Brussels, 06/07/2012 (Agence Europe) - On Thursday 5 July 2012, the European Commission unveiled new implementation measures for EU Regulation 236/12, applicable from November 2012 onwards, for naked short-selling and sovereign debt credit default swaps (CDS) (see EUROPE 10495).
The regulation virtually bans speculation in CDS, but investors will be able to buy them if they own the underlying bonds of the countries in question and/or assets whose value is largely determined by sovereign bonds (shares in big banks of the country in question, for example). The draft European Commission “delegated act” lays down exactly how investors can demonstrate the correlation between assets they own and the bonds for which they have a sovereign CDS contract using two correlation tests - one quantititive and one qualititative. Investors must pass at least one of the two tests to be allowed to take out CDS.
Naked short-selling. The regulation aims to increase transparency in naked short-selling. For the naked sale of sovereign debt, the draft delegated act sets two thresholds for the divulgence of holdings to the regulators. For less than €500 billion of sovereign debt on the market, the threshold is 0.1% of the total, beyond that it is 0.5%.
The regulation also lays down circumstances under which the lack of a sufficiently liquid bond market would require a lifting of the restrictions on the naked short-selling of bonds, also setting thresholds (in terms of price falls on any one day) determining when naked short-selling of sovereign bonds can be banned. The draft delegated act sets out the “adverse events” that can be used by national regulators or the European Securities Markets Authority (ESMA) to justify temporary bans on short-selling of certain bonds, for example serious problems encountered by a country, bank or other financial institution in the financial, monetary or budgetary domains; physical damage due to a natural disaster or a terrorist attack impacting on regulators, market infrastructure or payment and clearing systems.
The draft delegated act will be deemed adopted and come into force in November if neither the Council of Ministers nor the European Parliament object within six months. It comes on top of other implementation measures for the same regulation unveiled at the end of last week (see EUROPE 10645). (MB/transl.fl)