Europe Spurning the Short Sale

Back in August, we shook our heads as European leaders put a ban on shorting European stocks– and the whole world of futures scrambled to find out just how limited they would be (their market are down about 4.2% since that ban, by the way- though past performance is not necessarily indicative of future results).  Now, depending on the final shape of the solution to the Euro Crisis, it looks like they may try another so-called ‘solution’ to keep people from betting against their economies.

The Financial Times reported on the coming resolution on a ban on using sovereign CDS for anything other than hedging this morning:

The most controversial part of the deal will be measures – strongly advocated by Germany – to stop traders buying sovereign CDS as a straight bet rather than as a means of reducing risk exposure on other underlying positions.

While broad agreement has been reached, key details on the size of the exemptions for investors and the rules allowing some national regulators to opt-out of the ban for short periods are still to be resolved in the final round of talks.

The CDS restrictions will be accompanied by a ban on naked short selling of bonds and shares, as well as other rules that will require investors to provide more information on short positions to regulators and the general market.

We tend to believe that such limits rarely accomplish their goals, and as it turns out, the IMF agrees.  The FT article continued:

A recent IMF report warned that banning naked sovereign CDS positions “could easily increase contagion rather than diffuse it”.

“The alternatives for counterparties seeking to hedge their sovereign exposures are either rapidly to institute proxy hedges in liquid alternatives (through shorting government bonds, systemic bank equities, or the currency) or to cut country exposure by rapidly reducing credit lines to corporates and banks,” the report said.

Someone from the establishment (we’ll lump the IMF in there with the indebted banks and governments) actually talking about how government intervention can cause unintended consequences? How shocking.

Just as interesting – their theories on what could happen.  A spike in short selling of government bonds (and Euro bond futures)?  Massive selling of the currency?  Managed futures likely wouldn’t mind seeing some of that volume come out of the over the counter CDS market into the exchange traded futures markets (or the currency markets), but would the volume cause trends lower in those? Possibly, but we can’t imagine the hedge and the proxy hedge are that far off in pricing. Sure, a CDS gives direct exposure while shorting the government bonds or currency is indirect exposure, but the market laws of arbitrage would make us believe that if there is a premium available in the proxy over the direct exposure, smart firms will already be using the proxy to earn that premium.

We’ll have to see how the final rules take shape, but as the solution building process drags on, we’re starting to wonder if a workable solution is possible, or if the end game is a rule that requires markets to go only one direction- up.

Write a Comment

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.