UPDATE 2-Exchange execs hit forced OTC derivatives clearing

* CME, ICE execs to testify to congressional panel

* Exchanges question excessive OTC derivatives clearing

* Kanjorski targets "dark corner" of financial services (Recasts with CME, ICE exec comments, adds byline, dateline)

By Kevin Drawbaugh and Jonathan Spicer

WASHINGTON/NEW YORK, June 8 (Reuters) - Top managers from two major financial exchange groups on Monday warned the U.S. government not to go too far in forcing central clearing of over-the-counter derivatives, a troubled, multi-trillion-dollar market whose future is central to both companies.

Terrence Duffy, executive chairman of CME Group Inc (CME.O), said in prepared remarks to be delivered on Tuesday to a congressional panel that government-mandated clearing of all over-the-counter derivatives could drive business overseas.

He said CME opposes merging the U.S. Securities and Exchange Commission with the U.S. Commodity Futures Trading Commission, another possible reform under study.

"Congress clearly intended to set futures apart from securities regulation and that grant of exclusive jurisdiction to the CFTC must be preserved," Duffy said in written remarks posted on the House Financial Services Committee's website.

Further, he said, "Legislation mandating the clearing of all OTC derivative transactions could well induce certain market participants to transfer this business offshore, resulting in a loss to the U.S. economy.

"We are concerned that this may result in a significant shift of related transactions that would have been traded on U.S. regulated exchanges to foreign jurisdictions."

As lawmakers and the Obama administration move to crack down on OTC derivatives, the House Capital Markets Subcommittee is set to hold a hearing to "advance the discussion in Congress on ... meaningful regulation of this dark corner of the financial services industry," said Representative Paul Kanjorski, Democratic subcommittee chairman, in a statement.

The OTC derivatives market, pegged at greater than $590 trillion in notional value at the end of 2008, is where credit default swaps and other exotic financial instruments, widely implicated in the global credit crisis, are traded.

Among those testifying will be Duffy and Jeffrey Sprecher, chief executive of IntercontinentalExchange (ICE.N), as well as Thomas Callahan, CEO of NYSE Liffe (NYX.N); and Christopher Edmonds, CEO of International Derivatives Clearing Group, in which Nasdaq OMX (NDAQ.O) owns a controlling stake.

ICE's Sprecher said in prepared remarks that forcing illiquid, unstandardized derivatives contracts into a clearinghouse could actually increase market risk.

"While ICE certainly supports clearing as much standardized product as possible, there will always be products which are either non-standard, not sufficiently liquid, or that do not have enough interest in them for clearing to be practical, economic or necessary," he said.

"While the illiquid and unstandardized contracts should not be forced to be cleared, firms dealing in these derivatives should report them to regulators, so regulators have a clear and total view of the markets."

The massive, high-risk, over-the-counter derivatives market operated for years with little government oversight, partly by design. Congress in 1990 adopted a law that protected it from too much regulation. Warren Buffett in 2003 labeled derivatives as "financial weapons of mass destruction."

Many OTC derivatives flew off the rails in 2007 when the housing bubble burst and credit tightened, leaving banks, such as the now defunct Lehman Brothers, with huge losses. Credit default swaps played a major role in the troubles at American International Group (AIG.N) that led to its government bailout.

GEITHNER CALLS FOR REGULATION

Treasury Secretary Timothy Geithner in May called for legislation to require many derivatives to be traded on exchanges or in clearinghouses, rather than over the counter.

Derivatives are contracts whose value depends on the value of something else, such as a stock, bond, currency or commodity. Examples are futures, options and swaps.

Derivatives can reduce or transfer risk in such things as interest rates, currency values and commodity prices.

ICE's credit default swaps clearinghouse has ramped up business since its beginning in March, while CME's CDS clearinghouse has not yet launched.

Britain's ICAP Plc (IAP.L) and other inter-dealer brokers such as GFI Group Inc (GFIG.O) could benefit if centralized clearing brings new participants into the market.

Losers could include big banks that deal in derivatives. The biggest in the market are JPMorgan, Bank of America Corp (BAC.N), Citigroup Inc (C.N) and Goldman Sachs Group (GS.N). (Additional reporting by Jonathan Spicer in New York; Editing by Padraic Cassidy)