There was an uproar in the markets, following Germany’s announcement to ban “naked short-selling” of stocks of certain financial institutions, bonds and CDS. The response, however, seems to be overdone.
For equities, “naked short-selling” has been banned in the US for quite sometime now, though its enforcement has not been entirely effective (it is obvious that it’s very hard to enforce, if not impossible – even in Germany). One can still short sell the securities in question, or even should be able to short sell them naked if they are reasonably confident that they can borrow the securities (although I am not sure, at this point, how Bafin will implement and enforce the rules). The ban in Germany seems to be far less comprehensive than the restriction in the U.S.
As for the government bonds, the targets are limited to “debt securities that are traded on a regulated market”. Derivatives, such as bund futures seem to be excluded from the restriction. Thus, the securities affected should be limited primarily to German and Austrian bonds listed on German exchanges. Big deal? No, not at all.
Also, CDS transaction volume in Germany is quite limited, so the ban should have little impact, if any. Most European CDS trades are taking place in the UK, and it is very unlikely that the UK FSA will follow suit. Even subsidiaries of German banks/funds in the UK should be able to trade “naked” CDS in the UK without restrictions. Given these, the “ban” is obviously a – deliberately ineffective – blank shot in the air and has little substance, if any.
So what’s the buzz? It seems to me that -
- Markets are irrationally driven by headlines, without proper assessment of the ban.
- Merkel has certain credibility: Frau Merkel, unlike the SEC in the US, is not a chicken. It might have been a blank cartridge this time, but she might fire real bullets next time.
- Markets waged preemptive strike: Financial institutions are trying to make sure the Governments understand that they will make a big noise and cause significant collateral damages if anyone tries to touch the all important “their precious” CDS.
I believe Merkel’s move is just a symbolic one and directed toward the angry voters and legislators in Germany, for now. Also, I doubt if the German leaders really expected other EU members to follow (no one actually needs to, if it is a mere warning shot and nothing significant). I cannot think of any other credible explanation for the lack of prior “formal” consultations with other member nations or the Commission. Other version of explanation, given by Mr Wolfgang Münchau is that the German leadership is criminally incompetent, which I disagree. No sane person would expect French or Briton to follow German Blitzkrieg without significant negotiation.
Merkel is cautious and far from rash. She showed that she would play “sovereign” hardball as, for instance, Chinese government would do, if she so chooses. This time, it was just a symbolic move but another one might follow and if so, it might point to more direct conflicts between sovereign nations and the markets. If this is the case, the markets feared, quite rightly.
Sheriff Merkel fired the blanks into the air and the Markets rattled
There was an uproar in the markets, following Germany’s announcement to ban “naked short-selling” of stocks of certain financial institutions, bonds and CDS. The response, however, seems to be overdone.
For equities, “naked short-selling” has been banned in the US for quite sometime now, though its enforcement has not been entirely effective (it is obvious that it’s very hard to enforce, if not impossible – even in Germany). One can still short sell the securities in question, or even should be able to short sell them naked if they are reasonably confident that they can borrow the securities (although I am not sure, at this point, how Bafin will implement and enforce the rules). The ban in Germany seems to be far less comprehensive than the restriction in the U.S.
As for the government bonds, the targets are limited to “debt securities that are traded on a regulated market”. Derivatives, such as bund futures seem to be excluded from the restriction. Thus, the securities affected should be limited primarily to German and Austrian bonds listed on German exchanges. Big deal? No, not at all.
Also, CDS transaction volume in Germany is quite limited, so the ban should have little impact, if any. Most European CDS trades are taking place in the UK, and it is very unlikely that the UK FSA will follow suit. Even subsidiaries of German banks/funds in the UK should be able to trade “naked” CDS in the UK without restrictions. Given these, the “ban” is obviously a – deliberately ineffective – blank shot in the air and has little substance, if any.
So what’s the buzz? It seems to me that -
I believe Merkel’s move is just a symbolic one and directed toward the angry voters and legislators in Germany, for now. Also, I doubt if the German leaders really expected other EU members to follow (no one actually needs to, if it is a mere warning shot and nothing significant). I cannot think of any other credible explanation for the lack of prior “formal” consultations with other member nations or the Commission. Other version of explanation, given by Mr Wolfgang Münchau is that the German leadership is criminally incompetent, which I disagree. No sane person would expect French or Briton to follow German Blitzkrieg without significant negotiation.
Merkel is cautious and far from rash. She showed that she would play “sovereign” hardball as, for instance, Chinese government would do, if she so chooses. This time, it was just a symbolic move but another one might follow and if so, it might point to more direct conflicts between sovereign nations and the markets. If this is the case, the markets feared, quite rightly.