UPDATE 1-New York banking dept works on CDS clearing house

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NEW YORK, Sept 23 (Reuters) - New York's banking department is working with the Federal Reserve Bank of New York to help create a central clearing house for credit default swaps that will "help address counter party risk and establish margin requirements," Gov David Paterson said in a statement.

"The absence of regulatory oversight is the principal cause of the Wall Street meltdown we are currently witnessing," the Democratic governor said in a statement issued one day after he announced new regulation would begin in January for credit default swaps that serve as insurance.

"This is why New York took the crucial next step of planning to regulate an area of the market which had previously lacked appropriate oversight, but that is indisputably as regulatable as insurance," he added.

The move marks the third clearing house being planned for the credit derivative market. A clearing house is viewed as crucial to removing risks posed by the failure of a large counterparty, as it would step into the middle of all trades.

Chicago-based The Clearing Corporation, which is owned by a group of derivative dealers, is planning to launch a clearing house by early 2009.

Liffe, part of NYSE Euronext (NYX.N) (NYX.PA), also said in July it will begin clearing credit default swaps based on the benchmark European credit derivative indexes in the fourth quarter.

Paterson said earlier on Tuesday that state regulation of the credit derivative market is likely to affect 20-25 percent of credit default swaps in New York.