Christopher Langner, Christopher Whittall, IFR, 23 October 2012
Some Asian fixed-income investors are grappling with how to hedge high-beta portfolios on the eve of the implementation of a ban on naked shorting of European sovereign CDS.
Until March this year, using European CDS bets to offset potential losses from a drop in prices of Asian high-yield bonds had become a fairly popular strategy. However, since regulators in Europe said they were banning the practice from November 1, many of those bets were unwound.
Asia is not alone in unwinding these positions. Liquidity in EU sovereign credit default swaps has cratered ahead of the controversial EU ban of outright short positions. The net notional outstanding of EU sovereign CDS has plummeted to USD112bn, its lowest level since records began, from more than USD140bn when the eurozone crisis intensified last year.