Senators wrangle over OTC derivatives exemptions

WASHINGTON, March 8 (Reuters) - Republican and Democratic senators are at odds over which financial players should be exempt from complying with proposed rules designed to shed light on the $450 trillion over-the-counter derivatives market.

Policy makers agree that the opaque market needs supervision after a type of derivative contributed to the financial crisis, but there is concern that some companies will be unfairly punished.

The concern is that non-financial companies such as airlines and manufacturers will not be able to use the derivatives to hedge risks related to their operations.

The two senators charged with crafting legislation are grappling with the exemptions, with Democratic Senator Jack Reed favoring a narrow exemption and Republican Senator Judd Gregg pushing for more leeway, sources said on Monday.

For months Reed and Gregg have been working on derivatives legislation after Republicans rejected Senate Banking Chairman Christopher Dodd's draft bill and Dodd decided to craft a bipartisan bill.

Dodd's draft, unveiled in November, gave market regulators authority to supervise the market and required most derivatives to be cleared by a central clearinghouse, which would assume the risk if one party defaults.

In January, Reed told Reuters there was agreement for trying to get as many standardized derivatives cleared by a central clearinghouse. He also said there was agreement that all transactions would be reported to a central repository so that regulators would have real time access to the data.

But now the two Senate Banking Committee members are trying to compromise on exemptions for companies that use derivatives.

The Senate Banking Committee is in charge of passing a financial reform bill that will regulate everything from derivatives to consumer financial products and give regulators a way to unwind large troubled financial firms.

Dodd has been expected to introduce a bipartisan bill in March, but it is unclear whether he will be able to do so.

If Dodd is able to pass a bill out of his committee, the full Senate would have to vote in favor of the legislation before it can advance.

Four senators outside of Dodd's banking committee have already warned the chairman that they oppose wide-ranging exemptions. (Editing by Leslie Adler)