NY state to regulate some credit default swaps

NEW YORK (Reuters) - New York state authorities said on Monday they will begin classifying some credit derivatives as insurance, in a move that will bring the instruments under the state's regulatory authority.

State officials called on the federal government to regulate the rest of the $62 trillion market for credit derivatives.

New York Gov. David Paterson said in a release the move was designed to ensure that insurers have adequate capital resources to pay their policy holders, including on insurance they sell with credit default swaps.

Credit default swaps are used to hedge against a borrower defaulting on its debt or to speculate on the borrower's credit quality.

The move comes after the federal government spent $85 billion to bail out American International Group (AIG.N) as concerns grew the company did not have enough capital to cover insurance it had sold on mortgage debt with credit derivatives.

"The severity of this crisis was substantially increased by what the government chose not to regulate, principally credit default swaps," Eric Dinallo, the New York State insurance superintendent, said in the release.

Regulators said they will also introduce new standards to the market, including strict limits on the ability of insurers to sell protection in collateralized debt obligations on mortgages.

AIG used CDOs to insure mortgage-backed debt, which rapidly declined in value as the housing market plummeted.

Dinallo said in May that he was considering regulating the part of the market which can be classified as insurance, which he said represent around 20 percent of the market.

(Reporting by Joan Gralla and Karen Brettell; Editing by Leslie Adler)