The European Union (EU) member states are set to drop permanent restrictions on trading in credit default swaps (CDS), Financial Times reports. The EU states are expected to side with the European Commission in not pursuing a ban on naked trading, which typically involves hedge funds selling protection to the bank credit valuation adjustment desks.

Banks and several states, including the Netherlands, Italy, Sweden and the U.K., believe that a ban on naked trading will cause liquidity to dry up. This will force banks to stop lending to riskier governments, such as Greece, or riskier banks and corporates. The commission’s draft proposals still require approval of member states and the European Parliament.

Click here for the story from Financial Times.