11/01/2012 Author: Tony Griffiths

EU CDS ban could take managers by surprise

Too few hedge fund managers understand the full implications of this year’s EU ban on naked sovereign Credit Default Swaps (CDS), legal experts have warned.  

The EU Parliament signed off on its new short-selling regulations in November 2011 and the EU Council is widely expected to follow suit before the end of January, paving the way for the proposal’s inclusion in the Official Journal (OJ) of the EU.

The regulations, which are due to come into effect on 1 November 2012, will include a controversial ban on uncovered sovereign CDS.   

However, only CDS agreements signed before the legislation is finalised in the OJ will be grandfathered across when the ban comes into force in November – a fact “a lot of managers won’t have appreciated yet,” said Neil Robson, a regulatory specialist at Schulte, Roth & Zabel.

CDS agreements can be signed after the regulation’s entry into the OJ, but these could be deemed illegal if the underlying bonds have not been purchased before 1 November 2012.

Unlike EU Directives, which enter into force 20 days after publication in the OJ, EU Regulations enter into force the day after publication. “You could easily get caught out,” agreed one London-based legal professional.