UPDATE 2-No end user exemptions for CDS -CFTC's Gensler

* Most CDS transactions between financial institutions

* Should be subject to new trading, clearing requirements

* Reforms needed to curb CDS impact in bankruptcies (Adds background and details from speech)

By Christopher Doering

WASHINGTON, March 9 (Reuters) - Congress should require that all credit default swaps, a financial instrument blamed for contributing to the recent financial crisis, are centrally cleared and traded, the head of the Commodity Futures Trading Commission said on Tuesday.

Congress is working on reforms for financial markets, including bringing derivatives under the guise of regulators and requiring standardized derivatives to be cleared by central counterparties, which guarantee the trades, with some exemptions.

Regulators also want cleared contracts to be traded on electronic platforms.

But more than 95 percent of credit default swap transactions are between financial institutions, and should not be exempt from trading and clearing requirements, Gary Gensler, chairman of the CFTC, said in remarks prepared for a speech in New York to a Markit conference.

Companies that use derivatives to hedge against commodity, interest rate and other risks have lobbied to be exempt from central clearing, arguing that margin requirements would be too costly to their businesses.

Gensler, however, has urged Congress to curb exemptions for large financial players.

"While similar to other derivatives, credit default swaps have unique features that require additional consideration," said Gensler, who noted the CDS market was worth $36 trillion last year.

Lawmakers and the Obama administration have vowed to crack down on the excesses of Wall Street, including with legislation that would increase transparency of the privately traded derivatives market, which the CFTC has estimated is worth $300 trillion.

Credit default swaps, a type of derivative used to protect against the risk of debt default, have been blamed for amplifying concerns about corporate and sovereign credit quality, which can in some cases increase their borrowing costs and limit their access to credit markets.

The European Commission said on Tuesday it will consider a ban on investors buying credit default swaps. [ID:nLDE6282BZ]

Greece has blamed speculators for its fiscal crisis, and top Greek officials have urged tougher rules for credit default swaps.

CDS also has come under fire for allowing some companies, such as U.S. insurer AIG (AIG.N), to take outsized positions on risky assets such as subprime mortgages, without having enough capital to back up the contracts.

Gensler also said credit default swaps can play a significant role once a company has defaulted or entered bankruptcy. Bondholders and creditors with credit default swap protection that exceeds their actual credit exposure -- sometimes called empty creditors -- could benefit more if the firm defaults or goes into bankruptcy than if it succeeds.

"These so-called empty creditors also have different economic interests once a company defaults than other creditors who are not CDS holders," said Gensler.

While reform efforts in Congress have not yet addressed the bankruptcy laws, Gensler said "we should seriously consider modifications to address this new development in capital markets."

He proposed requiring credit default swap-protected creditors of bankrupt companies to disclose their positions. Another option would be to specifically authorize bankruptcy judges to restrict or limit the participation of empty creditors in bankruptcy proceedings. (Editing by Chizu Nomiyama)