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Presidential Panel Announces New Oversight of Credit Default Swaps

Federal officials acted to increase oversight of credit default swaps and place controls on derivative instruments in a series of steps announced by the President's...
November 18, 2008

Federal officials acted to increase oversight of credit default swaps and place controls on derivative instruments in a series of steps announced by the President's Working Group on Financial Markets to reduce systemic risk and provide greater transparency in the markets.

The Federal Reserve Board of Governors, the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission entered into a memorandum of understanding designed to smooth consultation and information-sharing on credit default swap issues, facilitate regulatory approvals and establish more consistent regulatory oversight. It also designated the top near-term priority the development of credit default swap central counterparties, some of which will commence operations before the end of 2008.

In testimony before the U.S. House Oversight and Government Reform Committee in October, New York state Insurance Superintendent Eric Dinallo faulted provisions of 2000's Commodity Futures Modernization Act, sponsored by then-Sen. Phil Gramm (R-Texas), that exempted so-called "naked" credit default swaps - those in which the holder has no direct exposure to the named credit event - from state gaming laws. Without direct oversight by securities, commodities or insurance regulators, Dinallo said, the massive growth of the unregulated credit default swap market, from $900 billion in 2000 to an estimated $58 trillion today went "completely unchecked" and was at the core of the current financial crisis.

The National Association of Insurance Commissioners (NAIC) is considering a proposal to require insurers to disclose financial position, financial performance and cash flow information to regulators with respect to credit default swaps, credit spread options, and credit index products, as well as hybrid instruments that have embedded credit derivatives and other guaranty-type contracts.