Andrew Baker, chief executive of the Alternative Investment Management Association, which represents the global hedge fund industry, said: “We have previously expressed our concerns about the impact of a ban on uncovered sovereign CDS. It could not only reduce liquidity and increase volatility in debt markets, but also increase government borrowing costs and reduce real economy investments in EU Member States.”
The regulation will not have a big direct impact on the mainstream asset management industry, which apart from the relatively small number of absolute return funds and 130/30 funds does not take short positions. But the industry is concerned about the indirect effect of it making trading more expensive. Adrian Hood, regulatory advisor at the Investment Management Association, said: “The measures will damage the market, by reducing liquidity, and will therefore ultimately increase funding costs”.
The interdealer sector is also concerned by the EU proposals. Alex McDonald, chief executive of the Wholesale Markets Brokers Association, which represents the market’s major interdealer brokers, said: “Notwithstanding the fact that the case against sovereign CDS has not been proved, for market operators the implementation of these rules is unclear and would present an insurmountable obstacle; while the liquidity in these products is likely to move offshore. Without a global approach towards real cures, these measures seem more damaging to all market users than the initial symptoms.”
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