Germany Fails to Recruit Nations to Outlaw Speculative Trades

Germany has largely failed to persuade other nations to follow its prohibition on naked short- selling and speculation on European government bonds, limiting the effect of the rules.

A Europe-wide ban on the practices is “doubtful,” Eddy Wymeersch, Europe’s top market regulator, said in a telephone interview today. European Union Financial Services Commissioner Michel Barnier said the rules would have been “more efficient” if they were coordinated with the EU.

In an effort to calm the region’s financial markets, German regulator BaFin issued a ban that took effect at midnight and lasts until March 31, 2011. The move caused stocks around the world to drop and the euro traded near a four-year low against the dollar.

“Unless you have the U.K., United States and rest of Europe on board, then it’s a waste of time,” David Buik, a market analyst at inter-dealer broker BGC Partners in London, said in a telephone interview today. “You’re asking people to look for trouble. It’s so ham fisted it’s laughable.”

German Chancellor Angela Merkel told lawmakers in Berlin today that her country would act alone if needed, saying the national ban will last until a European solution is found.

Only German Market

Germany’s naked short-selling ban currently only applies to transactions “executed on the German market,” said Wymeersch, the head of the Committee of European Securities Regulators, or CESR.

The euro rose to $1.2311 at 3:18 p.m. in London after having fallen to $1.2144, the lowest level since April 17, 2006.

To be covered by the ban, bonds must have been admitted on a German exchange for trading on the regulated market, BaFin spokeswoman Anja Engelland said in an interview today. Short selling of these securities is outlawed regardless where it is done, she said. Credit default swaps transactions are only covered if they are done within Germany, she said.

France, The Netherlands, Spain and Finland have no plans to implement similar measures. “We haven’t envisioned doing it,” French Finance Minister Christine Lagarde told reporters in Paris.

“It is important that member states act together and that we design a European regime to avoid regulatory arbitrage and fragmentation,” the EU’s Barnier said in an e-mailed statement.

European Commission President Jose Manuel Barroso said “we agree on the need to address the issue of abusive short selling.”

‘Relevant Elsewhere’

Barosso told reporters in Madrid the commission is calling for CESR “to quickly examine whether the conditions that led the German authorities are also relevant elsewhere in Europe.”

Paris-based CESR’s role is to coordinate national market regulators and make policy recommendations to the EU on securities regulation.

The ban doesn’t cover branches of German institutions outside of Germany or in the U.K., said U.K. Financial Services Authority spokesman Joseph Eyre. The FSA will assist BaFin, where appropriate, he said.

Portugal’s financial regulator said it was keeping its restrictions on naked short-selling that date back to 2008.

Merkel said the ban on naked short-selling is part of her proposals to gain control over “destructive” financial markets.

The euro is at risk and Europe may be facing its greatest challenge since the founding of the European Union, with “incalculable” consequences if leaders fail to act, Merkel said.

Euro Backstop

Merkel, opening a parliamentary debate on Germany’s contribution to a $1 trillion bailout to backstop the euro, said faster budget cuts, tougher penalties for countries that flout the rules and the orderly insolvency of euro-region states are among the measures Germany will offer to European Union partners on May 21.

Trading in the debt that sparked the recent Greek and euro- region bailouts won’t be affected by the ban, said Jochen Kindermann, a capital markets lawyer at Simmons & Simmons in Frankfurt.

“Only German and Austrian government bonds are listed on the regulated market in Germany, so Greek bonds are hardly covered,” Kindermann said in an interview. “Even if it’s not covering CDS transactions outside Germany, those deals might decrease if parties will not be able to hedge their transactions in the German market.”

Long-term Regulation

Austria’s finance ministry is calling for talks on long- term regulation of credit-default swaps and naked short-selling of sovereign debt, said Harald Waiglein, a spokesman for the ministry.

Short sellers borrow assets and sell them, betting the price will fall and they’ll be able to buy them later, return them to the lender and pocket the difference. In naked short- selling, traders never borrow the assets so betting is unlimited.

The failure to get other countries on board will make the ban ineffective, the Bank of China Ltd. said.

“Germany is not one of the major financial centers,” Steve Wang, a credit strategist for Bank of China International, said in a telephone interview from Hong Kong today. “You need to get the U.S., U.K. and in some sense Tokyo involved to be very effective.”

Banks, Insurers

The BaFin order also applies to the shares of 10 banks and insurers, the regulator said yesterday in a statement. France and Austria have bans on short selling of financial shares that are still in place from the height of the global financial crisis in 2008.

Germany, along with the U.S. and other EU nations, banned short selling of banks and insurance company shares in 2008. BaFin had lifted its ban in January and reinstated it yesterday. The country still has rules requiring disclosure of net short positions of 0.2 percent or more of outstanding shares of 10 separate companies.

Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy insurance on bonds they don’t own.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

To contact the reporter on this story: Karin Matussek in Berlin at kmatussek@bloomberg.net

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