New York state will regard some credit default swaps in the $62 trillion market as insurance contracts starting in January, Gov. David Paterson said today in a statement.
The decision will put some credit-default swaps under the oversight of the New York Insurance Department, which today also issued new guidelines for that market. There had been a debate whether such swaps were insurance contracts or securities and how to regulate them. New York is the first state to see CDS as insurance contracts.
I urge the federal government to follow New Yorks lead once again by regulating the rest of the $62 trillion credit default swap market, Mr. Paterson said in a statement.
The statement also said that the decision was similar to the recent short-selling restrictions by the SEC, which aimed to stabilize financial markets. Unlike the short-sale restrictions, New York states decision regarding credit default swaps would be permanent.
The absence of regulatory oversight is the principal cause of the Wall Street meltdown we are currently witnessing, Mr. Paterson said in the statement. Credit default swaps can be used to manipulate bond prices with naked swaps that the market participant sells short without owning the bond.