Article: “No evidence” bank CDS used as sovereign shorting proxy

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“No evidence” bank CDS used as sovereign shorting proxy

Christopher Whittall, 30 April 2013

LONDON, April 30 (IFR) – The European Union’s ban on short selling government debt using credit default swaps is pushing hedging or speculative activity into the bank CDS market, according to some market participants, but analysis from JP Morgan has poured cold water on these claims.

Sovereign CDS trading volumes have fallen off a cliff since the EU’s ban on naked or outright short positions came into force last November, with some arguing that trading is migrating to financial CDS, which are not covered by the rules.

“Because of the ban on sovereign CDS, activity has moved to bank CDS. That is something policymakers have to think about very carefully as it creates a feedback loop [between banks and weak sovereigns],” Athanassios Diplas, a senior adviser to the International Swaps and Derivatives Association Board, told the ISDA Annual General Meeting in Singapore last week.

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