OTC versus Exchange Traded

Now that health reform has been passed in the US it seem that the next piece of regulation that the Obama administration is targeting is Financial Reform. I haven't read yet the senate proposal, but it seems that among its clauses there is one that will require that financial derivatives to be traded in exchanges. This is in contrast to the current practice where the bulk of these trades are done in the OTC market. What is the difference? Well, simply put, an OTC derivative is a custom made contract, whereas the ones traded in exchanges are standardized products (you have, say, a limited number of maturities for futures or maturities and strikes for options, whereas in an OTC you can get for yourself any desired contract); but more importantly (and the reason the government wants to push the market in that direction), derivatives traded in exchanges are margined everyday, thus almost eliminating counterparty risk (i.e. the risk that one of the involved parties doesn't fulfill is obligation).

So far so good, the market will loose creativity so to speak in the area of Financial Engineering, but we will probably finish up with a safer financial system. What is not clear to me at all is if this requirement will apply to any financial derivative or if they have a subset of these in mind (it is clear that, for example, Credit Default Swaps will be pushed to exchanges; but I'm not sure if, for example, from now on all FX options have to be exchanged traded). I suspect it will finish up being the second one, and that implies that some government agency will have from time to time to cherry pick which derivative should stop being OTC to become market traded. That to me sounds like a very bad idea, moving derivatives from OTC to market based should be something that the involved parties have an incentive to do, and that can be achieved through higher capital requirements on OTC derivatives. There is no need for a super-bureaucrat, that will only end up in corruption and in another round of regulation.