WASHINGTON - If Congress creates a cap-and-trade system to control carbon emissions, futures and cash trading should be under U.S. regulation with no exceptions, the top U.S. futures regulator said on Wednesday.

Gary Gensler, chairman of the Commodity Futures Trading Commission, told a Senate panel his agency was well-suited to oversee the cash markets for emission allowances, as well as having a wealth of experience in regulating futures contracts.

Should Congress pass cap-and-trade legislation, the CFTC would work with other regulators and market users to ensure that all transactions in both the carbon futures and cash markets are promptly reported and that a central registry is updated at least on a daily basis, Gensler said.

With immediate registry of trades, it will be easier for regulators to identify manipulation in the markets.

During his testimony, Gensler said carbon-based contracts should be regulated, even those tailored for a specific client in the over-the-counter market. He also backed moving as much trading to centralized clearinghouses to boost transparency and using aggregate limits across markets.

I do have a concern that the more we exempt, the more we might be looking back at 2009's Enron loophole. We have to be very careful, he said. My concern is that any exemptions that we might craft now ... be very narrow and specific.

A House-passed climate bill would put the Federal Energy Regulatory Commission in charge of a carbon cash market. Carbon derivatives, including futures, would be regulated by the CFTC.

The Senate is in the early stages of drafting a bill. The Obama administration has given priority to control of greenhouse gases ahead of a global summit at year's end.

Under a climate bill, Congress would set up an emissions market under which the government would set a gradually declining cap on greenhouse gases. Polluters and investors would buy and sell the rights to release greenhouse gases, but who will regulate them remains to be seen.

Markets that aren't properly and carefully regulated will blow up, Tom Harkin, chairman of the Senate Agriculture Committee, said. This market has the potential to be very big and very complicated, with a lot of money at stake, and we have seen what can happen when there isn't sufficient transparency, accountability, or limits on risky behavior in markets.

Committee members Blanche Lincoln and Mike Johanns said they worried a carbon market would display the erratic prices that disrupted agricultural markets last year.

For a cap-and-trade system to work effectively, an official from the Chicago Mercantile Exchange, the world's largest exchange, told the committee, Congress should not establish price floors or ceilings. He said those measures would hinder effective price discovery for carbon, slow liquidity and deter market participants with varying points of view from participating.

We fully understand the motivation to protect American consumers from dramatic increases in the cost of carbon. However, the dynamics associated with price floors and ceilings would undermine the overarching intent of a cap-and-trade program, said Julie Winkler, a managing director of the CME and a member of the board of the Green Exchange LLC.

Officials from CME and power company Exelon Corp said the CFTC was best positioned to use its experience in regulating derivatives to oversee a mandatory cap-and-trade market system.

But they warned that any carbon trading program should allow transactions to occur on both regulated exchanges and over-the-counter markets, where costs are less expensive and allow for contracts to be tailored to a customer's needs.

To draw the obvious conclusion -- power prices will be higher, meaning that consumers will ultimately pay more than they would otherwise, if companies like Exelon are forced to do all of their hedging on exchanges and clearing platforms, said Joseph Glace, an Exelon vice president.

Glace estimated that moving all of his firm's hedging operations to exchanges could cost it hundreds of million of dollars, and possibly even in the billions, in additional costs.

(Editing by Walter Bagley)