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The Actuary The magazine of the Institute & Faculty of Actuaries

New regulations proposed to clean up credit derivatives markets

The impact of credit derivatives on the insurance, banking and hedge fund sectors is the catalyst behind a new push to improve market regulation. In September, the US Insurance Department gained the authority to regulate part of the stock market’s $62tn of credit default swaps. The department reversed an eight-year-old ruling that credit default swaps are not a form of insurance.

Until now, writers of credit default swaps, contracts that offer protection against counterparty default, have not been subjected to the capital requirements meted out for conventional insurance contracts. Eric Dinallo, the New York insurance superintendent, is now working with New York governor David Paterson to implement the new regime from January 2009. “This is primarily a credit crisis, not an equity crisis, and that is where the focus should be now,” said Dinallo. “The severity of this crisis was substantially increased by what the government chose not to regulate — principally, credit default swaps.”