Regulating Credit Default Swaps

The head of the Agriculture committee, Collin Peterson (D-MN-07) is proposing that credit default swaps be treated like the insurance that they are. Here is money quote(PDF):

(h) LIMITATION ON ELIGIBILITY TO PURCHASE A CREDIT DEFAULT SWAP.—It shall be unlawful for any person to enter into a credit default swap unless the person would experience financial loss if an event that is the subject of the credit default swap occurs.
...
EFFECTIVE DATE.—The amendments made by this section shall be effective for credit default swaps (as defined in section 1a(34) of the Commodity Exchange Act) entered into after 90 days after the date of the enactment of this section.

Basically, what this is saying is that you can't buy insurance on something unless you actually benefit from it.

This was discovered a long time ago, specifically 263 years ago, when the British Parliament passed the Marine Insurance Act of 1746:

In 1746, Parliament passed the Marine Insurance Act, requiring anyone seeking to collect on an insurance contract to have an interest in the continued existence of the insured property. Thus was born the insured-interest doctrine. The indemnity doctrine, which precludes a buyer from insuring property for more than it’s worth, soon followed. The point of these rules is to limit insurance contracts to trading existing risks and not to create new risks by giving buyers of insurance incentive to destroy property. The doctrines have been part of insurance law in both England and the United States (which in 1746 were colonies under English common law) ever since.

Unfortunately, it appears that the distinguished gentleman from Minnesota only intends for this regulation to be temporary, but it's a good start.

It should be permanent though, there is a reason that this adopted so long ago.