UPDATE 2-U.S. regulators to cooperate on CDS clearing house

(Recasts, adds details, background)

By David Lawder

WASHINGTON, Nov 14 (Reuters) - Top U.S. financial regulators and agencies agreed on Friday to cooperate on developing a central clearing infrastructure for credit default swaps to try to bring transparency to the $55 trillion market, blamed for worsening the financial crisis.

The President's Working Group on Financial Markets said member agencies have signed a memorandum of understanding to share information and coordinate regulatory responsibilities to speed the development of CDS central counterparties.

The group aims to have one or more central counterparty firms operating by the end of 2008.

Credit default swaps, contracts that insure against a debt issuer's default and allow for speculation on a company's credit-worthiness, have exacerbated the financial crisis in recent months, particularly for big providers such as American International Group (AIG.N).

The Treasury-led working group, which includes the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission, said access to CDS trade and position information would help regulators identify potential problems, reduce systemic risks and prevent market manipulation.

"The virtually-unregulated over-the-counter market in credit default swaps has played a significant role in the credit crisis, including the now $167 billion taxpayer rescue of AIG," SEC Chairman Christopher Cox said in a statement. "Bringing transparency to this market is vitally important."

On Monday, the Treasury and Fed restructured their bailout of AIG to finance purchases of $30 billion in debt securities on which the insurer has written credit default swap contracts, reducing its balance sheet risk.

Critics claim that credit default swaps have helped spread fears in financial markets and pose systemic risks, as the market's private nature makes it impossible to know the size of a counterparty's exposures and where they are distributed.

"A well-regulated and prudently managed CDS central counterparty can provide immediate benefits to the market by reducing the systemic risk associated with counterparty credit exposures," the working group said in a statement.

A central clearing house also can "help facilitate greater market transparency and be a catalyst for a more competitive trading environment that includes exchange trading of CDS," it said.

The group is reviewing proposals from several potential providers of counterparty services. Previously, the SEC had informed several industry firms of its CDS clearing house plans, including IntercontinentalExchange Inc (ICE.N), CME Group Inc (CME.O), NYSE Euronext (NYX.N) and Eurex. (Additional reporting by Mark Felsenthal and Rachelle Younglai; Editing by Dan Grebler)