WASHINGTON — Congress must draft legislation mandating broad regulation of all over-the-counter derivative dealers and markets, including those for municipal rate swaps and other nonstandardized products, Commodity Futures Trading Commission Chairman Gary Gensler said Thursday.

"We must urgently enact broad reforms to regulate over-the-counter derivatives," Gensler told Senate Agriculture Committee members at a hearing. "The current financial crisis has taught us that the derivatives trading activities of a single firm can threaten the entire financial system, and that all such firms should be subject to robust federal regulation."

Derivative reform is as important as the reforms that President Franklin D. Roosevelt asked Congress to adopt for the securities and commodities markets during the Great Depression, he said.

Lawmakers pledged to take action soon.

"We will be taking action this year," said Senate Agriculture Chairman Tom Harkin, D-Iowa.

While Harkin's committee only has jurisdiction over the CFTC, industry and congressional sources said Thursday that there is an emerging consensus between the banking and agriculture committees on shared jurisdiction of derivatives and a plan for regulating them. The idea of a merger between the CFTC with the Securities and Exchange Commission is dead, the sources said.

During the hearing, Gensler called for "two complementary regimes" to regulate OTC derivative dealers and markets.

Dealers should meet reporting and record-keeping requirements that provide an audit trail and business conduct rules designed to prevent fraud, manipulation and abuse, as well as capital and margin requirements, he said.

The capital and margin requirements would ensure that dealers and counterparties "no longer would … be able to amass large or leveraged risks outside the oversight and prudential safeguards of regulators," Gensler said.

Dealers may be required to set aside higher amounts of capital for customized derivatives and those that are less liquid and hard to value, he said.

"The full, mandatory regulation of all derivatives dealers would represent a dramatic change from the current system, in which some dealers can operate with limited or no effective oversight," Gensler said. "Standards that already apply to some dealers, such as banking entities, should be strengthened and made consistent, regardless of the legal entity where the trading takes place."

But regulators should have a clear picture of the derivative markets and should be able to police them for fraud and abuse, he said, and the public should have access to aggregated information on positions and trades from dealers.

"No longer should the public be in the dark about the extensive positions and trading in these markets," he said. "The public information will improve the price discovery process and market efficiency."

Customized derivatives, such as rate swaps in the municipal bond market, could be regulated primarily through these dealer requirements, Gensler said.

Standardized and, to the extent possible, customized derivatives should be required to be cleared through regulated central clearing houses to reduce risk, he said, and they should be brought on to regulated exchanges or transparent electronic trading systems.

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