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Comment: The EU and naked CDS shorting

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Michael McKee (pictured), Head of Financial Services Regulation at DLA Piper, comments on the EU Finance Ministers decision not to permanently ban naked CDS shorting…

When the market targets the debt of a particular sovereign borrower it is usually because the country’s politicians have failed to make economic reforms quickly enough.

Usually, it is the country’s government that is to blame for such a debt crisis – rather than the markets. However, given the economic pressure on the Eurozone, the European Council have shown considerable political restraint in limiting themselves to passing emergency powers to impose a ban on naked short selling.

There is broad agreement amongst traders, economists and even the buy side that having the ability to short sell brings liquidity – which can often be in short supply, particularly for bonds.

Banning short selling would have been bad news for the markets – but also for the wider European economy.

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