NY Official Hints at Credit Derivatives Regulation


New York Insurance Superintendent Eric Dinallo said it may make sense to discuss regulating certain segments of the credit derivatives market as if they were insurance products.

MBIA Posts Large Losses

Dinallo told CNBC on Monday that when an investor buys credit derivatives to protect a bond against default, it may make sense for that trade to be considered an insurance transaction, and regulated accordingly. (See the Dinallo interview in the video at left.)

These trades represent around 20 percent of the $62 trillion market, which is largely over-the-counter and unregulated now, he said.

Around 80 percent of the contracts in the market are used in so-called naked shorts, which are outright bets that the credit quality of a debt issuer will deteriorate and are not backed by any debt exposures, Dinallo said.

These trades do not qualify as insurance because they are not backed by any debt, he said.

Also on Monday, bond insurer MBIA posted a loss of $2.41 billion, or $13.03 per share, versus a profit of $199 million, or $1.46 per share, in the year-earlier quarter.