Draft European Parliament regulations on short selling and credit default swaps are potentially inapplicable and even counterproductive, according to the EDHEC-Risk Institute.
The proposed ban on naked sales of sovereign credit default swaps, and a lack of convergence on the issue with authorities in the United States, left little hope that it would be effective, the institute stated in an open letter to the Economic and Monetary Affairs Committee of the European Parliament.
The institute noted that “it would be impossible for intermediaries and ultimately for regulators to verify investors’ holdings of the securities representative of the risk the credit default swaps are assumed to cover”.
It added that the ban would make it harder for countries to manage the interest rate risk on their debt actively, and their counterparties would no longer be able to hedge the country risk of the interest rate swaps they entered into.
“This active management of the yield curve is a major component in the optimisation of the cost of public debt,” the institute stated.
The proposed regulations may more importantly have an adverse impact on public/private partnerships and private financing of public infrastructure projects – at the very least increasing costs, and at worst becoming a major hurdle to development. The potential for lower liquidity may also increase of the cost of debt, the institute stated.
