As we previously reported here, the National Conference of Insurance Legislators (“NCOIL”) has debated whether credit default swaps (“CDS”) constitute securities or insurance, and the advantages and disadvantages of regulating the CDS market on a state, rather than federal, basis if such swaps constitute insurance. On April 3, 2009, the NCOIL Task Force on Credit Default Swaps Regulation (the “Task Force”) approved plans to treat CDS as insurance and to develop model legislation regulating CDS on a state basis. The Task Force expects a draft of the model legislation by the end of the month.

According to the Task Force, the model legislation will establish strong solvency and disclosure requirements for CDS. The legislation will be modeled on concepts in (1) New York State’s financial guaranty insurance statute (Article 69) and (2) New York Insurance Superintendent Eric Dinallo’s Circular Letter 19. In drafting the legislation, the Task Force will also review Virginia House Bill 2320, which is designed to regulate CDS.

Task Force Chair Assemblyman Joseph Morelle (NY) stated:

The lack of oversight, transparency, and public disclosure in the CDS market is now apparent to all . . . We will develop legislation that when adopted uniformly across the states can create first-rate CDS regulation. We believe that so-called ‘covered’ swaps can be considered a form of financial guaranty insurance, and as a species of insurance, should be subject to solvency protections insurable interest requirements, and other staples of insurance oversight.

For a copy of Article 69 of the New York Insurance Law, click here. For a copy of Circular Letter 19, click here. For a copy of Virginia House Bill 2320, click here.