Brussels, 01/12/2010 (Agence Europe) - French Green MEP Pascal Canfin wants to ban the holding of credit default swaps (CDS) against the risk of issuers of sovereign debt (in other words, nation states) defaulting on their debt for investors that do not actually own the bonds and gilts (sovereign debt) to which the CDS apply. In a draft report on the draft refutation on naked short selling and derivatives that will be discussed by a committee at the European Parliament on Monday 13 December 2010 (EUROPE 10211), Canfin says that the purchase of a sovereign debt CDS should only be allowed for holders of the debt in question. He explains that CDS are insurance products and therefore one has to own the bond to be insured, failing which CDS open the door to speculation. It is such speculation on CDS that has been blamed of exacerbating Greece's problems with rolling over its severing debt on the money market.
In the draft regulation, the Commission suggests restricting naked short selling by requiring sellers to have at least signed a deal with a third party to isolate and reserve the securities in question in order that they can be properly delivered on the payment date. Canfin goes further, believing that naked selling should be accompanied by a loan of a security or an agreement to guarantee the loan in advance of naked selling. He supports the Commission's idea that if the security is not supplied, then it should be automatically bought back after a certain time, arguing that this has applied in the United States since 2008 and has resulted in a sharp decline in the number of non-delivery deals. He argues that the measures should apply to over to the counter sales (sales not using regulated selling platforms). The new European authority for the supervision of financial markets (ESMA) should decide on penalties for infringement of the rules.
Canfin wants greater transparency requirements than set out in the draft legislation, calling for the notification to the regulator system for share-holdings to be extended to debt and CDS. He says it would be desirable to introduce symmetrical notification of naked sales of shares allowed for leverage effect. He says that the flagging of securities to monitor transaction flow and sales volumes would enable Europe to line up with international standards and recommends a three-year deadline for its application. (M.B./transl.fl)