UPDATE 2-NY Gov: Credit default swaps need US oversight
(Adds comments on clearing house)
By Joan Gralla
NEW YORK, Sept 23 (Reuters) - New York Gov. David Paterson on Tuesday said regulating the $62 trillion credit default swap market was not a state-by-state issue, one day after unveiling new curbs that New York will put in place starting in January.
The state decided to treat about 20 percent to 25 percent of new credit default swaps as insurance, putting them under the purview of the state's insurance regulator.
"I don't think that this is really a state-to-state issue," Paterson told reporters after addressing a Foreign Policy Association luncheon. He called for a national policy to regulate credit default swaps.
Credit default swaps, which are used by banks, brokerages, insurance companies, hedge funds and other entities to protect against the risk that a borrower will default on its debt, have been blamed for some of the financial sector's recent severe problems.
Insurer American International Group (AIG.N), which sold these derivatives from non-insurance arms, was prominent in this fast-growing field. Its numerous ties to companies that bought its swaps to speculate or protect their holdings is seen as one of the main reasons behind the U.S. government's $85 billion bailout of the company.
Paterson noted that his decision has drawn skeptics. "People in the banking industry had questioned why we would get into this," he said. Though credit default swap issuers might not have considered their selling of this protection as insurance, the governor said that was precisely what it was.
Paterson also said the state banking department is working with the Federal Reserve Bank of New York to help create a central clearing house for credit default swaps to "address counter party risk and establish margin requirements."
It is the third derivative clearing house now planned.
For more details, please click on: [nN23612415.]
NEW YORK UNVEILS FIRST-EVER RULES
New York state's new credit default rules, the first-ever for this free-wheeling market, opened the door for other states to follow suit. For example, many hedge funds that issue credit default swaps are located in Greenwich, Connecticut. A spokeswoman for Connecticut's insurance department was not immediately available.
New York says its new rules, which do not affect existing credit default swaps, aim to safeguard the companies that buy these instruments by ensuring that the companies that sell them do not become insolvent.
The regulations would not affect so-called "naked" credit default swaps. Instead, the state will require companies to get insurance licenses in order to issue credit default swaps to borrowers who also own the bonds or loans they aim to protect. Other rules stiffen capital requirements and reduce the amount of risk issuers can take on.
New York's insurance department made the move to regulate credit default swaps one day before the top U.S. securities regulator urged Congress to regulate this market, saying the lack of oversight was a cause for great concern.
Securities and Exchange Commission Chairman Christopher Cox urged Congress to grant his agency the statutory authority to regulate these derivatives. For more details, please click on: [nN23325727.] (Additional reporting by Karen Brettell in New York, Karey Wutkowski and Rachelle Younglai in Washington, D.C.; Editing by Leslie Adler)
