Bloomberg News

Naked CDS Curbs on Sovereign Debt Sought by European Parliament

July 05, 2011

July 5 (Bloomberg) -- European lawmakers called for restrictions on traders’ use of credit default swaps to profit from defaults on sovereign debt they don’t own.

The European Union Parliament also voted in Strasbourg, France, in favor of a ban on short selling of government bonds in the EU unless traders have at least “located and reserved” in advance the securities they intend to sell.

“Today we are sending a very strong political message,” Pascal Canfin, a French lawmaker who is responsible for securing the adoption of the measures by the Parliament, said after the vote. Negotiations on the measures with governments in the 27- nation region will continue next week, he said.

Politicians including German Chancellor Angela Merkel and French President Nicolas Sarkozy have claimed that naked short- selling and credit-default swaps worsened the euro area’s sovereign-debt crisis, and have called for EU curbs. Michel Barnier, the EU’s financial-services chief, said last year such trades may lead to “disorderly markets and systemic risks.”

The vote confirmed that the Parliament is seeking tougher curbs on short selling and sovereign CDS than those supported by most EU governments.

The assembly called for a ban on the buying and selling of credit-default swaps on European Union nations’ debt, unless the buyer either owns the underlying security or another asset whose market price moves in close tandem with it. That would allow investors to take out insurance if they know that a default would harm their non-sovereign holdings such as shares in companies in the defaulting nation.

Bonds and Stocks

Finance ministers from the 27-nation region agreed in May that traders should be allowed to short sell government bonds and stocks if they have a “reasonable expectation” that they can obtain the underlying securities. They also rejected calls from Germany for a ban on sovereign CDS.

The Parliament today signaled support for measures to force some trading of over-the-counter derivatives through clearinghouses in a bid to safeguard financial markets.

The assembly approved proposals to empower the European Securities and Markets Authority to decide on the type of derivatives that should be centrally cleared. Traders that flout the rules would face fines or restrictions on trading.

The Parliament said members of its economic and monetary affairs committee should continue negotiating with governments on both the derivatives law and the law on short selling with a view to holding further votes once a deal has been reached.

The EU assembly and national governments must agree on the measures before they can enter into force.

Lawmakers also voted on legislation to bolster protection for fund investors and to update oversight rules for so-called bancassurers, financial companies with bank and insurance arms.

--Editors: Peter Chapman, Anthony Aarons

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net;

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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