The UK government wants to scrap restrictions inherited from the European Union that ban the “naked” short-selling of UK government bonds.

The UK Treasury said it wants to end the ban on naked short selling of gilts — which stops investors from taking a short position unless they have borrowed the underlying bonds.

The Treasury also wants to scrap a requirement to disclose sizeable short positions in UK government debt securities to the regulator and to overturn a ban on naked purchases of credit default swaps, which are contracts that would pay out if the UK government defaulted on its debt.

The UK government is arguing that the restrictions have harmed liquidity in the the £2.4 trillion gilt market.

“Short selling of sovereign debt and owning sovereign CDS generally contribute to the healthy functioning of sovereign debt markets, promoting liquidity and facilitating price discovery,” said the Treasury in a consultation paper on Tuesday.

“While the government sees a clear purpose for covering requirements for the short selling of shares, it is not necessarily the case that the same requirements should apply to sovereign debt markets.”

The Treasury added in the paper: “While the government sees a clear purpose for covering requirements for the short selling of shares, it is not necessarily the case that the same requirements should apply to sovereign debt markets.

“The purpose of covering requirements is to prevent settlement failure, which can arise from the short selling of more shares than are available in the market.

“However, while these requirements are critical for equity markets, there are fundamental differences between equity and sovereign debt markets.

“For example, as of 31 March 2022, the size of the UK gilt market is roughly £2.4tn, larger than the market cap of all the companies in the FTSE100 and FTSE250 combined.

“While it is conceivable that in extreme circumstances, without covering requirements, short selling of shares in an individual issuer could exceed share availability, the government considers this risk to be almost non-existent in sovereign debt markets, given the size and liquidity of the market.”