SAN FRANCISCO (MarketWatch) -Gov. David Paterson said Monday that New York will begin regulating part of the $62 trillion credit default swap market next year because a lack of regulation in that area of finance has contributed to the current credit crisis.
At Paterson's direction, the New York Insurance Department issued guidelines on Monday that establish some types of credit default swaps as insurance, subjecting them to state regulation.
CDS are a type of derivative contract that pay out in the event of default. These types of derivatives have grown very quickly in the past 10 years because they allow market participants to hedge against the risk of holding debt, while also letting traders speculate more easily on the fortunes of companies.
While the market has ballooned, it remains lightly regulated. That's sparked concern that problems in the market could exacerbate stresses in the broader economy and other financial markets.
Paterson's office said the goal of regulating the swaps is not to stop sensible economic transactions, but to ensure that sellers have sufficient capital and risk management policies in place to protect the buyers, who are in effect policyholders.