Germany's Unilateral Short-Selling Ban Drops `Bomb' on Regulators, Lawyers
Germany’s unilateral move to curb speculative trading of government bonds and some naked short selling last week forced lawyers to work long hours to interpret rules enacted with less than a day’s notice.
The nation’s financial regulator, BaFin, has been posting guidance about the rules online, while lawyers toiled over what countries the rules apply in, what constitutes a “naked” deal and whether the ban covers derivatives.
“The situation has been tough for all of us, lawyers and regulators alike,” said Jochen Kindermann, a capital markets lawyer at Simmons & Simmons in Frankfurt. “The step was dropped on us like a bomb and no one really had any time to prepare.”
Germany was criticized for banning naked short selling of debt securities as well as naked credit-default swaps last week. BaFin published the ban late in the evening of May 18 and the rules took effect less than four hours later. Stocks around the world fell and Germany’s benchmark DAX Index has dropped more than 7 percent since the ban was announced.
Germany’s Finance Ministry proposed legislation that would extend the ban to all German stocks and certain euro currency derivatives. The plan would ban naked short selling in stocks off all German companies listed on a domestic exchange, the ministry said in draft legislation distributed to banks and industry groups today.
Not ‘Ideal Situation’
The International Swaps & Derivatives Association set up a conference call less than 20 hours after the BaFin ban was announced last week and 700 people from the finance industry dialed in, Okko Behrends, a capital markets lawyer at Allen & Overy LLP, said in an interview. It was the first time he had to advise on rules that were less than a day old, he said.
“It certainly wasn’t an ideal situation, because we were still discussing with Bafin what exactly the rules mean,” Behrends said. “Some of them are unprecedented and there is still a bit of uncertainly how far they reach.”
The confusion extends to regulators.
The U.K. Financial Services Authority said the ban doesn’t cover branches of German institutions outside Germany or in Britain. BaFin spokeswoman Anja Engelland said May 19 the ban on short selling of some financial shares and bonds applies outside Germany, while credit-default swap transactions are only covered when the deal is done within German borders.
The FSA comment was based on the information the U.K. regulator had when BaFin made its announcement, FSA spokesman Joseph Eyre said. “It’s BaFin’s task to clear the exact details of its rules and you have to contact them for that,” he said.
Lawyers also had difficulties defining what bonds are covered by the ban. The rules say they cover debt securities admitted for trading on the regulated market of a German exchange, mainly German and Austrian bonds. Because of a little known clause in Germany’s stock exchange act, there was a risk other euro-zone government bonds could have been included, said Kindermann and Behrends.
“We could clear with BaFin that they didn’t intend to include all the other countries’ debt,” Behrends said. “But you can see from that example how difficult it can be to draft rules -- and to advise clients.”
Short sellers borrow assets and sell them, betting the price will fall. They would buy them later and pocket the difference. In naked short-selling, traders never borrow the assets, so betting is unlimited.
German stocks fell last week on concern that European government leaders lacked a common position on how to resolve the sovereign-debt crisis. The DAX index fell for a fifth straight day today, declining 2.3 percent to 5,670.04.
Clients from the U.S., who were initially worried about the ban, concluded that it was a political move by Chancellor Angela Merkel that will have limited effects on their actions, said Andreas Lange, a banking lawyer at Mayer Brown LLP in Frankfurt.
“When they understood the limits of the rules, they pretty much shrugged and said: ‘Oh, well, just another odd move by the Germans,’” Lange said.
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