On 9 July 2010, the German legislator passed the Act to Prevent Abusive Securities and Derivative Trades (Gesetz zur Vorbeugung gegen missbräuchliche Wertpapier- und Derivategeschäfte) (Act). The Act is likely to come into force in August 2010.

Further to our earlier updates in relation to the ban on naked short selling and the Act (see Legal update, BaFin prohibits naked short selling of debt of Euro Countries and Legal update, German Ministry of Finance publishes draft Act to Prevent Abusive Securities and Derivative Trades), in summary, the Act prohibits naked short selling in the following securities:

(Note that a naked short selling position requires that the seller of the securities is not at the time it sells the securities the legal owner of them and does not have a contractual, unconditional and enforceable claim to a corresponding number of securities at the end of the day on which the short sale is concluded.)

The Act also prohibits the conclusion of credit default swaps (CDS) in respect of default risks of EU member states in the euro zone where the CDS is not intended to achieve a more than insignificant reduction of the hedged risks.

The Act further introduces a disclosure regime for net short positions in shares admitted to trading on a regulated market in Germany. The disclosure regime follows the model proposed by CESR in its March 2010 feedback statement on a pan-European short selling regime and requires private disclosure to BaFin of net short positions at the 0.2%, 0.3% and 0.4% thresholds and public disclosure to the market of net short positions at the 0.5% threshold and each 0.1% increment thereafter.

The German treasury department will also be authorised to prohibit (by way of ordinances) additional trades, in particular, of derivatives that map prohibited short selling positions. Also, the German regulator, BaFin, in consultation with the German Bundesbank, will be authorised to temporarily prohibit (by way of decrees) additional trades not covered by the statutory prohibitions (for example, equity derivatives or currency derivatives) where such prohibition is necessary because of exceptional market circumstances.

We expect similar rules to be implemented at EU-level in the near future.