EC naked sovereign CDS rules met with relief by traders

The European Commission backed away from a ban on naked sovereign credit default swaps in September, instead proposing fresh disclosure requirements. The move was met with relief from dealers, but elements of the rules are unclear. Mark Pengelly reports

Sovereign credit default swaps (CDSs) have been extolled by risk managers and investors as a simple and efficient means of hedging the credit risk posed by certain countries. But in the eyes of some European policy-makers, they are a financial weapon of mass destruction pointed directly at the region’s governments.

The proof, they say, can be found in spread movements in the lead-up to the eurozone sovereign debt crisis, which peaked in May. As anxiety about the level of debt racked up by some