UPDATE 1-Lawmaker says Fed should regulate OTC clearinghouse

(Adds further details, background)

By Joanne Morrison

WASHINGTON, July 8 (Reuters) - The Federal Reserve should be the key regulator of a clearinghouse intended for trades in the $62 trillion credit default swaps market, Sen. Charles Schumer said on Tuesday.

In a letter to Federal Reserve Chairman Ben Bernanke and New York Federal Reserve Bank President Tim Geithner, the Democrat from New York said such a clearinghouse should be chartered as a New York bank.

Doing so would shift regulatory oversight from the Commodity Futures Trading Commission -- which typically regulates clearinghouses used broadly in the U.S. futures markets -- to the Fed.

"In these tumultuous markets, having a strong regulator overseeing this important new financial actor will reassure market participants and restore confidence in the safety and soundness of the United States' financial infrastructure," Schumer wrote.

"The Federal Reserve is the appropriate regulator for this new clearinghouse," he added.

The lawmaker's comments come as a group of the largest credit default swaps dealers, accounting for roughly 90 percent of market activity, has been working with the New York Fed to establish such a clearinghouse.

"A clearinghouse and central counterparty for the OTC derivatives markets is important for ensuring safety and soundness for the major financial institutions involved in these markets, and reducing systemic risk for the markets as a whole," Schumer wrote.

Institutions involved in the plan include Goldman Sachs Group Inc (GS.N), Citigroup Inc (C.N), Deutsche Bank (DBKGn.DE), JPMorgan Chase & Co (JPM.N), UBS (UBSN.VX), Credit Suisse (CSGN.VX), Merrill Lynch & Co Inc MER.N, and Bank of America Corp (BAC.N).

The clearinghouse is owned by these swaps dealers but it is not yet running. However, under current regulations it would be overseen by the Commodity Futures Trading Commission.

Shifting it to a New York-chartered bank would put it under the Federal Reserve's purview.

Schumer's concerns come as regulators have been urging swaps dealers to improve processing, reporting and credit risk.

And while a clearinghouse would accomplish this, central bankers for years have warned that a clearinghouse has its own risks too, because all the risk from those complex trades is transferred to one entity rather than being spread between the firms involved in the trades.

Improving credit default swaps oversight was heightened earlier this year amid the near collapse of Bear Stearns, as regulators and market participants feared the firm's CDS exposure was broad-based and would cause systemic risk in the market.

In June, Schumer urged federal regulators to take a more active role in overseeing the derivatives markets, citing a need for more transparency in these complex and loosely regulated markets. (Reporting By Joanne Morrison; Editing by Jonathan Oatis)