Naked Sovereign CDS Ban to Apply to Market-Makers, ESMA Says

The European Union’s top markets regulator granted market-makers an exemption from some tougher rules on short-selling, while stopping short of allowing them to trade naked sovereign credit-default swaps.

The European Securities and Markets Authority, set up in 2011 to harmonize rules across the bloc, said products that aren’t traded on a regulated market, including sovereign CDS, wouldn’t qualify for the exemption.

“ESMA has taken considerable time to closely consider the regulation and explore through a legal analysis whether there were ways to accommodate non-admitted/non-traded instruments,” the Paris-based agency said in a report on its website today. “Results of the analysis led to a negative conclusion.”

German Finance Minister Wolfgang Schaeuble and lawmakers in the European Parliament have called for a ban on naked CDS trades on government debt over concerns the practice fueled the euro-area debt crisis. Germany already has restrictions on using swaps to bet on sovereign defaults. The EU agreed on short- selling restrictions, including on sovereign CDS, last year. ESMA’s guidelines clarified whether market-makers were subject to the curbs.

Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy and sell insurance on bonds they don’t own.

A market maker maintains a liquid market for a particular security by buying and selling as circumstances require.

To contact the reporter on this story: Ben Moshinsky in Brussels at

To contact the editor responsible for this story: Anthony Aarons at

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.