Cutting Across Linguistic and Regulatory Divides: on Covered Credit Default Swaps and Insurance

The financial crisis has highlighted the importance of closely monitoring the transfer of risks across the various sectors of global financial markets. From a legal viewpoint, credit risk transfer mechanisms may take different forms. With a view to identifying potentially critical areas, this article discusses the different regulatory regimes governing financial guarantee insurance contracts and credit default swaps, from a comparative and functional perspective. The regulatory divide between different contractual tools available in the derivatives and insurance domains is marked by legal definitions. The meaning attributed to words or locutions such as “insurance” and “credit default swap” (CDS), therefore, becomes fundamental in order to determine the actual scope of application of different sets of legal rules. Uncovering the strong functional similarities between insurance contracts and certain types of CDS – in particular, the so-called “covered” credit default swaps in which the protection buyer holds an interest in the underlying loan or security –, this article examines key issues arising out of the most recent developments in the legal definition of these instruments and, as a consequence, the boundaries of their respective regulatory regimes in a multi-jurisdictional and multilingual context.