Financial Regulatory Forum

Short-selling and CDS regulation in EU: Less to nakedness than meets the eye, funds and firms argue

By Peter Elstob

LONDON/NEW YORK, March 5 (Thomson Reuters Accelus) - Regulators and market participants continue to differ fundamentally over when a credit default swap should be deemed to be uncovered, or ‘naked’, and when investors are using CDS as a legitimate hedge. If a sovereign CDS can be demonstrated to be hedging counterparty or systemic risk, it can be exempted from the provisions of the proposed European short-selling regulation, which is aimed at abusive use of sovereign CDS by financial institutions to bet against countries’ debt.

Trade bodies argue that regulators should recognize various forms of ‘proxy’ hedging, including buying CDS for the debt of countries other than the one where the institution’s exposure lies — so-called ‘cross-border’ hedging’ — and ‘tail-risk’ hedges that may or may not turn out to have been necessary over a given period. They believe that the short-selling regulation (level 1) does not ban these strategies, and they should therefore be permitted (and so qualify for exemptions) in the detailed rules (level 2) that the European Securities and Markets Authority (ESMA) is still drawing up. (more…)

U.S. anti-corruption setbacks seen having little impact on company strategies

By Brett Wolf

NEW YORK, Feb. 23 (Thomson Reuters Accelus) - The U.S. Justice Department has suffered a string of setbacks in its efforts to enforce the Foreign Corrupt Practices Act, including two this week, but it retains sufficient leverage to persuade companies to settle bribery allegations without a legal fight, sources said.

“I think companies should be emboldened, but I doubt they will,” said Mike Koehler, an assistant professor of business law at Butler University. “After all, to challenge the Justice Department and to put it to its burden of proof requires a company to be criminally indicted.” Indictment would not only open up a long legal battle, it would also threaten a company’s reputation.  (more…)

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