By Michelle Price and John McCrank

WASHINGTON, Dec 1 (Reuters) - The U.S. derivatives regulator said on Friday it would allow CME Group Inc. and CBOE Global Markets Inc. to list bitcoin futures, after the rival bourses were able to show their proposed contracts and trading arrangements met the necessary regulatory requirements.

The announcement by the Commodity Futures Trading Commission (CFTC) paves the way for CME and CBOE to become the first traditional U.S. regulated exchanges to launch trading in bitcoin-related financial contracts, in a watershed moment for the cryptocurrency that should lead to greater regulatory scrutiny.

Trading in the CME and CBOE bitcoin futures contracts, which will be priced against and settled in the cash bitcoin market, should begin by year end, a CFTC official said.

Bitcoin soared above $11,000 for the first time this week, up 10-fold year-to-date and prompting multiple warnings of a bubble.

To guard against volatility, CME and CBOE will put in place stricter than usual risk-management safeguards, including initial margin requirements of between 35 percent and 40 percent.

The exchanges have also agreed to enter into information sharing agreements and to send the CFTC data on the settlement process so the regulator can conduct its own surveillance.

CFTC Chairman Christopher Giancarlo warned investors, however, that the nascent underlying bitcoin cash markets remain largely unregulated and mostly beyond the CFTC's purview.

"We expect that the futures exchanges, through information sharing agreements, will be monitoring the trading activity on the relevant cash platforms for potential impacts on the futures contracts’ price discovery process, including potential market manipulation and market dislocations due to flash rallies and crashes, and trading outages," he said in a statement.

"Nevertheless, investors should be aware of the potentially high level of volatility and risk in trading these contracts.”

CFTC regulations allow designated contract exchanges such as CME to list products for trading without prior CFTC approval by filing a written self-certification with the regulator.

Under the self-certification process, which is a quirk of the futures market, the exchanges file a submission to the CFTC confirming the product complies with the Commodity Exchange Act and CFTC regulations - including a key provision that requires the contract is not susceptible to manipulation.

The CFTC has the power to block the contract but will not do so in this instance.

CME has been vying with CBOE to launch the first bitcoin-related financial product. Nasdaq OMX Group is also eyeing a contract launch before year end, Reuters reported this week. (Reporting by Michelle Price and John McCrank; Editing by Leslie Adler)