UPDATE 1-US CFTC head urges stricter rules in OTC bill

(Gensler lists areas of concern; paragraphs 4-11 new)

By Charles Abbott

WASHINGTON Oct 7 (Reuters) - Lawmakers should toughen an outline of a bill regulating over-the-counter derivatives to require standardized OTC contracts to go through clearinghouses and to require all cleared swaps to trade on regulated exchanges, said the U.S. futures regulator on Wednesday.

In testimony prepared for a House hearing, the chairman of the Commodity Futures Trading Commission listed six areas where the "discussion draft" was not as strong as Obama administration proposals. The Financial Services Committee plans to write and vote on an OTC bill next week.

CFTC chairman Gary Gensler said the House draft would require clearing only if regulators order it. Gensler said clearing "is essential to lowering risk" and argued clearing should be norm.

The Obama administration has proposed to bring the $450 trillion market in OTC derivatives under federal regulation. It calls for mandatory clearing and trading of standardized contracts and reporting of trades in customized instruments.

"If Congress decides to shift from the presumption of mandatory clearing, the market regulators should be given the authority to determine that broad classes of swaps must be cleared rather than be required to make such determinations on a swap-by-swap basis," said Gensler.

Some "end users" -- manufacturers, processors and utilities -- say it would be a burden to go through clearinghouses. Utilities, for instance, say it is common to pledge assets rather than post a cash reserve as collateral in a deal.

Gensler said end users could work out credit arrangements with a member of a clearinghouse.

"To the extent that Congress decides not to follow this approach, I believe that any clearing exception for end users should be very narrowly defined to only include nonfinancial entities that use swaps incidental to their business to hedge actual commercial risks," he said.

In reviewing the House draft, Gensler said it may unintentionally create a regulatory loophole for swaps participants by letting them declare their dealings are for risk management, an area that would be exempt from coverage.

He also said all swaps that go through clearinghouses should be required to trade on regulated exchanges. The House draft makes trading optional but not mandatory, he said.

The House bill, like the administration, would allow agricultural swaps to be traded off-exchange. Gensler said it should be mandatory for standardized commodity swaps to go through clearing and trade on exchanges. (Reporting by Charles Abbott, editing by Dave Zimmerman)