UPDATE 2-US CFTC asks authority over OTC market, dealers

* CFTC seeks comprehensive OTC derivatives regulation

* Two sets of rules: one for dealers, one for markets

* CFTC asks power to set OTC position limits

* Senate bill may not move until this fall
(Adds CFTC chairman's comments, time frame for likely
legislation, other details)

By Charles Abbott

WASHINGTON, June 4 (Reuters) - The U.S. regulator of the
futures industry proposed a package of reforms for the first
comprehensive regulation of over-the-counter derivatives and the
dealers who handle the exotic instruments on Thursday.

Derivatives such as credit default swaps were blamed for
amplifying last fall's economic crisis. Trading runs in the
trillions of dollars for derivatives, contracts whose value is
based on the price for another item.

"Many of these (reforms) will require statutory changes, of
course," said Gary Gensler, chairman of the Commodity Futures
Trading Commission, at a Senate hearing. For the second time
this week, he said broad reform is urgent this year.

"Such reforms must comprehensively regulate both derivative
dealers and the markets in which derivatives trade."

His package expanded on a May 13 outline by the Obama
administration to require standardized OTC derivatives to go
through clearinghouses and move standardized derivatives onto
public exchanges. Reporting and record-keeping rules would apply
to standard and customized contracts to assure fair trading.

Gensler said the federal regulation must apply to all
dealers and all types of derivatives. He suggested two sets of
rules: one covering markets, including regulated exchanges,
electronic trading and clearinghouses, and the other governing
dealers. The plan includes position limits on holdings.

"These two regimes should apply no matter which type of
firm, method of trading or type of derivative swap is involved,"
Gensler told the Senate Agriculture Committee, which oversees
the CFTC and writes futures market law.

Agriculture Committee chairman Tom Harkin is sponsoring a
bill to move all OTC derivatives onto regulated exchanges in
order to increase liquidity, reduce risk and make terms of trade
public. U.S. Sen. Saxby Chambliss of Georgia said banning OTC
derivatives "is unrealistic" and the wrong answer to the
financial crisis.

Two trade groups, the Business Roundtable and the U.S.
Chamber of Commerce, said in a letter to Senate leaders that OTC
derivatives were a vital tool. They said the administration's
May 13 plan "is a positive catalyst" for reform.

"There's got to be some fundamental change in the way we do
things. We'll be developing this legislation sometime this year,
probably not until this fall," Harkin said at the end of the
hearing.

Under the CFTC proposal, dealers would be subject to
capital requirements, initial margining requirements, business
conduct rules, and reporting and record-keeping rules. The CFTC
would have power to set position limits, including aggregate
limits, on OTC derivatives that affect prices on futures
exchanges.

"We should require that all derivatives that can be moved
into central clearing be required to be cleared through central
clearing houses and brought on to regulated exchanges or
regulated electronic trading systems," said the CFTC chairman.

Regulators would monitor contracts to make sure dealers do
not try wrongly to label a derivative as customized.

The CFTC and the Securities and Exchange Commission would
share regulatory duties for the OTC system, Gensler said.

"Position limits should be applied consistently across all
trading platforms and exemptions should be limited and
well-defined," said Gensler. The CFTC is reviewing exemptions
now in force.

"The term OTC derivative should be defined and CFTC should
be given clear authority over all such instruments," said
Gensler in discussing changes in law.
(Reporting by Charles Abbott; editing by Dave Zimmerman and
Matthew Lewis)