EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 8 July 2010  
on restrictions on short selling 
(CON/2010/53) 
 
Introduction and legal basis  
On 17 June 2010 the European Central Bank (ECB) r eceived a request from the German Federal Ministry 
of Finance for an opinion on a draft law on the prevention of improper transactions in securities and derivatives (hereinafter the ‘draft law’). 
The ECB’s competence to deliver an  opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and the sixth indent  of Article 2(1) of Council Decision 98/415/EC of 
29 June 1998 on the consultation of the European Ce ntral Bank by national authorities regarding draft 
legislative provisions
1, as the draft law relates to rules applicable  to financial institutions insofar as they 
materially influence the stability of financial ins titutions and markets. In accordance with the first 
sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council 
has adopted this opinion. 
 1.  Purpose of the draft law 
1.1 The draft law aims at counterac ting recent negative market developm ents such as the spreading of 
turbulence to the markets for government bonds i ssued by euro area Member States. It seeks to 
introduce a legal ban on certain financial tran sactions and an improvement of transparency. 
According to the explanatory memorandum to the dr aft law, the financial crisis revealed the need 
for further substantial improvements in supervisory law. Therefore, the German national legislator 
intends to further stabilise financial markets, alongs ide international efforts, by creating an explicit 
legal basis for the prohibition of certain transacti ons that could potentially exacerbate the crisis.  
1.2 The draft law proposes principally three sets of am endments to the existing law. First, naked short 
sales
2 of shares and debt securities of euro area Me mber States authorised on a domestic stock 
market to trade in the regulated market are to be banned ex lege . Thus, risks resulting in strong 
downward pressure on stock market prices that could arise from such transactions, as well as from the possibility of selling more securities than ava ilable on the market, will be reduced significantly. 
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
2 Sales where the seller of the securities is not the owner of a corresponding number or amount of the same type of the 
securities sold or does not have an unconditionally enforceable ri ght under the law of obligations or under a fiduciary 
entitlement to receive a corresponding number or amount of securities of the same type. 
2 Second, the legislator provides for a two-leve l transparency system for net short positions, 
including covered short positions in shares a nd commercially corresponding positions in other 
financial instruments. The third amendment is aimed at inhibiting ex lege  the conclusion of certain 
naked credit default protection instruments – such as ‘credit default swaps’ (CDSs) – in relation to 
the liabilities of Member States whose currency is the euro. As CDSs not purchased for hedging are 
particularly capable of intensifying negative ma rket trends and creating excessive upward pressure 
on CDS premiums in the market, they are to be prohibited by law.  
1.3 In addition, the Federal Financ ial Supervisory Authority’s (BaFin ) generic power to take measures 
against material shortcomings will be further specifi ed to include the possibility of a ban on further 
types of transactions on a case-by-case basis, in pa rticular on transactions in currency derivatives 
based on the euro and on transactions in derivatives that reflect short sales. Moreover, on the same 
grounds, the Ministry will be empowered to adopt  regulations imposing permanent prohibitions on 
certain types of transactions. 
 2. General observations  2.1 In general, the ECB considers timely and welc ome legislation requiring an  appropriate level of 
transparency for certain types of transactions, su ch as those relating to CDSs for sovereign debt. 
The ECB supports in particular the enhancement of requirements for the disclosure to supervisory 
authorities of net short positions held by financia l institutions in certain financial instruments. 
2.2 The ECB notes that there are currently no harmonised rules banning short selling, concerning 
transparency in relation to short selling, or banning naked credit derivatives at Union level. 
However, the Commission has announced a legislative proposal to regulate short selling, to be adopted in September 2010, and launc hed a public consultation for this purpose. In this context, the 
ECB notes that given the integrated nature of the single market, regulatory initiatives aimed at safeguarding the efficiency of financial markets and promoting their orderly functioning can be 
fully effective only if coordinated. This is the underlying reason that inspired the adoption of the 
‘Declaration on a concerted European action plan of the euro area countries’ issued by the Heads of 
State of the euro area on 12 October 2008 (hereinafter the ‘Declaration’)
3. In this spirit, the ECB 
has highlighted in its opinions that close coordination at Union level of government measures intended to alleviate tensions in the fina ncial markets is of crucial importance.  
2.3 As regards the proposed ban on naked shor t selling, the ECB notes that although naked short 
selling practices may fulfil important economic functions, these market practices may also have potentially negative impacts from a financial stability perspective. A cautious approach 
underpinned by sound analysis is therefore need ed in this regard. In this context, the 
ECB/Eurosystem supports the work started by the Commission aimed at identifying the main 
features of a Union legislative proposal concerni ng short selling and will contribute to the public 
                                                 
3  The Declaration is available on the French Presidency’s website at www.ue2008.fr. 
3 consultation launched by the Commission. The E CB therefore draws the consulting authority’s 
attention to the need to take into account possible developments that will emerge at European level. 
 This opinion will be published on the ECB’s website.    Done at Frankfurt am Main, 8 July 2010. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET