Billions of euros (dollars) have been wiped off banks' balance sheets in recent months on fears that some complex investments may be based on assets that are nearly worthless - such as housing loans that may not be paid back when a recession puts people out of work.

The market for derivatives boomed over the last decade as investors sought new ways to parcel out risk, with many jumping on a gravy train that few really understood. Billionaire investor Warren Buffett has been vocal in avoiding them, dubbing them 'financial weapons of mass destruction.'

EU financial services chief Charlie McCreevy called on national supervisors and the financial industry to agree on the real risks credit derivatives pose - and how they can be limited to prevent further losses unraveling.

'I would like to have, by the end of this year, concrete proposals as to how the risks from credit derivatives can be mitigated,' he said in a statement.

Mr McCreevy said there is now a pressing need for a central clearing counterparty - or negotiator - to trade derivatives. McCreevy pointed to a vacuum in the system since the collapse last month of US investment bank Lehman Brothers, which negotiated many of the world's derivative contracts.

'At US$600 trillion, the size of derivatives markets today are such that we cannot let this over-the-counter market continue without adequate counterparty clearing,' he said.

Mr McCreevy said this was urgent for credit default swaps which offer insurance for lenders worried about a borrower's ability to pay them back. Lenders are due a substantial payout if a company goes bankrupt - as many large businesses have in recent weeks, including three Icelandic banks.

US authorities are also pushing for more oversight of credit default swaps, with Securities and Exchange Chairman Christopher Cox last month urging Congress to set out federal rules.

As much as US$60 trillion worldwide may be owed on credit default swaps, McCreevy said - and it is unclear who is responsible for paying for them and if the money will be paid at all.

'The opaqueness of these products leads to nasty surprises when things go wrong,' he said. 'The potential knock-on effect to other players in the market is obvious ... No one is able to say how these swaps will unwind.'

Regulators do not have the information they need to see potential liabilities for the banks they monitor and need 'a much better view of where the real risks in these instruments lie,' he said.

State regulators in New York will start next year to oversee the small part of the market in which a buyer of a credit default swap actually owns the bond or debt.

That will force banks to register as insurers if they want to sell swaps, requiring them to put money aside to cover potential claims.

It will not cover the larger part of the market for speculators who do not own the underlying bond or debt - which might be targeted by wider federal regulation. -- AP