UPDATE 2-U.S. regulator urges OTC derivatives reform

(Adds that global market rules needed; paragraphs 1-4, 11-13, 18 new)

By Charles Abbott

WASHINGTON Oct 15 (Reuters) - Creation of a clearinghouse for credit default swaps will reduce the risk posed by the financial derivatives, three U.S. regulatory agencies said on Wednesday and one of them urged broader reform of over-the-counter derivatives markets.

Officials from the Federal Reserve System, the Securities and Exchange Commission and the Commodity Futures Commission said U.S. regulatory changes must be coordinated with the financial overseers overseas so rules are uniform globally.

Evidence suggests more credit default swaps are traded in London than in the United States, said the Federal Reserve, so U.S.-only action "will not address perceived problems."

CFTC chairman Walter Lukken said a centralized clearing of swaps "is a near-term solution" and "broader reform of the OTC derivatives markets is also needed and will require decisive congressional action."

Most OTC financial derivatives are exempt from U.S. regulation under a 2000 law. Credit default swaps have been blamed for helping ignite financial turmoil worldwide.

At a House Agriculture Committee hearing, Lukken suggested:

--when an OTC market, like credit default swaps, becomes large enough to play a public pricing role, deal-makers would be required to report their activities.

--there should be incentives, or even a mandate, to bring some OTC derivatives to clearinghouses.

--an examination of the amount of risk-based capital should be held by dealers and large participants in OTC markets in case of market disruptions.

--"clear enforcement authority" against fraud and manipulation of OTC products.

Agriculture chairman Collin Peterson said he would work with the Financial Services Committee to have a bill ready for consideration in February in the new session of Congress.

"At a minimum, we've got to know what is going on," said Peterson, so reforms would require more reporting of the volume of derivatives dealing and who owns the instruments.

Peterson said he would consider a requirement to use centralized clearinghouses and whether to require most derivatives trading to occur on regulated markets.

Regulators say a clearinghouse for credit default swaps or other derivatives would increase liquidity, ensure payment and shed more light on derivatives, such as who is buying or selling swaps, in what amount and under what terms.

Operators of four exchanges say they want to offer centralized clearing for credit default swaps. There were roughly $55 trillion worth of the swaps at mid-year according to the International Swaps and Derivatives Association.

"Yes, more than one of these entities can exist," Lukken said at the hearing. He said federal regulators met almost daily on clearinghouse arrangements.

"In this setting, we believe competition can be helpful," said Erik Sirri, director of trading and markets at the U.S. Securities and Exchange Commission.

Kim Taylor, a leader in the clearinghouse proposal by CME Group (CME.O), based in Chicago, said it could be in full operation in January if SEC and Federal Reserve approval is forthcoming. (Editing by Marguerita Choy)