State Regulation of Credit Derivatives

New York is planning to bring parts of the credit derivative market under the control and regulation of insurance supervisors (see Financial Times article). One has to wonder whether this is in fact the proper regulator for credit derivatives, and whether adding another separate oversight agency is the best move. Such a move is being made at a time when plans for a central counterparty clearing house for the credit derivatives market are still being discussed (see Financial Times article). No doubt that such a clearing house would have its own regulator. The problem is that regulatory inconsistencies, which at times even produce regulatory arbitrage, may be contributing to the current problems as much as the lack of regulation. Hopefully a smart, comprehensive, non-complicated, and consistent agency and set of regulations will result. As recently stated by Robert Pickel, from the International Swaps and Derivatives Association: “The state ... should proceed very cautiously and in consultation with federal regulators before acting in a way that may ultimately cause more harm than good.” We can only hope. Unfortunately, time is not on our side for some of the current market problems.