UPDATE 1-EU watchdog backs exchange trading of derivatives

* To consult on mandatory exchange trading of derivatives

* Mandatory central clearing of contracts seen as priority

* Better transparency would avoid German go-it-alone actions

(Adds more detail)

FRANKFURT, Aug 27 (Reuters) - Pushing privately negotiated derivatives contracts onto exchanges would make markets safer, but it is unclear how this would work in practice, a top European Union securities regulator said on Friday. "I believe this can contribute to more transparency effectively," Carlos Tavares, Chairman of the Committee of European Securities Regulators (CESR), told Reuters Insider.

"The point is how in practice that can be applied, and that is why we are going to consult the market on that issue," Tavares said.

Regulators want to shine a light on the opaque $615 trillion off-exchange derivatives market, which came under heavy criticism for its central role in the financial crisis, such as in the near demise of U.S. insurer AIG (AIG.N).

The United States has adopted a sweeping reform of Wall Street that pushes derivatives trading onto exchanges, raising the prospect of new revenue streams for exchanges and slimmer margins for a clutch of big banks that dominate derivatives.

The EU is due to come out with its draft law on derivatives next month.

Tavares said that before mandatory exchange trading of derivatives, other structural measures were needed like better transparency, mandatory central clearing of standardised contracts and giving supervisors powers to intervene in the market.

CESR is due to be transformed into a more powerful European Securities and Markets Authority from January under an EU reform of supervision now being approved. But the extent of its powers is still unclear due to last-minute haggling.

"The worst of all would be if we were expecting a great reform and little change," said Tavares.

"I am sure the new authorities will be given the necessary powers to act according to their objectives," Tavares said.

Stronger powers would help CESR avoid a repeat of a situation earlier this year when Germany unilaterally introduced a ban on naked selling of credit default swaps, taking its EU partners by surprise and rattling global markets.

Tavares said there must be room for countries to take emergency measures but regulators were looking more at structural measures such as better transparency and supervision.

"If those structural measures are taken and if they are successful then probably the case-by-case measures will be less needed. And if they are needed, they will be taken on solid ground," Tavares said.