“Market Turmoil Spurs Movement Towards Credit Default Swap Central Counterparties”

November 20, 2008 was a high-profile day for the New York Insurance Department (“NYID”).  At a hearing of the United States House of Representatives Committee on Agriculture to review the role of credit derivatives in the US economy, Eric Dinallo, the Superintendent of the NYID, urged the financial services industry, federal agencies and Congress to establish a completely transparent and fully regulated credit default swap (“CDS”) market.   

Also on November 20th, the NYID issued the First Supplement to Circular Letter No. 19 (2008) (“the “Supplement”), in which it stated that it will indefinitely delay its plan to regulate part of the CDS market and will defer to the movement made toward comprehensive federal regulation.  As stated in the Supplement, “[i]n light of [ ] progress made toward comprehensive federal regulation of CDS, New York will delay indefinitely its application of New York Insurance Law to CDS as described on pages 6 and 7 of Circular Letter No. 19 (2008).”  This decision reflects a distinct about-face from plans announced by the NYID on September 22, 2008 in Circular Letter No. 19, to regulate certain types of CDS beginning January 1, 2009.  

In his November 20th testimony, Superintendent Dinallo stated that although the NYID continues to have jurisdiction to regulate certain CDS, it believes that the best option is a holistic solution for the entire market and, consequently, it would not be effective or efficient for New York to regulate some, but not all, CDS transactions.  Superintendant Dinallo cited recent developments aimed at more comprehensive regulation of CDS, including SEC Chairman Cox’s request for the power to regulate the CDS market, the New York Federal Reserve’s meetings with the dealer community, efforts by the President’s Working Group on Financial Markets (“PWG”) toward establishment of CDS central counterparties (“CCP”), and Congressional discussions and meetings, as reasons behind the NYID’s decision to suspend regulation.  

This Stroock Special Bulletin examines recent federal initiatives relating to the establishment of a CCP, and some of the pros and cons of establishing a CCP.