Davis Polk & Wardwell Newsflash

New York Revises its Plan to Regulate Credit Default Swaps

November 21, 2008

The New York State Department of Insurance will delay indefinitely its previously outlined plan to regulate credit default swaps, while remaining on active surveillance of the various federal plans and options, according to the testimony of NYS Department of Insurance Superintendent Eric Dinallo before the United States House of Representatives Committee on Agriculture yesterday.

The decision, as officially announced in the First Supplement to Circular Letter 19, published yesterday, results from “the progress made toward comprehensive federal regulation.”  In his testimony, Mr. Dinallo specifically referred to SEC Chairman Christopher Cox’s request for power to regulate the credit default swap market, subsequent actions by the President’s Working Group (in particular, its initiative to develop central counterparties for credit default swaps) and his discussions with members of the United States Congress.  Mr. Dinallo asserted that while the NYS Department of Insurance continues to have the jurisdiction to regulate credit default swaps where the buyer holds, or is expected to hold, a material interest in the referenced obligation, the NYS Department of Insurance believes that “the best option is a holistic solution for the entire credit default swap market” and that “it would not be effective or efficient for New York to regulate some transactions” while others are regulated under another scheme or not at all.

Mr. Dinallo stated that the NYS Department of Insurance will be actively following and assisting with regulatory efforts made by federal agencies and Congress.  He suggested that, in his view, federal regulation should contain the following elements:

  • requirements that all sellers maintain adequate capital and post sufficient trading margins to minimize counterparty risk;
  • a guaranty fund that ensures that a failure of one seller will not create a cascade of failures in the market;
  • clear and inclusive dispute resolution mechanisms;
  • mechanisms for collecting comprehensive market data and making it available to regulatory authorities; and
  • comprehensive regulatory oversight, such that regulation is not voluntary.

Once appropriate regulations have been put in place, Mr. Dinallo concluded, New York will consider changes in state law to prevent problems that could arise from some swaps being categorized as insurance.   On the other hand, if New York finds the federal government is not acting decisively enough, the implication is that the NYS Insurance Department may again decide to act as a regulator of credit default swaps.

See a copy of First Supplement to Circular Letter 19.

See a copy of Superintendent Dinallo’s Testimony.

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If you have any questions about the matters covered in this newsflash, please contact any of the lawyers listed below or your regular Davis Polk contact:

Daniel N. Budofsky, Partner
212-450-4907 | daniel.budofsky@dpw.com

Randall D. Guynn, Partner
212-450-4239 | randall.guynn@dpw.com

Michael Kaplan, Partner
212-450-4111 | michael.kaplan@dpw.com

Warren Motley, Partner
212-450-4032 | warren.motley@dpw.com

Annette L. Nazareth, Partner
202-962-7075 | annette.nazareth@dpw.com

Margaret E. Tahyar, Partner
011-33-1-56-59-36-70 | margaret.tahyar@dpw.com

Courtenay U. Myers, Counsel
212-450-4943 | courtenay.myers@dpw.com

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