May 19 (Bloomberg) — Germany prohibited naked short- selling and speculating on European government bonds with credit-default swaps in an effort to calm the region’s financial markets, sparking investor anxiety about increasing regulation.
The ban, which took effect at midnight and lasts until March 31, 2011, also applies to the shares of 10 banks and insurers, German financial regulator BaFin said yesterday in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, BaFin said.
“Asian markets have been taken by surprise because this was not on the cards,” Sebastien Barbe, head of emerging-market research for Credit Agricole CIB, said in a phone interview from Hong Kong. “Investors are fearful other countries may follow suit and, because it’s only Germany doing this, there’s concern regarding the lack of co-ordination in Europe over how to fix the current crisis.”
“The way it’s been announced is very irresponsible, and it’s sent many market participants into panic mode,” said Darren Fox, a regulator lawyer who advises hedge funds at Simmons & Simmons in London. “We thought regulators had learned their lessons from September 2008. Where is the market emergency that necessitates the introduction of an overnight ban?‘Serious Fundamental’ Mistake
The move may also add to concern that EU nations are not working in coordination, damping their credibility.
“This is a mistake of a serious fundamental nature and of severe consequence and once again demonstrates to me how little the European politicians understand about the world’s financial markets,” Mark Grant, managing director of Fort Lauderdale, Florida-based Southwest Securities Inc. wrote in a note to clients. “They are making, in fact, an obvious attempt to control financial markets across the globe by this action just as they plead for investors to provide funding for the European governments and the banks in the European Union.” Prohibiting speculation in the contracts may cause trading in the market for swaps tied to Europe government bonds to freeze up, possibly increasing borrowing costs or limiting the flow of capital, said Tim Backshall, the chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.
“This will close the CDS markets if it is anything like what it appears to be,” Backshall said. “The removal of the possibility to hedge government bond risk will necessarily cause risk premia to rise in bond markets, which could easily lead to a broad-based repricing of government bond risk.”
Futures on the Standard & Poor’s 500 Index sank 0.8 percent. The index fell 1.4 percent yesterday in New York as Germany’s financial-services regulator said that it will introduce a temporary ban on naked short selling and naked credit-default swaps of euro-area government bonds starting.
Short selling involves the sale of borrowed securities in the hope of profiting by buying them later at a lower price and returning them to the owner. When securities are sold naked, the trader fails to borrow the assets before sending an order to sell. Investors own naked credit-default swaps when they don’t hold the bonds the derivatives are linked to.
Japanese exporters fell as a stronger yen threatened to reduce the value of overseas sales when converted into the companies’ home currency. The euro depreciated to 111.89 per yen today from 114.44 at the 3 p.m. close of stock trading in Tokyo yesterday. The dollar weakened versus the yen to 91.84 from 92.56.
Nippon Sheet Glass dropped 5.2 percent to 239 yen in Tokyo. Daiwa Securities Capital Markets Co. cut its rating on the stock to “neutral” from “outperform.”
Canon Inc., a camera maker that counts Europe as its largest market, retreated 1.8 percent to 3,905 yen. Panasonic Corp., which gets almost half of its revenue overseas, declined 1.3 percent to 1,211 yen.
“Investors are afraid that Germany’s ban on naked trading will reduce people’s appetite for risk,” said Hiroichi Nishi, an equities manager in Tokyo at Nikko Cordial Securities Inc. “The weakening euro is worrying investors about Japanese exporters’ earnings.”