May 19, 2010
On May 18, 2010, and with effect as of May 19, 2010, 00:00 hrs CET, the German Federal Financial Supervisory Authority ("BaFin") temporarily prohibited uncovered short sales of debt securities of euro zone countries admitted on a German exchange to trading on the regulated market. These countries are (in alphabetical order) Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, The Netherlands, Austria, Portugal, Slovakia, Slovenia, Spain and Cyprus.
Moreover, BaFin prohibited uncovered short-selling transactions in the shares of the following companies from the financial sector:
- 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
Short selling is considered as uncovered if the seller – at the time of the entering into of the transaction – neither holds title nor has an absolutely enforceable claim to obtain the title to an equivalent number of instruments of the same class.
This short selling ban supplements notification duties with regard to short selling positions in stock of the aforementioned 10 financial institutions that BaFin had introduced with effect as of March 25, 2010.
BaFin also temporarily prohibited credit default swaps (CDS) – whether or not embedded in a credit linked note or in a total return swap – in which the reference liability is at least also a liability of a euro zone country and is not used to hedge default risks (uncovered CDS).
There are a few exceptions. For example, the prohibitions do not apply to (i) short sales that aim at securing positions existing by the time of the entering into force of the prohibitions, (ii) transactions that aim at evening up positions in CDS which gave rights to the secured party already before May 19, 2010, and (iii) transactions in credit linked notes issued before May 19, 2010.
These prohibitions will apply until March 31, 2011, 24.00 hrs, and will be reviewed on an ongoing basis.
BaFin justified this move by the extraordinary volatility of debt securities of countries from the euro zone. According to BaFin, the spreads of credit default swaps on credit default risks of several countries of the euro zone had widened considerably. In this context, massive short selling of the debt securities concerned and the conclusion of uncovered CDS on credit default risks of euro zone countries were said to be resulting in further excessive price movements which could result in further serious disadvantages for the financial market and could jeopardize the stability of the financial system as a whole.
Gibson, Dunn & Crutcher attorneys are available to assist in addressing any questions you may have regarding these issues. If you have any questions about these particular matters or would like additional information, please contact any of the following attorneys in the firm’s Munich office:
Benno Schwarz (+49 89 189 33 110, [email protected])
Philip Martinius (+49 89 189 33 121, [email protected])
Markus Nauheim (+49 89 189 33 122, [email protected])
© 2010 Gibson, Dunn & Crutcher LLP
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