M. Todd Henderson

Abstract

This article explores whether credit derivatives should be regulated as insurance and proposes an alternative regulatory approach for these financial instruments. The largely unregulated credit derivatives market has been cited as a contributing factor to the recent housing market collapse and resulting credit crunch. The article examines the possibility of regulating credit derivatives as insurance but concludes that, although some credit derivatives allow banks and other debt providers to share risk with investors, this characteristic alone is insufficient to classify such contracts as “insurance.” It argues that insurance regulation is not suitable for the credit derivatives market, while acknowledging that some form of regulation is necessary. The first section provides an overview of the basics of credit derivatives; the second presents arguments supporting insurance-style regulation; the third explains why credit derivatives, despite facilitating risk sharing or transfer, fall outside the scope of insurance law; and the final section outlines what an appropriate regulatory framework for credit derivatives might look like and contrasts it with traditional insurance regulation.

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