Linklaters article discusses New York Insurance Department threat to regulate credit derivatives

In an article entitled “Credit derivatives as insurance: in race to regulate CDS, wrong runner takes early lead”, Linklaters partner Adam Glass discusses the recent press release from the New York Insurance Department which suggests that it may treat some credit derivatives as insurance. Glass argues that based on the wording of the press release, it is unlikely that the department has plain vanilla corporate credit default swaps in its sights.

The department has singled out contracts where the protection buyer holds a material interest in the reference obligation. But Glass points out that in standard corporate CDS, there is no single reference obligation. “Thus, regular corporate CDS that refer to entities, rather than obligations, will apparently not be regulated,” he writes.

The article says that the types of credit derivative transactions that might be affected are negative basis trades and synthetic balance sheet CDOs. Glass points out that catastrophe bonds and longevity swaps might be caught up in the insurance department’s mooted redefinition of insurance.

Isda is scheduled to hold a conference call today as part of its efforts to fight the department’s initiative as a threat to the credit derivatives market.