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13th Aug 2022

EU miffed by unilateral German ban on short-selling

  • Markets and other member states were surprised by the German move (Photo: rednuht)

Germany's decision to place a unilateral ban on naked short-selling of eurozone sovereign debt instruments has drawn a frosty response from its EU partners, with the European Commission saying the move highlighted the need for a more co-ordinated regulatory approach.

European stocks fell on Wednesday morning (19 May) in reaction to the previous evening's announcement made by Bafin, the German regulator, that it would crack down on the speculative practice, perceived by some to have a destabilising effect on financial markets.

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While careful not to criticise Berlin's latest move, the EU internal market and financial services commissioner, Michel Barnier, said a more multilateral approach would bring greater benefits.

"It is important that member states act together and that we design a European regime to avoid regulatory arbitrage and fragmentation both within the EU and globally," said the French commissioner in a statement.

The commission is currently working on proposals to increase the regulation of financial derivative products, with a new European Securities and Markets Authority, part of the EU supervisory package being debated by member states and MEPs, set to gain greater co-ordinating powers between national regulators.

"We will be publishing within a few weeks a consultative document covering draft rules on short-selling," said Mr Barnier. "As I have already announced, my intention is to have a formal commission proposal ready in October this year."

Information on the effects of short-selling is limited. The speculative practice involves a trader 'borrowing' underlying assets such as shares and proceeding to sell them to a buyer. Sometime later the trader then buys an equivalent amount of shares back, hopefully at a lower price, thereby pocketing the difference.

Naked short-selling is a type of short selling without first arranging to borrow the asset.

Member state reaction

Like Mr Barnier, its appears most member states were given no prior warning of Berlin's intention to impose the ban, with France, Sweden and the Netherlands all indicating they do not intend to follow suit.

French finance minister Christine Lagarde said she was concerned the ban could reduce liquidity in bond markets, potentially damaging more vulnerable eurozone states, and called on the Committee of European Securities Regulators to examine the German move.

"I think we should really request the views of those governments affected by this measure. We did not envisage doing this. And for liquidity reasons, it is useful to continue functioning without banning short selling," she said.

France imposed a ban on the short-selling of different financial products in October 2008 in the wake of the fall of the US investment bank Lehman Brothers, a ban that will remain in place, explained Ms Lagarde.

Analysts were also sceptical about the merits of the German move.

"Apparently Germany has not learnt from the temporary ban on short-selling in 2008 which reduced liquitity," said Karel Lannoo, chief executive officer of the Centre for European Policy Studies, a Brussels-based think-tank.

"I have no idea why they implemented the move. The effectiveness is seriously questionable and most of the activity takes place in London anyway," he told this website, adding that the general consensus was that implementation must be on a Europe-wide basis to be effective.

Austria has called for a debate on the subject to be included on the agenda of a gathering of EU finance ministers, or there representatives, scheduled to take place this Friday in Brussels.

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