Furthermore, CDS contracts have recent substantial attention in Congress and from federal securities regulators. As recently as November 14, 2008, the President's Working Group on Financial Markets (the "PWG") announced that the Federal Reserve Board of Governors, the U.S. Securities and Exchange Commission, and the Commodity Futures Trading Commission entered into a memorandum of understanding, designed to, inter alia, facilitate the regulatory approval process and improve the regulatory oversight of credit default swap issues.1 The PWG announced additional initiatives as well, including broad set of policy objectives to guide efforts to address the various issues associated with the over-the-counter derivatives market, and the development of credit default swap central counterparties.2

The Department has responded to the lack of regulation of products that essentially provide insurance for the payment of the obligations of the underlying bond by issuing Circular Letter 19 (2008).3 Circular Letter 19, which also establishes "best practices" for financial guaranty and bond insurers, and encourages new players to enter the bond insurer market, provides that the making of CDS contracts in which buyers own the underlying bonds referenced by the swaps could constitute the doing of an insurance business in New York, and could require that a seller of a CDS be licensed in New York as a financial guaranty insurer.

The new "best practices" will not affect existing credit default swaps and will not take effect until January 1, 2009. While the Circular Letter is merely guidance, the New York Insurance Department intends to propose new regulations and/or legislation to implement these reform measures.

INSURANCE DEPARTMENT TO REVIEW INSURERS' FINANCIAL STRESS TESTING PROCESSES The New York State Insurance Department (the "Department") has declared that insurers must have in place "scenario stress testing" as part of their management processes. To ensure that insurers' maintain and update such processes, the Department announced in Circular Letter No. 25 (2008) that it will be commencing on-site reviews of New York domestic insurers' financial stress testing and scenario analyses. Mondaq Business Briefing