The Obama administration is still drafting its plan for regulating derivatives markets. But turf fights are already beginning among sectors of the financial industry, Congress and regulators over rules the White House will propose and over who should oversee derivatives trading.

Two House committees -- Financial Services and Agriculture -- are going at it over which holds sway over the future of derivatives trading. The Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission now divide various oversight duties.

Picking one to be an overarching regulator, however, would not only pit the agencies against each other but also set off a fight to determine whether finance- or agriculture-oriented congressional committees would have primary jurisdiction over derivatives, too.

Newly confirmed CFTC Chairman Gary Gensler and SEC Chairwoman Mary Schapiro have reportedly come to an understanding that would enable their agencies to share authority over the derivatives market. The regulators will need Congress to go along with the plan that would give the SEC authority over derivatives that relate to publicly traded securities and other instruments under the SEC's purview, such as credit-default swaps, while the CFTC would oversee commodities-based derivatives, the reports said.

Schapiro told a Senate panel last week it would be "logical" to combine the SEC and the CFTC. "There is a logic and efficiency that can be achieved through a merger of the two agencies, but short of that we can work together effectively," Schapiro said.

But while the administration has been clear that it wants regulation of most derivatives, it had hoped to defer to Congress the decision on which agency should get the task. This may force the White House to take sides.

Many financial instruments fall under the jurisdiction of both the SEC and the CFTC, complicating regulation of products such as credit default swaps, which have been blamed for bringing down firms such as American International Group Inc. and Lehman Brothers Holdings Inc.

Industry experts say that over the years, such battles between the agencies contributed to the neglect of that market by federal overseers. By stopping the infighting among the agencies, lawmakers say they can ensure one regulator will give the business the scrutiny it requires. But lawmakers themselves have shown no inclination to set aside their own turf battles.

In February, lawmakers began moving competing legislation on derivatives oversight. The House Agriculture Committee, chaired by Rep. Collin Peterson, D-Minn., approved a bill by voice vote that would give the CFTC primary oversight of derivatives that trade outside of traditional exchanges.

The bill would limit the role of the Federal Reserve.

The measure would require over-the-counter derivatives to be cleared through a firm regulated by either the CFTC or, in the case of financial derivatives, the SEC. Certain transactions could be excluded, but the CFTC would still collect information on them and impose requirements.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, opposes the bill and was reportedly disappointed that the agriculture committee moved ahead without his panel's input. Frank's committee has oversight of the Fed and the SEC.

He had already begun work on legislation that would establish a systemic-risk regulator with oversight of financial institutions and markets that could damage the system at large, including over-the-counter derivatives. Frank favors handing that role to the Fed, but he remains open to alternatives.

Peterson and Frank have since put on the brakes to avoid a collision and are vowing to work together. In a joint statement, they said, "We agree there must be strong, comprehensive and consistent regulation" of derivatives. "We will work closely together to achieve that goal," they added.

There's been talk of a potential merger between the SEC and the CFTC, and some administration officials and industry groups believe the agencies should be consolidated into one, but that, too, would likely stir up a huge jurisdictional fight on Capitol Hill.

And there are calls for Congress to make the Federal Reserve the nation's super-regulator, with the mandate to monitor systemic risk across the financial services industry, including the derivatives markets.

One of the strongest supporters of this plan are the Wall Street banks, which are reportedly pushing for the Fed to have sole authority, with only a limited role for the SEC and CFTC. The three agencies now share information in the $28 trillion market for credit default swaps.

Others oppose making the Fed a supreme regulator. They say it failed to protect consumers from predatory mortgage lending and acted arbitrarily and contradictorily during ad hoc interventions aimed at preventing the collapse of Bear Stearns Cos., Fannie Mae and Freddie Mac.

The administration is expected to make a formal recommendation to Congress in mid-June. "It is too early to predict at this point, but I think it's vital that any such move is done with a clear set of objectives in mind," says Ian Cuillerier, a partner at New York law firm White & Case LLP. "Congress first needs to figure out what it wants to regulate -- which activities, specifically -- and why. They need to have a clear view of what needs to be accomplished. Once that is decided, the question of which regulator should have jurisdiction will be much easier to answer."

Oversight of the derivatives market is expected to be the centerpiece of the new regulatory framework. "This is an important beginning with an important set of proposals," Treasury Secretary Timothy Geithner said in a recent letter to Senate Majority Leader Harry Reid, D-Nev.

But while the details about a regulator are still fuzzy, the question of how more complicated customized derivatives are regulated will end up being one of the biggest fights.

Forcing standardized trades to a clearinghouse has already begun, but slowly. Several clearing operations only recently went live with ICE Trust, a unit of Atlanta-based IntercontinentalExchange Inc., the only one that actually has cleared any trades. NYSE Euronext, through Liffe's BClear platform, has been operating since last October in Europe but hasn't cleared any contracts.

Meanwhile, CME Group Inc. and Citadel Investment Group LLC's joint venture, CMDX, received Federal Reserve and SEC regulatory approvals in March, but it's not yet live.

Firms with large derivative exposures or that trade more complex derivatives would be subject only to new record-keeping and reporting requirements. Simply requiring parties to report these deals isn't enough to eliminate the potential systemic risk posed by the collapse of a major derivatives counterparty, some experts say.

A lighter regulatory touch for custom contracts may be a loophole, but not one that dealers would find useful to game the system, says John Jay, a senior analyst at financial consulting firm Aite Group LLC. There is not a lot of incentive to manipulate the market if they need to hedge their own portfolios, he points out. "The need to lay off risk outweighs the benefits of gaming the system," Jay says.

In the Senate, Agriculture Chairman Tom Harkin, D-Iowa, held a hearing last week to get input on his legislation to move all derivatives onto exchanges.

The move to trade standardized contracts on exchanges may be more problematic, because it will be "putting pricing pressure on dealers," says Howard Spilko, a partner at Kramer Levin Naftalis & Frankel LLP. Spilko says imposing standardized capital or margin requirements through the clearinghouse will hurt dealers, since it will tie up more capital than the current framework.

"Regulatory change in the derivatives market appears inevitable," he says. "The dealers would be well served to take the medicine before more draconian measures appear."