SEC chief warns that CDS market is ripe for fraud and manipulation; not even 'minimal disclosure'
September 23, 2008
(Reuters)—The top U.S. securities regulator urged Congress on Tuesday to pass laws to regulate the $58 trillion credit default swap (CDS) market, which has been blamed for contributing to the financial crisis.
Securities and Exchange Commission Chairman Christopher Cox said there is a regulatory hole in supervision of the CDS market and said the potential for unfettered naked short-selling has caused great concern.
The swaps are used to hedge against a borrower defaulting on its debt or to speculate on the borrower’s credit quality. On Monday, New York state officials took steps to regulate the market, classifying some of the securities as insurance products to bring them under the authority of state insurance regulators.
Sellers of the contracts have been criticized for not having enough capital to cover potential losses, posing a systemic risk to the broader financial market.
Mr. Cox warned the market was ripe for fraud and manipulation.
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