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NCOIL Advances Credit Default Swap Model Act

State insurance legislators have voted to move forward with a model act that would regulate at the state level the controversial financial instruments known as...
June 13, 2010

State insurance legislators have voted to move forward with a model act that would regulate at the state level the controversial financial instruments known as credit default swaps. At a meeting of the National Conference of Insurance Legislators (NCOIL) July 7 in Boston, the state lawmakers advanced the model law which requires sellers of CDSs to be licensed by the state insurance department. Licensed CDS dealers would be required to comply with certain financial requirements, including a minimum surplus. They would also be subject to regulation as property/casualty insurers.

In addition, so-called "naked" credit default swaps, in which the buyer has no insurable interest, would be illegal under the model act. Many state legislators, including the author of the model, New York Assemblyman Joseph D. Morelle, have compared naked default swaps to gambling.

House Financial Services Committee Chairman Barney Frank (D-Mass.), in a speech to the NCOIL lawmakers, said he thinks credit default swaps should be regulated at the federal level because they are sold by entities other than insurance companies and more closely resemble other financial instruments. The NCOIL legislators disagreed with his assessment and wanted to have a model ready in case the federal law was overturned.

July 13, 2010