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The Actuary The magazine of the Institute & Faculty of Actuaries

MEPs vote to curb short-selling and CDS trades

The rules will impose much more transparency and virtually ban certain CDS trades, thereby making speculation on a country's default more difficult.

The European Parliament obtained a ban on naked CDS trading (purchasing default insurance contracts without owning the related bonds). Purchasing Italian CDSs, for example, will now be possible only if the buyer already owns Italian government bonds or a stake in a sector highly dependent on the performance of these bonds, such as an Italian bank - in the event of an Italian default, Italian banks would certainly suffer significantly.

The sole exception is an option for a national authority to lift the ban for a maximum of 12 months in cases where its sovereign debt market is no longer functioning properly, and then possibly renew it for a further six months. Even this possibility would be closely circumscribed, because the text specifies a limited number of indicators which could justify the regulator's action. Moreover, within 24 hours, the European Securities and Markets Authority (ESMA) would publish an opinion on its website as to the utility of suspending the ban. A negative opinion from ESMA would have political weight.

Welcoming the ban, rapporteur Pascal Canfin (Greens, FR) said: "These rules prove that the EU can act against speculation when the political will is there. This rule will make it impossible to buy CDSs for the sole purpose of speculating on a country's default."

MEPs from groups sponsoring the deal also managed to preserve the powers of the EU's financial markets watchdog, ESMA, in particular to restrict their short-selling, as an arbiter of a national authority's wish to introduce measures to address exceptional situations, and also to require other authorities to introduce exceptional measures to deal with difficult situations.

Mr Canfin continued: "The new powers for ESMA will allow better co-ordination at EU level in times of crisis. He added: "It would have been better had ESMA had similar powers over decisions relating to sovereign debt, but the Member States refused."

The new regulation must be formally approved by the European Council in the coming weeks, and will enter into force in November 2012.