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)