Yesterday, the German financial regulator BaFin announced three temporary provisions to address recent market volatility in the euro zone.

The first measure bans the naked short-selling of the government debt securities of euro zone countries. The second measure temporarily halts trading in credit default swaps (CDS) in which the reference liability is also a liability of a euro zone country and is not used by the investor to hedge default risks. Finally, BaFin instituted a temporary halt on the naked short-selling of ten financial sector stocks:

  • Aareal Bank AG
  • Allianz SE
  • Commerzbank AG
  • Deutsche BANK AG
  • Deutsche Börse AG
  • Deutsche Postbank AG
  • Generali Deutschland Holding AG
  • Hannover Rückversicherung AG
  • MLP AG
  • Münchener Rückversicherungs-Gesellschaft AG

In announcing the decision, BaFin stated that the extraordinary volatility of debt securities of countries from the euro zone, and the widened spread of CDS, justified the implementation of the temporary measures. Specifically, BaFin stated it was concerned that massive short selling of government debt securities and settlement of uncovered CDS would result in further excessive price movements, serious disadvantages for the financial market and could jeopardize the stability of the financial system as a whole.

The temporary prohibitions took effect today and will be in place until March 31, 2011. BaFin stated that it will review the temporary rules on an ongoing basis.