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Comment on EU permanent ban on use of naked CDS

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19 October 2011, Brussels

Finance Watch welcomes news that the EU is to make the ban on naked use of credit default swaps (CDS) permanent, after Council and Parliament negotiators yesterday announced a ban on the so-called naked use of CDS with an opt-out to allow the hedging of certain correlated risks.

“We are delighted that negotiators reached this balanced and sensible conclusion. Their decision protects sovereign issuers from the most harmful types of speculation while making it still possible for people who provide real investment capital to hedge their exposure”, said Thierry Philipponnat, Secretary General of Finance Watch.

The EU’s Commissioner for the single market, Michel Barnier, repeated Finance Watch’s warning that naked CDS increases instability by mechanically accelerating price movements. “Short selling did not cause the crisis, but can aggravate price declines in distressed markets”,said Mr Barnier.

Mr Philipponnat added: “We hope the industry will now drop its claim that the use of naked CDS lowers the cost of sovereign funding. This argument is simply incorrect, as we said in July”.

Finance Watch’s paper on naked CDS, “Why sovereign credit default swaps do not lower the cost of funding of sovereign borrowers” was published on 11 July 2011.

Council and Parliament must now ratify the agreement. A plenary vote in Parliament is expected in the third week of November.

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