Summit News

Naked CDS needs to be constrained: FDIC

WASHINGTON (Reuters) - A top U.S. banking regulator said on Tuesday that naked credit default swaps create skewed incentives and that regulators need the power to restrict them.

The comments from Federal Deposit Insurance Corp Chairman Sheila Bair come as Congress tries to clamp down on the swaps and the $450 over-the-counter derivatives market. Credit default swaps, which were blamed for nearly toppling American International Group Inc, are sold to investors who want protection from the risks of a debt default.

But naked credit default swaps, where the holder of the swap does not own the underlying bond, have been blamed for driving down institutions and recently blamed by the Greek finance minister for his country’s financial woes.

“Naked credit default swaps, I think that is something the regulators should have the power to constrain, absolutely,” FDIC Chairman Sheila Bair told the Reuters Global Financial Regulation Summit in Washington.

“I worry a lot about the CDS market. It does create skewed incentives,” she said.

Reporting by Ann Saphir and Rachelle Younglai; Editing by Tim Dobbyn