NEW YORK–In a move toward developing a comprehensive creditdefault swap policy, a group of the nation's state legislators tooktestimony from experts, who urged putting swaps under stateinsurance regulators' control.

Among those who testified here Saturday at the NationalConference of Insurance Legislators' hearing on credit default swapmarket regulation was Michael Greenberger, a University of MarylandSchool of Law professor, who said there is an acute need for betteroversight and urged state lawmakers to take the lead on theissue.

Do not wait for the federal government to take action, headvised the NCOIL panel.

NCOIL, under its financial services and investment productscommittee steered by New York Assemblyman Joseph Morelle,D-Rochester, is due to discuss whether to pursue model legislationduring its spring meeting next month in Washington.

Mr. Greenberger reiterated comments of earlier speakers that noone really has a full handle on the total CDS market, which hascaused major investment losses, and that the conventional wisdom inWashington is that insurance regulation has failed.

He said that failure to take the lead on the issue is inviting anotion that “states are just not up to this responsibility.” Thisnotion is “not only about credit default swaps but the ability toregulate all insurance regulation.” He urged state legislators to“aggressively” take up the issue.

And, he said that he was “very, very worried that we are notnear the tip of the iceberg” because of other CDS backed not byresidential mortgages but commercial mortgages, credit card debt,and auto and student loans.

Eric Dinallo, New York superintendent of insurance, explainedthe CDS market to legislators and said it really needs to bedifferentiated between covered and naked commercial default swapsand that the approach legislators and regulators take should bedifferent depending on the type of security.

A covered CDS occurs when you actually have risk and you want totransfer that downside risk, while the purchaser of a naked CDSdoes not have any risk but is taking a bet that the company inquestion and its security will falter, according to Mr.Dinallo.

Mr. Dinallo said that a CDS is, at the base, a security, and notinsurance, because the party accepting risk offers no guarantee tomake an affected party whole, as there would be in an insurancearrangement.

CDS is at the base, a security and not insurance because thereis not a guarantee to make a party whole as there is in insurance,he said.

Mr. Dinallo and his department maintain that covered CDS, whichit estimates make up about 20 percent of the market, are insuranceproducts.

The lack of transparency was a disturbing point that came tolight as the New York Insurance Department worked on the federalgovernment's seizure of American International Group, New York, Mr.Dinallo told the lawmakers. While AIG held approximately $450billion in CDS, “we can't say how much was written on AIG. Nowherewas it listed where we could get a sense of it.”

Mr. Dinallo said that all CDS should be listed on an exchange inorder to increase transparency.

Robert Pickel, executive director and chief executive officer ofthe International Swaps and Derivatives Association, New York,noted that CDS can and have brought a “tremendous amount of valueto the economy” and have “transformed the credit business.”

Requiring collateral can be a “very powerful tool,” according toMr. Pickel. And, Mr. Pickel said, insurance regulators need fullinformation available both on regulated and unregulated parts of acompany so there will be a fuller picture of what the company'sholdings are.

Michael Schozer, president of Assured Guaranty and director ofthe Association of Financial Guaranty Insurers, both in New York,explained that CDS are similar to letters of credit and that LOCsare not insurance. And, he added, it is important to distinguishbetween CDS and liquidity issues.

What he suggested to NCOIL legislators as a better approach is aproper measurement of imbedded liquidity risk, not tying posting ofcollateral to rating triggers and mark-to-market accounting, whichforced the sale of securities in a falling market.

Another action item Mr. Schozer recommended was increasedregulation of rating agencies because $225 billion in “AAA”-ratedCDS defaulted.

Others offering testimony that CDS should definitely beregulated by disinterested parties included Ryan Wilson, a seniorpolicy advisor with AARP Public Policy Institute, Washington, andDavid Ingram, a senior vice president of Willis Re, speaking onbehalf of the American Academy of Actuaries, Washington.

Thomas Hoens, a partner with HRF Associates, Westfield, N.J.,said that “without question,” NCOIL should start the process ofregulating CDS.

“To the extent that [state legislators] wait, it is a possibleopen door to federal regulation of insurance,” Mr. Hoens warnedNCOIL legislators. He said that CDS are insurance products and he“would like to see states retake control of this industry.”

Insurers are “sound and solvent” and did not cause the need fora bailout, according to Nat Shapo, who was representing theNational Association of Mutual Insurance Companies, Indianapolis.He said that CDS should receive congressional oversight but notdisturb a regulatory system that works well.

NCOIL President and New York Sen. James Seward, R-Oneonta, saidin a statement after the session that the message from experts “wasloud and clear: that unfettered, 'naked' swapping should not beallowed. Participants in the CDS market are not subject to the samestrong solvency, reserving and insurable interest standards thatare imposed on actors operating in the insurance market.”

“These standards protected the insurance sector as otherfinancial services industries have struggled or failed during thiseconomic crisis. NCOIL legislators at the hearing found thedefinite need to fill an existing regulatory gap and to provideguidance to the states on how to address CDS regulation.”