NCOIL Sets Model Bill For State Control Of Credit Default Swaps

NU Online News Service, Nov. 23, 3:09 p.m. EST

The National Conference of Insurance Legislators said it has adopted model legislation to prohibit "naked" credit default swaps and put "covered swaps" under state insurance regulation.

Under the model approved, the covered swaps would be overseen in the states as credit default insurance.

Credit default swaps became an issue after heavy involvement by American International Group's financial products unit with billions in CDS led to the firm's near collapse. The National Association of Insurance Commissioners has noted repeatedly that, unlike other risk protection, CDS were not classified as an insurance product,

NCOIL approved the model at its annual meeting that concluded yesterday in New Orleans, NCOIL announced it had "acted boldly" to "fill a regulatory void created by a decade of federal deregulation."

Presiding NCOIL President and New York State Sen. James Seward (R-C-I-Oneonta) said, "Though CDS may not have been the sole cause of our nation's economic crisis, few could deny the key role that they played."

Mr. Seward added, "In a market lacking in transparency and adequate safeguards, CDS were permitted to grow to unimaginable levels. When the underlying assets began to lose value, the downward spiral was immediate as market participants could not cover their own obligations. Our model would bring fundamental change to the marketplace and would prevent a repeat of such an economic catastrophe.

The legislation was sponsored by New York Assemblyman Joseph Morelle, D-Irondequoit, chairman of NCOIL's Financial Services & Investment Products Committee.

NCOIL said the measure is modeled after the New York State financial guaranty insurance law and would include a first-of-its-kind definition of CDI and would establish a state regulatory regime to oversee the CDI market.

The model would contain requirements regarding company licensing; contingency, loss and unearned premium reserves; policy forms and rates; and reinsurance, among other things. It would define authorized CDI and prohibit and penalize parties that engage in unauthorized CDI. In doing so, the model would ban so-called "naked" CDS.

Assemblyman Morelle's committee adopted the model Friday. He said "NCOIL legislators felt strongly in March that we should not sit idly by and watch as the federal government attempted to develop a regulatory regime for derivatives.

"We understood from the beginning that there was a chance that Congress could develop a derivatives strategy that would preempt our efforts, but we knew that it would be in the consumers' best interest if we proceeded to develop rules for the industry. We agreed that certain CDS were a form of insurance and, thus, products to be regulated by the states. We set out to develop model legislation, and we succeeded."

The model legislation, it was noted, was developed largely by an NCOIL Task Force on CDS Regulation, which was appointed at the NCOIL Spring Meeting in March. The Task Force convened six interim meeting conference calls–two additional full committee calls were held following the Summer Meeting–and received input from various interested parties.

Organizations that participated in NCOIL policy discussions included the New York State Insurance Department, the International Swaps & Derivatives Association and the Securities Industry & Financial Markets Association, as well as the American Academy of Actuaries, the American Council of Life Insurers, the Association of Financial Guaranty Insurers, Marketcore and the National Association of Mutual Insurance Companies.

Most legislators active in NCOIL either chair or are members of the committees responsible for insurance legislation in their respective state houses across the country.