CDS Market to Finally get Regulated

Finally, the SEC is getting its act together and regulating this massive market.

The swaps became one-way bets on the demise of financial institutions as traders hedged the risk that their partners might implode, said Gary Kelly, a strategist at broker Tradition Asiel Securities Inc. in New York. The wagers sent distorted signals about credit risk, he said.

The resulting run on shares of financial companies prompted Cox yesterday to seek enforcement powers over the market. New York State will also start regulating some sales of the derivatives, according to Governor David Paterson.

So you can't take two sides of this trade anymore by buying the CDS and then shorting the stock at the same time. It still boggles my mind how a $62 trillion market was not regulated in the first place. You would figure that some alphabet soup organization would have taken control of things when it went over like $10 trillion. In any case this move will go a long way toward keeping the market stable in the years to come.

In fact it may be a boon for ICE, NYSE Euronext, or the CME group or whoever sets up a liquid market for these things. You would think that fees on trades of a $62 trillion market will be the kind of thing that lifts all boats in this industry.