EU Faces Obstacles in Sovereign Debt Trade Reforms

European Union is planning to crack down on illegal trading methods of Sovereign Debt Bonds, but facing opposition from several member states. EU finance ministers are going to review progress in preparing a draft law to curb illegal short selling and CDS trading on December 7. The draft law envisages measures such as:

  • To inject transparency in short selling of shares
  • To regulate trading of CDS based on sovereign debt bonds

EU states are divided over forcing trading venues to flag short selling orders and publish daily summaries of short orders. The measure introduces sanctions for traders who fail to settle a stock trade in time. The aim is to curb short selling where the investors are not prepared to borrow the stock when settlement arises.

The draft measure also gives emergency powers to the new European Securities and Markets Authority (ESMA), a pan-EU regulator that will start operating in January. Some member states believe that giving ESMA powers to override a national supervisor goes too far, especially when it comes to sovereign debt markets.

Policy makers say hedge funds have used CDS contracts based on sovereign debt to bet on falling price of debt bonds. They are of the view that this betting worsened the situation during Greece debt crisis. Britain, Europe’s biggest derivative trading centre argues that there is no evidence of necessity of such a regulation and such regulation would hamper the functioning and liquidity of sovereign debt bonds.


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