Oct. 23 (Bloomberg) -- Derivatives legislation being considered by the U.S. Congress should be improved by requiring more transactions to go through clearinghouses, the head of the Commodity Futures Trading Commission said.

“Broadening coverage could result in substantial further reduction in financial-system risk,” Gary Gensler, chairman of the CFTC, said today at George Washington University Law School in Washington. Gensler spoke of the need to capture deals from financial firms that would otherwise be exempt from the clearinghouse requirement.

The House Financial Services and Agriculture committees approved derivatives legislation this month as part of a broader effort to overhaul financial regulation. Before the Financial Services panel voted, Gensler called on lawmakers to tighten regulations to force as many standardized contracts as possible onto clearinghouses.

Gensler said the U.S. has about half of the world’s $600 trillion over-the-counter derivatives market, which he said “played a central role” in the financial crisis.

“We want to bring more transactions” onto clearinghouses, he said. “In both bills, there’s an opportunity to work with the committee chairs and the leadership to do that.”

The House measures would require the use of clearinghouses only those defined as swap dealers or “major swap participants.” Gensler said bringing the transactions of financial firms and hedge funds onto clearinghouses would reduce risk.

“These parties would not be regulated for capital, or business conduct -- just their transactions would be brought in,” Gensler said.

The requirements imposed by clearinghouses reduce the risks associated with swap dealers and the potential for their failure harming the financial system, Gensler said.

“If a large swap dealer gets into trouble, it’s not pulling and tugging at thousands of others in the system, that’s the benefit.”

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

Last Updated: October 23, 2009 11:59 EDT