The European Parliament voted to prohibit “naked” short sales on credit default swaps this morning, after a long debate over the controversial market behaviour.
“Naked” short selling—purchasing an insurance contract on a security without actually owning it—has been blamed for speculative attacks that increase the likelihood that the security’s issuer will default.
This is a hot issue right now in Europe, as speculation that fragile sovereigns will default on their debts drives market fear which, in turn, heightens the likelihood that said sovereign will indeed default.
The ban provides some loopholes for governments, which can lift the ban when the sovereign debt market isn’t functioning properly. This issue had previously stalled implementation of the ban.
The law is slated to go into effect December 1 in all 27 countries of the EU. Read the full press release from the European Parliament here.