CFTC asks authority over OTC market, dealers

By Charles Abbott

WASHINGTON (Reuters) - The U.S. regulator of the futures industry proposed a package of reforms for the first comprehensive regulation of over-the-counter derivatives and the dealers who handle the exotic instruments on Thursday.

Derivatives such as credit default swaps were blamed for amplifying last fall's economic crisis. Trading runs in the trillions of dollars for derivatives, contracts whose value is based on the price for another item.

"Many of these (reforms) will require statutory changes, of course," said Gary Gensler, chairman of the Commodity Futures Trading Commission, at a Senate hearing. For the second time this week, he said broad reform is urgent this year.

"Such reforms must comprehensively regulate both derivative dealers and the markets in which derivatives trade."

His package expanded on a May 13 outline by the Obama administration to require standardized OTC derivatives to go through clearinghouses and move standardized derivatives onto public exchanges. Reporting and record-keeping rules would apply to standard and customized contracts to assure fair trading.

Gensler said the federal regulation must apply to all dealers and all types of derivatives. He suggested two sets of rules: one covering markets, including regulated exchanges, electronic trading and clearinghouses, and the other governing dealers. The plan includes position limits on holdings.

"These two regimes should apply no matter which type of firm, method of trading or type of derivative swap is involved," Gensler told the Senate Agriculture Committee, which oversees the CFTC and writes futures market law.

Agriculture Committee chairman Tom Harkin is sponsoring a bill to move all OTC derivatives onto regulated exchanges in order to increase liquidity, reduce risk and make terms of trade public. U.S. Sen. Saxby Chambliss of Georgia said banning OTC derivatives "is unrealistic" and the wrong answer to the financial crisis.