Washington: The Way Forward - Wall Street

Speculation is swirling that Eric Dinallo is on the short list to become the next SEC Chairman.

Although we asked if there was any truth to the market rumor, he didn’t answer our question. Of course he didn't deny it either.

In either case if you’re not familiar with Dinallo he’s the New York Insurance Superintendent and very much at the center of the movement to create transparency in the credit default swaps market.

Bringing Order to No Man’s Land

A few weeks ago, New York Governor David Paterson said New York would begin classifying some swaps as insurance products so that it could begin overseeing financial instruments that are traded over the counter and without any regulation. He asked the federal government to regulate those outside of the state's jurisdiction.

After the hearing, though, Dinallo told us the state may not have to follow through on those plans if the federal government embraces other reforms, specifically the idea of a central counter-party.

"A lot of these solutions would I think satisfy some of the concerns that we've had, and the Governor would have to decide... how to cooperate with those solutions," he said.

A central counter-party would function much like insurance, he said, where two parties wanting to create a swap would do so through a third body, which had a reserve fund.

Devil in the Details

Many of the details still have to be settled, Dinallo said, including how the fund would be capitalized, but the basic idea would be to create a guarantee akin to insurance on the swaps.

"Think of it as an extra-large financial guarantee company, or a version of an insurance company, where you have capital behind all the commitments, to a certain extent," he said. "Instead of you and I exchanging insurance on whether we're going to die, you get a bunch of people and you do it with an insurance company. That, to me, is what central counter-party implies, with the necessary funding behind it."

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