Aug. 19 (Bloomberg) -- Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, is asking Congress to strengthen the Obama administration’s legislative proposal for regulating the over-the-counter derivatives market.

In a letter to House and Senate committee leaders, Gensler requested revising the bill to get rid of exemptions for small derivatives dealers, repeal parts of the Federal Deposit Insurance Corporation Improvement Act, and impose requirements to set aside money to back up trades.

“The law must cover the entire marketplace without exception,” Gensler wrote in the Aug. 17 letter to Senate Agriculture Committee Chairman Tom Harkin, an Iowa Democrat, and the ranking Republican on the committee, Saxby Chambliss of Georgia. Gensler attached more than 20 pages of language to insert into the bill “to ensure that we best meet this goal.”

Gensler, whose staff contributed to the bill that President Barack Obama sent to Congress last week, said he is seeking to “enhance” the proposal. Treasury Secretary Timothy Geithner in July told regulatory chiefs including FDIC Chairman Sheila Bair to stop campaigning for changes in Obama’s revamp of financial industry rules, a person familiar with the matter said.

Scott Schneider, a CFTC spokesman who confirmed the letter was sent to lawmakers, declined to comment on Gensler’s intent. Identical letters were sent to Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, and at least four other lawmakers.

Harkin’s Response

Obama’s attempt to rein in the $592 trillion over-the- counter derivatives markets is part of a wider financial regulatory overhaul meant to prevent a repeat of last year, when the collapse of Lehman Brothers Holdings Inc. and American International Group Inc. froze credit markets.

The derivatives legislation asks Congress to impose higher capital and margin requirements, move most derivatives to regulated exchanges and clearinghouses and impose supervision over all dealers. It also includes a provision to “better protect” small municipalities and “unsophisticated investors” by limiting their eligibility to trade derivatives.

In his two-page letter and 31 pages of explanation and proposed legislative language, Gensler asks Congress to strike Obama’s proposed exemptions for foreign exchange swaps, so that “all swaps are covered,” with “an appropriately tailored exclusion for foreign exchange forwards.”

“His recommendations carry weight, as they should,” Harkin said today in reaction to the letter. “Among Chairman Gensler’s several important suggestions, the most important are those that eliminate exclusions and exemptions for some categories of swaps.”

Set-Aside Rule

Gensler also proposes that mandatory clearing and trading requirements apply even when one of the counterparties isn’t a swaps dealer or major swaps participant.

“This excludes a significant class of end users from the clearing and mandatory trading requirement,” Gensler wrote.

Gensler calls for repealing parts of the FDIC Improvement Act that lets banks and certain foreign clearinghouses clear over-the-counter derivatives.

The memo also states the legislation should “impose a mandatory set-aside requirement with respect to collateral received by swap dealers.” Gensler said such a requirement would be equivalent to what is used in futures markets.

Taken Seriously

“These changes largely seek to toughen the administration’s proposal and bring more transactions under a regulatory umbrella,” Teddy Downey and Chris Krueger of Concept Capital’s Washington Research Group, wrote in a note today.

“CFTC will have a huge role in implementing the legislation once a bill is passed,” they wrote. “Input from Chairman Gensler on legislation will be taken very seriously on the Hill.”

Derivatives are contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. Opaque financial products including some derivatives contributed to almost $1.6 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg.

To contact the reporter on this story: Tina Seeley in Washington at tseeley@bloomberg.net.

Last Updated: August 19, 2009 17:45 EDT