World Business

Germany bans naked short-selling, swaps speculation

(Agencies)
Updated: 2010-05-19 14:14

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 investor anxiety about increasing regulation.

The ban, which took effect at the midnight of May 18 and lasts until March 31, 2011, also applies to the shares of 10 banks and insurers, German financial regulator BaFin said 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. US stocks fell, Treasuries soared and the euro extended its decline as the announcement, made after European 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, Deutsche Bank

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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, according to BaFin's statement.

The regulator 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 cost of insuring government and corporate debt with credit swaps soared in the US and Asia-Pacific. The Markit CDX North America Investment Grade Index climbed 12.17 basis points to a mid-price of 120.67 basis points in New York, according to Markit Group Ltd.

Swap prices

BaFin's announcement came the same day as a report that 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 nations led by Greece will struggle to meet the European Union's austerity requirements to lower their budget deficits has driven the euro down from last year's high of $1.5144 in November.