ESMA · ESMA_QA_1955 Answer Published

Uncovered Credit Default Swap - Use of a sovereign CDS position to hedge different risks

Regulation
Short Selling Regulation (SSR) Regulation (EU) No 236/2012
Topic
Uncovered short sales
Submitted
2013-01-29
Answered
2013-01-29
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Question

Can a sovereign CDS position be used to hedge against the risk not only of default in respect of an exposure but also against the risk of credit spreads widening e.g. by maintaining different durations in static or dynamic hedges to hedge against spread widening risk?

Answer

[ESMA70-145-408 SSR Q&A, Q&A 11.5] ESMA considers that this would be permissible as long as the sovereign CDS position never became uncovered. Article 19(3) of the DR recognises that the same sovereign CDS position can be used to hedge different risks i.e. when one risk is liquidated another risk could be substituted provided it met the tests.
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This Q&A is published by European Securities and Markets Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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