SEC Chairman Mary Schapiro, looking to improve upon the Treasury Department’s regulatory reform proposal released this summer, wants to see over-the-counter derivatives regulated like securities.

In testimony given before the House Committee on Agriculture, Schapiro said that the proposal is based on the idea that “similar products should be regulated similarly, or equivalently, if possible.” This would also mean that commodity and other non-securities-related OTC derivatives are regulated more like futures. She called on Congress to extend the federal securities laws to all securities-related OTC derivatives and extend the Commodity Exchange Act to all commodity-related and non-securities-related OTC derivatives.

“This should significantly reduce the arbitrage opportunities between the regulated markets (securities or futures) and the differently regulated swaps market, as well as between narrow-based security index swaps and broad-based security index swaps, while building off the existing regulatory framework,” Schapiro said.

Schapiro noted that the derivatives market has grown to approximately $450 trillion of the outstanding notional amount as of June 2009. Chief among the market dangers is systemic risk because OTC derivatives can facilitate significant leverage, concentrate risk and “behave badly” during times of crisis, she added.

Schapiro also addressed the Treasury’s proposal that contains an exclusion from the regulatory scheme for OTC derivatives for products that are “identified banking products.” Although she believes this makes sense for banks regulated in the U.S., Schapiro expressed concern that foreign banks could offer OTC derivatives as “bank products” and thus escape regulation. To guard against this potential loophole, Schapiro doesn’t want the exclusion to apply to foreign banks.