Senior lawmaker vows to regulate CDS market

By Rachelle Younglai

WASHINGTON (Reuters) - The head of a U.S. Congressional finance panel said on Monday he would seek to regulate the fast-growing $55 trillion credit default swaps market, which has been blamed for exacerbating the financial meltdown.

Rep. Barney Frank, a Massachusetts Democrat, said regulation is needed to stem the financial crisis that has rocked Wall Street and shaken investor confidence.

"Failure to regulate the economy appropriately is what led to this mess," Frank, the chairman of the House Financial Services Committee, told a Capitol Hill news conference.

The committee, which has oversight of the Federal Reserve, Treasury Department and Securities and Exchange Commission, is holding hearings and will play a key role in crafting relevant legislation.

Frank said he would seek "sensible" regulation of the credit default swap (CDS) market when the new Congress meets in 2009.

"The turmoil in the market has given us a little bit of a breathing space," he said. "They have screwed up so badly that they can't screw up again for a while. Before they gain the ability to screw up, we have to put the (regulations) in place."

Credit default swaps are used to protect or insure against the risk that a borrower will default on debt, or to speculate on a borrower's credit quality.

The swaps, used by banks, brokerages, insurance companies and others, have been criticized for posing systemic risks because the opaque market makes it impossible to know the size of a counterparty's exposures and where they are distributed.

Calls for regulation and a centralized CDS clearinghouse gathered steam last month after Lehman Brothers Holdings Inc collapsed and U.S. authorities were forced to rescue insurer American International Group Inc with an $85 billion loan.

It remains unclear which federal regulator might be tapped to police the CDS market, but both SEC Chairman Christopher Cox and a commissioner with the Commodity Futures Trading Commission, Bart Chilton, have called for regulation.

The U.S. House and Senate agriculture committees, which oversee the CFTC, will hold hearings this week on the role of credit derivatives in the U.S. economy.

(Reporting by Rachelle Younglai, Thomas Ferraro, Donna Smith; editing by Mohammad Zargham and Gerald E. McCormick)