UPDATE 4-US' Geithner seeks clampdown on derivatives dealers

* Geithner-Aims to prevent mark manipulation, other abuses

* Major dealers to be subject to supervision, regulation

* SEC, CFTC would impose recordkeeping, reporting rules (Adds Geithner quotes, background on SEC, CFTC roles)

By Rachelle Younglai

WASHINGTON, July 10 (Reuters) - U.S. Treasury Secretary Timothy Geithner on Friday proposed clamping down on dealers in freewheeling markets for derivatives, the little-understood, complex securities that helped create a crisis in U.S. and world financial markets.

In testimony before two congressional panels that will play a role in writing legislation on derivatives, Geithner set out proposals that would make big dealers like JPMorgan Chase (JPM.N) and Goldman Sachs (GS.N) subject to much stronger supervision.

"We propose to require all OTC (over-the-counter) derivatives dealers ... be subject to substantial supervision and regulation, including conservative capital requirements, conservative margin requirements and strong business conduct standards," Geithner said in comments that acknowledged there were few limits in the past.

The Obama administration is trying to bring about a sweeping overhaul of the U.S. financial regulatory system in the wake of a two-year old credit crisis that has hobbled economies worldwide.

ONE PIECE IN A PUZZLE

Its proposals on derivatives are just one small piece of this larger effort. Months of political wrangling lie ahead before anything is put into law. [ID:nN18397897]

Derivatives are financial instruments that derive their value from an underlying asset like a Treasury bond, a commodity like oil or copper or a mortgage-backed security.

Geithner stressed the need to move decisively on a regulatory overhaul before impetus to do so is lost.

"It's the typical pattern of the past," he said. "As the crisis starts to recede, the impetus to reform begins to fade in the face of the complexity of the task and opposition by the economic and institutional interests that are affected."

In the United States, four big banks control more than 90 percent of derivatives markets: JPMorgan Chase, Bank of America (BAC.N), Citigroup (C.N) and Goldman Sachs.

Geithner told the House of Representatives Financial Services and Agriculture committees that the existing system allowed some financial institutions to sell large amounts of derivatives, which are intended to offset or manage risks, even without the capital to back those commitments.

He cited the example of insurer American International Group (AIG.N), which has required huge infusions of taxpayer funds to stay afloat.