German Regulator (BaFin) Extends Ban on Naked Short Selling
The German Federal Financial Supervisory Authority (BaFin) has extended its ban on naked short selling in the shares of eleven financial companies to May 31, 2009. This is BaFin’s second extension of the prohibition, which was adopted in September of 2008. The companies affected by the ban include Allianz SE, Commerzbank AG, and Deutsche Bank AG.
Bafin defines naked short selling as when sellers sell shares which they do not own or for which they do not have a plea-proof claim to transfer of title in shares of the same class at the time of the transaction. By influencing the prices of the stocks specified, transactions resulting in a short position or in the increase of a short position (referred to as short selling transactions) in shares within the meaning of the ban would, by reason of the importance of the companies for the aggregate economy, reinforce this development and result in further excessive price movements, thereby jeopardizing the stability of the financial system.
BaFin noted that short share positions created by the exercise of option transactions are not subject to the ban. Although the sale of a short call option is a transaction, it does not yet result in a short position in shares. The short position arises only when the call option is exercised, explained BaFin, since it is only at this point of time that a delivery obligation arises with the option writer. Similarly, BaFin said that the ban does not extend to the sale of futures since the d decree only refers to naked short transactions in shares.
Regarding the ban’s application to trading in short warrants or short certificates, BaFin said that restrictions may arise for trading in short positions if the risk positions created thereby are hedged by a short sale of shares. If, however, hedging is performed by the sale of a future or a similar instrument, this is not subject to the restriction on short selling.
The ban does not apply to short sales backed by securities lending. The decree only prohibits naked transactions in the specified shares that are not backed by securities lending. According to BaFin, the securities lending transactions have to have been concluded prior to, or at least simultaneous with, the respective transaction. It is sufficient that at the time of the conclusion of the transaction an absolutely enforceable legal claim on the borrowed shares already exists. It is not necessary that the shares have already been booked into the account of the borrower.