AIMA Asks EU Lawmakers To Re-think Naked CDS Regs

Mar 7 2011 | 10:46am ET

An alternative investment management organization is warning EU policymakers to consider the economic impact of potential restrictions on credit default swaps in sovereign debt.

The Alternative Investment Management Association, a global hedge fund association, made the comments ahead of a key vote in the European Parliament’s Economic and Monetary Affairs Committee, which is expected to consider amendments imposing severe restrictions or bans on uncovered (or ‘naked’) credit default swaps in sovereign debt.
AIMA CEO Andrew Baker said: “AIMA fully supports the reform of the derivatives markets, including the introduction of central clearing of OTC derivatives, greater transparency as well as full disclosure of positions to regulators. However, 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.”

Baker says data from the European Commission and the German central bank, among other sources, shows no evidence of market failure in the CDS markets.
“If a ban or restriction on entering into net short positions via sovereign CDS was to be enacted it would affect the efficient functioning of global debt markets and have far reaching and substantial negative consequences,” said Baker. “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.”

AIMA has over 1,200 corporate members based in over 40 countries worldwide. Members include hedge fund managers, fund of hedge funds managers, prime brokers, legal and accounting firms, investors, fund administrators and independent fund directors

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