NEW YORK STATE TO REGULATE CREDIT DEFAULT SWAPS AS INSURANCE
The New York State Insurance Department announced that credit-default swaps are insurance contracts and that issuers of CDSs must be licensed as an insurance company. The new regulatory oversight will not apply to “naked” shorts where the CDS purchaser does not own the underlying bond. New York State Governor David Paterson called on the federal government to “follow New York’s lead…by regulating the rest of the credit default swap market.” The primary goal of requiring CDS issuers to obtain an insurance license is to ensure their solvency, according to New York State Insurance Superintendent Eric Dinallo.
OUR TAKE: This may be the beginning of the end for the unregulated swaps market. If CDSs are insurance contracts, other swaps and derivatives could also be similarly classified. It will be interesting to see whether other states will follow New York’s lead (likely) and whether the feds will allow state-by-state regulation.