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The regulatory black hole for credit default swaps is one of the most significant issues we are confronting in the current credit crisis, SEC Chairman Christopher Cox said and called on the Congress to provide for regulatory oversight.
The OTC market in credit default swaps has experienced explosive growth in recent years insuring some $58 trillion of value, Cox said. This is more than the combined gross domestic product of every country on earth, he underlined. “When entire asset classes fall in value, the exponentially larger losses on credit default swaps can work to amplify the risk to the financial system.”
The market for CDS has grown between the gaps and seams of the current regulatory system, where neither the Commission nor any other government agency can reach it, he warned. “No one has regulatory authority over credit default swaps — not even to require basic reporting or disclosure.”
“The over-the-counter credit default swaps market has drawn the world's major financial institutions and others into a tangled web of interconnections where the failure of any one institution might jeopardize the entire financial system”, he continued. “This is an unacceptable situation for a free market economy.”
Legislation is needed to require trade and position reporting by dealers in over-the-counter credit default swaps, he said. Also, both the SEC and the CFTC should be given authority to issue anti-fraud rules, he added.
Finally, these measures have to be discussed with governments and parliaments in other major market centers. “The climate for such co-operation is good, because the cross-border impacts of the current market problems are quickly becoming obvious to all”, he said.