NYS Seal




New York's Regulation of the Credit Default Swap Market


The purpose of this hearing is to examine the need to regulate the Credit Default Swap Marketplace.

Friday - December 5, 2008
10:00 AM
250 Broadway
Assembly Hearing Room
Room 1923, 19th Floor
New York, NY

In response to the lack of regulatory oversight of the $62 trillion credit default swap (CDS) market, as well as the attention brought on insurance giant AIG regarding its parent company's bailout, Governor Paterson announced on September 22, 2008 a plan in which the State Insurance Department (SID) would begin to regulate financial guarantee insurers (FGI) and other financial service providers who participate in the CDS marketplace. Beginning January 1, 2009, under the framework of "best practices," all FGIs would be subject to regulations as outlined in SID Circular Letter #19. These new rules would require entities engaging in the business of credit default swaps to be licensed; increase the amount of financial reserves that FGIs would be required to maintain in order to engage in certain CDS transactions; limit the types of investments that they could insure; increase accounting and reporting standards to afford greater oversight by the SID; and restrict aggregate investment portfolios to investment grade securities or better.

The SID is charged with overseeing the business of insurance, but there are questions regarding the extent to which and under what circumstances CDS contracts constitute the business of insurance. In its simplest form a CDS contract allows a protection buyer to purchase credit protection on a debt obligation, which they own, from a protection seller. Upon the occurrence of a "credit event" such as a default on the reference obligation, the protection seller agrees to step in and pay a certain amount to a protection buyer. Some of these debts include municipal bonds and mortgages. Where the owners of the debt obligations have actual pecuniary interests in the investments, CDS operate as a form of insurance. However, some transactions known as "naked swaps" involve investors who do not actually own the referenced debt but instead bet or gamble on the probability of whether the bond or mortgage will default; if the investment loses value, the investors prosper. Naked swaps present a unique situation where there are no real "insurable interests" that the SID can protect. In 2000, the Office of General Counsel released an opinion that answered a narrowly-drafted question, stating that CDS involving buyers who did not suffer economic losses did not constitute insurance contracts; since then the SID has clarified that this opinion was only addressing naked swaps, not all CDS.

As a temporary measure to help stabilize the stock market, the federal Securities Exchange Commission has issued a temporary suspension on the short-selling of stocks, but not CDS. The recently passed federal Emergency Economic Stabilization Act of 2008 (H.R. 1424) has provisions for the strengthening of the mortgage-backed securities market, which should result in fewer defaulting mortgages, and requires a study on the mark-to-market accounting system currently in use which makes the valuation of assets difficult. More federal oversight may still be required, as Governor Paterson called upon the federal government to step in and follow New York's lead in regulating the rest of the CDS market.

This hearing will examine the State Insurance Department's proposal to regulate the CDS market and other statutory changes that may be considered by the legislature to reform the CDS market.

Persons wishing to present pertinent testimony to the Committee at the above hearing should complete and return the enclosed reply form as soon as possible. It is important that the reply form be fully completed and returned so that persons may be notified in the event of emergency postponement or cancellation.

Oral testimony will be limited to ten minutes duration. In preparing the order of witnesses, the Committee will attempt to accommodate individual requests to speak at particular times in view of special circumstances. These requests should be made on the attached reply form or communicated to Committee staff as early as possible.

Ten copies of any prepared testimony should be submitted at the hearing registration desk. The Committee would appreciate advance receipt of any prepared statements.

In order to further publicize these hearings, please inform interested parties and organizations of the Committee's interest in hearing testimony from all sources.

In order to meet the needs of those who may have a disability, the Assembly, in accordance with its policy of non-discrimination on the basis of disability, as well as the 1990 Americans with Disabilities Act (ADA), has made its facilities and services available to all individuals with disabilities. For individuals with disabilities, accommodations will be provided, upon reasonable request, to afford such individuals access and admission to Assembly facilities and activities.

Hon. Joseph Morelle
Member of Assembly
Committee on Insurance


  1. What role does New York State have in overseeing and regulating the credit default swap (CDS) marketplace?

  2. Is the State Insurance Department's proposed interpretation of what transactions constitute "insurance" justified? Does the SID have the authority to deem CDS insurance without legislative approval?

  3. What are some of the unintended consequences of SID circular letter #19? How does New York being the only state in the nation to regulate just a portion of the CDS market affect the financial services sector? Is the federal government more appropriate for such oversight and regulation?

  4. How will these new regulations and laws affect the rest of the financial services providers?

  5. Will these regulations bring stability to the financial services marketplace?

  6. Are the current "mark to market' accounting standards used for determining an investments value a partial cause of the problem? Should other methods be used?

  7. What are the benefits to the broader economy of CDSs?

Please feel free to address other appropriate topics concerning the circumstances of domestic employment.


Persons wishing to present testimony at the public hearing on New York's Regulation of the Credit Default Swap Market, are requested to complete this reply form as soon as possible and mail or fax it to:

Cillian Flavin
Committee Assistant
Assembly Committee on Insurance
23rd Floor - Alfred E. Smith Office Building
Albany, New York 12248
E-mail: FlavinC@assembly.state.ny.us
Phone: (518) 455-4311
Fax: (518) 455-7095

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