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CREDIT COMMENTARY
Jun 04, 2013
ESMA responds to short-selling restrictions
The European Securities and Markets Authority has published its response to the European Commission's request for technical advice on the impact of short-selling restrictions.
The Regulation, which has been in force since November 2012, aims to enhance transparency and reduce certain risks associated with short selling and trading uncovered CDS on the debt of EU Member States.
As expected no compelling impact on the liquidity of EU sovereign single name CDS could be noted.
The restrictions have however had a significant impact on the liquidity of European sovereign CDS indices. Specifically liquidity in Markit's iTraxx SovX Western Europe and SovX CEEMEA indices has completely dried up.
This contrasts with liquidity on sovereigns such as Italy and Spain, which remains among the ten most actively traded CDS contracts by volume according to DTCC data.
Liquidity also remains high for all constituents of iTraxx SovX Western Europe, with all still allocated the highest liquidity score by the Markit CDS Liquidity service. This service allocates a daily liquidity score from 1 to 5 to all CDS entities with a score of 1 indicating the highest level of liquidity.
ESMA has, however, advised that certain aspects of these regulations should be further clarified, specifically regarding correlation tests and the use of sovereign CDS indices for hedging purposes.
Market participants are allowed to enter short positions on EU member states where they have significant levels of correlation with long positions. Further clarity on the use of CDS indices for hedging purposes could possibly see some liquidity return to iTraxx SovX Western Europe and SovX CEEMEA.
With little else on the news front markets traded in the green today with iTraxx Europe at levels close to 104bps and iTraxx Crossover close to 424bps.
Sovereign spreads on France and Spain also traded tighter, following positive findings from the IMF in its sector monitoring mission to Spain and its consultation report on France. France was trading 2bps tighter at 69bps while Spain tightened by 9bps to 232bps.
Frans Scheepers, CFA
Credit Indices
Markit
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