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The Governor of New York has drawn howls of opposition from Wall Street to his announcement of a plan by which the New York State Department of Insurance will begin regulating credit default swaps under guidelines that reportedly take effect in January, 2009. Shannon D. Harrington and Christine Richard, "Credit Swaps Move Closer to Regulation With N.Y. Plan (Update 2)" (Bloomberg.com, Tuesday, September 23, 2008).
"Credit default swaps" have been addressed and definitions have been provided here in many posts. In the linked newspaper article, it is said that credit default swaps "are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt or to hedge against losses. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrower fail to adhere to its debt agreements." Id.
The New York State Superintendent of Insurance will provide more details about the plan and its guidelines. Until then, it is reportedly clear that, first of all, the plan limits the issuance of credit default swaps to licensed Insurance Companies.
Second, the licensed Insurance Companies must demonstrate that they have the capacity to actually pay claims on the credit default swaps they issue, in the event of a default.
In the interim, the linked newspaper report quotes many investors including investors in the previously unregulated credit default swaps, which are now renowned for their role in the current credit market crisis, as being outright opposed to or otherwise scoffing at the New York Insurance Regulation guidelines -- even before the Insurance Department guidelines are more fully announced.
For a more understandable definition of "credit default swaps," and a perhaps more careful examination of their regulation as Insurance in New York, see Danny Hakim, "New York to Regulate a Financial Tool Behind the Credit Crisis" p. C10, col. 1 (New York Times Nat'l Ed., Tuesday, September 23, 2008): "Credit-default swaps essentially function like insurance contracts to protect bond buyers from the risk that companies will default, but over the years they have become a favorite tool of speculators who use them to bet that a certain company will fail."
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