GERMANY: Response from BaFin on Germany short selling restrictions regarding credit derivatives

Wednesday February 2 2011

Following a query submitted regarding Germany short selling restrictions on credit derivate transactions, BaFin clarified the application of the rules as follows:

“The conclusion of certain naked CDS’s on liabilities of EU member states in which the person or entity in question is not pursuing any hedging purposes of their own is prohibited. In addition to CDS’s, this ban also covers cases in which CDS’s are embedded in other instruments such as credit-linked notes or total return swaps. The ban only refers to the protection buyer; it does not affect the protection seller.

Given the absence of a connection to a regulated market in Germany (in contrast to the ban of naked Germany short selling in section 30h Securities Trading Act), the ban is based on the place where the act establishing the credit derivative takes place. The ban thus relates only to transactions concluded in Germany, with the transaction’s conclusion under civil law being decisive in this regard. If civil-law acceptance of an offer for conclusion of a transaction takes place abroad, this transaction does not fall under the scope of the ban.”