Introduction

Calls for greater credit derivatives regulation are gathering pace. David Paterson, state governor of New York, announced on September 22 that parts of the credit default swap (CDS) market will be regulated from January 2009. The next day, Christopher Cox, chairman of the US Securities and Exchange Commission, called on the US Senate Banking Committee to "provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets".

Given the huge amounts of cash used to support failing financial institutions in the US, UK and Europe, it now seems almost unthinkable politicians and regulators will not respond by demanding greater regulation and oversight of the banking sector.

Nonetheless, CDS traders are aghast at the news their market could face greater regulation. The CDS market, claim dealers, has worked well in difficult conditions and allowed investors to hedge exposures and take positions in credits for which there are no liquid underlying bonds. They say moves to regulate the sector in the US could push the business to other jurisdictions.

The derivatives industry has developed strong lobbying skills over the past two decades, which stood it in good stead during a spate of losses in 1994, blamed on the mis-selling of derivatives (Orange County, Procter & Gamble and Gibson Greetings). While the industry successfully campaigned against greater regulation in the derivatives market then, it may now find more resistance from politicians, determined to show they are standing up to Wall Street.

Nick Sawyer, Editor.