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A replacement trade is a practice used in compression service for CDS. They aims partially terminate a CDS and subsequently replace with new swap corresponding in economic terms with the trades they replace. With respect to sovereign CDS concluded before 25 March 2012, are replacement trades on these CDS deemed to fall under the transitional measures set out in Art 46(2) of the Regulation (sovereign CDS concluded before 25 March 2012 may be held until the maturity date of the contract even if such CDS result in an uncovered position)? Or should such replacement trades be subject to Article 14 of the Regulation (restriction to enter into an uncovered CDS)?

Article 15(2)(a) of the DR provides that “where the exposure being hedged relates to the Union or the Member States which have the euro as their currency, it shall be permissible to hedge it with an appropriate European or Euro area index of sovereign bond credit default swaps”. In cases where such indices are used, is it necessary to undertake a look through assessment of correlation and proportionality be to each underlying long position and reference obligation that underlies the index being used?

Can a sovereign CDS position be used to hedge against the risk not only of default in respect of an exposure but also against the risk of credit spreads widening e.g. by maintaining different durations in static or dynamic hedges to hedge against spread widening risk?

Should the holding of a sovereign bond be treated as a static or dynamic hedge for the purposes of Articles 19 and 20 of the DR?

Is it legitimate for an investor to hedge a risk through a CDS position which is either longer or shorter in duration than the term of the asset/liability being hedged? As examples, could a 12 year sovereign bond be hedged by 5 year sovereign CDS contract which was then rolled until the maturity date for the bond or a 2 year bond be hedged with a 5 year sovereign CDS contract?