Dealers predict CVA-CDS loop will create sovereign volatility
Dealers say regulators have cooked up a pro-cyclical credit value adjustment capital charge that will force them to buy increasing amounts of protection in an illiquid market, regardless of changes in counterparty credit. The impact will be felt by uncollateralised counterparties, such as corporates and sovereigns. By Laurie Carver
Following more than a year of wrangling, European parliamentarians managed to persuade the Polish presidency of the European Union to support tough restrictions on so-called ‘naked’ sovereign credit default swaps (CDSs) – the buying of protection on government debt as an outright short position. The deal, announced on October 18, was hailed as a great victory. Since Germany imposed a unilateral ban on naked sovereign CDSs in May 2010, the market had been seen by many as a way for speculators to
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