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WASHINGTON - For decades the Commodity Futures Trading commission languished as an underfunded regulatory backwater in Washington. But that is set to change after the financial crisis exposed wide fissures in the U.S. regulatory system.

Congress is keen to bestow significantly more authority to regulate commodities and other more exotic instruments, but how this will take shape is emerging as a tug of war in Congress and with the White House.

The CFTC, which oversees futures trading, was flailed by lawmakers who say it failed to monitor volatility sufficiently and rein in runaway speculation that sent energy and commodity prices to record highs by mid-2008. Prices crashed a few months later. The agency also lacked the authority to regulate the over-the-counter markets, including the $58 trillion credit default swap market, which helped undermine confidence in the entire economy.

"We've just done eight years of seeing what happens when you put people in charge who don't believe in regulation, and the answer is a world crisis," said William Black, an economics and law processor at the University of Missouri- Kansas City.

Even as commodity prices retreat, efforts to overhaul the CFTC and other parts of the U.S. financial regulatory system appear to be gaining momentum with President Barack Obama and the Democratically-led Congress. Obama is expected to publish soon a detailed plan for regulatory changes.

"We're more like the fire department right now, sort of reacting to problems," CFTC Commissioner Bart Chilton said.

"We should be, I think, more like a cop on the beat, trying to look around the corner to prevent things from happening. I'm hopeful Congress will act swiftly."

There is concern that Obama's nominee to head the CFTC, Gary Gensler, played a key role as an undersecretary of the Treasury in enacting the Commodity Futures Modernization Act of 2000, which exempted regulation of credit default swaps.

Now he will be in charge of helping to repair the damage the exotic financial instruments caused.

Securities experts believe Gensler was picked to lead the CFTC because he may play a role in bringing the agency under the auspices of the Treasury Department, or merging it with the Securities and Exchange Commission. Obama also picked former CFTC Chairman Mary Schapiro to lead the SEC, fueling speculation the administration intends to merge the futures and securities regulators.

Still, the Obama administration has "not picked people who, by background or ideology, have ever been believers in effective regulation. They've been part of the problem, not part of the solution," noted Black. "The question is whether they've radically changed."

Some Democratic lawmakers, including Sen. Tom Harkin and Rep. Collin Peterson, who head the Senate and House Agriculture committees, respectively, have proposed stronger regulation of over-the-counter swaps and derivatives as a step toward curbing the financial turmoil plaguing the U.S. economy.

An anti-speculation bill unveiled on Wednesday by Peterson would require most over-the-counter derivatives to be cleared by federally regulated clearinghouses, boost CFTC staffing by 200 people and require the CFTC to set position limits on major energy and agricultural futures contracts, among other ideas.

Chilton has issued his own plan with similar proposals.

If Congress has its way, the CFTC would have far more oversight of the over-the-counter market and could better detect cases of abuse, fraud and manipulation.

So far, the chairmen of the House and Senate Agriculture committees are reluctant to merge the CFTC with the SEC, which regulates stocks and bonds. Peterson says CFTC has a better record than SEC in safeguarding Americans. Some believe a merger would actually create more problems without Congress first overhauling the regulatory environment.

And there is concern the SEC ought to take care of problems internally before it could handle a tie-up with the CFTC.

"There is a lot of talk out there that somehow by merging the two agencies that's going to cure the problem that resulted in the current financial turmoil," said Greg Mocke, a former chief of law enforcement at the CFTC, and now a partner at the Washington law firm McDermott Will and Emery.

"It would not have, and it won't in the future," he said. Speculators were blamed for the sharp increase in crude oil and other commodity prices last year. But, since then, the price of oil, for example, has dropped 70 percent and corn 50 percent amid concern over the worsening financial crisis and recession.

Still, lawmakers show no sign of giving up the fight to crack down on commodity speculators.

"I've heard that before," that speculation has calmed down and Congress may no longer need to act, said Harkin.

"Chances are we're going to need" stronger federal oversight again.

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