The Obama administration moved on Wednesday to exert more control over the shadowy over-the-counter derivatives market, now closely linked to the global credit crisis.

Federal regulators proposed subjecting all over-the-counter derivatives dealers -- whose trades are not made through an exchange, making them hard to monitor -- to a robust regime of prudential supervision and regulation, including conservative capital, reporting and margin requirements.

The plan, sketched out by Treasury Secretary Timothy Geithner and top regulators at a news conference, marks a big step in the administration's push to rewrite rules for banks and financial markets in response to a credit crisis that has sent economies around the globe reeling.

U.S. officials have pumped billions of dollars of taxpayer money into banks and automakers to try to stem the crisis. Last week, they wrapped up stress tests at the nations 19 largest banks and told ten of them to raise a combined $74.6 billion.

The Obama administration is now aiming to bolster regulatory oversight of the financial system.

Over-the-counter derivatives are presently difficult to monitor and supervise. Billionaire investor Warren Buffett has called derivatives financial weapons of mass destruction.

Under current law, they are only loosely policed.

We're going to require for the first time all standardized over-the-counter derivative products be centrally cleared, Geithner told the news conference.

EXPLOSION IN TRADING

Trading of OTC derivatives, instruments that derive their value from other assets, exploded in size in recent years, with many large firms -- such as mega-insurer American International Group -- charging into the burgeoning market.

The global market is pegged at about $450 trillion.

When the U.S. real estate bubble burst, firms such as AIG were left with mountains of complex, hard-to-sell financial instruments on their books.

In the United States, four large banks control over 90 percent of the derivatives market: JPMorgan Chase & Co , Bank of America Corp , Citigroup Inc , and Goldman Sachs Group Inc . All have received taxpayer aid.

Officials did not make clear which agency would be in charge of the crackdown. They said they would work together to prevent forum shopping for weak rules. Lawmakers disagree over which agency should oversee OTC derivatives clearing.

Laws enforced by both the Securities and Exchange Commission and Commodity Futures Trading Commission would have to be amended by Congress to accommodate the administration's plans.

Besides tighter supervision and centralized clearing, the proposal would impose more recordkeeping and reporting requirements and allow regulators to set position limits on OTC derivatives that affect prices on public exchanges.

It would also try to push more standardized OTC derivatives trading onto exchanges and regulated, transparent electronic trade execution systems.

Senator Tom Harkin, chairman of the Senate Agriculture Committee which oversees the CFTC, said the proposal was a more substantial expression of commitment to regulatory reform than we have previously seen from the administration.

Harkin filed a bill in January that would bring OTC derivatives trading onto regulated exchanges.

CLEARINGHOUSES GET A LIFT

Clearinghouses are widely used to bring liquidity into a market and bring trading into the open. Because members of a clearinghouse are obligated to absorb losses, they are expected to carefully gauge risk and set margin requirements.

Following last year's market turmoil, U.S. regulators urged creation of clearinghouses to stabilize the market in credit default swaps, a particular type of derivative valued in trillions of dollars.

Exchanges have already begun to jockey for business clearing OTC derivatives.

The Intercontinental Exchange and CME Group Inc , which runs the Chicago Mercantile Exchange, are the two main contenders in the race, with ICE benefiting from support from large dealers that own a stake in the company.

The ICE began clearing credit default swaps in March.

CME and ICE will benefit the most from the proposed changes, if they become law, said Fox-Pitt Kelton Cochran Caronia Waller analyst Edward Ditmire in a research note.

Both own U.S. clearinghouses and have significant over-the-counter experience, Ditmire wrote, adding that the CME is the biggest winner.

Shares of both companies rose on Wednesday as news of the proposal leaked into the market. CME rose 6 percent while ICE edged up 0.1 percent as the broader market fell.

(Reporting by Charles Abbott and Kevin Drawbaugh, with Chris Sanders and Dan Wilchins in New York)

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