New EU regulations on trading in sovereign debt could have an unwanted negative impact on Romania's bond market, according to the Wall Street Journal. The new legislation, which comes into effect from November 1, is intended to stop speculators pushing up eurozone funding costs by trading Credit Default Swaps (CDS) without owning the debt (known as naked CDS trading).

However, Romania, and other countries in the region, could also benefit from the trade. According to the Wall Street Journal, trade in naked CDSs helps to keep the CDS market liquid, which in turn keeps the underlying bond markets stable. The new rules must be adopted by all 27 EU member states and although the Wall Street Journal agrees that some naked CDS trading is unscrupulous and that countries' borrowing costs have suffered as a result, in some cases it could be argued that the trade has at least a partial positive impact.

CDS is a way of trading risk, the seller receives a series of payments from the buyer, in the case of a loan default, the CDS buyer will receive compensation, normally the face value of the loan and the seller will own the debt. Currently, CDSs can be bought and sold without owning the debt, which is known as a 'naked CDS.' The new EU rules will ban naked CDS trading on sovereign debt.

Liam Lever, liam@romania-insider.com