"But while we support these beginning efforts, we also recognize that they do not yet constitute a completely transparent and fully regulated market," he said. "We urge the industry, federal agencies and Congress to continue working until that essential goal is reached."

In September Mr. Dinallo, in an announcement with New York Gov. David Paterson, said some credit default swaps, as an example those in which bondholders swap their default risk, could be considered insurance transactions subject to state regulation.

In his testimony, Mr. Dinallo offered assurances that New York State would be willing to work towards resolving any potential conflicts that arise from that issue. "At that point, we will be prepared to consider any necessary changes in state law to prevent problems that might arise from the fact that some swaps are insurance," he said.

Also today, Sen. Tom Harkin, D-Iowa, announced the introduction of legislation that would bring credit default swaps and other derivatives onto a regulated futures exchange and under the regulatory jurisdiction of the Commodities Futures Trading Commission.

Sen. Harkin is the chairman of the Senate Agriculture Commission, which has jurisdiction over the CFTC and the commodities futures market.

Under his bill, Sen. Harkin said, "Every swap, every derivative in the future will have to be traded on a regulated exchange," which would impose requirements to increase transparency and end what he referred to as the "casino capitalism" of unregulated speculation.

"Everyone will know exactly what's going on," he said.

With the end of the legislative year approaching, however, Sen. Harkin acknowledged that his bill will not go anywhere, but rather serve as a placeholder for the debate until the next Congress convenes in early January.

"Nothing will be done this year," said the senator. He said he introduced the bill "because I wanted have a marker, I wanted to get it out there and sort of test the waters, see what the reaction would be." Sen. Harkin also said the bill would be reintroduced on Jan. 6, 2009 "the first day back" for senators.

Meanwhile, different federal regulators are seeking common ground on which to build a framework that would involve a clearing of CDS transactions and the use of counterparties to help reduce the risks involved.

At the committee hearing, officials from the CFTC, the Federal Reserve and the Securities and Exchange Commission noted that the agencies have been working collaboratively to evaluate different proposals for central counterparties (CCPs) and clearinghouses.

"The CFTC, SEC, and Federal Reserve recognize their mutual interests in ensuring that all CCPs for credit derivatives are organized and managed prudently," said Patrick Parkinson, Deputy Director of the Division of Research and Statistics for the Federal Reserve.

He added that the agencies have signed a "memorandum of understanding (MOU) that established a framework for ongoing consultation and information sharing related to CCPs for CDS."

The establishment of a clearinghouse and central counterparty for the transaction would significantly decrease the risk inherent to CDS transactions currently, and better stabilize the market.

"By clearing and settling CDS contracts submitted by participants in the CCP, the CCP could substitute itself as the purchaser to the CDS seller and the seller to the CDS buyer," said Erik Sirri, Director of the Division of Trading and Markets for the SEC.

"This innovation process by a CCP would mean that the two counterparties to a CDS would no longer be exposed to each others' credit risk. A single, well-managed, regulated CCP could vastly simplify the containment of the failure of a major market participant," said Mr. Sirri.

In discussing his proposed legislation, Sen. Harkin argued that while clearing of trades is important, it remained in his view "not sufficient" in terms of oversight.

"Regulated clearing of trades is essential, but it's not enough," he said. "We have to bring all of these swaps and derivatives onto regulated exchanges," which would entail daily reporting, increased transparency and margin requirements.

Sen. Harkin said he was not interested in a jurisdiction fight over whether the Fed, the CFTC or some other regulator should have oversight of CDS transactions, but he asserted his belief that credit default swaps should be viewed as futures contracts.

"They are a futures contract, because the basis of it is something that does, or does not, happen in the future," he said.