German regulator BaFin announced a ban on speculative trading, in effect at midnight and lasting until March 31, 2011. The ban applies to naked short-selling on the shares of banks and European government bonds via credit default swaps (CDS). Markets reeled on the measure, which has the possibility to stifle liquidity in the market for swaps but primarily piques investor wariness of Eurozone legislative action. The Euro hit fresh 4-year lows on market shock over the unilateral move by Germany, declining 14.7% from the beginning of the year. Equities markets plunged, with the DowJones slumping 150bps on the news.
Although BaFin did not state whether the ban applies outside of Germany, the price of CDS swaps skyrocketed: Markit CDX North America Investment Grade Index climbed 12.17 bps. Most CDS trading takes place in London and NYC.
10 banks are covered by the ban, including: Allianz SE, Deutsche Bank AG, Commerzbank AG, Deutsche Boerse AG, Deutsche Postbank AG, Muenchener Rueckversicherungs AG, Hannover Rueckversicherungs AG, Generali Deutschland Holding AG, MLP AG and Aareal Bank AG. Financial shares have been hit on the measure, with the banks in question losing a percentage point or so in European morning trading. Germany has implemented bans on short selling bank and insurance company debt before during the 2008 financial crisis, along side the US and other EU nations.
Chancellor Angela Merkel's coalition is seeking momentum on financial market regulation as Bundestag members today debate a bill authorizing Germany's contribution to $1 trillion Eurozone bailout. Merkel has frequently villified CDS traders and short sellers in her campaigns to push through EU bailout measures, vocally criticizing them as early as May 6 where Merkel stated in a speech to the European Commission, "In some ways, it’s a battle of the politicians against the markets... I’m determined to win. The speculators are our adversaries."