A New York state lawmaker Wednesday called on Congress to allow states to regulate credit default swaps, saying they are “species of insurance.”
The comments by New York Assemblyman Joseph Morelle, D-N.Y., on behalf of the National Conference of Insurance Legislators, Troy, N.Y., took part at a hearing on legislation introduced by Rep. Collin Peterson, D-Minn., chairman of the House Agriculture Committee.
The bill Peterson is drafting would require most over-the-counter derivatives to be cleared by federally regulated clearinghouses and would ban “naked” credit default swaps.
“Frankly, this discussion is not only appropriate but, perhaps, sadly overdue,” Morelle said in his testimony. “It is a discussion with implications beyond even the very broad horizons of its specific subject matter, for it relates to our fundamental notions of the free market system.”
He added that if Congress concludes that CDS “are a species of insurance, and I would strongly suggest that they are, then authority in relation to CDS must accrue to the states.”
NCOIL takes the position “that state regulators, with their extensive experience at regulating insurance products, are extremely qualified to regulate covered CDS as insurance products,” Morelle said.
He also said that it is NCOIL’s position that Congress erred when it preempted the states from regulating CDS “under our gaming and bucket shop laws” when it passed the Commodities Futures Modernization Act of 2000.
The CFMA “permitted so-called ‘naked swaps’–those CDS contracts that are speculative in nature and are merely directional bets on market outcomes–to proliferate to the point where they now constitute 80 percent of the CDS market, which has a notional value of around $54 trillion, with no regulatory framework,” he said.
The NCOIL Financial Services Committee will discuss the hearing and chart a formal policy course for the organization when it meets Feb. 28, during the NCOIL Spring Meeting in Washington, DC, he said.
The hearing and the legislation introduced by Rep. Peterson–as well as similar legislation introduced in the Senate Agriculture Committee–represent the opening bell in what is expected to be a knock-out, drag-out fight by legislators of all stripes to win oversight over CDS.