US experts see hurdles to closing regulatory gaps

* SEC, CFTC split oversight of derivatives

* US, EU have different approach to troubled firms

By Rachelle Younglai and Emily Chasan

NEW YORK, Nov 4 (Reuters) - Attempts to supervise the $450 trillion private over-the-counter derivatives market and ensure that the government has a way to unwind large, troubled firms may lead to more regulatory gaps, former and current U.S. officials said on Wednesday.

The United States and the European Union have embarked on sweeping reforms to oversee the financial markets after regulatory lapses contributed to the worst economic crisis in decades.

But differing approaches on both sides of the Atlantic and a failure to consolidate U.S. securities and futures regulators could lead to the same kind of fragmentation blamed for the current problems, the experts told a Practising Law Institute conference.

"Imagine what happens as we now have two regulators splitting the oversight of the over-the-counter derivatives market," said Annette Nazareth, a former U.S. Securities and Exchange Commission commissioner now in private practice.

Nazareth said she feared further regulatory fragmentation.

The Obama administration shied away from consolidating the SEC and Commodity Futures Trading Commission out of concern it would take too much time and political capital.

The SEC and CFTC are overseen by different congressional committees, which have jealously guarded their turf ever since the futures regulator was established in the 1970s.

Instead, the White House, Congress and the regulators are working on elaborate plans to give both agencies a piece of the derivatives market, including credit default swaps which nearly toppled insurer AIG (AIG.N).

"This is not going to be overseen by one agency. It has tremendous inter-linkages with the cash market. We are setting a foundation that is not on firm ground," Nazareth told the conference.

A top Treasury Department official voiced similar concerns with efforts under way to give the federal government the power to deal with large troubled financial firms.

George Madison, who has been general counsel at Treasury since September, said regulators should be "making sure U.S. institutions aren't treated too differently than foreign firms."

A U.S. congressional committee is working on a bill to create a systemic risk monitoring council and giving government powers to impose stricter rules on firms that could pose a risk to the economy.

Meanwhile, Britain is emphasizing the need for banks to draw up plans for winding down a financial firm's position quickly in an emergency. The European Union is contemplating a pan-EU risk monitoring board although that board would have no power to force a bank to take action.