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…)

BREAKINGVIEWS – Pressure for sovereign CDS ban should be resisted

– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –

 By Neil Unmack

LONDON, Feb 17 (Reuters Breakingviews) – Every crisis needs a bogeyman. In a tense euro zone, attention is turning to sovereign credit-default swaps (CDS). Some in the market fear that regulators will now be tempted to ban these derivative instruments — just as the curbs on short-selling financial stocks were introduced following Lehman Brothers’ failure.

It is unclear whether such draconian moves really are in prospect, but wholesale curbs on sovereign CDS should certainly be resisted.