On September 22, New York governor David Paterson announced a framework to regulate part of the CDS market using state insurance rules. Under the plans, which were set to enter into effect from January 2009, CDSs bought to hedge a bond owned by the protection buyer would have been considered insurance contracts.
According to NYSID's own figures, such trades constitute no more than 20% of the CDS market.
But regulating the CDS market required a "holistic solution", said Dinallo, at a Washington, DC hearing on the role of credit derivatives in the US economy before the House Committee on Agriculture. "New York will delay indefinitely our plan to regulate part of this market," he added.
The U-turn will come as a relief to many participants in the CDS market, among whom the plan was controversial. "The NYSID proposal is the most unworkable and unreasonable suggestion under discussion today," one chief risk officer told Risk last month.
Instead, Dinallo praised a memorandum of understanding between the Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission aimed at strengthening infrastructure and oversight for the CDS market. Among other things, it establishes a framework for overseeing the development of a central CDS counterparty.
Several planned CDS clearing houses are currently under development, although it looks likely the initiatives will miss the November 30 deadline for central counterparty clearing laid out by the Federal Reserve Bank of New York.
Dinallo said NYSID would follow and assist the efforts of federal regulators in overseeing the market. It would also be prepared to "consider any necessary changes in state law to prevent problems that might arise from the fact that some swaps are insurance," he said.
Earlier this month, figures from the Bank for International Settlements showed the global CDS market was worth $57.3 trillion in notional volume, a decline of 1% in the first half of this year.
See also: CDS clearing house to miss November 30 deadline
November target for CDS central counterparty
New York governor announces CDS regulation