New York Halts Plan to Regulate Part of Credit Default Swap Market

November 20, 2008

New York Insurance Superintendent Eric Dinallo will put his plans to regulate part of the credit default swap market on ice, instead favoring a broader regulatory plan, he said in Congressional testimony in Washington on Thursday.

Dinallo, who had said in September that he would start in January to regulate the part of this market that is considered insurance, said he now believes it would be counterproductive to have multiple regulators.

“It would not be effective or efficient for New York to regulate some transactions under the insurance law, while other transactions are either not regulated or regulated under some other law,” Dinallo told a Congressional committee.

“The best outcome is a holistic solution for the entire credit default swap market,” he added.

Credit default swaps can be used to protect against a borrower defaulting on their debt, such as bonds or loans, or to speculate on the borrower’s credit quality.

As New York’s insurance regulator, Dinallo has had a bird’s eye view of how the $47 trillion market has contributed to the global financial crisis.

American International Group Inc., the giant insurer, nearly collapsed after it ran out of cash to meet collateral calls on credit default swaps it had sold to guarantee underlying mortgage debt, as the U.S. housing crisis deepened.

The New York Insurance Department is the main regulator for AIG and is overseeing the company’s sale of assets as it tries to pay off a federal bailout that has ballooned to $150 billion from $85 billion initially.

(Reporting by Lilla Zuill; Editing by Lisa Von Ahn)

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