On 30 January, the European Securities and Markets Authority (ESMA) published 2nd Update of Q&A on the application of the Short Selling Regulation(SSR) which clarified that replacement trades resulting from compressions are not covered by the ban on uncovered sovereign CDS. Several other issues concerning derivatives, including sovereign CDS were also addressed. The exact language follows :
"Provided that the replacement trade does not extend the life or value of the sovereign CDS position beyond what they were when originally taken out before 25 March 2012, ESMA considers that it would be legitimate to treat the trade as an existing rather than a new contract and so not encompassed by the Regulation's prohibition on entering into uncovered sovereign CDS transactions."
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