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European Parliament Votes To Ban “Naked” Credit Default Swaps on Sovereign Debt and Restrict “Naked” Short Sales

November 28, 2011

On November 15, 2011, the European Parliament adopted a regulation banning any person or legal entity in the European Union from entering into "naked," or uncovered, credit default swaps on sovereign debt and restricting uncovered short sales on shares and sovereign debt after November 1, 2012. The Regulation also bans such transactions from being effected on any trading venue in the European Union. CDS on sovereign debt that do not hedge exposure to the sovereign debt itself or to assets or liabilities whose value is correlated to the value of the sovereign debt will no longer be permitted. Short sales of shares and short sales of sovereign debt will be permitted only where the seller has "located" the share or debt instrument prior to entering into the agreement and has a "reasonable expectation" of being able to borrow the shares. The Regulation provides exemptions for market- making activities and primary market operations and allows Member States of the EU to temporarily suspend the ban on uncovered CDS on sovereign debt if the Member State determines that its sovereign debt market is not functioning properly as a result of the ban. The Regulation also introduces reporting requirements for significant net short positions.

To read the memo, click here.

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