Wednesday, October 15, 2008

Calls for regulating credit derivatives markets

(FT) The backlash against the $54,000bn credit derivatives market gathered pace yesterday as US legislators renewed calls for regulating a sector widely blamed for contributing to the financial crisis.

“There is no question that we must adopt a stronger system of regulation,” Tom Harkin, the Democratic senator, told a Senate hearing on Tuesday. “It is hard for me to see how we are going to put our financial sector and our economy back on a sound footing unless we do so.”

He called the market for credit default swaps, which offer a kind of insurance against companies defaulting on their debt, a part of “casino capitalism” ­operating outside federal regulation, and said they contributed to the ­collapse of financial ­institutions.

The comments by the chairman of the Senate agriculture committee, which oversees futures market oversight, accompanies calls in recent weeks by a growing group of politicians, regulators and some industry participants, explicitly to regulate credit derivatives

The sector, which emerged a decade ago, is conducted via private, ”over-the-counter” deals rather than on a central exchange. One concern has been that there is no clear information about the amount of credit derivatives that exist, or where exposures are concentrated.

Last week, the US Federal Reserve held two meetings with dealers in the credit derivatives market in an effort to tackle the credit risks inherent in the CDS market.

Market participants say that there is clearly a push for a viable plan to be announced. Further hearings are scheduled for Wednesday and coming weeks.

Eric Dinallo, New York insurance superintendent, said on Tuesday: “One of the major causes of this financial crisis was not how lax or tight we regulated or how easy or hard we enforced, but what we chose not to regulate. Clearly, it is time to start regulating credit default swaps.”

However, Robert Pickel, chief executive of the International Swaps and Derivatives Association, said: “To say that CDS were the cause, or even a large contributor, to that turmoil is inaccurate and reflects confusion of the various financial products that have been developed in recent years.”

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