New York tries taming credit default swaps

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http://online.wsj.com/article/SB122213119866965761.html

New York regulators are attempting to tame parts of the unregulated credit-default-swaps market by requiring some sellers of these contracts to become insurance companies.

On Monday, the New York Insurance Department under Eric Dinallo reversed a previous position and issued guidelines that declared some CDS contracts are "insurance and therefore subject to state regulation," it said in a statement.

Credit-default swaps are privately negotiated contracts that act like insurance and protect investors against a default on bonds and loans that they own. Swap buyers make regular payments to sellers, which in turn agree to make large payouts if defaults take place.

The rules, which are supposed to take effect in January 2009, would cover swaps bought by investors that also own the actual bonds or loans referenced by the swaps. The regulations involve New York buyers and sellers, but they account for a large chunk of the market. And the state's action could inspire other regulators elsewhere.