EU policymakers should consider the economic impact of potential restrictions on credit default swaps in sovereign debt. That’s according to the Alternative Investment Management Association (AIMA), the global hedge fund association.
The warning comes ahead of a key vote in the European Parliament’s Economic and Monetary Affairs Committee today, which is expected to consider amendments imposing severe restrictions or bans on uncovered (or ‘naked’) credit default swaps in sovereign debt.
AIMA CEO Andrew Baker said: “AIMA fully supports the reform of the derivatives markets, including the introduction of central clearing of OTC derivatives, greater transparency as well as full disclosure of positions to regulators. However, it makes little sense to single out one particular derivative contract. There should be recognition of the fact that the market cannot function properly without liquidity providers who may enter in and out of the contract without hedging any underlying risk exposure.
“The political positions that stated that sovereign debt woes were caused by or exacerbated by activity in CDS markets were taken before any hard evidence became available. Ever since, the data coming out of the European Commission, the German central bank as well as a great number of academic sources shows there is no evidence of market failure in the CDS markets, let alone any evidence that those who bought protection without owning the underlying bonds were somehow pushing down the prices of sovereign debt.
“If a ban or restriction on entering into net short positions via sovereign CDS was to be enacted it would affect the efficient functioning of global debt markets and have far reaching and substantial negative consequences. Debt markets would be less efficient, liquid and transparent. The cost of borrowing would increase and the availability of credit to borrowers would decrease, with a concomitant negative impact on growth and jobs.”