Securities and Exchange Commission (SEC) Chairman Christopher Cox reiterated that Congress must quickly authorize oversight of the credit default swaps (CDS) market, an opaque, unregulated $58 trillion market. Cox made the comments October 8 in a roundtable discussion on disclosure and transparency for credit default swaps held at the agency’s Washington headquarters, Cox highlighted the fact that the federal securities laws explicitly prohibit regulation of credit default swaps. “That simply cannot continue,” Cox said, adding that there is no excuse for continued inaction.

The sheer size of the CDS market, which has experienced explosive growth over the past two decades, also makes the instruments risky. According to Cox, CDS currently insure $58 trillion, which is “more than the gross domestic product of every country on earth combined.” The total amount of CDS outstanding “far exceeds” the total value of their underlying asset classes.

Cox expressed concern that manipulation in the unregulated CDS market can “drive prices” in regulated markets. “That is why I believe it is important for Congress to act now to provide for regulatory oversight of the [CDS] market.” Cox said the SEC is "doing what [it] can under existing statutory authority. He said that his agency is continuing to cooperate with other regulators to establish a central counterparty and to create an electronic trading system for the CDS market.

House Financial Services Committee Chairman Barney Frank said he would seek to regulate the fast-growing $55 trillion CDS market, which has been blamed for exacerbating the financial meltdown. Frank said he would seek “sensible” regulation of the CDS market when the new Congress meets in 2009. “The turmoil in the market has given us a little bit of a breathing space,” he said. “They have screwed up so badly that they can’t screw up again for a while. Before they gain the ability to screw up (again), we have to put the (regulations) in place.”

October 15, 2008