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No naked deals

June 2, 2010

German Chancellor Angela Merkel's cabinet has approved a draft law widening the government's recent temporary ban on the short sale of certain types of shares - a practice known as naked short-selling.

Trader monitoring screens at Frankfurt Stock Exchange
Germany is clamping down on risky trading practicesImage: DW / von der Au

The draft, agreed on Wednesday, foresees a permanent ban on the naked short selling of all stocks listed on German exchanges, as well as bonds issued by eurozone governments.

The ban "concerns securities that registered on a regulated German market," a finance ministry said.

The ban also encompasses certain trades on currencies that are not used for hedging purposes. A previous version of the draft law had envisaged a complete ban on short selling currency derivates.

Naked short is effectively a bet that a certain stock or government bond will lose value. But unlike conventional short selling whereby traders borrow securities to sell and buy them back at a profit once their price has fallen, naked short selling leapfrogs the borrowing process altogether. It is viewed as a far riskier form of trading.

The practice came under fire after Greece struggled to raise capital to finance its debt. Naked trades were blamed for artificially inflating the country's funding costs.

Last month, Germany stunned its international partners and roiled financial markets worldwide with its plan to temporarily ban naked short selling of some financial shares, sovereign debt bonds and credit default swaps.

After Berlin announced its ban last month, Christoph Schmidt, head of Germany's RWI economics institute, referred to the move as "an isolated step in a globalized world" and doubted it would have an impact.

Indeed, most short selling takes place in London; it is not a common practice in Germany.

The draft bill must still be approved by the lower house of German parliament, the Bundestag, where Chancellor Merkel's coalition government holds a majority. The upper house of parliament, the Bundesrat, can delay the bill but not block it indefinitely. The Merkel camp recently lost its majority in the Bundesrat.

Editor: Sam Edmonds