France relaxed a ban on selling banks short, trying to calm index futures traders concerned the rule would keep them from exchanging contracts when they expire today.
Investors who are short index futures that include bank shares can replace the holdings with new contracts, according to the AMF, France’s financial regulator. Speculation the ban would prevent that may have contributed to volatility yesterday, when European stocks plunged the most since March 2009.
“They really should have thought about that earlier,” said Trung-Tin Nguyen, a hedge-fund manager at TTN AG in Zurich. “If you want to change the rules of the game, then do it right.”
In a short sale, speculators borrow shares and sell them, betting they will be able to purchase them later at a lower price. France prohibited new short positions on financial stocks last week after Societe Generale SA, the nation’s second-biggest bank, plunged the most since 2008.
Adding to concern yesterday were rules in the original ban designed to quash so-called synthetic positions in which traders bet against banks by shorting an index and buying every non-financial stock it contains. Some brokerages insisted that customers selling futures on gauges proved that they owned financial stocks, according to e-mails sent to clients and obtained by Bloomberg News.
The Stoxx Europe 600 Index plummeted 4.8 percent yesterday as U.S. economic data trailed forecasts, two Federal Reserve officials said the central bank shouldn’t act to protect stock investors and Swedish regulators warned that lenders are unprepared for a freeze in money markets. Societe Generale slid 12 percent as the Wall Street Journal said that U.S. regulators are stepping up scrutiny of Europe’s largest lenders.
“Any uncertainty about what products can be traded, when and where, is bad for the market,” Richard Perrott, exchange and diversified financials analyst at Berenberg Bank in London, said in an interview yesterday. “There was huge confusion today what participants could and couldn’t do, which isn’t helpful when there are large share price movements. Potentially the regulators didn’t think this through.”
Futures on France’s CAC 40 Index expiring tomorrow plunged 5.6 percent to 3,071.5 at 8:35 p.m. in Paris yesterday.
Morgan Stanley yesterday asked clients to ensure any sales of Euro Stoxx 50 Index futures were a “hedge” aimed at protecting against market declines, according to an e-mail sent to clients obtained by Bloomberg News. Goldman Sachs Group Inc. demanded confirmation that all transactions involving restricted securities, including derivatives positions, “comply with all applicable laws, regulations and rules, including any applicable short-selling restrictions,” another e-mail showed.
Spokespeople for Morgan Stanley and Goldman Sachs weren’t immediately available to comment.