NU Online News Service, July 24, 10:39 p.m.EDT

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National Conference of Insurance Legislators (NCOIL) leaderssaid they are working on a model act to protect consumers from "thewidespread economic fallout of controversial CDS (credit defaultswap) transactions."

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The NCOIL legislators sent a letter explaining the draft modelto the chairs of the U.S. Senate Committees on Banking, Housing andUrban Affairs; and Agriculture, Nutrition and Forestry; as well asthe chairs of the House Committees on Financial Services, andAgriculture.

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The letter states the draft model would regulate certain"covered" CDS–defined as "those that maintain a material interestin an underlying asset"–as a new form of insurance called creditdefault insurance (CDI). It would also prohibit "naked" CDS–definedas "swaps in which a party has no material interest in theunderlying asset."

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The model act would "mandate licensing of credit defaultinsurers and impose solvency standards, such as minimum capital andsurplus, as well as contingency, loss, and unearned premium reserverequirements on such insurers," according to the letter.

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Specifically, the letter states that the draft model bill would,among other things, require strict limitations on permissiblecredit default insurance, set single and aggregate risk limits, andauthorize minimum policy and rate standards.

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"We also included a section that would impose civil and criminalpenalties for impermissible credit default insurance," NCOILlegislators said in the letter.

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They added that the draft model bill mirrors financialrequirements imposed on financial guaranty insurance, which NCOILsaid is "a similar credit default instrument."

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According to the letter, "Instead of reinventing the wheel,NCOIL Task Force [on CDS Regulation] members based the model billon New York State Article 69–the 1989 law governing financialguaranty insurance–and drew into its scope the CDS that mostresembles insurance."

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NCOIL president State Sen. James Seward, R-N.Y., said, "AsCongress grapples with how to address an under-regulated market, wefeel it essential to alert federal lawmakers of the progress wehave made to protect consumers from the widespread economic falloutof controversial CDS transactions. The premise of our draft modelact–that credit default swaps with material interest areinsurance–means consumers would be protected by the safeguardsinherent in state-regulated coverage."

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