The Committee of European Securities Regulators (CESR) has published a report asking for further analysis into whether the European sovereign CDS markets have been manipulated, and whether CDS speculation causes a destabilizing risk for the refinancing position of sovereigns.
In the report entitled: Trends, Risks and Vulnerabilities in Financial Markets, CESR expressed doubt that CDS caused a risk to refinancing positions, but highlighted that the lack of information on OTC markets prevented more secure conclusions.
CESR also published a report proposing changes to MiFID, touching on CDS transparency. Once sovereign CDS become eligible for clearing, CESR stressed that the derivatives should be included in the mandatory post-trade transparency regime put forward by CESRs July 2009 report.
Sovereign CDS transparency hit the headlines after a number of investment banks, including Goldman Sachs, were accused of artificially lowering Greeces debt-to-GDP ratio, but also buying CDS on Greek debt.
The CESR Trend and Risk report noted the unusual behaviour of Greek CDS prior the countrys bail-out. In mid-January, the Greek CDS curve inverted, an unusual situation indicating that the market is seeing a higher risk that the country will experience a credit event in the short-term. The report continued to explain that it is possible to construct examples where CDS spreads reflect speculative behaviour rather than fundamentals. Such news will encourage political figures such as Ted Kaufman, United States Senator for Delaware, who in March 2009 said: If we uncover bad behaviour that was nonetheless lawful, or that we cannot prove to be unlawful (as may be exemplified by the recent reports of actions by Goldman Sachs with respect to the debt of Greece), then we should review our legal rules in the US and perhaps change them so that certain misleading behaviour cannot go unpunished again.
However, the CESR report concluded that it has not been possible to make a clear case of destabilising speculation or market manipulation concerning the developments in markets related to Greek sovereign bonds. Further analysis should be conducted as the potential risk of destabilising effects cannot be neglected.