Given the recent volatility in the credit and stock markets, there have been increasing calls for regulation of the $62 trillion credit default swap (“CDS”) market. As we reported yesterday, New York State, determined to take the lead in the regulation of CDS contracts, announced that it would regulate certain CDS contracts as insurance. In announcing the state’s position, New York Governor Paterson urged the federal government to close the regulatory gap in the CDS market, asking the federal government to “follow New York's lead once again by regulating the rest of the credit default swap market,” which he stated “will have a positive impact on our collective efforts to get the national economy back on track.”

U.S. Securities and Exchange Commission Chairman Christopher Cox seemed to be on the same page as Governor Paterson yesterday when, in testimony before the Senate Banking Committee, he stated that lawmakers should "provide in statute the authority to regulate these products [credit default swaps] to enhance investor protection and ensure the operation of fair and orderly markets." Cox went on to say in his prepared testimony that the CDS market as currently constituted is “ripe for fraud and manipulation,” that neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure, and that such a lack of oversight should be addressed “immediately.”

Click here for a copy of Chairman Cox’s testimony.