EPFSF Breakfast Discussion
28 September 2010, Radisson Blue EU Hotel, Brussels
Speech from Stanislas de CAUMONT
Managing Director, Head of European Governenment Bonds Trading
My name is Stanislas de Caumont, and I am Vice Chairman of the European Primary
Dealer Association, and Head of European Government Bond Trading at Credit
Suisse. I have been acting as a market maker in the European Sovereign Debt
market for the past 20 years.
I am delighted to be here to discuss a topic of such critical interest and importance
for European governments, the EU institutions, and all market participants. The
European Parliament is a vitally important forum for this complex debate.
The EPDA’s objective is to promote, in conjunction with all the Sovereign issuers in
Europe, an efficient government bond market in which they can meet their ever
increasing need for funds and where customers all over the world can buy and sell
securities with the least friction cost and the most up-to-date information.
Let me begin by discussing the current state of the European Sovereign Debt market.
As a percentage of GDP, European Sovereign debt has increased by a third in just 4
years, to represent in 2011 89% of GDP, a far cry from the 60% level mentioned in
the Maastricht treaty. It was the very liquid nature of government bonds as a financial
instrument that allowed such a large sudden supply to be absorbed. And the creation
of the CDS market 10 years ago was a contributor to that liquidity.
The market has obviously changed a lot over the past 2 ½ years, and more
specifically since the Greek crisis began a year ago, which caused investors to
discriminate much more between the various sovereign issuers than they used to.
The sheer increase in funding requirements and size of public debts, as well as the
Greek crisis have taken the market to a level where it is currently not possible to fund
seamlessly the whole Eurozone government debt needs.
The intervention of the ECB to purchase some government bonds in May 2010 was a
very wise and well executed decision. At that time, there was a large imbalance
between buyers and sellers of Greek debt that was disrupting the market and the
ensuing panic was threatening to spread over to other countries. The response by
the ECB helped stabilise the markets by absorbing this imbalance and dissipating the
fear to allow market participants to act with reason again.
This intervention, in conjunction with the creation of the European Financial Stability
Facility, was the right answer to a temporary crisis. It proved to everyone that,
despite voicing diverging views on how to deal with a serious fiscal situation in a
member country, Europeans were able to rally and come to a compromise when the
existence and the stability of the Euro was threatened.
However it would be a dangerous mistake to believe that these measures are long
term solutions. The message delivered by the market that the level of sovereign debt
in various European countries has reached a dangerous threshold is still valid. In
particular, the debts of Greece, Ireland and Portugal are still nervously scrutinised by
the market because of the lack of significant progress made on closing down either
their current account deficit or their budget deficit.
In the end, the market is only a transmission mechanism between the demand for
funds dictated by macro economic fundamentals and the supply of funds freely
decided by potential investors.
And there is only very little that new regulation can do to mitigate this reality.
Let me now touch upon the upcoming regulations on short selling.
As a well established trading activity that is an integral part of the financial system,
short selling is essential for market making and widely accepted by investors and
regulators as helping to enhance price discovery, counteract supply/demand
imbalances and provide liquidity to the market in the relevant securities. By taking on
the risk of loss themselves and covering the sale to the client at a later time, it is a
way for financial institutions to ensure that they can meet their clients’ requirements
to purchase specific securities at a designated time and price.
I strongly believe that short selling is not abusive and that, as an investment activity,
it is NO more susceptible to market abuse than any other form of transaction.
This is broadly in line with the opinion of many academics and institutions like the
IMF. In the public debate however the virtues of short selling have been overlooked,
and it has become the scapegoat of the sovereign crisis.
There is no strong evidence to suggest that short selling was behind the price falls
over the crisis of this spring, in particular, the amount of Greek bonds borrowing at
that time was less than 5% of the total Greek debt. The total amount of CDS
outstanding was also in the region of 5% of total debt.
Most of the adverse market movements could be attributed to fundamental factors
and to uncertainty due to partial or inadequate disclosures.
Downward price movements are due to many factors other than short selling.
In efficient markets, negative information should have a negative price impact. Short
selling restrictions impede the flow of negative information into prices. In a liquid
product like sovereign debt, far from depressing prices, short selling actually support
prices because a short seller always needs to purchase his security back at some
stage. It is worth noting that when Germany announced its ban on short selling on
Sovereign debt, the liquidity of the market vanished and the subsequent feeling of
chaos only dissipated when France announced that it wouldn’t follow in its footsteps.
In general, short selling is a symptom not a cause of the problem.
With regard to the ECs legislative proposal on short selling, my first remark is that it
is preferable to national legislative solutions like the German Short selling ban. We
appreciate the European common approach.
Also, we are satisfied with the market maker exemption for private reporting and the
ban on naked short selling, as proposed by the EC.
However, I would point out the following concerns with the proposal as drafted:
• The blanket banning of naked short selling is disproportionate. Even when
market makers are exempted, the ban will reduce the number of participants in
the market and reduce liquidity. This means higher borrowing costs for
• The emergency situations in which governments can implement bans on all short
selling, need to be carefully defined. Imposing bans can lead to more unrest and
volatility at a time where it is least needed.
• The proposed mandatory buy-in procedure is problematic to implement. It places
a disproportionate burden on trading venues, which may well lead to less
competition in these markets.
In conclusion, I believe that it is essential when dealing with the sovereign debt
market to remember that it is the benchmark for the pricing of most other rate
products. As such, it is the most liquid fixed income instrument and this liquidity
should be safeguarded and enhanced as much as possible. It is the only way to
ensure that European Governments can finance their debt at the cheapest cost for
their taxpayers. I would urge regulators and legislators to keep this in mind when
proposing new directives that can affect this liquidity like the one on Short Selling or
the one on Price Transparency.
Ladies and gentlemen, thank you for your attention.