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Does the Dodd-Frank Wall Street Reform Act Rein in Credit Default Swaps? An EU Comparative Analysis

Wall Street’s critics have focused in on Credit default swaps (“CDS”) and the central role they played in various financial crises striking world markets between 2007 and 2010, having contributed an estimated $60 trillion in global losses to the meltdown. The U.S. effort to reign in the largely unregulated CDS market, the Dodd-Frank Wall Street Reform and Consumer Protection Act, was signed into law by President Obama on July 21, 2010. The law significantly changes how CDSs are transacted and regulated, and also mandates further study and review of the ongoing academic discourse concerning the complex, little understood, market forces responsible for the global economic downturn that are yet to be fully understood. This paper responds to that direct legislative call and examines whether the Dodd-Frank Act went far enough in regulating CDS. Regulators worldwide now struggle to craft regulatory regimes capable of addressing the issues that made the CDSs a major player in the crisis. There are ripe analogies between CDSs and other financial instruments, like insurance policies, that are subject to strict restrictions, and the question remains whether the U.S. should follow suit with European regulators who are imposing similar limits on trading in CDSs. At the core of this debate is the question of whether speculation in CDSs should be allowed, or whether, alternatively, the purchaser of a CDS should be required to hold an economic interest in the debt underlying the CDS.