New credit derivative rules needed, US financial regulator urged

11 March 2010

New proposals to regulate transactions surrounding derivatives including credit default swaps (CDS) need to be introduced, a finance regulator in the US has claimed.

Gary Gensler, chairman at the Commodity Futures Trading Commission (CFTC), said that bank use of CDS should be restricted to prevent derivatives of this ilk from being used to reduce levels of regulatory capital.

Mr Gensler, a former Goldman Sachs executive, told Bloomberg that new rules should be introduced to stop banks from lowering capital to “dangerously low levels”.

New legislation would ensure only CDS subject to collateral requirements are allowed to go ahead.

“These measures are within the current regulatory authority of bank regulators, and I am hopeful that internationally coordinated and consistent revisions to the capital adequacy regime that are currently under way will consider such suggestions,” he explained to the news provider.

CDS trades have come under recent scrutiny after their use was blamed by many financial analysts for the economic turmoil in Greece.

The Greek government is alleged to have been involved in a number of CDS transactions which helped mask the extent of its financial deficit.

By Jim Ottewill

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