This article was authored by Tim Jukes, compliance consultant at The IMS Group.
The European Securities and Markets Authority (ESMA) released a consultation draft on short selling and CDS in January 2012; Jukes discusses the short timetable, the proposed restrictions on using CDS as a hedge and the complexity of reporting requirements.
Many interested parties have criticised the compressed timetable which has allowed for only three weeks consultation with the industry on the detailed aspects of the Regulation contained in ESMA's draft regulatory and implementing technical standards and delegated acts. The timescale also resulted in the absence of the normal call for evidence process and the lack of a cost benefit analysis of the measures. Commentators have noted that such short timeframes could well impede ESMA's aim of producing high quality and credible standards.
Amongst the areas where respondents to the consultations highlighted concerns, the proposed restrictions on using Credit Default Swaps as a hedge feature highly. Under the Regulation, a short sale in sovereign debt is permissible where the transaction serves to hedge a long position in the debt instrument of an issuer, the pricing of which has a 'high correlation' with that of the given sovereign debt. The detailed ESMA proposals, however, introduce narrow, back-ward looking definitions to determine and measure co......................
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