NEW ORLEANS—The National Conference of Insurance Legislators has adopted model legislation that would ban “naked” credit default swaps and establish a state-based regulatory framework for “covered” swaps.
The model law, adopted at NCOIL’s annual meeting in New Orleans last weekend, is modeled after New York state’s financial guaranty insurance law. Among other things, the model provides a definition of credit default insurance and contains requirements regarding company licensing, loss and unearned premium reserves, policy forms, and rates and reinsurance.
“Though CDS may not have been the sole cause of our nation’s economic crisis, few could deny the key role that they played,” said NCOIL President James Seward, a Republican New York state senator. “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.”