Paulson: Derivatives make markets more efficient

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson on Thursday told lawmakers that off-exchange derivatives, used by firms to hedge against a range of risks including credit and interest rates, have been a good tool.

"These contracts have done a lot to make the markets more efficient," Paulson told the U.S. House Financial Services Committee in answering questions after testifying on the need for widespread reforms in regulating financial markets.

But both Paulson and Federal Reserve Chairman Ben Bernanke cautioned that improvements are needed in the operations of these markets, particularly in processing and clearing.

The Federal Reserve is closely involved in the process to improve the post-trade, clearing and settlement process, the management of risks associated with this, and the transparency and standardization of these complex products, Bernanke said, adding: "This is a very high priority for us."

Their comments come as major dealers in the $62 trillion credit default swaps markets are working with the Federal Reserve Bank of New York to develop a central clearinghouse for these customized trades.

As for broader reforms to the financial markets, both Bernanke and Paulson said repeatedly that more dialogue is needed and that there would be no immediate changes.

(Reporting By Joanne Morrison; Editing by James Dalgleish)