US senator introduces bill to regulate derivatives

* CDS would be traded through clearinghouse

* Bill sets capital, margin requirements for dealers

* SEC would regulate all securities-based derivatives

WASHINGTON, Sept 22 (Reuters) - U.S. Senator Jack Reed on Tuesday introduced legislation to regulate derivatives such as credit default swaps that have been widely blamed for fueling the recent financial crisis.

The legislation would require standardized credit default swaps and other unregulated derivatives to be traded through a clearinghouse and would subject derivatives dealers to new capital and margin requirements.

Reed, a Democrat from Rhode Island, said the legislation would fill regulatory gaps and help prevent future financial crisis similar to the one that required the U.S. government to bailout of American International Group (AIG.N), the insurer that was brought to its knees by bad bets it made on the U.S. housing market.

The legislation fleshes out a proposal from the Obama administration to create a regulatory framework for the $450 trillion private derivatives market.

Securities and Exchange Commission Chairman Mary Schapiro told a congressional panel earlier on Tuesday that the administration's proposal needed to be strengthened to stop market participants from shopping for favorable regulation. [ID:nN22349257]

Schapiro testified along with Gary Gensler, chairman of the Commodity Futures Trading Commission, whose agency would share responsibility with the SEC for overseeing derivatives.

Reed's legislation follows some of Schapiro's suggestions on how to divide the jurisdiction and would give the SEC authority over all derivatives that are securities or can be used as synthetic substitutes for securities.

The CFTC would have jurisdiction over all other derivatives and there would be a process for quickly assigning responsibility for new products so they do not fall through the cracks.

The bill would give regulators new authority to set position limits and oversee the marketing of products to certain investors.

Furthermore, it would create recordkeeping and reporting requirements to ensure that regulators and investors have broad information about derivatives transactions and positions in the financial system.

The House of Representatives has not yet introduced comprehensive legislation to regulate derivatives. (Reporting by Karey Wutkowski, editing by Leslie Gevirtz)