

Concern that nations led by Greece will struggle to meet the European Union’s austerity requirements to lower their budget deficits has driven the euro to below $1.22 from last year’s high of $1.5144 in November.

The DAX Index fell as much as 9.7 percent after reaching a 19-month high in April. The Athens Stock Exchange General Index has fallen 26 percent, while Portugal’s PSI General Index has dropped 13 percent and Spain’s IBEX 35 slipped 19 percent.

“Massive” short-selling was leading to excessive price movements which “could endanger the stability of the entire financial system,” BaFin said in the statement.

Short-selling is when investors borrow shares they don’t own and sell them in the hope their prices will go down. If they do, the investors buy back the shares at the lower price, return them to their owner and pocket the difference.

Finance Minister Wolfgang Schaeuble said the government decided it was best to introduce the ban on naked short-selling as soon as possible. “If you do something like this, you don’t let it drag out but you implement it right away,” he said yesterday in an interview on ZDF television.

Merkel’s Battle

Merkel and French President Nicolas Sarkozy have called for curbs on speculating with sovereign credit-default swaps. EU Financial Services Commissioner Michel Barnier called this week for stricter disclosure requirements on the transactions. Last month the EU proposed that the Financial Stability Board, set up by the Group of 20 nations to monitor global financial trends, “closely examine the role” of CDS on sovereign bonds.

“In some ways, it’s a battle of the politicians against the markets” and “I’m determined to win,” Merkel said May 6. “The speculators are our adversaries.”

Germany, along with the U.S. and other EU nations, banned short selling of banks and insurance company shares at the height of the global financial crisis in 2008. The nation still has rules requiring disclosure of net short positions of 0.2 percent or more of outstanding shares in 10 companies.

“The way it’s been announced is very irresponsible, and it’s sent many market participants into panic mode,” said Darren Fox, a regulator lawyer who advises hedge funds at Simmons & Simmons in London. “We thought regulators had learned their lessons from September 2008. Where is the market emergency that necessitates the introduction of an overnight ban?”

‘Serious Fundamental’ Mistake

The move may also add to concern that the EU nations are not working in coordination, damping their credibility.

“This is a mistake of a serious fundamental nature and of severe consequence and once again demonstrates to me how little the European politicians understand about the world’s financial markets,” Mark Grant, managing director of Fort Lauderdale, Florida-based Southwest Securities Inc. wrote in a note to clients. “They are making, in fact, an obvious attempt to control financial markets across the globe by this action just as they plead for investors to provide funding for the European governments and the banks in the European Union.”

Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- fails to meet its debt obligations. Traders in naked credit-default swaps buy insurance on bonds they don’t own.

‘Broad-Based Repricing’

Prohibiting speculation in the contracts may cause trading in the market for swaps tied to Europe government bonds to freeze up, possibly increasing borrowing costs or limiting the flow of capital, said Tim Backshall, the chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.

“This will close the CDS markets if it is anything like what it appears to be,” Backshall said. “The removal of the possibility to hedge government bond risk will necessarily cause risk premia to rise in bond markets, which could easily lead to a broad-based repricing of government bond risk.”

Bets made with swaps on the bonds of 10 European nations including Greece, Spain, Italy and Portugal is less than $108 billion, according to the Depository Trust & Clearing Corp, which runs a central registry that captures most trading. That’s 0.97 percent of the $11 trillion in outstanding debt of those countries, International Monetary Fund data show.

BaFin itself said two months ago it found “no evidence” that credit-default swaps were being used excessively to speculate against Greek bonds. Depository Trust data “do not support the conclusion that speculation is taking place on a massive scale,” the regulator said in a March 8 statement on

[customerserviceguy]

1. It would be nice if they did that here

I remember being a kid in junior high school learning about the stock market. It was supposed to be all about capital formation, people honestly investing in something that they wanted to succeed through offering something the public wanted and needed, and would willing to pay hard-earned money to get.

All that idealistic nonsense about capitalism evaporated when I learned about the fringes of the market, and naked short selling is one of those things. It's just fucking gambling, pure and simple.

[Statistical]

4. Naked short selling is already illegal in the United States.

Enforcement is the key and it is severely lacking. There amount of enforcement and the penalties are just no there. The watchdog has no teeth and hedge fund managers aren't worried about getting gummed to death.

[customerserviceguy]

5. Even if what you say is true

there are still numerous other ways to 'bet' by using the stock market. I consider the whole thing gambling, and I sold off my tiny holdings today, to take effect tomorrow. The whole thing's going to come crashing down as Greece drags the world economy down.

[Statistical]

6. "The whole thing's going to come crashing down as Greece drags the world economy down."

Well there is a way to position yourself if you believe that is true.

[scheming daemons]

2. Who wants to see Wall Street types naked anyway?

If they want to short-sell, they should wear clothes.


That's my view.

;-)

[sharesunited]

7. These are Germans.

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[Statistical]

3. It will do no good.

The medicine is worse than the sickness.

Anytime you ban shorts it scares the living shit out of the market and the market tanks (kinda the result you were trying to avoid by instituting a ban).

So why would you institute a ban knowing that predictible reaction?
Only when there is something out there (like a German AIG) that would result in even MORE downside pressure if it isn't contained.

I think some Germany banks likely were massively over-leveraged to Greece debt and and now are going to implode. The regulators are trying to prevent a disorderly collpase but rarely is that ever effective.

The Euro is dead. Good chance of going to parity before end of the year. Even if the Euro gets a bounce the countries which will need austerity measures will cripple any growth in the EU and put long term downward pressure on Euro.

Within a year one of three things happen:
a) major country like German depegs and goes back to national currency.
b) euro zone implodes.
c) strong nations force the weak nations out of EU.

[Swamp Rat]

8. no good without photos

:D