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The EU’s restrictions will come fully into effect on November 1. The EU also banned “naked” shorting of European equities and government bonds, which is when investors sell a stock or bond that they do not actually hold or have borrowed.
Even among long-term institutional investors that rarely use CDS, there is concern that the restriction could lead to unwelcome and unintended consequences for the wider European bond market.
Some of the impact is already becoming apparent. The net notional amount of CDS referencing western European sovereign bonds has dipped to the lowest since mid-2010, according to the Depository Trust and Clearing Company. Although CDS volumes overall have declined, it has been particularly noticeable in Europe. Much of the decline has happened since the summer when investors belatedly started to react to the incoming restrictions.
The prices of European CDS have also tumbled since the summer. It is unclear how much of this is due to the unwinding of uncovered positions, rather than the brighter outlook sparked by the European Central Bank’s promise to intervene, but the EU regulations have at least been a contributory factor.
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