European Parliament votes naked CDS ban into law
15 November 2011 Strasbourg
Image: Shutterstock
The European Parliament has voted into law a regulation to curb short selling and trading in CDS to make speculation on a country's default more difficult.
Parliament obtained a ban on naked CDS trading which targets the purchase of default insurance contracts without ownership of the related bonds. Purchasing Italian CDS, for example, will now be possible only if the buyer already owns Italian government bonds or a stake in a sector highly dependent on the performance of these bonds, such as an Italian bank.
National authorities can lift the ban in certain cases if their sovereign debt markets are no longer functioning properly. However, a negative opinion from the European Securities and Markets Authority (ESMA) would have political weight on any such moves to lift the ban.
Rapporteur Pascal Canfin (Greens, FR) said, "These rules prove that the EU can act against speculation when the political will is there. This rule will make it impossible to buy CDS for the sole purpose of speculating on a country's default."
Other rules were watered down. The "locate and reserve rule" which would have mandated that traders obtain a guarantee of being able to borrow shares was changed to a rule of reasonable expectation.
However, EU financial markets watchdog, ESMA, will determine measures for judging what may be deemed a "reasonable expectation".
"The new powers for ESMA will allow better coordination at EU level in times of crisis", Canfin said, adding however that, "it would have been better had ESMA had similar powers over decisions relating to sovereign debt, but the member states refused".
The regulation must be formally approved by the European Council in the coming weeks and will enter into force in November 2012.
Parliament obtained a ban on naked CDS trading which targets the purchase of default insurance contracts without ownership of the related bonds. Purchasing Italian CDS, for example, will now be possible only if the buyer already owns Italian government bonds or a stake in a sector highly dependent on the performance of these bonds, such as an Italian bank.
National authorities can lift the ban in certain cases if their sovereign debt markets are no longer functioning properly. However, a negative opinion from the European Securities and Markets Authority (ESMA) would have political weight on any such moves to lift the ban.
Rapporteur Pascal Canfin (Greens, FR) said, "These rules prove that the EU can act against speculation when the political will is there. This rule will make it impossible to buy CDS for the sole purpose of speculating on a country's default."
Other rules were watered down. The "locate and reserve rule" which would have mandated that traders obtain a guarantee of being able to borrow shares was changed to a rule of reasonable expectation.
However, EU financial markets watchdog, ESMA, will determine measures for judging what may be deemed a "reasonable expectation".
"The new powers for ESMA will allow better coordination at EU level in times of crisis", Canfin said, adding however that, "it would have been better had ESMA had similar powers over decisions relating to sovereign debt, but the member states refused".
The regulation must be formally approved by the European Council in the coming weeks and will enter into force in November 2012.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
