The German government has approved a draft law expanding a ban on highly speculative trades that caused uproar internationally when it was announced last month.
The ban on so-called naked short selling has been extended to include all shares traded in Germany, Finance Minister Wolfgang Schauble said, presenting the controversial legislation.
Previously the ban was in place only for the biggest financial stocks and euro area government bonds. 'The financial markets urgently need more efficient regulation,' Mr Schauble told reporters.
Naked short selling is effectively a bet that a certain share or government bond will go down on the markets. But unlike conventional short selling, a trader does not even borrow the stock or bond before it is traded.
The practice came under fire as the Greek debt crisis escalated. Many analysts said that such trades artificially inflated Greece's funding costs. Critics of the practice also say it can create highly damaging volatility on financial markets. But most short selling takes place in London and it is not a common practice in Germany.
The law also encompasses certain trades on currencies not used for hedging, although a ban on these can be implemented in times of crisis but not as a permanent measure. The move marks a slight watering-down of the original proposals as a previous version had envisaged a complete ban.
Last month, Germany rocked its European partners and unsettled markets worldwide by unveiling, out of the blue, a ban on naked short selling of sovereign bonds and credit default swaps. The surprise move, by Germany's financial regulator, was introduced unilaterally and without informing other G20 countries.
Schauble defended this approach, arguing that other countries had similar bans already in force against short selling. This time, however, he said he had circulated a draft of the legislation to other EU finance ministries. He said he hoped the German law would spur EU-wide regulation on the issue.
The minister also stressed that the ban would in practice only affect Austrian and German government bonds, as they are traded in Germany, although in theory it extends to all euro zone government debt. The draft bill now passes to the German parliament, where Chancellor Angela Merkel's centre-right coalition holds a clear majority.
