CDS contracts trading in volumes greater than the underlying bonds outstanding provide information to the market and allow for more efficient pricing.

The rejoinder at this point is, "Didn't that get AIG into trouble?" Yes, and that was true for the municipal monoline insurers (remember them?) as well. The answer is with central clearing and margining of outstanding CDS, you can support almost any volume of contracts. The futures industry has done this for years; only a small fraction of contracts ever go to delivery, but the remainder used for purposes of price discovery, risk management and speculation do not wreak havoc.

A derivatives market limited to the size of its underlying asset will collapse immediately. Whatever benefits existed from CDS, such as institutional investors being more willing to hold various corporate and municipal bonds, will disappear as well. Provide for centralized clearing and margining and everything should function just fine without Congressional interference.