Cox Says Congress Should Regulate Credit-Default Swaps

The chairman of the Securities and Exchange Commission, Christopher Cox, said Congress should "immediately" grant authority to regulate credit-default swaps amid concern the bets are fueling the global financial crisis.

"Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure," Mr. Cox told the Senate Banking Committee yesterday at a hearing on the government's $700 billion financial rescue plan. Lawmakers should provide the authority "to enhance investor protection and ensure the operation of fair and orderly markets," he said.

Calls for greater regulation of the $62 trillion market have grown since the takeover of American International Group Inc. September 16 and gave the New York-based insurer an $85 billion loan to cover obligations at a unit that sold protection on securities through credit-default swaps. The AIG subsidiary was required to post collateral against more than $400 billion of contracts after its credit rating was downgraded.

The SEC is concerned investors may seek to profit by spreading false information or making trades designed to drive down financial stocks during the credit crisis that has re-shaped Wall Street. The agency is demanding hedge-fund managers, brokerages, and institutional investors describe in sworn statements their bets on the companies, including trades in credit-default swaps, the regulator said September 19.

Separately, New York State said it will start regulating part of the credit-default swaps market. The state will consider contracts sold to investors who own bonds they are trying to protect from default as insurance, Governor Paterson said in a statement Monday. The plan won't apply to contracts purchased by speculators who don't own bonds and only want to bet on an increase or decrease in a borrower's creditworthiness.