NEW YORK (Bloomberg) — New York's insurance department is drafting stronger regulations to stabilise the market for bond insurers.

Insurance Superintendent Eric Dinallo said in a statement yesterday his office is drafting new regulations that would "redefine" the future activities of bond insurers. He said in an interview last week he is examining whether to limit the types of debt that can be guaranteed by bond insurers.

Bond insurers including the two largest, MBIA Inc. and Ambac Financial Group Inc. are struggling to find fresh capital and retain the AAA credit ratings that give them the financial credibility to guarantee bonds issued by state and local governments. Fitch Ratings last week cut Ambac's grade because of plummeting values of credit-default swap contracts it sold that guaranteed securities linked to sub-prime-mortgage bonds.

"It is clearly time to develop new rules for the road," Dinallo said an e-mailed statement today. "The Department is engaged with insurers, banks, financial advisers, credit-rating agencies, other regulators and government officials, and other stakeholders in examining and developing measures to help stabilise the market."

Credit-default swaps are unregulated, privately negotiated contracts traded between banks, securities firms, insurers, hedge funds and other institutional investors to speculate on a company's ability to repay debt. The market has grown to cover $45.5 trillion in bonds and loans. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to honour debt agreements.