SEC Chair Asks Congress to Regulate CDS Market

The Securities and Exchange Commission [SEC] Chairman Mary Schapiro said the U.S. policymakers and other regulators need to supervise the opaque and fast growing credit default swap market, blamed for fueling 2008’s market meltdown.

Reuters: “If we continue to allow these risky financial products to operate in the dark we should not be surprised at the damage we find when the lights come on,” Mrs. Schapiro said in a statement.

The contract swaps — also blamed for bringing the world economy to its knees and costing taxpayers hundreds of billions of dollars in bailouts for events such as Lehman Brothers (LEHMQ) and American International Group (AIG), and more recently exacerbating the Greek debt crisis — are sold to investors to protect them from the risks of a debt default. But the absence of regulatory oversight has significantly reduced transparency into the impact of CDS positions on the overall financial markets.

The SEC has asked Congress for explicit authority to regulate the CDS market which is worth pointing out has enjoyed a massive growth since 2000; the market at that time was estimated to be over $630 billion. In 2008 the market printed $58-trillion in notional value and had grown exponentially up to the crisis.

With several European leaders including Chancellor Angela Merkel and the Greek prime minister pushing for tougher rules for credit default swaps, the White House, notes Reuters, wants to shed light on credit default swaps and the $450 trillion OTC derivatives market (which still remain virtually unregulated) by requiring most derivatives to be traded on an exchange or cleared by a central clearinghouse.

According to Reuters, legislation to put more of the derivatives trade within regulated markets is still being negotiated in the U.S. Senate, with lawmakers having a hard time deciding over who should be forced to comply.

This is not  the first time by the way gov’t officials have attempted to regulate the CDS market. Regulation of CDS was attempted by CFTC in May 1998 but without much success.

Shirvani. “Throughout the crisis, credit default swaps have remained available and liquid. They
have been the only means of hedging credit exposures or expressing a view at a critical time for the
industry. Impairing their use would be counterproductive to efforts to return the credit markets to a
healthy, functioning state.”

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