Credit Derivatives: Industry Initiative Supplants Need for Direct Regulatory Intervention: A Model for the Future of U.S. Regulation?

Abstract

A brief introduction to credit derivatives and the state of the current market is given as a means to orient the reader as to the complexity and evolving importance of these financial instruments. This comment then offers a detailed survey of the recent developments in the credit derivatives market from 2005-2006, focusing on the initiative by the market participants that were called to action by the Federal Reserve Bank of New York. This model of shifting market control to the private sector is then explored as a central tenet of a revised U.S. financial regulatory structure, proposed in this comment as a means to increase the efficiency of regulation and maintain U.S. competitiveness in the global arena by consolidating regulatory authority, moving to a principles-based approach of regulation and allowing those best situated to understand and respond to the needs of the modern financial markets to determine the rules and practices by which they will be governed, i.e. the actual market participants.

Keywords: credit derivatives, regulation