Commodity futures regulator Bart Chilton called Friday for moderated regulatory reform, warning of potential trading migration overseas if watchdog agencies overreact to an era of free-marketeering.

Chilton, a Commodity Futures Trading Commission commissioner, urged international regulators to coordinate oversight rules in comments made at a reception for European Union financial market attaches.

His comments come as U.S. and international regulators and lawmakers strive to stem derivative market meltdowns such as the one that precipitated the current global economic crisis.

"We don't want overzealous laws and regulations, nor do we want the current regulatory vacuum - we can see where that has gotten us," Chilton said in remarks to the attaches at the French Embassy here.

"Becoming too overzealous may have the unintended consequences of moving the bad actors into darker markets outside regulatory reach," the CFTC commissioner said.

Derivative markets have been rocked by unregulated credit default swaps based on soured assets and the economy taking a beating from record energy prices that many believe were fueled by speculation in unregulated swaps and over-the-counter markets.

Industry, regulators, Congress and the Bush administration are battling over how the multi-trillion dollar derivatives markets should be overseen. Some lawmakers are calling for a merger of agencies such as the Securities Exchange Commission and the CFTC, and others such as Sen. Tom Harkin, D-Iowa, are crafting legislation that would require all derivatives to be traded on exchanges. Others say clearing is essential, but warn against requiring aggregated position limits.

Chilton, who's also a part of President-elect Barack Obama's transition team, said the past decade had veered too far to the right toward deregulation, "and with the meltdown, we know the government went too far ... and the result is a global economy in disarray.

"An overcorrection, here or abroad, could create more problems than solutions," he said.

CME Group Inc. (CME), IntercontinentalExchange Inc. (ICE), the Eurex derivatives unit of Deutsche Boerse AG (DB1.XE) and NYSE Euronext Inc.'s (NYX) Liffe platform are all vying to "clear," or process, trades in multi-trillion dollar credit-default swaps markets, amid regulatory pressure on both sides of the Atlantic to reform this over-the-counter market. The groups this week called for Congress to mandate clearing.

House Agriculture Committee Chairman Collin Peterson, D-Minn., said he intends to introduce a bill as early as January that would address mandated clearing for swaps.

Chilton said the CFTC should oversee clearing instead of the banking regulator overseeing platforms in the guise of banks. He also said his agency should be given the authority to set position limits, but not required to establish the aggregated trading thresholds.

"Congress should extend CFTC anti-fraud, anti-manipulation, and emergency authorities to OTC transactions to allow greater oversight and transparency of these markets," he said.

"We need to have a sure-footed regulator over these dark markets to protect consumers and businesses," Chilton said, calling for Congress to provide "immediate steps ... to provide legal certainty that the financial sector requires to help create stability."

To prevent migration of lucrative trading overseas, the commissioner told the attaches that global coordination was essential. "I'm hopeful that we all will take into account the interconnectedness of our economies, and that our rules and regulations will reflect that reality," he said.

-By Ian Talley, Dow Jones Newswires, 202-862-9285; ian.talley@dowjones.com

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