Tucked into the climate change bill the House passed Friday is a provision that would significantly limit trading in credit-default swaps. The bill's main purpose is to set new standards for emissions, clean energy usage and other green initiatives. But section 355 of the bill offers an amendment to the Commodity Exchange Act that would require anyone buying a CDS contract to own the underlying instrument on which the contract was based.
That would effectively ban all naked CDS contracts, which are taken out by an investor on a bond that he or she does not actually own. The ban would go into effect for all CDS contracts signed 60 days or more after the bill is enacted. Whether the provision will be included in the Senate bill is unclear. Another provision in the House bill would void all of the bill's laws on derivatives if a separate derivatives bill were to be enacted later.