The proposed regulation, which is in the form of a draft bill, would extend the ban to include all German equities. It would also ban the use of currency derivatives for speculation.

A German government official said that the bill “has been in the making for some time” and its inception predates the ban introduced by the Federal Financial Supervisory Authority (Bafin), the German regulator, last week. The Bafin ban and the draft bill are separate and are the result of two different processes. The draft bill is broader than the ban and would have no expiry date. The ban expires on March 31, 2011.

At the moment just 10 German equities are affected by the Bafin ban, as well as sovereign credit default swaps and eurozone bonds. Currency and equity derivatives are not affected.

The draft bill would ban currency derivatives based on the euro which are not used to hedge.

There would be a disclosure rule, which would require market participants to disclose short positions.

Equity derivatives are not affected under the Bafin ban. But the draft bill says that the ban on uncovered short selling of shares also applies to derivatives whose value is dependent on the price of the shares. In other words, going short on equity derivatives without holding the equivalent equity would be banned.

The draft bill will be sent to cabinet ministers on June 2. If it is voted through by the ministry, it will be passed through to parliament before it can become law.

Elizabeth Gregory, a market strategist from ACM Markets in Switzerland, does not think that a ban on currency derivatives is workable.

“It’s notoriously difficult to differentiate between speculation and hedging,” she said. “A realistic outcome is that there won’t be any ban on currency derivatives outright.”

“What makes it more difficult with currency is that we don’t have a single exchange. With the FX market, there are so many more pools of liquidity,” she said.

A round of discussion about the bill with market participants will be held on May 27.

Sian Williams +44 207 779 8370 swilliams@fow.com