As the buyer of a CDS could potentially profit on the default of the underlying bond without having to own it, Cox also likened CDSs to naked short selling.
“This potential for unfettered naked shorting and the lack of regulation in this market are cause for great concern. I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets," he said.His remarks follow a statement on September 22 by the governor of New York, David Paterson, who declared parts of the CDS market will be regulated from January 2009. Paterson also compared CDSs with the short sale of stock and urged the federal government to monitor the rest of the market. “The absence of regulatory oversight is the principle cause of the Wall Street meltdown we are currently witnessing,” claimed Paterson. Calls for federal supervision of the CDS market have met with fierce opposition from industry representatives.
In a statement prompted by Cox’s testimony, Robert Pickel, executive director and chief executive of the International Swaps and Derivatives Association, said: "During the current market volatility, the credit derivatives market has performed very well. Credit derivatives market participants are the first to encourage the SEC to use its authority to ensure attempted manipulation of these markets is punished. However, proposals that would seek to treat privately negotiated contracts as securities, or otherwise apply ill-fitting regulatory regimes to these agreements, are likely to deter healthy economic activity and push derivatives into markets where the SEC has no jurisdiction."