Client Alert

New York Aborts Attempt to Regulate Credit Default Swaps as Insurance

November 24, 2008

New York's Superintendent of Insurance has announced an indefinite suspension of the Insurance Department's proposal to regulate a portion of the credit default swap market. In September, Superintendent Eric Dinallo and Governor David Paterson had jointly publicized the Department's intention to treat as insurance contracts those swaps in which the protection buyer had, or was reasonably expected to have, a material interest in the referenced underlying obligation so that the protection being purchased would be triggered by an actual loss.

Testifying before a Congressional committee on November 20th, Superintendent Dinallo took note of the various steps that the SEC, CFTC and Federal Reserve were taking to implement a clearinghouse for CDS trades and to impose solvency and transparency standards. At the G-20 Summit, the member nations also pledged to develop international supervisory measures for the cross-border CDS markets.

In view of these developments, Superintendent Dinallo said that New York regulators considered their unilateral moves no longer necessary. The Superintendent stated that although New York was prepared to intervene to regulate part of the CDS market, "the best solution for a healthy market for credit default swaps is a single market," and he was encouraged that the federal government and CDS issuers had begun to fashion a comprehensive approach to regulation.