Regulation of credit default swaps—the Short Selling Regulation

The following Financial Services practice note provides comprehensive and up to date legal information covering:

  • Regulation of credit default swaps—the Short Selling Regulation
  • What is a credit default swap?
  • How are sovereign credit default swaps restricted by the EU Short Selling Regulation and UK Short Selling Regulation?
  • Notification of short positions in sovereign debt under the EU Short Selling Regulation and UK Short Selling Regulation

Regulation of credit default swaps—the Short Selling Regulation

What is a credit default swap?

A credit default swap (CDS) is a form of credit derivative agreement, under which the buyer will make regular premium payments to the seller, called the spread. When a buyer and a seller enter into an arrangement they both take on counterparty risk and the spread is used to insure against an event of default otherwise known as a credit event. This is because a CDS is usually linked to a 'reference entity' or 'reference obligor'. This is normally a corporation or government. The reference entity is not a party to the contract but it is the defaulting act of the reference entity that triggers the credit event. In the event of a credit event, the seller of the CDS is required to compensate the buyer of a CDS. For more information on CDS, see Practice Note: What are credit derivatives?

Two types of CDS are identified in Regulation (EU) 236/2012 (OJ L 86/1) (the EU Short Selling Regulation) and Retained Regulation (EU) 236/2012 (the UK Short Selling Regulation), which applies in the UK as of IP completion day (31 December 2020):

Article 1(c) defines a credit default swap as a derivative contract in which one party pays a fee to another party in return for a payment or other benefit in the

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