The State of New York has proposed to start regulating credit default swaps owned by investors trying to protect bonds they own, Bloomberg News reported.
The plan won't apply to credit default swaps purchased by speculators, i.e. swap owners who are trying to profit from an increase/decrease in a borrower's creditworthiness, New York Governor David Paterson told Bloomberg News. Paterson also urged the federal government to follow New York's lead and regulate the rest of the credit default swap market.
Credit default swaps are contracts designed to protect against or speculate on default. CDSs pay the buyer face value if a company fails to adhere to its debt. Hedgers typically use them to guard against bond losses. However, speculators use them as an active investing/trading tool in an attempt to profit from a company's / issuer's credit worthiness.
Economist David H. Wang told BloggingStocks there's an upside and a downside to increased regulation of the $62 trillion CDS market.
"On the one hand, we do need a central regulator in the United States to verify that those selling credit default swaps can in fact pay the swap holder if there is a default claim," Wang said. "The system for swaps was jeopardized when AIG could not pay all claims, and could have resulted in contagion, which prompted the federal government's loan."
The plan won't apply to credit default swaps purchased by speculators, i.e. swap owners who are trying to profit from an increase/decrease in a borrower's creditworthiness, New York Governor David Paterson told Bloomberg News. Paterson also urged the federal government to follow New York's lead and regulate the rest of the credit default swap market.
Credit default swaps are contracts designed to protect against or speculate on default. CDSs pay the buyer face value if a company fails to adhere to its debt. Hedgers typically use them to guard against bond losses. However, speculators use them as an active investing/trading tool in an attempt to profit from a company's / issuer's credit worthiness.
Economist David H. Wang told BloggingStocks there's an upside and a downside to increased regulation of the $62 trillion CDS market.
"On the one hand, we do need a central regulator in the United States to verify that those selling credit default swaps can in fact pay the swap holder if there is a default claim," Wang said. "The system for swaps was jeopardized when AIG could not pay all claims, and could have resulted in contagion, which prompted the federal government's loan."
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