Industry participants have raised fears that the European credit and sovereign debt market could be severely damaged by new European rules that propose to clamp down on trading in certain types of credit default swaps.

Hedge funds, dealers, and trade associations voiced their concerns after European Union lawmakers in the European Parliament voted on Monday to back proposals curbing trading in uncovered sovereign CDS. Sovereign CDS insure against the risk of a country defaulting on its debt obligations but they are frequently traded by investors which do not own the underlying sovereign debt -- often referred to as an uncovered or 'naked' CDS trade.