After 18 Years, Watchdogs Set to Leash Credit Swaps

RISK reports that the CFTC and SEC are partnering to oversee single-name credit default swaps, something required under Dodd Frank. This could bring to an end the damage, potential and actual, created by the product in the 18 years since the disastrous Commodity Futures Modernization Act of 2000 left over-the-counter derivatives completely free of regulation.

From RISK:

The top US markets regulators have reached a tentative agreement to jointly regulate single-name credit default swaps (CDS), Risk.net has learned. The deal will pave the way for the Commodity Futures Trading Commission to propose a clearing rule for single-name CDS, fulfilling a key provision of the Dodd-Frank Act.

CFTC chairman Christopher Giancarlo discussed the agreement in a behind-closed-doors meeting with industry participants on March 13.

Neither regulator covers itself in honor on a regular basis, but the SEC is known to be more conservative in its views. Whether it will re-litigate the “insurable interest” question that CDS critics have leveled at those who take naked short positions (pretty much everyone in the market, that is), is unclear. But as RISK notes, this could be a step toward central clearing, moving credit products toward the same fate as interest rate derivatives, cratering dealer earnings but reducing systemic risk.

Unless, like me, you worry that clearinghouses just concentrate risk. But that’s another story.

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