The International Swaps and Derivatives Association (ISDA) responded to HM Treasury’s short selling consultation on sovereign debt and credit default swaps (CDS).
In other international jurisdictions, investors can buy protection through sovereign CDS in countries without any short selling restrictions. Removing the restrictions:
- will help the UK to align with international standards
- may incentivize more client demand for UK sovereign CDS and therefore more liquidity provision from banks
- is likely to reduce the extent to which market participants hedge UK country risk by shorting UK banks (as the nearest equivalent to sovereign CDS)
“Removing the restrictions altogether is preferable to making further amendments to the existing UK regime, which is unlikely to deliver benefits that would outweigh the costs and complexity of additional implementation,” ISDA wrote in the response.