* CDOs back to pre-crisis levels, global regulator says
* IOSCO says rise in interest rates could cause bubble-like selloff
* IOSCO examining why other market-based lending still sluggish
By Huw Jones
LONDON, Oct 15 (Reuters) - Collateralised debt obligations (CDOs), the complex financial instruments at the heart of the 2008 financial crisis, have almost regained their previous popularity because of their high returns, and could form a bubble, global regulators said on Tuesday.
CDOs are a type of security based on an underlying pool of bonds or other assets that offers attractive returns at a time of historically low interest rates.
They came under the spotlight in the 2007-09 financial crisis when their complexity long obscured the fact that the U.S. home loans that underpinned them were turning bad. Their eventual crash triggered a global market meltdown that forced governments into a series of bank rescues.
Now, demand for CDOs in a low-interest environment has pushed sales up from $6 billion in 2010 to an estimated $35 billion this year overall, the International Organization of Securities Commissions (IOSCO) said in a report.
IOSCO said issuance was back at pre-crisis levels, especially in the United States - but that if interest rates rose back to more normal levels, CDOs were likely to be sold off in favour of bonds offering better yields.
"Prolonging low interest rates could drive up leverage in these products and, in the longer run, cause a bubble," it said.
As one corner of the securitisation market is causing concern, regulators are trying to kickstart other parts to help finance growth and wean banks off central bank money.
IOSCO chairman Greg Medcraft told reporters the Group of 20 leading economies (G20) recognised that reviving market-based funding - as opposed to lending by banks - was critical to boosting sluggish economic growth.
The watchdog, made up of regulators from 115 countries, said it had just teamed up with banking and insurance supervisors to look at the impediments to the securitisation market.
"On the industry side, the securities that were often created (in the past) were issuer-driven and not necessarily investor-driven, so I think the industry itself needs to look at what it creates," Medcraft said. Tougher rules for the financial sector overall may also be an impediment.
"We need to ask investors why they are not buying securities. A market exists when investors participate," said Medcraft, a former global head of securitisation at SocGen bank.
Carlos Tavares, vice-chairman of the European Securities and Markets Authority, said reviving and increasing the role of market-based financing to U.S. levels would be a positive side-effect of the financial crisis.
"It will make access to funding more balanced than it is now as Europe is very much more reliant on banks," Tavares said.
The IOSCO report said a concentration of derivatives contracts in clearing houses, risks related to capital flows to and from emerging markets, and risks related to managing collateral or assets used to back transactions were also top priorities for IOSCO to monitor. It is also taking a closer look at cyber crime and crowd funding.