Editor's letter

Throughout the crisis in this market, Credit has recognised the need for - and inevitability of - significant regulatory change. We have been just as clear, though, that such intervention must be soberly applied, and the product of proper consultation with the institutions it will affect. This is not a defensive stance, but one born of the hope that new regulation will work, and of recognition that bad lending and ill-informed investment derive not from loose regulation but the optimistic sentiment accompanying bull markets and, indeed, bubbles.

It is in this spirit that we note with some alarm the tone and content of recent comments from regulatory and political figures about the derivatives market. In the US, it has been proposed in the Agriculture Committee that the CDS market be limited to a straightforward hedge, with 'naked swaps' - the holding of CDS contracts by investors other than the holders of the cash bonds - eradicated. In Europe, the European Commission has reacted impatiently to the time it has taken for a clearing house to established, with the French finance minister going so far as to call for the ECB to set one up itself.

The first measure is, as Isda's Bob Pickel explains in our interview (p. 26), simply too simplistic and could cause the demise of the credit derivatives market as we know it. The noise about clearing houses, though, is a deplorable departure from the principle that the market is best placed to decide how to address counterparty risk. The various competing attempts to establish a functioning central clearing house will take time to get up and running and - most importantly - attract dealer support. But once this happens and the industry votes with its feet as to which one (or ones) it favours, the best solution will have been found.

Matthew Attwood.