Brussels, 05/07/2011 (Agence Europe) - The European Parliament has adopted the wish of its competent parliamentary committee to ban hedging contracts against the risk of default of an issuer of sovereign debt (sovereign CDS) when they are used for solely speculative purposes. “The Parliament has just demonstrated to the Council its determination to put an end to speculation on sovereign debt in Europe”, said Pascal Canfin (Greens/EFA, France), in a press release issued on Tuesday5 July. “With today's vote in plenary, it would no longer be possible for a hedge fund to buy Greek CDS without owning Greek state bonds and therefore speculate on the country's bankruptcy”, he says, convinced that “Europe cannot for much longer allow speculators to get rich on the back of its citizens, who have been asked to top up the coffers of states on the brink of bankruptcy”.
In reality, the EP is slightly less restrictive, as investors owning instruments whose value correlates closely with that of sovereign debt would be allowed to buy sovereign CDS. Effectively, an investor would be able to take steps against the risk of Greece's default by buying CDS-type insurance in relation to the Greek debt if he or she is the shareholder of a Greek bank or strategic business. The EP's position conflicts with that of the Council, which does not go as far, although it gives the European Securities and Markets Authority (ESMA) the right to suspend, temporarily and in emergency situations, “bare” transactions on sovereign CDS (EUROPE 10380). Some countries, such as Spain and Italy, are concerned that a total ban on investors not exposed to the underlying risks buying sovereign CDS could penalise the liquidity of their debt instruments. “I have reservations (…) regarding the effects of an unconditional ban on bare CDS as regards the liquidity of the sovereign markets and the impact this could have on the bonds market”, warned Michel Barnier, during Monday's debate in plenary. The commissioner for the single market, who wants to change the status quo, which is based on solely national decisions, simply noted his inclination to work with the Council and the EP to find a solution which responds to “legitimate” concerns.
Short selling. It is worth noting that the MEPs rejected an amendment tabled by ALDE and the ECR groups, which would have weakened provisions aiming to restrict the short bare selling of bonds. According to the text as adopted by the EP, if a vendor is not the bare owner of the bond being sold short, he or she will at least have to have entered into an agreement with a third party to isolate the bond and hold it in reserve, so that it can be delivered on the compensation date (locate rule). The Liberals and Conservatives feel that this agreement required between the vendor and a third party could have been replaced with an absolutely enforceable claim, allowing the ownership of a corresponding number of instruments of the same category to be transferred, in such a way as to ensure that the settlement is made when it is due.
The EP also wishes to tighten up the role of ESMA. The European authority will act “to prevent clearing houses from competing by means of regulatory dumping”, said Philippe Lamberts (Greens/EFA, Belgium), in a press release. (M.B./transl.fl)