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NY to regulate credit default swaps
By Aaron Elstein
Published: September 22, 2008 - 4:07 pm
http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20080922/FREE/809229965/1120&category=FREE&template=printart
The huge market for credit default swaps, a derivative behind many of the problems roiling the financial markets, will get some regulatory oversight from New York state, Gov. David Paterson announced Monday.
Credit default swaps are contracts that enable institutional investors to bet on the likelihood of companies defaulting on the debts. The market for these contracts has grown from nothing a decade ago to $62 trillion of notional volume this year. Despite this extraordinary growth, the credit default swaps market has remained outside the purview of federal or state regulators, largely because they accepted Wall Street's argument that swaps are not securities or insurance policies.
That seems poised to change. Mr. Paterson said the state Department of Insurance issued guidelines to establish that credit default swaps are a form of insurance and, hence, subject to state regulation.
"We are going to ensure that whoever sells them [credit default] protection is solvent, in other words, can actually pay the claims," said Eric Dinallo, the New York state Department of Insurance superintendent. "There is currently no such protection for policyholders."
Credit default swaps were a major factor in the difficulties experienced by American International Group Inc., the giant insurer taken over by the federal government last week. AIG wrote insurance against tens of billions worth of credit default swaps and had to post billions of additional collateral when the value of those swaps declined due to growing mortgage defaults, causing the losses that nearly bankrupted the firm.
A spokeswoman for the International Swaps and Derivatives Association, a trade group that represents many Wall Street institutions, couldn't be reached for immediate comment on the actions taken New York state regulators.
By Aaron Elstein
Published: September 22, 2008 - 4:07 pm
http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20080922/FREE/809229965/1120&category=FREE&template=printart
The huge market for credit default swaps, a derivative behind many of the problems roiling the financial markets, will get some regulatory oversight from New York state, Gov. David Paterson announced Monday.
Credit default swaps are contracts that enable institutional investors to bet on the likelihood of companies defaulting on the debts. The market for these contracts has grown from nothing a decade ago to $62 trillion of notional volume this year. Despite this extraordinary growth, the credit default swaps market has remained outside the purview of federal or state regulators, largely because they accepted Wall Street's argument that swaps are not securities or insurance policies.
That seems poised to change. Mr. Paterson said the state Department of Insurance issued guidelines to establish that credit default swaps are a form of insurance and, hence, subject to state regulation.
"We are going to ensure that whoever sells them [credit default] protection is solvent, in other words, can actually pay the claims," said Eric Dinallo, the New York state Department of Insurance superintendent. "There is currently no such protection for policyholders."
Credit default swaps were a major factor in the difficulties experienced by American International Group Inc., the giant insurer taken over by the federal government last week. AIG wrote insurance against tens of billions worth of credit default swaps and had to post billions of additional collateral when the value of those swaps declined due to growing mortgage defaults, causing the losses that nearly bankrupted the firm.
A spokeswoman for the International Swaps and Derivatives Association, a trade group that represents many Wall Street institutions, couldn't be reached for immediate comment on the actions taken New York state regulators.
