07/03/2011
By Matt Ritchie
The Alternative Investment Management Association (AIMA) is calling on European Union policymakers to take into account the economic impact of potential restrictions on credit default swaps (CDS) in sovereign debt.
The European Parliament’s Economic and Monetary Affairs Committee is set to take a vote today considering amendments imposing severe restrictions or bans on uncovered credit default swaps in sovereign debt, the association said.
AIMA chief executive Andrew Baker said the organisation “fully supports” reform of the derivatives markets, including the introduction of central clearing of OTC derivatives, greater transparency, and full disclosure of positions to regulators.
However, Baker said it makes “little sense” to single out one particular derivative contract.
“There should be recognition of the fact that the market cannot function properly without liquidity providers who may enter in and out of the contract without hedging any underlying risk exposure.
“The political positions that stated that sovereign debt woes were caused by or exacerbated by activity in CDS markets were taken before any hard evidence became available. Ever since, the data coming out of the European Commission, the German central bank as well as a great number of academic sources shows there is no evidence of market failure in the CDS markets, let alone any evidence that those who bought protection without owning the underlying bonds were somehow pushing down the prices of sovereign debt.”
Baker warned that a ban or restriction on entering into net short positions via CDS would affect the efficient functioning of global debt markets, and have “far reaching and substantial negative consequences.”
“Debt markets would be less efficient, liquid and transparent. The cost of borrowing would increase and the availability of credit to borrowers would decrease, with a concomitant negative impact on growth and jobs,” he said.
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