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There is good news and bad news from a Letter to the Editor from New York State Insurance Superintendent James Wrynn, that was published in the Business Section of the Sunday New York Times on March 7, 2010.
First, the bad news. Superintendent Wrynn reaffirmed a decision to back off of Regulation of the forms of Credit Insurance exemplified by some kinds of Credit Default Swaps. At first, the New York State insurance Department was going to Regulate those CDSs that functioned like the Credit Insurance they are. Download NYS Insurance Dept Circular Letter.09.22.08. Two months later, the New York State Insurance Superintendent announced that he discovered that the Federal Government was taking steps to possibly talk about Regulating CDSs, and that satisfied him to back off. Download NYS Insurance Dept News Release.11.20.08.
Second, the good news. The importance of Reserves is explicitly recognized in Superintendent Wrynn's Letter:
There are two benefits to reserve requirements. One, they ensure that the seller of the swap can pay up on its promise. Two, since they will increase the price of swaps, they will tend to limit their use to situations where they serve a real economic purpose.
Amen.
Parenthetically, note the current description of these requirements as "reserve requirements". Financial planners tend to describe setting aside Capital as "Capital requirements," and Insurance professionals tend to describe setting aside enough Capital to pay Claims as "Reserve requirements". The difference in wording expresses the difference in orientation of the speaker. When the previous New York State Insurance Superintendent backed off regulating CDSs in November, 2008, the Department's Press Release used the language of Finance -- to be regulated by the Federal Government -- and described similar requirements as maintaining "adequate capital". Download NYS Insurance Dept News Release.11.20.08, at first unnumbered bullet point.
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