Tuesday, May 13, 2008

Eric Dinallo wants to regulate the CDS market

The unregulated credit derivatives market is a concern to market regulators. According to billionaire investor George Soros couterparty risks on derivative contracts were behind the dramatic rescue of Bear Stearns. The notional value of CDS contracts has soared to $62,000bn from less than $1,000bn at the end of 2001. There are two kinds of CDS says Eric Dinallo, NYS Insurance Dept. superintendent. About 20 percent of the market provides protection against bonds that are owned and the rest 80 percent are short or "naked CDS".

NYS regulators want to have at least a debate about a possible oversight role, but there are others like Greg Zerzan, counsel and head of global public policy at the International Swaps and Derivatives Association, who caution about more regulation.

"It is important to remember that dealers in these markets are highly regulated institutions, whose derivatives books are subject to capital requirements and scrutiny,"

In the second part of the video Dinallo makes his case for more regulation:

"The pricing might be higher but the valuation might be different because there is a regulation behind it and there is a different solvency requirement behind it."

"...as to the others ("naked CDSs") is clearly more of a speculative play, ....and we should definitely have a discussion about what role we (Insurance Dept.) should play in it and whether there really is a distinction between CDS as insurance product and CDS as a pure shorting instrument."

click for video

video: MBIA Posts Large Losses
Insight on MBIA earnings and the state of the credit markets, with Eric Dinallo, NYS Insurance Dept. superintendent

No comments: