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EU Ministers Adopt Curbs on Naked CDSs in Short-Selling Law

European Union finance ministers adopted a short-selling law that includes an optional ban on naked credit-default swaps tied to sovereign debt.

The legislation, which would also curb so-called naked short-selling of stocks and government bonds, was approved at a meeting in Brussels today. The decision marks the final stage in the adoption of the law, which was also approved in November by lawmakers in the European Parliament.

Investors buy CDSs as insurance to protect themselves from losses if a bond issuer defaults. A sovereign CDS trade becomes naked when an investor buys the swap without being at risk of suffering such losses.

The short-selling and naked-CDS curbs will come into effect on Nov. 1, according to a copy of the law published on the EU’s website.

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