As Carol Straw reported here two weeks ago, Senator Tom Harkin recently introduced a bill that would revise the regulation of credit default swaps (“CDSs”). Recall that CDSs act as insurance policies for corporations on the defaults of bonds and corporate debt. They currently receive very little in the way of oversight, as they are exempt from regulation as futures contracts and they do not trade on any exchange. Many blame this unregulated $60 trillion market -- at least in part -- for playing a significant role in our ongoing financial crisis. As an example, AIG was on the hook for nearly $500 billion worth of CDSs at the time of its government bailout. At Senate hearings held last month in connection with Senator Harkin’s bill, numerous industry experts testified to the great benefits to be obtained from greater regulation of CDSs.
So, the old laissez-faire attitude toward CDSs is about to meet its demise. The SEC is reportedly working on a plan designed to create a “central counterparty clearinghouse” (i.e., an exchange of sorts) to organize and regulate the trading of CDSs. Commission Chairman Christopher Cox recently wrote in a Washington Post editorial: “The risk to the market from these instruments would be far less if investors had the benefit of basic disclosures. The lack of transparency around credit default swaps played a role in the collapse of AIG and contributed to the crisis of confidence that has enveloped other financial institutions. Credit default swaps must be brought immediately into the regulatory framework.”
According to an article in today’s online issue of SecuritiesLaw360, the Commission has alerted The IntercontinentalExchange Inc., CME Group Inc., NYSE Euronext, and Eurex of its plans to commence a central counterparty program for the trading of CDSs. Both IntercontinentalExchange and CME have announced their technical ability to convert CDSs into regulated exchange futures and to support their trading on an electronic platform. In what we feel is a savvy trade-off, the SEC has agreed with a number of exchanges and CDS dealers to lighten registration requirements in exchange for quick action. Thus, in conjunction with the exchanges’ swift implementation of exchange platforms, the SEC has agreed to temporarily exempt them from the normally onerous and time-consuming exchange registration requirements.
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