Opinion of the European Central Bank of 8 July 2010 on restrictions on short selling (CON/2010/53)
Date: 2010-07-08
Institutions: European Central Bank
Subjects: Germany, financial stability, national law, payment system, public borrowing

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) received 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  Central  Bank  by  national  authorities  regarding  draft 
legislative provisions1, as the draft law relates to rules applicable to financial institutions insofar as they 

materially  influence  the  stability  of  financial  institutions  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 counteracting recent negative market developments such as the spreading of 

turbulence  to  the  markets  for  government  bonds  issued  by  euro  area  Member  States.  It  seeks  to 

introduce a legal ban on certain financial transactions and an improvement of transparency. 

According to the explanatory memorandum to the draft 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, alongside international efforts, by creating an explicit 

legal basis for the prohibition of certain transactions that could potentially exacerbate the crisis.  

1.2  The draft law proposes principally three sets of amendments to the existing law. First, naked short 
sales2  of  shares  and  debt  securities  of  euro  area  Member  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 available on the market, will be reduced significantly. 

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2 

OJ L 189, 3.7.1998, p. 42.  
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  right  under  the  law  of  obligations  or  under  a  fiduciary 
entitlement to receive a corresponding number or amount of securities of the same type. 

 
 
 
 
                                                 
Second,  the  legislator  provides  for  a  two-level  transparency  system  for  net  short  positions, 

including  covered  short  positions  in  shares  and  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 market 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 Financial Supervisory Authority’s (BaFin) generic power to take measures 

against material shortcomings will be further specified to include the possibility of a ban on further 

types of transactions on a case-by-case basis, in particular 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  welcome  legislation  requiring  an  appropriate  level  of 

transparency  for  certain  types  of  transactions,  such  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 financial 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 launched 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 financial markets is of crucial importance.  

2.3  As  regards  the  proposed  ban  on  naked  short  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  needed  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 concerning short selling and will contribute to the public 

3  

The Declaration is available on the French Presidency’s website at www.ue2008.fr. 

2 

 
                                                 
consultation  launched  by  the  Commission.  The  ECB  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 

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