Brussels, 31/10/2012 (Agence Europe) - EU Regulation 236/12 on the naked sale of some types of credit default swap (CDS) insurance policies against the bankruptcy of a debt emitter, along with its application measures, comes into force on Thursday 1 November (see EUROPE 10495). This is flagship legislation initiated by the G20 in the wake of the 2008 financial crisis and it virtually bans speculation using sovereign debt CDS. It is no longer possible for investors to buy up CDS for Spanish bonds, for example, if they do not actually own Spanish bonds, but investors will still be allowed to purchase sovereign CDS if they own shares in assets whose value is strictly correlated with Spanish bonds (such as shares in big Spanish banks).
Fearing the impact on their ability to roll over debt on the money markets, Spain and Italy have managed to get the member states given the option of requesting a lifting of restrictive rules on naked selling of sovereign CDS and in fact, their opt-out was key to the EU being the first area of the world to introduce legislation of this type.
Naked short-selling. The new EU rules give the European Security and Markets Authority (ESMA) the power to hugely restrict naked selling in exceptional circumstances and also increase transparency requirements for naked short-selling. Two thresholds have been set for the naked sale of sovereign bonds, above which positions must be reported to national supervisory bodies. When the total volume of sovereign debt on the market is below €500 billion, the short position is 0.1% of the total. Beyond that, the disclosure threshold is 0.5%.
The regulation lays down circumstances in which the absence of sufficient liquidity on the sovereign debt market requires restrictions in the naked selling of bonds and sets thresholds (calculated in terms of price falls on any one day) for a blanket ban of naked short-selling of sovereign bonds. (MB/transl.fl)