From the July 01, 2010 issue of Futures Magazine • Subscribe!

Germany bans naked shorts

The success of an effort by German regulators to help curb volatility of debt securities in the Eurozone could depend on whether other European nations follow suit. On May 18, Germany’s Federal Financial Supervisory Authority (BaFin) temporarily prohibited naked short selling for debt securities and prohibited naked short selling transactions in the shares of 10 financial sector companies. The ban is scheduled to end in March 2011. On June 9, German Prime Minister Angela Merkel and French President Nicolas Sarkozy reportedly wrote a letter to the European Commission urging them to institute a wider EU short selling ban.

Brian Dolan, chief currency strategist for Forex.com, says a wider European ban on short selling would be needed to help solve Europe’s debt problem. “All [the German ban] does is shift selling from Frankfurt to London. German institutions aren’t even prohibited from selling short through London markets,” he says, adding that the ban was an effort by Germany to prevent speculators from trashing the euro and creating a self-fulfilling prophecy. "What they were counting on was that other European countries would follow suit,” he says.

Joseph Trevisani, chief market analyst for FX Solutions, says, “People were speculating on European stocks because they own all of this sovereign debt. If that debt starts to go down, a sensible position is to short the bank stocks. If Greece would fall, all of these bank stocks would go down hard.” However, he adds, “Whenever governments ban short selling, the market tends to fall.”

Dolan points out that the ban actually had a negative impact on the euro.

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