EU body takes softer line on CDS ban

The European Commission published a consultation document yesterday on regulation of credit default swaps and short-selling. It says the commission is considering giving individual countries the power to issue temporary bans on trading credit default swaps and short-selling “in emergency situations”.

It also says it is looking at ways to increase transparency around short positions, either for all financial instruments or just for equities and government bonds.

However, the commission seems to have rejected calls for an outright ban on “naked” (that is, most) credit default swaps. Beyond the idea of temporary bans, the commission proposes only that regulators should have greater ability to gain information about individual credit default swap positions, especially net shorts on European sovereigns. It specifically rules out any ban on naked credit default swaps for market makers, pointing out that this function is important to the efficiency of markets.

In response to the consultation paper, Isda pointed out that data on sovereign credit default swaps are already readily available at the DTCC. The trade association also said it is unlikely that the credit default swaps market tail wags the cash bond market dog, since the sovereign bond market is 70 times the size of the sovereign credit default swap market.