What legal restrictions apply when investing in credit default swaps?

In California, investors interested in credit default swaps need to be aware that there are legal restrictions in place governing the use of this investment product. Credit default swaps (CDS) are private securities contracts between two parties, typically because one party is seeking to hedge or insure against the potential of losses due to credit events, such as loan defaults or bankruptcy. The Alternative Investment Act, passed in 2018 in California, applies to various areas of alternative investment, including CDS. It states that investors must be ‘accredited investors’, meaning they must meet certain financial requirements, such as having an income of over $200,000 a year. The Alternative Investment Act also includes the regulation of CDS. This includes licensing requirements for CDS brokers, registration of CDSs with the California Department of Business Oversight, and requirement to keep certain records. Additionally, any CDS contracts must provide for periodic reports to the Department of Business Oversight so that they may verify such contracts. The Alternative Investment Act also states that CDS must contain certain terms in order to be legal. Such terms include disclosures about the potential for losses, a process for dispute resolution, and a mechanism for expiration of the swap. Ultimately, when considering the use of CDS, investors should understand the legal restrictions to ensure that their investments are in compliance with California law.

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What legal restrictions apply when investing in credit default swaps?

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