European Parliament seals ban on ‘sovereign debt speculation’
15 Nov 2011
EUROPE – The European Parliament has voted into law a regulation to curb short selling and trading in credit default swaps (CDS).
With the vote, naked CDS trading – the purchase of default insurance contracts without owning the related bonds – has now been banned.
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In a statement, Parliament said: “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 – in the event of a Italian default, Italian banks would certainly suffer significantly.”
It said the sole exception would be for a national authority to lift the ban for a maximum of 12 months when its sovereign debt market was “no longer functioning properly”. But even this scenario will be “closely circumscribed”, it said.
Parliament said the new rules would impose much more transparency and essentially ban certain CDS trades – thereby making “speculation on a country’s default more difficult”.
It pointed out that short selling and CDS trading had been “accused of having fuelled market volatility”, with CDS trades having been “widely blamed for potentially aggravating Greece’s troubles”.
It also announced that the powers of the European Securities and Markets Authority (ESMA) would be enhanced.
The EU’s financial markets watchdog will now have the authority to restrict short selling and act as an arbiter of a national authority’s wish to introduce exceptional measures.
It will also be able to require other authorities to introduce exceptional measures to deal with “difficult situations”.
The Council must approve the new regulation in the coming weeks, but this will largely be a formality. The law is set to enter into force from November 2012.
Author: IPE staff