• C++ Programming for Financial Engineering
    Highly recommended by thousands of MFE students. Covers essential C++ topics with applications to financial engineering. Learn more Join!
    Python for Finance with Intro to Data Science
    Gain practical understanding of Python to read, understand, and write professional Python code for your first day on the job. Learn more Join!
    An Intuition-Based Options Primer for FE
    Ideal for entry level positions interviews and graduate studies, specializing in options trading arbitrage and options valuation models. Learn more Join!

NY to regulate credit default swaps

Joined
5/4/07
Messages
176
Points
28
NY to regulate credit default swaps


By Aaron Elstein

Published: September 22, 2008 - 4:07 pm

http://www.crainsnewyork.com/apps/pbcs.dll/article?AID=/20080922/FREE/809229965/1120&category=FREE&template=printart


The huge market for credit default swaps, a derivative behind many of the problems roiling the financial markets, will get some regulatory oversight from New York state, Gov. David Paterson announced Monday.

Credit default swaps are contracts that enable institutional investors to bet on the likelihood of companies defaulting on the debts. The market for these contracts has grown from nothing a decade ago to $62 trillion of notional volume this year. Despite this extraordinary growth, the credit default swaps market has remained outside the purview of federal or state regulators, largely because they accepted Wall Street's argument that swaps are not securities or insurance policies.

That seems poised to change. Mr. Paterson said the state Department of Insurance issued guidelines to establish that credit default swaps are a form of insurance and, hence, subject to state regulation.

"We are going to ensure that whoever sells them [credit default] protection is solvent, in other words, can actually pay the claims," said Eric Dinallo, the New York state Department of Insurance superintendent. "There is currently no such protection for policyholders."

Credit default swaps were a major factor in the difficulties experienced by American International Group Inc., the giant insurer taken over by the federal government last week. AIG wrote insurance against tens of billions worth of credit default swaps and had to post billions of additional collateral when the value of those swaps declined due to growing mortgage defaults, causing the losses that nearly bankrupted the firm.

A spokeswoman for the International Swaps and Derivatives Association, a trade group that represents many Wall Street institutions, couldn't be reached for immediate comment on the actions taken New York state regulators.
 
Oh no she didn't.
Wall Street has tried to create a central clearing house just to avoid this exact regulation oversight.
FT.com - Investment banks eye CDS clearing house
This part is particularly right on
Some senior Wall Street figures are now warning that, if the industry does not swiftly act to tackle this counterparty risk issue via the creation of a clearing house or other mechanisms, it could be forced to accept higher regulation - or shift its activity into an exchange.
The clearing house mechanism was near launch.
http://www.operationsmanagement.com/ArticleLogin.aspx?ArticleID=2002674

Too little too late, I guess.
 
yeah, great way to attract business to NYC - by regulating the hell out it.

i wonder if they knew about the clearing house, or were just compelled to jump on the me-too bandwagon. just wait till the proposals on the fed level clear out and then think about proposing state legislature, if at all necessary.

it's like russian sauna - you sit in the steam room until you start seeing things on the ceiling, and then jump into a pool of ice-cold water. it may make sense for russian saunas, but might be a bit too extreme when it comes to fin markets regulation - finding middle ground would be a much better idea. oh well, these are "extraordinary times" after all...
 
If you are NY gov, you want to show people that you are on top of the situation and not let the Fed run the show on your turf.
From the language they used in the release, not all CDS will be reclassified as insurance policy. Only those tied to mortgage. At least that what I understand until we see the full press release.
http://uk.reuters.com/article/marketsNewsUS/idUKN1229743020080512
 
I have only glanced at this AND I'm not a lawyer (please don't ask me what I mean by that remark)...

It seems one can argue that since a derivative securities transaction may result in the transfer of ownership of the reference security, while the goal of the transaction may be to mitigate or capitalize risk, it's still a securities transaction, not an insurance contract.

On the other hand, even an insurance contract can have the result of ultimate ownership (i.e. the insurance company collects your totalled automobile)...

This hearkens back to the concept and definition (or redefinition) of "true sale" that we discussed at length in 9848, even though the context was slightly different.

Fascinating issues, quants.

***

This is a great read, by the way. Paragraph 4 of page 3 clearly states the rationale behind the Dept's jurisdiction over the CDS in question -- those entered into with the FGI's as sellers of protection.

I'm impressed with Supt. Dinallo's grasp of the limited role and responsibility of a regulating agency, and the role of the marketplace -- at least as indicated by this paper.
 

Attachments

  • ny dept of insurance.pdf
    596.9 KB · Views: 8


This is the natural course of things.

I don't want to make any sweeping generalities (because I am not "anti-regulation," just anti-ill-conceived regulation), but it might be noticed that it was regulation that brought us to this place to begin with: i.e. the forced mark-to-market of OTC securities and its effect on capital requirements.

manias and regulation are like yin and yang, pendulum swings, etc. Wall Street figures out the loopholes, the mania ensues, then more regulation...

ad infinitum.
 
I don't think regulation will do as much as people are hoping. The imbeciles in Washington (excluding Emperor Paulson and Bernanke that are trying their absolute hardest to avert outright disaster) can pass laws until they're blue in the face. We have more laws than we can count, and still we have such disasters.

I believe this man put it best:

YouTube - Wall Street - Greed Is Good

And he's absolutely right. Why is Apple thriving? Because Steve Jobs makes sure of it because it's his money at stake.

If the compensation of the top brass was paid at $1 plus company equity that vested only after several years, then the only executives that would succeed would be those that take the job for their love of the company, and not for their selfish avarice.

It wasn't greed that caused this disaster. Greed is good. It was blind corruption and thievery. The way to stop it is to make sure that those who take command do so because their selfishness comes from seeing their employees and shareholders prosper--and not from owning another yacht.
 
You are not correct regarding APPL. Steve Job does it more for pride than for money. So his case doesn't apply here.

LTCM people were invested up to their necks in their HF and they still took big risks and blew up.

Greed did cause this disaster. Corruption and thievery are just byproducts of greed in this case.
 
It depends what you see as greed. I see it simply as a desire for more--a sort of Ayn Rand type selfishness.

With LTCM, at least the people that took the huge risks got their butts handed back to them, which is all we can ask.

Whether Steve Jobs is running Apple so well out of pride or because it's his money at stake, the fact is that he's running it **** well. He is the kind of CEO that needs to be running Wall Street firms.
 
Ilya, Steve Jobs micromanages the products at apple. That is not a model that works for a company with as many orifaces as an investment company. Good control is one thing, but micromanagement is another.

Almost every hedge fund and investment bank has the managers investing their own money; in a hedge fund, they plough their profits back in, and at an investment bank, they are paid in stock.

How can you say managers don't have an interest when you have people like Jimmy Cayne at Bear going from a billionaire to a few million in net worth?
 
Ilya, have you ever read the history of any of these companies?
 
Warren Buffet is going to invest in Goldman Sachs!
Is he the awaited saviour on the Wallstreet? Is this investion the golden act of faith in Anglo-Saxon financial markets?
 
Back
Top