18/05/2011 Author: Tony Griffiths

Ban on shorting CDS rejected by EU Council 

An EU ban on the naked short selling of sovereign credit default swaps (CDS) looks increasingly unlikely after European governments agreed not to pursue the proposal during an EU Council meeting on Tuesday.

The controversial proposition, which had received backing from the EU’s other legislative chamber, Parliament, gained little traction at the Ecofin meeting of Council member states and was excluded from the chamber’s final version of the text.

Restrictions on the uncovered shorting of sovereign debt however, were included and will be discussed next month by Council, Parliament and the EU Commission, author of the original draft directive, at the next stage of the process, the trialogues.  

Having been included in the Parliament’s text, the ban on sovereign CDS will also require negotiation, but with neither Council nor the Commission keen, the chances of its inclusion in the final version of the directive are slim.    
 
A relieved Aima welcomed the decision. “The Council’s stance bears out the fact that such a ban could push up government borrowing costs and it is also worth noting that the European Commission has never proposed a ban on uncovered sovereign CDS,” said Aima CEO Andrew Baker. “We hope that the European Parliament, Council and Commission will now find a workable solution on this issue.”

Concerns had been raised in March after Parliament voted through a draft including measures preventing hedge funds shorting sovereign CDS unless a demonstrable hedge was in place.

Expectations are for a compromise text to have been agreed in time for a final vote in July.