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Germany bans naked credit default swaps referencing eurozone sovereigns


18 May 2010

In an effort to address perceived destabilization in the financial markets, Germany's Federal Financial Supervisory Authority (BaFin) today announced temporary bans on certain naked credit default swap transactions.  

BaFin announced temporary bans on certain naked credit default swap transactions referencing Eurozone Countries and their obligations, as well as naked short sales of debt of Eurozone Countries and equities of certain German financial institutions.

The temporary bans, announced by means of three separate orders after the end of trading in Europe on May 18, 2010, went into effect at 00:00 local time on May 19, 2010, and will remain in effect through 24:00 local time on March 31, 2011.

Summary of the temporary bans announced by BaFin

Specifically, the temporary bans announced by BaFin will apply, subject to certain exemptions, to naked short sales of debt obligations trading in the regulated segment of Germany's domestic stock exchanges and issued by member states of the European Union that have adopted the Euro (a Eurozone Country) as well as credit default swap transactions (including credit-linked notes and total return swaps) where a Eurozone Country, or one of its debt obligations, is the subject of the credit protection and such credit default swap transactions are not being used by buyers of credit protection to hedge against the risk that the relevant sovereign will default on obligations to which such buyers of credit protection are actually exposed. BaFin also banned naked short sales of equity securities of the following entities: Aareal Bank AG, Allianz SE, Commerzbank AG, Deutsche Bank AG, Deutsche Börse AG, Deutsche Postbank AG, Generali Deutschland Holding AG (a German unit of Italian insurer Assicurazioni Generali SpA), Hannover Re AG, MLP AG and Munich Re AG.

It has been reported that German officials have announced the German government's intention to prepare a bill that could potentially prolong these bans and/or expand the ban on naked short sales of equity securities to reach all equity securities of German entities.

Market call with Allen & Overy on Wednesday May 19, 2010, at 9:00 a.m. (New York time)

BaFin's announcement clearly raises a wide range of questions for financial institutions operating both inside and outside of Germany. Since it is not possible to preemptively address all of those questions in this bulletin, particularly given the short amount of time that has passed since BaFin's announcement, senior lawyers from Allen & Overy LLP's New York, London and Frankfurt offices will be hosting a conference call for clients on Wednesday, May 19, 2010, at 9:00 a.m. (New York time) to begin to discuss the implications and to respond to initial questions. Please email if you would like to participate in this call.

BaFin's press release and further information

The following is an unofficial translation of the press release issued by BaFin:

"On Tuesday, the Federal Financial Supervisory Authority temporarily banned naked short sales of debt securities issued by eurozone countries that are admitted for trading in the regulated market on domestic stock exchanges. It has also temporarily banned so-called credit default swaps (CDS) that do not serve to protect against credit default risks (naked CDSs) to the extent a reference obligation is at least also an obligation of a eurozone country.

In addition, BaFin has banned naked short sales of the shares of the following financial institutions:

  • MLP AG

These bans apply from 19 May 2010, 00:00, until 31 March 2011, 24:00, and will be reviewed on an ongoing basis.

BaFin justifies this step with the extraordinary volatility in the debt securities issued by eurozone countries. Furthermore, the spreads of credit default swaps on the credit default risk of several countries in the eurozone have widened significantly. Against this background, massive short sales of the affected debt securities and the entry into naked CDSs on eurozone countries have led to excessive price movements, which might lead to significant disruptions in the financial markets and might threaten the stability of the entire financial system.
In light of these circumstances, BaFin has also again banned naked short sales of the shares of selected financial institutions."

The full text of the relevant administrative orders (in German) is available at:


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